Fed Releases Updates to Term Asset-Backed Securities Loan Facility Program Reauthorized in CARES Act
The Federal Reserve Bank of New York went "live" on May 21, 2020, with updates about the Term Asset-Backed Securities Loan Facility Program (TALF Program) that was reauthorized under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The original TALF Program was created during the 2008 financial crisis and successfully established a market for consumer lending-related assets, including mortgage servicing receivables, credit cards, auto loans and other similar assets. The new program excludes most mortgage-related assets other than a limited category of commercial mortgage-backed securities (CMBS) while focusing on auto financing, credit cards and similar offerings.
Master Loan and Security Agreement
The Master Loan and Security Agreement (MLSA) released on May 21, 2020, will govern the contractual relationship between the TALF Agents (large financial institutions acting on behalf of the asset-backed collateral holders that will be borrowers) and the Administrator, which is the Bank of New York Mellon (BNY Mellon). Despite the slightly abstract notion that the agreement is between a TALF Agent and BNY Mellon, these are the binding contracts that dictate the terms of the arrangement between any borrower and the Federal Reserve. Here is a link to the program's terms and conditions, as well as another one to frequently asked questions (FAQ).
- CEO Attestations (Lender of Last Resort and Insolvency). Like other CARES Act programs, the TALF relies on CEO attestations. The first is in Appendix 2B and requires that 1) the Borrower is unable to secure adequate credit accommodations from other banking institutions, and 2) the Borrower is not insolvent.
- Lack of Available Credit. Lack of adequate credit does not mean that no credit is available: "Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market."
- Insolvent. According to the Federal Reserve Act and the Board's Regulation A, it is defined as being in bankruptcy, while the Title II resolution under the DODD-Frank Act (DFA) adds "any other Federal or State insolvency proceeding" or fails to pay "undisputed debts as they become due during the 90 days preceding the date of borrowing under the TALF."
- Jurisdiction. The State of New York and the exclusive jurisdiction of the U.S. courts for the Southern District of New York.
- Dividends and BuyBacks. The executive compensation limitations, stock repurchase ban and dividend restrictions that were detailed in the CARES Act do not apply to the TALF.
- Ownership. The MLSA requires that the borrower continuously monitor the ownership interests of the company to ensure that prohibited parties do not acquire an interest during the loan. The prohibited parties are direct and indirect ownership by foreign governments, or any company that is owned by the president, his family or the vice president. Furthermore, the borrower must maintain significant operations in the U.S. (with a significant number of employees in the U.S.; the Fed would not consider any parent company or sister affiliate under this test), an account relationship with a TALF Agent and stay organized under the laws of the U.S.
- Collateral Eligibility. For newly issued asset-backed securities (ABS), a Public Company Accounting Oversight Board (PCAOB)-recognized accounting firm must provide an Auditor Attestation, the Agreed-Upon Procedures (AUP) Report (TALF) and, if available, the AUP Report (Industry).
- TALF Agents. The list of TALF Agents is available here, and the Fed said it may increase the number in the future.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.