The Term Asset-Backed Securities Loan Facility (“TALF”) is intended to stimulate the securitization markets, and ultimately the underlying consumer and small business loan markets, by providing government financing for purchases by qualified borrowers of eligible AAA-rated asset-backed securities.
Leading up to the initial subscription date for the TALF program, the Federal Reserve Bank of New York (“New York Federal Reserve”) announced that it would extend the deadline for accepting loan requests until 5p.m. EST on March 19, 2009. The New York Federal Reserve will begin accepting loan requests starting 10 a.m. EST on March 17th as originally announced. The extension came as a result of pressure from market participants that requested more time in which to complete the documentation required in connection with the TALF loan request process.
As a result of ongoing negotiations among the primary dealers, borrowers and the New York Federal Reserve as to the terms of the documentation associated with the TALF program, several key modifications have been made to the Master Loan Servicing Agreement (“MLSA”) from the March 3rd posting.
One major issue for the market participants was the potential for recourse liability in the event the asset-backed securities purchased with the TALF loan were found to be ineligible under the TALF program. The March 3rd version of the MLSA provided that when the pledged collateral (“Collateral”) is discovered to have been ineligible as of the loan closing, borrowers would have to pay back their loans or substitute eligible Collateral for the ineligible Collateral. On March 11th, the New York Federal Reserve modified the MLSA to eliminate the obligation to provide substitute eligible Collateral or to prepay the TALF loan in the event that the Collateral is found to be ineligible. However, breach of the qualified eligible Collateral representation (which was modified to be based upon borrower’s knowledge after reviewing the offering materials) still results in recourse liability to the borrower.
In addition, except for SBA Pool Certificates or Development Company Participation Certificates, an issuer of the asset-backed securities and sponsor must provide a certification in connection with the prospectus that the securities are TALF eligible, that a nationally recognized certified independent accounting firm has certified that the securities are TALF eligible, and that the issuer has not made any untrue statements of material fact to one of the three major rating agencies to obtain the AAA-rating. If the Collateral is found to be ineligible, the New York Federal Reserve has the right of indemnity against the sponsor in the event damages are suffered in relation to the Collateral and further remedy is available if there is evidence of fraudulent activity.
Another major issue for market participants was the inspection rights that the New York Federal Reserve had under the MLSA to look into the TALF loan borrower’s financial affairs. The recent modifications to the MLSA limit these inspection rights so that they relate to that borrower’s TALF loan, Collateral and obligations under the MLSA.
In addition, the New York Federal Reserve implemented certain additional modifications to the MLSA to, among other things:
- Confirm that if the New York Federal Reserve fails to close a TALF loan, then the haircut amount, the Collateral (if it was already delivered as security for the loan), other closing amounts paid by the borrower and, if all closing conditions had been satisfied, the administrative fee will be refunded; and
- Delete the accrual of interest on the monthly interest shortfall amount which is the excess amount, if any, of (x) the monthly interest accrued on the TALF loan over (y) the monthly interest receipts in respect of the Collateral securing such TALF loan that have been received and credited against the monthly interest accrued on the TALF loan.
As the TALF program continues to be implemented, we expect to see additional modifications to the loan documentation and procedures, including major negotiations with respect to the customer agreements between primary dealers and borrowers of the TALF loans which may become a major hurdle in the success of the TALF program.