The Federal Reserve of New York yesterday released a revised set of frequently-asked-questions related to the Term ABS Loan Facility (TALF).

These revisions offer additional clarity on the Federal Reserve's funding commitment under the program. The New York Fed said that an eligible borrower posting eligible collateral should receive financing, except in exceptional cases. The exceptional cases include a revelation of materially adverse information about the borrower prior to settlement.

A source from a dealer told ASR that  this is “new and powerful language” that gives assurance to those who want to access the program.

The source added that delays in clarifying the terms of the customer agreement under TALF are understandable, given the complex nature of transactions under this program. “The TALF is different from the Federal Deposit Insurance Corp.’s (FDIC) Temporary Liquidity Guarantee Program, which merely offers a guaranty,” said the source.

Sources said that one apprehension that market players have is the unreasonable expectation that there will be a flurry of deals that would come forth for TALF's March subscription date.

The source from the dealer said that he expects more transactions to come forth in April, which is a more reasonable time frame to give people the opportunity to understand the terms of the customer agreement used under the program. “Why do healthy companies that don’t need the funding right away rush to come to market with a TALF-eligible deal?” asked the source.

Aside from the funding commitment, additional clarifications made yesterday include a description of attestation requirements for SBA 7(a) and 504 programs as well as refined definitions of prime and subprime for auto ABS. More detailed information on the regulatory capital requirements for securities financed by a TALF loan were also revealed.

The Federal Reserve made it clear yesterday that the TALF was not made to offer loans directly to small businesses or consumers. Instead, the aim is to increase credit availability to these sectors by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

The $10 million minimum loan size and the requirement that all loans be secured by eligible collateral should make direct borrowing under this program unlikely for small businesses and consumers.

Another clarification made was on the condition of the TALF loan's disbursement, which is that an accounting firm retained by the sponsor must provide an attestation showing that the ABS is TALF eligible.

However, SBA pool certificates and development company participation certificates are not required to be accompanied by an auditor attestation. The SBA will post on its Web site the CUSIPs of all TALF-eligible SBA pool certificates and development company participation certificates, according to a client alert by the Proskauer Rose’s Economic Crisis Response Practice Group

The clarifications also included refined definitions of prime and subprime as it relates to auto ABS as well as information on the regulatory capital requirements for securities that are financed by a TALF loan.

Eligible auto dealer floorplan ABS now includes 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 for prime and subprime auto ABS in terms of the haircut schedule have also been refined. Auto loan and lease ABS will be considered prime if the receivables' weighted average FICO score is 680 or greater. Meanwhile, receivables that do not carry a FICO score are assigned the minimum FICO score of 300 for this calculation.

The commercial receivables could be excluded from this calculation if these accounts' historic cumulative net losses have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus, Proskauer Rose explained  

Additionally, the percentage of commercial receivables in a trust must not go over 15%.
For borrowers to know whether an ABS is considered prime, issuers must publish in the prospectus if the deal is prime according to TALF criteria. If this were not included in the prospectus, the transaction will be considered subprime. Such representations in the prospectus will be seen as material to the New York Fed's determination of the haircuts for TALF loans. This is a component of the representation with regard to the offering document's accuracy .

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, the New York Federal Reserve clarified.

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