The end borrowers are not the main danger. The originator is. The originator finds the loans, collects the money, and reports the numbers. You are not in the room. Everything you know about the pool, you know because they told you.

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Why a waterfall does not help here

A tranche structure handles losses that arrive through the front door — borrowers who do not pay. It allocates them bottom-up in a defined order.
No tranche structure prevents money leaving through the wrong door. Tranches decide who loses first. That is a different problem from cash never arriving, or arriving and then being moved somewhere else.
Two failures look nothing alike in the data but land in the same place:
  • Credit loss. Borrowers default. The loan tape shows it. First loss absorbs it.
  • Originator failure or diversion. Collections are received and then moved, or the loan tape does not describe reality. The waterfall never sees it.
The second is the risk PRISM is actually designed around. See the Goldfinch case study for what it looks like in practice.

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What is done about it

Four structural controls, described in full on the four controls:

Controlled collections

Repayments land where the originator cannot reach them.

True sale

Each pool is a separate legal entity that buys the receivables outright.

The collection tripwire

Collections below 90% of expectation halt the pool automatically.

First loss deposited first

At least 15%, checked by the contracts before the pool can open.

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The part that cannot be fixed with code

Early pools will have one originator. If that company fails or misreports, protections help but do not make investors whole. Concentration is a real, unremoved risk, and it is listed as such in Disclosures.