ARTICLE
12 March 2009

Further TALF Clarification

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On Tuesday, March 11, 2009, the Federal Reserve Bank of New York released a revised set of frequently-asked-questions (“FAQs”) related to the Term Asset-Backed Securities Loan Facility (“TALF”).
United States Finance and Banking

On Tuesday, March 11, 2009, the Federal Reserve Bank of New York released a revised set of frequently-asked-questions ("FAQs") related to the Term Asset-Backed Securities Loan Facility ("TALF"). The revisions provide additional clarity for the Federal Reserve's funding commitment, a description of attestation requirements for SBA 7(a) and 504 programs, refined definitions of prime and subprime as it relates to automobile asset backed securities ("ABS") and information on the regulatory capital requirements for securities financed by a TALF loan.

For our prior TALF Client Alerts, please click here for the Further TALF Developments and click here for the Fed Unveils New TALF Proposals To Jumpstart Synchronization.

Funding Commitment

An eligible borrower that posts eligible collateral should receive financing, except in exceptional cases, such as revelation of materially adverse information about the borrower prior to settlement.

The Federal Reserve made it clear that TALF is not designed to provide loans directly to small businesses or consumers but to increase credit availability for small businesses and consumers by facilitating renewed issuance of ABS backed by loans to consumers and small businesses at more normal interest rate spreads. The $10 million minimum loan size and requirement that all loans be secured by eligible collateral should make direct borrowing from the TALF unlikely for small businesses and consumers.

Attestation Requirements For SBA 7(a) And 504 Programs

As a condition of the disbursement of the TALF loan, an accounting firm retained by the sponsor must provide an attestation indicating that the ABS is TALF eligible. SBA Pool Certificates and Development Company Participation Certificates, however, are not required to be accompanied by an auditor attestation.

The SBA will post on its website the CUSIPs of all TALF-eligible SBA Pool Certificates and Development Company Participation Certificates.

Auto ABS

Eligible auto dealer floorplan ABS will now 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.

The definitions of prime and subprime relative to auto ABS for purposes of the haircut schedule have been refined. Auto loan and lease ABS will be considered prime if the weighted average FICO score of the receivables is 680 or greater. Receivables without a FICO score are assigned the minimum FICO score of 300 for this calculation. 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 cannot exceed 15 percent.

In order for borrowers to know whether an ABS is considered prime, issuers must publish in the prospectus whether the deal is prime according to TALF criteria. If this is not published in the prospectus, the deal will be considered subprime. Such representations in the prospectus will be considered material to the New York Fed's determination of the haircuts for TALF loans and are considered a component of the representation as to the accuracy of the offering document.

Capital Requirements

There is no unique regulatory capital treatment for TALF-financed ABS held by a depository institution or bank holding company. The capital requirements for securities financed by a TALF loan are the same as those for securities that are not financed by a TALF loan.

Other

Except for SBA Pool Certificates or Development Company Participation Certificates, an ABS issuer and sponsor must provide a certification in connection with the prospectus that the ABS is TALF eligible, that a nationally recognized certified independent accounting firm has certified that the ABS is TALF eligible, and that the issuer has not made any untrue statements of material fact to the rating agency to obtain the credit rating of the ABS. In cases where the collateral is found to be ineligible, the New York Fed has the right of indemnity against the sponsor for damages suffered in relation to the collateral. Additionally, if a borrower who has participated in the program is found to be ineligible or is found to have knowingly breached a representation related to the eligibility of the collateral, the nonrecourse feature of the loan becomes inapplicable and the borrower is personally liable.

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