• Federal Reserve Adopts Changes in Rating Agency Criteria for TALF ABS
  • December 11, 2009
  • Law Firm: Alston & Bird LLP - Atlanta Office
  • Today, the Federal Reserve announced the adoption of a final rule  that establishes guidance for the Federal Reserve Bank of New York (FRBNY) in “determin[ing] the eligibility of credit rating agencies” for the Term Asset-Backed Securities Loan Facility (TALF). The final rule is substantially the same as the proposed rule announced on October 5, 2009, and applies only to asset-backed securities (ABS) and not commercial mortgage-backed securities (CMBS). Presently the list of TALF-eligible nationally recognized statistical rating organizations (NRSROS’s) as specified in the TALF guidance for ABS other than CMBS includes only  Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. The new rating agency criteria set forth in the final rule “is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer,” by extending the pool of eligible NRSROs.

    As a threshold requirement the final rule permits the FRBNY to accept “only a credit rating issued by a credit rating agency that is registered with the Securities and Exchange Commission” as a NRSRO for issuers of ABS. Under the final rule, NRSROs that wish to be considered eligible must have issued ratings on at least ten transactions within four enumerated asset categories since September 30, 2006. Further, the FRBNY will only accept credit ratings “from a credit rating agency that has a current and publicly available rating methodology specific to ABS” within each of the seven ABS TALF asset sectors as referenced in the TALF haircut schedule “for which the credit rating agency wishes its rating to be considered for TALF.” Under the rule the FRBNY reserves the right to review the use of ratings from a credit rating agency in one or more of the seven TALF ABS sectors and make a determination that such credit ratings are no longer acceptable in the event the NRSRO no longer met the stated eligibility requirements.
     
    NRSROs wishing to be considered eligible under TALF should provide written notification to the FRBNY as indicated and include the specified information requested under the rule. 

    NRSROs determined eligible pursuant to the final rule will take effect with the February 2010 TALF subscription. The FRBNY in connection with its announcement today also released information on future program changes. The FRBNY indicated that it may limit the volume of TALF loans secured by legacy CMBS, and that it was presently considering whether to allocate such volume pursuant to an auction process or “other procedure.” 

    The TALF is a $200 U.S. billion non-recourse credit facility funded by the FRBNY that was originally scheduled to terminate December 31, 2009. In August,  the Federal Reserve and the U.S. Treasury jointly issued releases announcing the extension of the TALF through March 31, 2010, for TALF loans against newly issued ABS backed by consumer and business loans and legacy commercial mortgage-backed securities (CMBS), and through June 30, 2010, for TALF loans against newly issued CMBS.