The following questions relate to credit card receivable-backed securities. Answer each one
What happens to the principal repaid by borrowers in a credit card receivable-backed security during the lockout period?
What will be an ideal response?
In contrast to an auto loan-backed security, the principal repayment of a credit card receivable-backed security is not amortized. Instead, for a specified period of time, referred to as the lockout period or revolving period, the principal payments made by credit card borrowers constituting the pool are retained by the trustee and reinvested in additional receivables. The lockout period can vary from
18 months to 10 years.
After the lockout period, the principal is no longer reinvested but paid to investors. This period is referred to as the principal-amortization period.
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