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Term Asset-Backed Securities Loan
Facility: Frequently Asked Questions
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Effective April 21, 2009
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Why is the Federal Reserve establishing the TALF?
The asset-backed securities (ABS) market has been under strain for
some months. This strain accelerated in the third quarter of 2008
and the market came to a near-complete halt in October. At the
same time, interest rate spreads on AAA-rated tranches of ABS rose
to levels well outside the range of historical experience, reflecting
unusually high risk premiums. The ABS markets historically have
funded a substantial share of credit to consumers and businesses.
Continued disruption of these markets could significantly limit the
availability of credit to households and businesses of all sizes and
thereby contribute to further weakening of U.S. economic activity.
The TALF is designed to increase credit availability and support
economic activity by facilitating renewed issuance of consumer and
business ABS at more normal interest rate spreads.
How will the TALF work?
Under the TALF, the Federal Reserve Bank of New York will provide
non-recourse funding to any eligible borrower owning eligible
collateral. On a fixed day each month, borrowers will be able to
request one or more three-year TALF loans. Loan proceeds will be
disbursed to the borrower, contingent on receipt by the New York
Fed’s custodian bank (custodian) of the eligible collateral, an
administrative fee, and margin, if applicable. As the loan is nonrecourse, if the borrower does not repay the loan, the New York Fed
will enforce its rights in the collateral and sell the collateral to a
special purpose vehicle (SPV) established specifically for the purpose
of managing such assets. The New York Fed has published a Master
Loan and Security Agreement (MLSA), which provides further details
on the terms that will apply to borrowings under the TALF. The TALF
loan is non-recourse except for breaches of representations,
warranties and covenants, as further specified in the MLSA.
ELIGIBLE BORROWERS
Who may borrow under the TALF?
Any U.S. company that owns eligible collateral may borrow from the
TALF provided the company maintains an account relationship with a
primary dealer. An entity is a U.S. company if it is (1) a business
entity or institution that is organized under the laws of the United
States or a political subdivision or territory thereof (U.S.-organized)
and conducts significant operations or activities in the United States,
including any U.S.-organized subsidiary of such an entity; (2) a U.S.
branch or agency of a foreign bank (other than a foreign central
bank) that maintains reserves with a Federal Reserve Bank; (3) a
EXTERNAL LINKS
Board of Governors
February 17, 2009 SEC
letter
Employ American
Workers Act: FAQs
U.S. insured depository institution; or (4) an investment fund that is
U.S.-organized and managed by an investment manager that has its
principal place of business in the United States. An entity that
satisfies any one of the requirements above is a U.S. company
regardless of whether it is controlled by, or managed by, a company
that is not U.S.-organized. Notwithstanding the foregoing, a U.S.
company excludes any entity, other than those described in clauses
(2) and (3) above, that is controlled by a foreign government or is
managed by an investment manager, other than those described in
clauses (2) and (3) above, that is controlled by a foreign
government.
What types of investment funds are eligible borrowers?
Investment funds that are organized in the United States and
managed by an investment manager that has its principal place of
business located in the United States are eligible borrowers for
purposes of the TALF. However, any investment fund which is not a
U.S. company in accordance with the last sentence of the preceding
FAQ is not an eligible borrower for purposes of the TALF.
Example
InvestcoBermuda is a “master” investment fund organized in
Bermuda that makes joint investments on behalf of InvestcoUS, a
U.S.-organized investment fund, and InvestcoCayman, a Cayman
Islands-organized investment fund. InvestcoBermuda, InvestcoUS
and InvestcoCayman are all managed by an investment manager with
its principal place of business in the United States. Only InvestcoUS
is an eligible borrower because it is the only investment fund that is
U.S.-organized. If, however, InvestcoBermuda establishes Newco, a
subsidiary investment fund, in the United States and hires its U.S.based investment manager to manage Newco, Newco would be an
eligible borrower for purposes of the TALF.
What is an “investment fund” for purposes of the TALF eligible
borrower definition?
An investment fund is any type of pooled investment vehicle,
including a hedge fund, a private equity fund, and a mutual fund, or a
vehicle that primarily or exclusively invests in eligible collateral and
borrows from the TALF.
To be considered an eligible borrower, does an investment
fund need to primarily or exclusively invest in TALF eligible
ABS or can it be a multi-strategy fund?
An eligible investment fund includes funds that only invest in TALF
eligible ABS and only borrow from the TALF, as well as funds that
invest in a mix of TALF eligible ABS and other assets.
What is the definition of “controlled” for purposes of the
eligible borrower definition?
For purposes of the eligible borrower definition, a foreign government
controls a company if, among other things, the foreign government
owns, controls, or holds with power to vote 25 percent or more of a
class of voting securities of the company.
Can a newly formed investment fund borrow from the TALF?
Yes, so long as it satisfies all the eligible borrower requirements set
forth above.
How does a borrower know that its loan request will be
funded?
If an eligible borrower posts eligible collateral there should be every
expectation of financing. The Federal Reserve reserves the right not
to fund in exceptional cases, such as upon revelation of materially
adverse information about the borrower prior to settlement, but those
cases are expected to be isolated and rare. To enhance certainty of
TALF financing, the Federal Reserve is developing procedures for precertification of certain classes of borrowers. Guidance as to the precertification process will be provided in the near future. Note: the
pre-certification process will not in any way exempt a primary dealer
from its responsibility to determine borrower eligibility or from
conducting its KYC obligations with respect to any potential TALF
borrower as required by applicable laws and regulations and the TALF
Borrower Eligibility and New York Fed Due Diligence Policy.
In the isolated and unlikely occurrence that a borrower is
deemed ineligible between the subscription date and the
settlement date, is a primary dealer who acts as underwriter
and agent for the borrower allowed to finance the failed
subscription by borrowing under the TALF facility?
If a borrower is deemed ineligible between the subscription date and
the settlement date, the primary dealer may borrow from the Primary
Dealer Credit Facility (PDCF) using the underwritten securities as
collateral subject to the existing terms and conditions for PDCF
borrowing. A primary dealer may also borrow under the TALF facility
provided that: 1) the amount borrowed is equal to the loan amount
that the ineligible borrower requested on the subscription date; and
2) the borrowing is not used for a transaction underwritten by the
primary dealer that contains assets that the primary dealer, any of its
affiliates, or any entities under direct or indirect control of the
primary dealer, originated. The primary dealer must indicate its
intent to borrow within two hours of receiving notification regarding a
borrower’s ineligibility. In such circumstances the primary dealer will
not be required to submit a conflict of interest identification and
remediation plan to the New York Fed.
Is the TALF designed to provide loans directly to businesses or
consumers?
No, the TALF is designed to increase credit availability for businesses
and consumers by facilitating renewed issuance of ABS backed by
loans to consumers and businesses at more normal interest rate
spreads. The $10 million minimum loan size and requirement that all
loans be secured by eligible collateral will likely make direct
borrowing from the TALF infeasible for businesses and consumers.
How does the Employ American Workers Act (EAWA) provision
related to hiring new employees who are in H-1B
nonimmigrant status apply to borrowers for purposes of the
TALF?
The EAWA applies to all borrowers under the TALF. In addition, if the
eligible borrower is an investment fund, the EAWA also applies to any
entity that owns or controls 25% or more of the total equity of the
investment fund. For more information on how the EAWA applies to
Federal Reserve lending facilities, see Employ American Workers Act:
FAQs.
ELIGIBLE COLLATERAL
What types of ABS are eligible collateral under the TALF?
Eligible collateral (eligible ABS) will include U.S. dollar-denominated
cash (that is, not synthetic) ABS that have a credit rating in the
highest long-term or short-term investment-grade rating category
from two or more major nationally recognized statistical rating
organizations (NRSROs) and do not have a credit rating below the
highest investment-grade rating category from a major NRSRO.
Eligible small business ABS also will include U.S. dollar-denominated
cash ABS that are, or for which all of the underlying credit exposures
are, fully guaranteed as to principal and interest by the full faith and
credit of the U.S. government.
All or substantially all of the credit exposures underlying eligible ABS
must be exposures to U.S.-domiciled obligors. The underlying credit
exposures of eligible ABS must be auto loans, student loans, credit
card loans, equipment loans, floorplan loans, small business loans
fully guaranteed as to principal and interest by the U.S. Small
Business Association, or receivables related to residential mortgage
servicing advances (servicing advance receivables). The set of
permissible underlying credit exposures of eligible ABS may be
expanded over time.
The underlying credit exposures must not include exposures that are
themselves cash ABS or synthetic ABS. For credit card, auto lease,
and equipment lease securitizations, the underlying exposures may
include financial assets that represent an interest in or the right to
payments or cash flows from another asset pool (intermediate
securities) created in the normal course of business solely to facilitate
the issuance of an ABS. In such cases, for purposes of determining
whether the exposures underlying an ABS meet the eligibility
requirements for TALF collateral, the credit exposures underlying the
intermediate securities are considered to be the underlying exposures
of the ABS itself. The average life for credit card, auto, equipment,
floorplan, or servicing advance receivables loan ABS cannot be
greater than five years.
Eligible ABS must be cleared through the Depository Trust Company
and, except for SBA Pool Certificates or Development Company
Participation Certificates, must be issued on or after January 1,
2009. Further:
All or substantially all of the credit exposures underlying
eligible auto loan ABS issued by a non-revolving trust must
have been originated on or after October 1, 2007. Eligible
auto ABS issued by a revolving (or master) trust must be
issued to refinance existing auto ABS maturing in 2009 and
must be issued in amounts no greater than the amount of the
maturing ABS. Eligible auto ABS may also be issued out of an
existing or newly established master trust in which all or
substantially all of the underlying exposures were originated
on or after January 1, 2009.
All or substantially all of the credit exposures underlying
eligible student loan ABS must have had a first disbursement
date on or after May 1, 2007.
Eligible credit card ABS issued by a revolving (or master) trust
must be issued to refinance existing credit card ABS maturing
in 2009 and must be issued in amounts no greater than the
amount of the maturing ABS.
All or substantially all of the credit exposures underlying
eligible equipment loan ABS must have been originated on or
after October 1, 2007.
Eligible floorplan ABS issued by a revolving (or master) trust
must be issued to refinance existing floorplan ABS maturing in
2009 and must be issued in amounts no greater than the
amount of the maturing ABS. Eligible floorplan ABS may also
be issued out of an existing or newly established master trust
in which all or substantially all of the underlying exposures
were originated on or after January 1, 2009.
SBA Pool Certificates and Development Company Participation
Certificates must have been issued on or after January 1,
2008, regardless of the dates of the underlying loans or
debentures. The SBA-guaranteed credit exposures underlying
all other eligible small business ABS must have been
originated on or after January 1, 2008.
All or substantially all mortgage servicing advances must have
been originated on or after January 1, 2007.
What types of receivables are TALF eligible?
Auto-related receivables will include retail loans and leases relating to
cars, light trucks, motorcycles and other recreational vehicles, as well
as commercial, government and rental fleet leases. Other
recreational vehicles include loans and leases for all recreational
vehicle types designed for consumer use that have collateralized ABS
transactions in the past, such as recreational vehicles (RVs), boats,
trailers and sports vehicles. Commercial, government and rental fleet
ABS may include loans and/or leases related to any type of vehicle
that have collateralized fleet securitizations in the past.
Eligible credit card receivables will include both consumer and
corporate credit card receivables. Student loan receivables include
federally guaranteed student loans (including consolidation loans) and
private student loans. SBA loans include loans, debentures or pools
originated under the SBA’s 7(a) and 504 programs, provided they are
fully guaranteed as to principal and interest by the full faith and credit
of the U.S. government and meet all other TALF eligibility
requirements.
Eligible equipment-related receivables will include loans and leases
relating to business, industrial, and farm equipment. Such equipment
includes, but is not limited to, agricultural, construction, or
manufacturing equipment; trucks other than light trucks; smaller
ticket items such as communications, office, and medical equipment,
computers, copiers and security systems; and other equipment types
that have collateralized securitized receivables in the past. The credit
exposures underlying an eligible equipment ABS may include a
mixture of loans and leases on a mixture of types of equipment.
Eligible floorplan receivables will include revolving lines of credit used
to finance dealers’ inventories of items including, but not limited to,
vehicles such as cars, trucks, recreational vehicles, trailers, boats and
sports vehicles; agricultural, construction, or manufacturing
equipment; manufactured housing; large appliances; and electronic
equipment. These revolving lines of credit may be collateralized by a
mixed type of inventory, including any type of inventory that has
collateralized securitized floorplan loans in the past. Auto floorplan
receivables will include revolving lines of credit to finance dealer
inventories of cars and light trucks.
Eligible servicing advance receivables must be related to residential
mortgage loan securitizations that grant the servicer first priority in
any insurance or liquidation proceeds from a loan, and, if those
proceeds are insufficient, grants the servicer a first priority to general
collections of the related securitization. The related servicing
agreement to every trust must give the servicer the right to assign,
transfer or pledge its rights to be reimbursed, and must provide that
all advances are reimbursed on a "first-in first-out" basis.
How does the US-domiciled obligor eligibility criteria apply to
ABS secured by servicing advance receivables?
All or substantially all of the advances creating the receivables must
be related to a US-domiciled residential property.
Are servicing advance receivables against commercial real
estate eligible collateral?
No.
What does “all or substantially all” mean in the context of
determining whether the credit exposures underlying an ABS
meet the U.S.-domiciled obligors criteria?
“All or substantially all” in this context means 95 percent or more of
the dollar amount of the credit exposures underlying the ABS.
Do U.S.-domiciled obligors in the TALF terms and conditions
include those who are domiciled in a U.S. political subdivision
or territory?
Yes. U.S.-domiciled obligors are those domiciled in the United States,
or a political subdivision or territory thereof.
What does “all or substantially all” mean in the context of
determining whether the credit exposures underlying an ABS
meet the date of origination criteria?
“All or substantially all” in this context means 85 percent or more of
the dollar amount of the credit exposures underlying the ABS.
Is there a minimum or maximum maturity limit for ABS that
can collateralize TALF loans?
There is no minimum limit. If an ABS’s maturity is shorter than the
three-year maturity of the TALF loan, the TALF loan will mature upon
maturity of the ABS collateral for that loan. The average life for
credit card, auto, equipment, floorplan, or servicing advance
receivable loan ABS cannot be greater than five years.
Why are there no loan origination date restrictions for credit
card ABS, floorplan ABS, and auto ABS issued by a master
trust?
Unlike other TALF-eligible loan categories of ABS, which are backed
by a fixed pool of loans, credit card ABS, floorplan ABS, and some
auto ABS are backed by dynamic pools of receivables that constantly
change as customers and dealers draw on and repay their credit
lines. The pools include both seasoned and recently originated
receivables. Due to the quick turnover and revolving nature of the
underlying pools, the refinancing of existing credit card ABS, floorplan
ABS, and some auto ABS largely fund newly originated receivables,
consistent with the policy goal of the TALF.
Which rating agencies are considered major nationally
recognized statistical rating organizations (NRSROs) for
purposes of the TALF?
The major NRSROs for purposes of determining TALF-eligible ABS are
Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. The
New York Fed will periodically review its use of NRSROs for the
purpose of determining TALF-eligible ABS.
What happens if an ABS that was eligible for TALF financing is
downgraded by an NRSRO?
Nothing happens to existing TALF loans secured by that ABS.
However, the ABS may not be used as collateral for any new TALF
loans until it regains its status as eligible collateral.
Are ABS that are rated in the highest investment grade rating
category but are on review or watch for downgrade TALF
eligible?
No, eligible ABS cannot be on review or watch for downgrade.
Are AAA credit ratings achieved using a third-party guarantee
applicable for TALF eligibility?
No, an eligible ABS must obtain the necessary highest investment
grade ratings without the benefit of a third-party guarantee.
When must the final credit rating letters for newly issued ABS
be received by the New York Fed?
The issuer/sponsor must submit to talfreports@ny.frb.org the final
credit rating letters from each of the relevant NRSROs for newly
issued ABS no later than 10 a.m. on the applicable TALF loan
settlement date.
What level of assurance will be required from the sponsor’s
accountants that the ABS is TALF eligible?
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. The accounting firm providing the
attestation must be a nationally recognized certified public accounting
firm that is registered with the Public Company Accounting Oversight
Board. The form of the certification is at
http://www.newyorkfed.org/markets/
TALFAuditorAttestationForm.pdf. SBA Pool Certificates and
Development Company Participation Certificates need not be
accompanied by an auditor attestation.
What information must the issuer and sponsor include in the
prospectus or other offering document of an ABS in order to
represent that the ABS is eligible collateral for a TALF loan?
In addition to information required by applicable laws, the issuer and
sponsor must ensure that the information included in a prospectus or
other offering document of an ABS they represent as eligible
collateral under the TALF includes a signed certification indicating,
among other items, that (1) the ABS is TALF eligible and (2) the
sponsor (or, if the sponsor is a special purpose vehicle, the sponsor’s
direct or indirect ultimate parent) has executed and delivered an
undertaking to the New York Fed indemnifying it from any losses it
may suffer if such certifications are untrue. Such indemnity
undertaking shall be delivered to the New York Fed no later than four
business days prior to the TALF loan settlement date. The form of
certification and indemnity is at:
http://www.newyorkfed.org/markets/
Form_Certification_TALF_Eligibility.pdf. SBA Pool Certificates
and Development Company Participation Certificates are not required
to provide an issuer certification or indemnity. However, pool
assemblers must deliver to the New York Fed an undertaking in
connection with SBA Pool Certificates which can be found at
http://www.newyorkfed.org/markets/
TALF_Undertaking_SBA_ABS.pdf. Development Company
Participation Certificates do not need to be accompanied by this or
any undertaking.
What entity is the “issuer” that must sign the Issuer
Certification?
The "issuer" for purposes of the issuer certification, in both public and
private offerings of TALF eligible ABS, will be the legal entity that
issues the ABS.
What information relating to TALF eligible SBA ABS will be
available from the SBA?
The SBA will post on its website the CUSIPs of all TALF-eligible SBA
Pool Certificates and Development Company Participation Certificates.
Are privately placed ABS eligible collateral for a TALF loan,
provided they meet all of the eligibility requirements?
Yes.
Does the requirement that eligible floorplan, credit card , and
auto ABS (issued by a master trust) be issued to refinance
existing ABS maturing in 2009 apply at the individual master
trust level or at the issuer level?
The refinancing limitation applies at the issuer level rather than the
individual trust level. For example, if an issuer has four master trusts
with a total of $20 billion in ABS maturing in 2009, the maximum
amount of TALF-eligible ABS the issuer could issue in 2009 is $20
billion; it may issue that $20 billion in ABS from one trust or from
multiple trusts.
How are variable funding notes (VFNs) with commitment
termination dates in 2009 treated in the calculation of the
amount of an issuer's credit card, floorplan, or auto ABS
(issued by a master trust) maturing in 2009?
For TALF purposes, a VFN's maturity date is its commitment
termination date and its amount is its maximum contractual principal
balance, regardless of whether the VFN is renewed.
How are VFNs that (1) had commitment termination dates
prior to 2009 and (2) have controlled amortization periods in
2009 treated in the calculation of the amount of an issuer's
credit card, floorplan, or auto ABS (issued by a master trust)
maturing in 2009?
For VFNs in controlled amortization periods, only the amount that
amortizes in 2009 counts toward the amount of an issuer's credit card
or floorplan ABS maturing in 2009.
For a VFN with a commitment termination date after 2009, (1)
if a collateral or other event causes the revolving period of the
VFN to end in 2009, or (2) if the VFN is amended to move its
commitment termination date to 2009, will the maximum
contractual principal balance of the VFN be included in the
calculation of the amount of credit card, floorplan, or auto ABS
(issued by a master trust) maturing in 2009?
No.
For non-VFN ABS with controlled amortization periods, what
amount counts toward an issuer's limit?
For ABS with controlled amortization periods, only the amount that
amortizes in 2009 counts toward the limit.
Do ABS in controlled accumulation periods with bullet
maturities after 2009 count toward an issuer's limit?
No. For TALF purposes, non-VFN ABS maturities are defined as dates
on which principal payments are due.
Must eligible ABS that refinance maturing ABS issued by a
master trust be issued concurrently with the maturing ABS?
No. Issuers may pre-fund their maturing ABS with eligible ABS up to
three months in advance. Issuers also have the option to refinance
ABS that matured in 2009 in bulk on any date up to December 31,
2009. Issuers may not, however, pre-fund ABS that mature in 2010
with eligible ABS.
How will the issuance limits on credit card, floorplan, and auto
ABS (issued by a master trust) be enforced?
Issuers of credit card, floorplan, and auto ABS must state in their
prospectuses that the aggregate amount of eligible ABS they have
issued does not exceed the amount of their 2009 ABS maturities.
Issuers may issue ABS in excess of their 2009 maturities; however,
these excess amounts will not be eligible collateral for TALF loans.
For ABS backed by SBA loans, are explicit credit ratings
required?
U.S. dollar-denominated cash ABS backed by loans, debentures, or
pools under the SBA’s 7(a) and 504 programs will be eligible as long
as all of the underlying credit exposures, or the ABS themselves, are
fully guaranteed as to principal and interest by the full faith and credit
of the U.S. government. These securities do not require an explicit
credit rating.
Can a company that originates loans securitize them, acquire
the AAA-rated tranche of the securitization, and finance it
using the TALF?
No, 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.
How is "affiliate of the borrower" defined for purposes of
determining eligible collateral?
An affiliate of a borrower means any company that controls, is
controlled by, or is under common control with the borrower. For this
purpose, a person or company controls a company if, among other
things, it (1) owns, controls, or holds with power to vote 25 percent
or more of a class of voting securities of the company; or (2)
consolidates the company for financial reporting purposes.
May investors borrow against ABS they already own?
Yes, an investor may borrow against any eligible ABS. Eligible ABS
must be issued on or after January 1, 2009, but need not be issued
on the same day the investor borrows from the TALF. SBA Pool
Certificates and Development Company Participation Certificates must
have been issued on or after January 1, 2008.
Are zero coupon ABSs eligible as collateral for the TALF?
No. Zero coupon ABS are not eligible as TALF collateral.
OPERATIONAL MECHANICS
How does an entity participate in the TALF program?
An eligible borrower must be a customer of a primary dealer and
must have executed a customer agreement authorizing the primary
dealer, among other things, to execute the master loan and security
agreement (MLSA) as agent for the borrower and to perform all
actions required on their behalf. The MLSA provides further details
on the requirements that apply to the entities seeking to borrow from
the New York Fed under the TALF.
What is the TALF process from subscription to settlement?
Prior to each subscription date, each primary dealer will collect from
prospective eligible borrowers the amount of each borrower’s loan
request(s), the interest rate format corresponding to the type of
collateral pledged (that is, fixed or floating), the CUSIPs of the ABS
the borrower expects to deliver and pledge to the New York Fed and
the prospectuses and/or offering documents of the ABS expected to
be pledged. On the subscription date, each primary dealer will
submit this information to the New York Fed’s custodial agent for
review and will also submit to the New York Fed the aggregate loans
request amount for all its customers by rate type and asset class.
On the loan settlement date, the borrower or its agent will deliver
against payment the ABS collateral, administrative fee and applicable
margin to the New York Fed’s settlement account at the custodian.
How will the process work if a new ABS issue closes on the
same day as the TALF loan settlement date?
The borrower of a TALF loan must identify the counterparty expected
to deliver the new issue ABS to be pledged as collateral at the time of
the loan subscription. When the borrower’s primary dealer who
submitted the loan request receives the confirmation of the loan and
its details from the custodian two days prior to the loan settlement
date, the primary dealer can extract the pertinent information to
generate and forward a trade confirmation to the borrower’s
delivering counterparty. The delivering counterparty can be the lead
underwriter or co-manager of the new ABS security issue, other
syndicate member, or the primary dealer agent of the borrower. The
borrower must always remit the margin to their agent primary dealer
who submitted the loan request. If the primary dealer is not the
delivering counterparty, the primary dealer will forward the margin to
New York Fed’s cash custody account at the custodian in order for the
issuer to receive the full purchase price of the security issue. The
delivering counterparty will deliver the ABS collateral to New York
Fed’s custodian against payment. Upon settlement, the custodian will
reflect the loan and collateral pledged on its books.
The MLSA requires the primary dealer to deliver, among other
things, a sales confirmation in connection with collateral that
is newly issued. What form of sales confirmation is
acceptable?
A Rule 10b-10 confirmation is satisfactory. Other written sales
confirmations, including e-mail confirmations that contain the
required pricing information and are customarily provided by many
broker-dealers prior to mailing of a Rule 10b-10 confirmation, will
also be acceptable.
Do issuers need to publish a final prospectus by the
subscription date, or can borrowers subscribe for a loan based
on the "red" prospectus, and deliver the final prospectus at a
later date?
On the subscription date, the primary dealer must provide the
custodian with the CUSIP numbers and prospectuses/offering
documents of all collateral expected to be pledged against the TALF
loans. If the CUSIP number corresponds to a new issuance, the
prospectus/offering documents submitted on subscription date may
be preliminary, but the final prospectus/offering documents must be
provided to the custodian no later than 12 noon three business days
prior to the applicable TALF loan settlement date.
Should the assertions made in the Issuer and Sponsor
Certification be made as of the date the ABS is priced, or can
such assertions be made as of an earlier date?
The assertions as to TALF eligibility of the ABS made by the issuer
and sponsor shall be made as of the date of the final ("black")
prospectus or offering document. In the event it is not feasible that
such assertions be made as of the date of the final offering
document, it is acceptable that the assertions be made as of the date
of the "red" prospectus or offering document. The opinion in the
Auditor Attestation shall be made as of the same date as the issuer
and sponsor make their assertions in the Issuer and Sponsor
Certification. Each of the Issuer and Sponsor Certification (and
accompanying Indemnity Undertaking) and the Auditor Attestation
shall only be submitted to the New York Fed once per CUSIP.
Must an eligible borrower own the ABS it plans to pledge as
collateral for a TALF loan at the time it subscribes for the
loan?
An eligible borrower need not own the ABS on the subscription date.
However, in order for the primary dealer and custodian to perform
their due diligence, the borrower must inform the primary dealer by
the subscription date of the CUSIP of the ABS it intends to deliver as
collateral on the loan settlement date. If the borrower is allocated
less than expected of the new ABS issue, the borrower must inform
New York Fed and its custodian, through its primary dealer, no less
than four days prior to the loan settlement date so that an
adjustment may be made to the margin and administrative fee prior
to the loan settlement date.
Is there a penalty if an investor fails to provide a security on
settlement date?
No, although the New York Fed expects the ABS collateral identified
by CUSIP in the confirmation sent to the primary dealer by the
custodian to be delivered on the loan settlement date. Should any
portion of expected ABS collateral not be received on settlement
date, that portion of the loan will be cancelled and the administrative
fee will not be refunded.
Over what time period will the TALF operate?
The facility will cease making loans on December 31, 2009, unless
the Board of Governors extends the facility.
Will there be a limit on how many loans a borrower may
request?
No, an eligible borrower may request an unlimited number of loans at
each monthly subscription.
May borrowers request loans through multiple primary
dealers?
Yes. If a borrower requests loans through multiple primary dealers, it
must deliver the collateral for each loan through the respective
primary dealer, unless the collateral is a new issuance delivered by
the underwriter/other syndicate desk.
What is the minimum TALF loan amount?
A borrower must request a minimum of $10 million for each loan.
Is there a maximum TALF loan amount?
No.
What is the maturity of a TALF loan?
TALF loans have a three-year maturity.
If the ABS matures in four years and the TALF loan matures in
three years, is the borrower responsible for selling the
collateral and repaying the loan at the end of the third year?
At the end of the three-year period the loan must be repaid. The
borrower may (1) repay the loan, at which time the New York Fed will
release the collateral, or (2) arrange for the sale of the collateral and
instruct the New York Fed to deliver the ABS to the counterparty
against payment. The settlement amount of the sales transaction
must either be equal to, or greater than, the loan amount
outstanding, or the borrower must make up any shortfall to repay the
loan in full, including accrued interest, before the New York Fed will
deliver the ABS. Any excess sale proceeds will be remitted back to
the borrower. At maturity, a borrower may surrender the collateral to
the New York Fed, in lieu of repaying the outstanding principal or
interest on a TALF loan, by delivering a Collateral Surrender and
Acceptance Notice with respect to such loan by the maturity date.
May a borrower pledge more than one security as collateral
for a single loan?
Yes, a borrower may pledge any combination of eligible ABS as
collateral for a single TALF loan. However, a fixed rate ABS must be
pledged against a fixed rate loan and a floating rate ABS against a
floating rate loan.
May a borrower revise its original loan request?
The borrower’s original loan request, submitted via its primary dealer
on the subscription date, may later be adjusted only if the borrower is
allocated less than the expected amount of a new ABS issue. A
borrower may not adjust its loan request to obtain a larger amount of
TALF loans than originally requested.
Will prepayment of the loan be permitted?
Yes. A borrower may prepay a TALF loan in full or in part at any
time. If a borrower makes a partial prepayment, collateral securing
its loan will be released on a pro-rata basis, taking into consideration
minimum ABS denominations.
Are there any penalties associated with prepayment of a TALF
loan?
No.
May a borrower substitute collateral during the term of its
loan?
No, a borrower may not substitute collateral.
If the ABS collateral supporting a TALF loan is sold, can the
TALF loan be transferred with that collateral?
A borrower may assign all of its obligations with respect to a TALF
loan to another eligible borrower with the prior consent of the New
York Fed. The New York Fed will assess the eligibility of the assignee
as a borrower at the time of the transfer and confirm that the
assignee has executed all the requisite documentation for the facility.
No assignments will be consented to after the termination date for
making new loans, which is December 31, 2009 unless extended by
the Board.
How are principal payments on eligible collateral allocated
between the borrower and repayment of principal on the TALF
loan?
Any remittance of principal on eligible collateral must be used
immediately to reduce the principal amount of the TALF loan in
proportion to the original loan-to-value ratio. For example, if the
original loan-to-value ratio was 90 percent, 90 percent of any
remittance of principal on the ABS must immediately be repaid to the
New York Fed.
If a TALF-financed ABS incurs a principal loss, would the loss
be allocated between the borrower's haircut and the TALF
loan?
No. The borrower is responsible for all interest and principal
payments on a TALF loan. If the borrower does not make these
payments, the New York Fed will enforce its rights to the collateral
and the borrower will forfeit its haircut amount.
What happens if a borrower does not repay its loan?
In lieu of repaying the outstanding principal or interest on a TALF
loan, a borrower may surrender the collateral to the New York Fed by
delivering a Collateral Surrender and Acceptance Notice with respect
to the TALF loan. If a borrower fails to deliver the Collateral
Surrender and Acceptance Notice by the maturity date, the New York
Fed may exercise recourse rights against the borrower and require it
to repay the TALF loan.
Is there a grace period associated with a borrower’s
obligation to pay interest on a TALF loan?
Yes, a borrower has a grace period of 30 days during which to pay
interest on a TALF loan if the net interest on the pledged ABS is not
sufficient to cover the interest payment associated with the loan.
After the grace period, if the loan remains delinquent, the New York
Fed will enforce its rights to the TALF loan collateral.
When a borrower elects to surrender the collateral in
satisfaction of a loan, can it do so by surrendering specific
collateral or is the entire pool of collateral surrendered?
All of the ABS that secure an individual loan must be surrendered. A
borrower that desires to effect a collateral surrender must make a
request through its primary dealer.
Will there be a separate facility for each ABS asset class?
No. Borrowers with eligible ABS of all asset types will receive loans
from the same facility.
What fees are associated with the TALF?
On each loan’s settlement date, the borrower must pay to the New
York Fed’s settlement account an administrative fee equal to 5 basis
points of the loan amount, which will cover the New York Fed’s fees
associated with the facility.
HAIRCUTS AND RATES
To what values will the haircuts be applied to determine the
maximum loan amount?
Under the TALF, the New York Fed will lend to each borrower an
amount equal to the lesser of the par or market value of the pledged
ABS minus a haircut. Alternatively, when the pledged ABS has a
market value above par, the New York Fed will lend an amount equal
to the market value—subject to a cap of 110 percent of par value—
minus a haircut, and the borrower will periodically prepay a portion of
the loan. The prepayments will be calculated to adjust for the
expected reversion of market value toward par value as the ABS
matures.1
What is the haircut schedule for each asset type?
Collateral haircuts are as follows:
ABS Average Life (years)
Sector
Subsector
0-1
Auto
Prime retail
lease
10% 11% 12% 13% 14%
Auto
Prime retail
loan
Auto
Subprime
retail loan
Auto
Motorcycle/
other
recreational
vehicles
7%
Auto
Commercial
and
government
9% 10% 11% 12% 13%
6%
>1- >2- >3- >4- >5- >62
3
4
5
6
7
7%
8%
9% 10%
9% 10% 11% 12% 13%
8%
9% 10% 11%
fleets
Auto
Rental fleets
12% 13% 14% 15% 16%
Credit
Card
Prime
5%
5%
6%
7%
Credit
Card
Subprime
6%
7%
8%
9% 10%
Equipment
Loans and
Leases
5%
6%
7%
8%
Floorplan
Auto
12% 13% 14% 15% 16%
Floorplan
Non-Auto
11% 12% 13% 14% 15%
Small
Business
SBA Loans
5%
5%
Student
Loan
Private
8%
9% 10% 11% 12% 13% 14%
Student
Loan
Gov’t
guaranteed
5%
5%
Servicing
Advances
Residential
mortgages
5%
5%
5%
5%
8%
9%
5%
5%
6%
6%
6%
6%
12% 13% 14% 15% 16%
For ABS benefitting from a substantial government guarantee with
average lives beyond five years, haircuts will increase by one
percentage point for every two additional years of average life
beyond five years. For all other ABS with average lives beyond five
years, haircuts will increase by one percentage point for each
additional year of average life beyond five years.
How is average life defined for the purposes of the haircut
table?
For ABS with bullet maturities, average life is determined by the
expected principal payment date. For amortizing ABS, average life is
defined as the weighted average life to maturity based on the
prepayment assumptions and market conventions listed below.
Sector
Subsector
Prepayment Assumption
Auto
Prime retail lease
75% of prepayment curve
Auto
Prime retail loan
1.3% ABS
Auto
Subprime
1.5% ABS
Auto
Motorcycle/other
recreational vehicles
1.5% ABS
Auto
Commercial and
government fleets
75% of prepayment curve
Auto
Rental fleet
75% of prepayment curve
Equipment
Loans and leases
8% CPR
Student
Loan
Student Loan Private
4% CPR
Student
Loan
Student Loan FFELP
6% CPR
Student
Loan
Student Loan
Consolidation
50% of CLR curve
Small
Business
SBA 7a
14% CPR
Small
Business
SBA 504
5% CPR
Servicing
Advances
Residential
mortgages
Average life is length of any
revolving period plus 2 years
CPR (Conditional Payment Rate) represents the proportion of the
principal of a pool of loans that is assumed to be paid off
prematurely in each period.
ABS (Absolute Prepayment Speed) represents the percentage of the
original number of loans that prepay during a given period.
Where will an ABS security’s average life be published?
The issuer is expected to publish the security’s average life in the
prospectus or offering document. For amortizing assets the issuer
should calculate the weighted average life to maturity based on the
above prepayment assumptions and make a representation in the
prospectus that the weighted average life to maturity for each AAArated tranche was calculated in accordance with the TALF prepayment
assumptions. In addition, issuers are encouraged to base weighted
average life to maturity calculations on a loan-by-loan analysis.
However, if the analysis is based on representative pools, the pools
must fairly and accurately model the actual collateral characteristics
underlying TALF-eligible securities. Issuers should understand that
such representations of weighted average life to maturity in the
prospectus are material to the New York Fed's determination of the
haircuts for TALF loans and the representation as to accuracy of the
offering document contained in the issuer certification would be
breached if the weighted average life calculations incorrectly apply
the prepayment assumptions listed above or are based on
assumptions that are not representative of the actual collateral
characteristics underlying TALF-eligible securities.
How are subprime versus prime defined for auto loan and
credit card ABS?
Auto loan and lease ABS are 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 must
not exceed 15 percent. For auto deals where a weighted average
FICO score is not disclosed, the subprime haircut schedule will apply.
Credit card ABS are considered prime if at least 70 percent or more of
the receivables have a FICO score greater than 660. FICO scores
must reflect performance data within the last 120 days. For credit
card trusts where the percentage of receivables with a FICO score of
greater than 660 is not disclosed, the subprime haircut schedule will
apply.
How will a borrower know if an ABS is considered prime or
subprime?
Issuers will publish in the prospectus whether the deal is prime or
subprime according to TALF criteria. If this is not published in the
prospectus, the deal will be considered subprime. Such
representations in the prospectus are 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.
Will the haircuts be the same for all borrowers for the same
assets?
Haircuts will vary across asset classes and securities’ average lives,
but not across borrowers.
What spreads will be offered on the TALF loans?
Borrowers will be able to choose either a fixed or a floating rate on
each TALF loan. In general, the interest rate on floating-rate loans
will be 100 basis points over 1-month LIBOR and the interest rate on
fixed-rate loans will be 100 basis points over the 1-year Libor swap
rate for securities with a weighted average life less than one year,
100 basis points over the 2-year Libor swap rate for securities with a
weighted average life greater than or equal to one year and less than
two years, or 100 basis points over the 3-year Libor swap rate for
securities with a weighted average life of two years or greater.
However, the interest rate spread on TALF loans backed by collateral
benefitting from a government guarantee—that is, FFELP ABS, SBA
7(a) ABS, and SBA 504 ABS—will be 50 basis points. That spread is
over the federal funds target rate (or the top of the federal funds
target range) plus 25 basis points for SBA 7(a) ABS, over one-month
LIBOR for FFELP ABS and over the three-year LIBOR swap rate for
SBA 504 ABS. Interest rates will be set on the subscription date.
Sector
Subsector
Fixed
(Weighted Average Life in
years)
Floating
<1
1-<2
>=2
Auto
1-year
LIBOR
swap
rate
+ 100
bps
2-year
LIBOR
swap
rate
+ 100
bps
3-year
LIBOR
swap
rate
+ 100
bps
1-month
LIBOR +
100 bps
Credit
Card
1-year
LIBOR
swap
rate
+ 100
bps
2-year
LIBOR
swap
rate
+ 100
bps
3-year
LIBOR
swap
rate
+ 100
bps
1-month
LIBOR +
100 bps
Equipment
1-year
LIBOR
swap
rate
+ 100
bps
2-year
LIBOR
swap
rate
+ 100
bps
3-year
LIBOR
swap
rate
+ 100
bps
1-month
LIBOR +
100 bps
Floorplan
1-year
LIBOR
swap
rate
+ 100
bps
2-year
LIBOR
swap
rate
+ 100
bps
3-year
LIBOR
swap
rate
+ 100
bps
1-month
LIBOR +
100 bps
Servicing
Advances
Residential
mortgages
1-year
LIBOR
swap
rate
+ 100
bps
2-year
LIBOR
swap
rate
+ 100
bps
3-year
LIBOR
swap
rate
+ 100
bps
1-month
LIBOR +
100 bps
Small
Business
SBA loans
7(a)
N/A
N/A
N/A
Fed Funds
Target +
75 bps
Small
Business
SBA loans
504
N/A
N/A
3-year
LIBOR
swap
rate
+ 50 bps
N/A
Student
Loan
Private
N/A
N/A
N/A
1-month
LIBOR +
100 bps
Student
Loan
Gov’t
guaranteed
N/A
N/A
N/A
1-month
LIBOR +
50 bps
How are the interest rates on TALF loans determined?
The interest rates on TALF loans are set with a view to providing
borrowers an incentive to purchase newly issued eligible ABS at yield
spreads higher than in more normal market conditions but lower than
in the highly illiquid market conditions that have prevailed during the
recent credit market turmoil.
Will the interest rate spread and haircuts change from month
to month?
The Federal Reserve will periodically review and, if appropriate,
adjust the TALF interest rate spread and haircuts for new loans,
consistent with the policy objectives of the TALF.
Why are the spreads on the loans backed by collateral
benefitting from government guarantees lower?
The lower credit risk of these ABS merits a lower risk premium on the
TALF loans.
OTHER
What is the primary dealer’s role?
The MLSA will specify a primary dealer’s roles and responsibilities,
including the agency functions to be performed on behalf of its
customers. Among other duties, the primary dealer shall:
Collect from its customers the amount of each borrower’s loan
requests, the CUSIPs of the ABS the borrower expects to
deliver and pledge against the loan and the prospectuses
and/or offering documents of the ABS expected to be pledged;
Submit aggregate loan request amounts on behalf of its
customers in the form and manner specified by the New York
Fed;
On the subscription date, submit a file to the custodian
containing a detailed breakdown of the loan requests, which
will, among other things, include the identity of the individual
borrowers, the amount of each borrower’s loan request and
the material information collected above;
Work with its customers to resolve any discrepancies identified
by the custodian;
Collect from its customers and deliver to the custodian the
administrative fee and any applicable margin required to be
delivered to the custodian on the loan settlement date;
Periodically receive from the custodian the portion of the
distributions on the collateral that are to be paid to its
customers and disburse such payments in accordance with the
instruction of its customers and provide any applicable tax
report to its customers; and
Receive, or forward, notices on behalf of its customers.
In addition, a primary dealer will be required to apply its internal
customer identification program and due diligence procedures (“Know
Your Customer” program) to each borrower and represent that each
borrower is eligible. A primary dealer will be required to provide the
New York Fed with information sufficient to describe the dealer’s
customer risk assessment methodology.
All primary dealers planning to participate in the TALF should review
the TALF Borrower Eligibility and New York Fed Due Diligence Policy
and should contact the New York Fed Compliance Function at
talf.compliance@ny.frb.org for further guidance.
What additional responsibilities does a primary dealer that is
an underwriter of an issue of asset-backed securities have
under section 10.1(d) of the MLSA?
While primary dealers generally do not have responsibility for the
accuracy of disclosure contained in the offering materials, section
10.1(d) of the MLSA makes an exception for primary dealers acting
as underwriters. Under section 10.1(d), a primary dealer that acts as
underwriter for an ABS issue represents that no information
contained in the ABS’ offering materials furnished by it is untrue as to
any material fact, or omits any material fact. The intention is that
the underwriter’s representation under Section 10.1(d) of the MLSA
as to the offering materials, taken together with the “reasonable
care” standard of liability under Section 17.0, would impose a duty as
to this disclosure coextensive with the underwriter’s legal obligations
under the federal securities laws. If, on the date offering materials
were delivered to the New York Fed or its custodian, the issuance and
distribution of the securities have been completed so that the primary
dealer is no longer acting as underwriter of the issuance, section
10.1(d) imposes no incremental duty on the primary dealer to "bring
down" the underwriter's due diligence to such date.
What constitutes “reasonable care” on the part of a primary
dealer in confirming the accuracy of the representation as to
eligibility of collateral for TALF loans?
The primary dealer is expected to have reviewed the relevant offering
materials (including the certifications contained therein) and, except
in the case of SBA collateral (as defined in the MLSA), separately
confirmed that the ratings currently applicable to the collateral meet
the eligibility criteria.
What are the tax reporting and withholding responsibilities of
primary dealers that participate in the TALF?
The primary dealers are responsible for managing any tax withholding
and reporting obligations for their customers. Primary dealers should
consult with tax counsel to understand the tax implications and
requirements of primary dealers for the specific tasks performed on
behalf of customers in connection with TALF.
What information will the primary dealer receive from the
custodian to assist in reconciling and distributing aggregate
monthly interest payments to investors?
With each payment distribution, the primary dealer will receive
information regarding the gross principal and interest amount paid by
the ABS collateral, as well as the principal and interest amount to be
remitted to the borrower. Should an interest deficiency exist, the net
interest and/or principal will be used to offset that deficiency, in
which case the primary dealer will be informed.
Are there any bankruptcy protections for the borrower if the
primary dealer should declare bankruptcy following its receipt
of principal and interest from the custodian, but prior to
disbursement to the borrower?
Once funds or collateral are transferred by the custodian to a primary
dealer or at the direction of the primary dealer, neither the
custodian/administrator nor the New York Fed has any obligation to
account for whether the funds or collateral are transferred to the
borrower.
Will the Securities and Exchange Commission (SEC) be
providing an exemption from Section 11(d)(1) of the
Securities Exchange Act of 1934 to permit primary dealers to
arrange TALF financing from the New York Fed on new issues
for which they may be underwriters?
The SEC has granted a limited exemption from the prohibition on
arranging certain credit under Section 11(d)(1) for those primary
dealers arranging TALF financing from the New York Fed on new
issues of non-exempted securities where such dealers may have been
within the preceding 30 days a "member of a selling syndicate or
group" in respect of the distribution of the new issue. This exemption
is limited to the arranging prohibitions of Section 11(d)(1), and does
not relieve primary dealers from any applicable limitations on direct
extensions of credit by them. Please refer to the SEC's letter to the
New York Fed on this matter.
May a primary dealer that underwrites or sells an issuance
and acts as an agent to arrange financing for a TALF borrower
enter into transactions with or on behalf of the borrower
intended to insure, in whole or in part, against losses on
securities purchased with TALF financing?
In Appendix I to the MLSA, each primary dealer will agree that it and
its affiliates will not acquire collateral from a borrower that it
underwrites at a price designed to reduce or eliminate any loss that
such borrower would realize on sale "or enter into any other
agreement or consummate any other transaction intended to have
the same effect." This contractual provision prohibits hedges since
these hedges are "other agreements" or "other transactions" intended
to protect the borrower against loss. As a result, in the
circumstances described above, a primary dealer will not be
permitted to enter into any transaction that is designed to hedge
against losses specific to securities purchased with TALF financing.
This prohibition extends to both direct hedges, such as credit default
swaps, and correlative hedges, such as short-selling the ABX index.
However, the prohibition does not extend to hedges on a borrower’s
broader portfolio, which may include securities purchased with TALF
loans.
May an issuer or sponsor enter into a transaction with or on
behalf of the borrower intended to insure, in whole or in part,
against losses on TALF collateral securitized by the issuer or
sponsor?
To ensure an independent assessment of risk by investors, issuers
and sponsors and their affiliates are prohibited from entering into a
transaction designed to hedge against an investor’s losses on ABS
purchased by the investor with TALF financing and securitized by such
issuer or sponsor.
Would the restrictions on hedging transactions prohibit a
primary dealer from entering into an interest rate swap with
an ABS trust, if it is intended solely to create a floating-rate
security based off of fixed-rate receivables?
Provided that the swap agreement is entered into at a fair price, such
an arrangement would not be prohibited, as the potential borrower is
not a party to the swap agreement.
What executive compensation restrictions will apply to
sponsors, underwriters and borrowers under the TALF
program?
The goal of the TALF program is to encourage securitization of
privately originated loans in important asset classes to consumers
and businesses. The TALF provides support to ABS sponsors, who are
providing credit to consumers and businesses, and to ABS investors,
who are bringing new capital to this frozen market. The success of
the program is important to halting the destructive credit cycle and to
restarting credit formation.
Executive compensation restrictions are targeted towards ensuring
that executives of institutions that receive government support are
not unjustly enriched at the taxpayers’ expense. Given the goals of
the TALF and the desire to encourage market participants to stimulate
credit formation and utilize the facility, the restrictions will not be
applied to TALF sponsors, underwriters, and borrowers as a result of
their participation in the TALF.
What is the legal basis for the TALF?
The TALF is authorized under section 13(3) of the Federal Reserve
Act, which permits the Federal Reserve Board, in unusual and exigent
circumstances, to authorize Reserve Banks to extend credit to
individuals, partnerships and corporations that are unable to obtain
adequate credit accommodations.
What is Treasury's role in the TALF?
The U.S. Treasury’s Troubled Assets Relief Program (TARP) will
purchase $20 billion of subordinated debt in an SPV created by the
New York Fed. The SPV will purchase and manage any assets
received by the New York Fed in connection with any TALF loans.
Residual returns from the SPV will be shared between the New York
Fed and the U.S. Treasury.
How will the Federal Reserve report lending under the TALF?
Balance sheet items related to the TALF will be reported on the H.4.1
weekly statistical release entitled “Factors Affecting Reserve Balances
of Depository Institutions and Condition Statement of Federal Reserve
Banks.” There will be an explanatory cover note on the release when
items are added. In addition, the value of the collateral pledged to
the New York Fed to secure TALF loans will be reported on the
Federal Reserve Board’s website.
What measures have been put in place to protect the TALF
against credit losses and fraud?
The Federal Reserve and the Treasury have structured the TALF to
minimize credit risk for the U.S. government to the greatest extent
possible, consistent with achieving the program’s purpose of
encouraging lending to consumers and businesses. Examples of the
structural features of the TALF that minimize credit risk include the
following: (1) investors are required to supply risk capital in the form
of haircuts; (2) the TALF haircut methodology is risk sensitive across
asset class and maturity; and (3) the TALF only accepts collateral
that has received two credit ratings in the highest investment-grade
rating category or that is fully U.S. government-guaranteed.
The New York Fed also has designed a number of measures to
discourage fraudulent activity associated with the TALF. The New
York Fed has established a compliance framework that includes a
borrower acceptance standard, an assurance program related to
borrower eligibility requirements, on-site inspection rights related to
the borrower’s obligations under the MLSA in respect to its
borrowings under the TALF and the right to reject a borrower for any
reason. The New York Fed has also retained the right to review all
loan files held by the custodian pertaining to each borrower.
Furthermore, the New York Fed is establishing a telephone and
internet-based hotline for reporting of fraudulent conduct or activity
associated with the TALF.
In addition, 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, and that the issuer has not made any untrue
statements of material fact to an NRSRO to obtain the credit rating of
the ABS. If the collateral is found to be ineligible, the New York Fed
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. 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 non-recourse feature of the loan
becomes inapplicable and the borrower must repay the loan.
Moreover, as indicated above, to assist the New York Fed in screening
borrowers, primary dealers are required to apply their internal
customer identification program and due diligence procedures to each
borrower and escalate information relating to those borrowers
assessed as high risk to the New York Fed.
Is there a unique regulatory capital treatment for TALFfinanced ABS held by a depository institution or bank holding
company?
The regulatory capital requirements for securities financed by a TALF
loan are the same as those for securities that are not financed by a
TALF loan.
Where should questions regarding the TALF be directed?
Questions should be directed to the New York Fed’s Public Affairs
department: 212-720-6130 or via email to TALF@ny.frb.org.
How may I receive updates regarding changes to TALF
documents?
Sign up for email alerts.
___________________________
1The amount of prepayment in dollars is determined by the following
formula:
Par*(1-h)*(min(Price,1.10*Par)/Par-1)/(b*WAL)
Par is the par value of the bond.
h is the haircut from the above table corresponding to the average life and
asset class of the bond.
Price is the price of the bond.
WAL is the weighted average life of the bond measured in years and
calculated at the prepayment assumption used to compute average life
above.
b is equal to 12, 4, or 2 for securities with a remittance frequency of
monthly, quarterly, or semi-annually, respectively.
FAQs: April 3, 2009 ››
Changes from April 3 FAQs
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