2nd UPDATE: NY Fed Revises TALF Compliance, Eligibility Terms
11 März 2009 - 8:19PM
Dow Jones News
A week before the Federal Reserve of New York launches its
program to boost the asset-backed securities market, the central
bank emphasized it will extend loans to all eligible borrowers.
It also revised compliance terms for participating investors and
refined definitions on the securities eligible for the Term
Asset-Backed Securities Loan Facility, commonly known as TALF.
In its revision Wednesday, the central bank stopped short of
guaranteeing funding, but said if an eligible borrower provides
qualified collateral "there should be every expectation of
financing."
The bank said it reserves the right not to fund "in exceptional
cases," if it receives "adverse information" about the borrower,
but those cases are expected to be "isolated and rare."
The Fed hopes to encourage greater participation by making these
clarifications. The Fed's "unfettered right" to decline a loan
application on closing day was a concern for some investors, said
Reed Auerbach, a partner at McKee Nelson LLC, a New York-based
securitization law firm.
TALF is one of several programs initiated by the Fed to help
stabilize financial markets and stimulate lending. Through TALF,
the Fed will extend loans that will be secured by newly created
bonds backed by auto, credit card, student and small business
loans. The bonds must have the highest triple-A rating.
The revisions issued also include compliance requirements on
inspection and recourse if collateral is found ineligible.
Issuers and sponsors have to ensure the information included in
their documents includes a signed certificate indicating the
collateral is TALF-eligible and that the Fed is indemnified from
any losses if these certifications are untrue.
Some investors may find that providing such details and the
possibility that the Fed or other agencies may inspect their books
onerous.
Allowing the Fed to inspect investor's documents could be a
"deterrent," said Mark Fontanilla, managing director at
Capitalfusion Partners, a small structured credit advisory firm
looking to participate in the TALF program. "It could be more of a
hassle than it is worth."
That said, Capitalfusion still plans to tap the program.
Steve Persky of Dalton Investments, a hedge fund based in Los
Angeles, says it is "reasonable" for the Fed to go examine these
documents because it is lending money to these firms.
"If you want the money, you should have to open your books,"
Persky said. "As a taxpayer, I would be shocked if the Fed and the
Treasury gave away money without checking."
Persky said his firm is likely to tap TALF when it expands to
include residential and mortgage-backed securities. The Fed hasn't
indicated when this will happen though the program is slated to
expand to $1 trillion and include these more troubled assets.
The New York Fed also fine-tuned its definitions of prime and
subprime as it relates to auto asset-backed securities and refined
eligibility criteria for bonds backed by dealer inventories.
Auto loan and lease-backed bonds will be considered prime if the
weighted average FICO score of the receivables is 680 or greater.
The FICO score is a number assigned to depict the credit quality of
the borrower.
Receivables without a FICO score are assigned the minimum FICO
score of 300 for this calculation, the Fed said on its Web
site.
Credit card asset-backed securities are considered prime if at
least 70% or more of the receivables have a FICO score greater than
660. FICO scores must reflect performance data within the last 120
days.
To help remove any ambiguities about auto inventory-backed
securities, the central bank said Wednesday that eligible bonds
must be issued "to refinance existing auto dealer floorplan
asset-backed securities" maturing in 2009 and may also include
bonds in which all or most of the lines of credit underlying the
bonds were originated on or after Jan. 1, 2009.
The TALF program is set to launch on March 17 as the bank begins
to accept applications for loans. The bank will begin disbursing
funds on March 25.
More information on the revisions can be found on the New York
Fed's Web site, http://www.newyorkfed.org/.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371;
anusha.shrivastava@dowjones.com