Fitch Ratings Addresses E-Contracts in U.S. Auto ABS

Fitch Ratings Addresses E-Contracts in U.S. Auto ABS

The inclusion of paperless, electronically originated auto loan contracts, or E-contracts, in U.S. auto loan asset-backed securities (ABS) has grown in the past few years. E-contracts are auto loan contracts that are generally originated through the internet and executed electronically. Fitch Ratings is comfortable with the inclusion of E-contracts in auto ABS transactions and applies very similar methodology to E-contracts as it does with traditional paper-originated auto loan contracts.

Fitch’s criteria and methodology for E-contracts is virtually identical to traditional auto loan contracts from a legal perspective. As with standard originated paper auto loan contracts included in a securitized pool of loans, one of Fitch’s primary concerns is the perfection and priority under the Uniform Commercial Code (UCC) as it relates to the transfer of loans to the issuing trust. Paper auto contracts are generally considered tangible chattel paper under the UCC and perfection can be achieved through the filing of UCC financing statements as well as by actual physical possession of the contracts. Priority is generally granted to the party with physical possession. Auto loans evidenced by E-contracts are subject to specific provisions of the UCC, which if met, classify each e-contract as electronic chattel paper under the UCC. Perfection can be achieved through filing of UCC financing statements as well as by control. However, the party with control of such E-contracts will have priority over secured parties who have filed UCC filings.

Fitch expects that an issuer/sponsor provides representations, warranties and covenants in the securitization documentation demonstrating that the E-contract meets the definition of electronic chattel paper, and that a security interest has been granted in favor of the securityholders or a secured party on behalf of the securityholders, which security interest is a first perfected priority security interest. Fitch also expects an opinion of transaction legal counsel indicating such security interest has been granted and that the securityholders have a first-perfected priority security interest in such E-contracts.

‘Traditional auto loan contracts involve physical paper documentation with an original written signature that creates the binding contractual obligation, while an e-contract is a paperless contract generated within a computer system/internet framework with an electronic signature and binding contract,’ according to Hylton Heard, Director in Fitch’s ABS Group. E-contracts can be originated directly (including through the internet utilizing the lender’s or a third-party provider’s internet website) or purchased indirectly through dealerships. File maintenance requirements for e-contracts are similar to those of paper contracts.

Fitch expects that E-contracts will continue to be included in auto ABS transactions as this origination method is an efficient and a cost-effective way for auto lenders and dealers to originate loans.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
Contacts

Fitch Ratings, New York
Hylton Heard, 212-908-0214
Jennifer San Cartier, 212-908-0205
or
Media Relations:
Sandro Scenga, 212-908-0278