Introduction

The Board of Governors of the U.S. Federal Reserve System (the “Federal Reserve”) and the U.S. Treasury Department (the “Treasury”) have announced further details of the Term Asset-Backed Securities Loan Facility (“TALF”). Initially announced in February 2009, TALF is a joint-initiative between the Federal Reserve and Treasury.

Pursuant to TALF, the Federal Reserve Bank of New York (the “FRBNY”) will provide funding to purchasers of asset-backed securities (“ABS”) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (“SBA”) (“Eligible Collateral”). The principal amount of each TALF loan will be based on the market value of the Eligible Collateral that is posted, subject to a designated “haircut.” The TALF will initially be capped at $200 billion, though may be increased in size up to $1 trillion.

It is hoped that this alternative source of funding will help thaw the consumer lending markets, result in lower interest rates for the underlying loans and thereby help market participants meet the credit needs of households and small businesses. The first loans under TALF are expected to be funded as early as March 25, 2009, with an initial subscription date extended to March 19, 2009, and monthly thereafter through December 2009, unless such date is extended.

Key Features of TALF Loans

Each TALF Loan will:

  • be non-recourse to the borrower, except in limited circumstances,
  • be secured by Eligible Collateral that will be subject to a haircut based upon the underlying asset class,
  • have a 3 year term to maturity,
  • have a fixed or floating coupon rates, tracking the posted Eligible Collateral, that is payable monthly,
  • be eligible for prepayment without penalty,
  • amortize as the underlying Eligible Collateral amortizes, and
  • be funded by the FRBNY through a Primary Dealer.

TALF Loans will not:

  • be required to be marked-to-market, or
  • require the posting of additional collateral.

Eligible Borrowers

  • Any U.S. company that owns Eligible Collateral may borrow from the TALF.
  • “U.S. company” means:  

(i) a business entity or institution that is organized under the laws of the U.S. (or a political subdivision or territory), that conducts significant operations or activities in the U.S., including any U.S. organized subsidiary of a foreign entity with significant operations in the U.S.,

(ii) a U.S. branch or agency of a foreign bank (other than a foreign central bank) that maintains reserves with the Federal Reserve, or

(iii) an investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the U.S.

A U.S. company excludes any entity that is controlled by a foreign government or is managed by an investment manager controlled by a foreign government.

  • Each Borrower must maintain an account relationship with a Primary Dealer.

Eligible Collateral

  • ABS with underlying credit exposures initially comprised of:

(i) auto loans,

(ii) student loans,

(iii) credit card loans, or

(iv) small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration.

  • The initial list of permitted underlying credit exposures may be expanded to include:

(i) commercial mortgages,

(ii) non-Agency residential mortgages, and/or

(iii) other asset classes.

  • Eligible Collateral must not include exposures that are themselves cash or synthetic ABS.
  • Eligible Collateral must:

(i) be U.S. dollar-denominated cash ABS,

(ii) have the highest investment grade rating of at least two applicable rating agencies, and

(iii) not have lower than the highest investment grade rating of any other applicable rating agency.

  • Applicable credit ratings cannot be based upon the guarantee of a third party.
  • Eligible small business loan ABS must be fully guaranteed as to principal and interest by the U.S. government.
  • Eligible Collateral must be cleared through the Depository Trust Company.
  • All or substantially all of underlying credit exposures underlying the ABS must be to U.S.- domiciled obligors.
  • Generally, Eligible Collateral must be issued on or after January 1, 2009, except that SBA Loans may have been issued on or after January 1, 2008.
  • Eligible auto loan ABS and credit card ABS must have an average life of no more than five years.
  • Eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower.

Role of Primary Dealers

  • Primary Dealers are comprised of those entities appearing on the FRBNY’s list of “Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York” (a list is available at http://www.newyorkfed.org/markets/pridealers_current.html).
  • Loan requests will be made by a borrower through a Primary Dealer. Each borrower will be required to enter into a Customer Agreement with its Primary Dealer. Each Primary Dealer will be a party to Master Loan and Security Agreement among the FRBNY, the Primary Dealers on behalf of themselves and the applicable borrowers and the Bank of New York Mellon in its separate capacities as administrator and custodian.
  • The FRBNY has published due diligence requirements applicable to the Primary Dealers in respect of borrowers with whom it enters into a customer agreement. Each Primary Dealer is required to subject borrowers to the Primary Dealer’s KYC program and comply with OFAC. Among other things, the policy grants the FRBNY the right to examine all books and records of the borrower that are held by the Primary Dealer. Additionally, the Primary Dealer is required to report the activity of certain “specified” borrowers to the FRBNY.