If securitization is a true sale, the investors get a legal right over the receivables. If it is not a true sale, investors may be either at par with unsecured lenders, or even worse. The genesis of securitization lies in giving the investors rights over specific assets of the originator, such that the investors are not affected by the performance, or bankruptcy of the originator. This would obviously necessitate that the investors, or the SPV which is a conduit on behalf of the investors, has legally acquired the assets. To allow investors an unqualified right over the assets being securitized.
True sale forms the very line of distinction between securitization and collateralised lending.
There are several common law rules that establish a true sale. For example, the rulings from both USA and UK - for some of these rulings, see our section on securitisation cases . Hence, the consequences of the transfer not being a true sale could be really disastrous. This again is a question to be answered with reference to local law. Normally, the receivables should be existing and identifiable.