TALF UPDATE: The Federal Reserve Bank of New York Updates TALF Terms and Conditions

March 11, 2009

The Federal Reserve Bank of New York released revised terms and conditions to the Term Asset Backed Securities Lending Facility (TALF).[1] The revisions follow an earlier March 3, 2009 announcement by the Federal Reserve and the U.S. Treasury Department that the initial TALF subscription date will be Tuesday, March 17, 2009, and the initial loan settlement date will be Wednesday, March 25, 2009.[2] Monthly subscriptions will be scheduled on the first Tuesday of every month. The facility will cease making new loans on December 31, 2009, unless the Board of Governors extends the facility.

As previously described, the Federal Reserve will lend up to $200 billion to eligible owners of certain AAA-rated asset-backed securities (ABS) backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans. The TALF has the potential to generate up to $1 trillion of lending for businesses and households.

Credit extensions under the TALF will be in the form of nonrecourse loans secured by eligible collateral. TALF loans will have a three-year term, with interest payable monthly. TALF loans will not be subject to mark-to-market or re-margining requirements. The Federal Reserve expects to fund every loan request, but has explicitly reserved the right to refuse exceptional cases, such as the introduction of materially adverse information about a borrower prior to settlement. Loans will remain nonrecourse except for breaches of representations, warranties and covenants, as described in the Master Loan and Security Agreement (MLSA), in which case the borrower must repay the loan.[3] If the collateral is found to be ineligible, the Federal Reserve Bank of New York has the right of indemnity against the sponsor for damages and further remedy in the case of fraudulent activity.

The following is a brief summary of changes made to the TALF in the March 3 and March 11 revised terms and conditions and revised FAQ, and newly released information, including updated haircuts and loan rates.

Eligible ABS Criteria

Each asset class has a requirement that substantially all of the credit exposures underlying the ABS were originated on or after a specific date, and Treasury announced that eligible auto dealer floorplan ABS may also include ABS issued out of an existing or newly established floorplan master trust in which all or substantially all of the auto dealer floorplan lines of credit underlying the ABS were originated on or after January 1, 2009.

In addition, the Federal Reserve and Treasury indicated that they anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF. Other types of securities under consideration for future inclusion include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances.

Executive Compensation Restrictions

The March 3, 2009 release disclosed that executive compensation restrictions will not be applied to TALF sponsors, underwriters, and borrowers as a result of their participation in the TALF out of a desire to “encourage market participants to stimulate credit formation and utilize the facility.”[4]

Inspection of Borrower

In order to prevent fraudulent activity, the Federal Reserve Bank of New York’s compliance framework includes on-site inspection rights related to each borrower’s obligations under the MLSA in respect to its borrowings under the TALF and the right to reject a borrower for any reason. As noted in the Wall Street Journal on March 11, 2009, potential borrowers are pushing back against this provision in the MLSA, “arguing that it gave Wall Street dealers and the Federal Reserve too much power to look at their books and reject them from the program.”[5] There is a concern among the primary dealers as to their liability if an investor accidentally or intentionally misrepresents information about themselves. On the other hand, investors, such as hedge funds, are protesting a provision which permits the Federal Reserve or any other agency it deems appropriate to review an investor’s records.

Refined Definitions of “Prime” and “Subprime” for Auto ABS

For auto loan and lease ABS, as previously disclosed, are considered prime if the weighted average FICO score of the receivables is 680 or greater. Receivables without a FICO score, which were previously to be assigned a 0 for this calculation, will now be assigned a minimum FICO score of 300. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus. In addition, the percentage of commercial receivables in a trust must not exceed 15 percent. For auto deals where a weighted average FICO score is not disclosed, the subprime haircut schedule will apply.

Issuers must publish in the prospectus or offering memorandum whether the transaction is prime or subprime according to this criteria. If this is not published in the prospectus, it will be considered subprime. Such representations in the prospectus are material to the Federal Reserve Bank of New York’s determination of the haircuts for TALF loans and are considered a component of the representation as to the accuracy of the offering document.

Attestation Requirements for SBA 7(a) and 504 Programs

Unlike other asset classes, SBA Pool Certificates and Development Company Participation Certificates are not required to be accompanied by an auditor attestation. Similarly, they will not be required to provide certification that the ABS is TALF eligible or a proof of indemnity from the sponsor. Instead, pool assemblers must deliver to the Federal Reserve Bank of New York an undertaking in connection with SBA Pool Certificates.[6] Development Company Participation Certificates do not have to provide issuer certification, indemnity or an undertaking.

Collateral Haircut Rates and Interest Rates

Finally, the collateral haircuts and loan interest rates were reduced for loans secured by ABS backed by the Small Business Administration or backed by government-guaranteed student loans. A comprehensive list of current haircuts and loan interest rates is as follows:

Current Haircuts:

Current Loan Interest Rates: