To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint, or Standard Poor’s and meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk, as outlined in the terms and conditions which can be found here: http://newyorkfed.org/markets/talf_cmbs_terms.html.

Key Terms:

• As of the TALF loan subscription date, at least 95 percent of the underlying properties on which mortgages are held, by related loan principal balance, must be located in the United States or one of its territories.
• The New York Fed will engage a collateral monitor to assess the risk of proposed CMBS collateral.
• In determining whether a particular pool of loans is TALF-eligible, the collateral monitor will give heavy consideration to the following mortgage pool characteristics:
  o historical losses,
  o concentrations of loans that are delinquent,
  o have special servicing or on servicer watch lists or concentrations of subordinate-priority mortgage loans,
  o lack of diversification with respect to loan size, geography, property type, and borrower sponsorship.
• Borrower may elect a three-year or five-year maturity. A three-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 3-year Libor swap rate. A five-year TALF loan will bear interest at a fixed rate per annum equal to 100 basis points over the 5-year Libor swap rate.
• The New York Fed may limit the volume of TALF loans secured by legacy CMBS, and is considering whether to allocate such volume via an auction or other procedure.

 It should be noted the New York Fed is in the process of establishing additional requirements for legacy CMBS, which Troutman Sanders will continue to monitor and report.

The New York Fed released details of the next TALF subscription date, which will be June 2, with loan settlement dates on June 9. As always, interested borrowers may obtain a pre-certification review by the New York Fed in advance of the next subscription date by having their primary dealer submit their name and details of the loan desired.

Collateral haircuts applicable to the June operation are as follows:

The first subscription date for newly issued CMBS (issued on or after January 1, 2009) will be June 16, with subsequent dates pre-announced in advance thereafter. Both types of CMBS collateral are expected to have the same subscription date going forward, usually in the middle of the month, while all other TALF-eligible collateral will continue operations in the first part of each month.

CONTACTS

Michael Leichtling
212.704.625

Jake Lutz
804.697.1490

Miles A. Borden
212.704.6161

Robert A. Friedman
212.704.6048

Rory S. Clark
212.704.6056

In addition to providing substantial additional funding for investigation and enforcement, the FERA enhances prosecutors’ statutory tools for charging fraud by adding private mortgage lenders to the definition of financial institutions, specifically covering TARP and Recovery Act recipients under the fraud statute, adding commodities fraud to the securities fraud statute, clarifying the comprehensive scope of the money laundering statute, and expanding the reach of the False Claims Act.

The Drivers of FERA and SIGTARP

As the economy began to falter in early 2008 and the Department of Justice shifted resources from national security to fraud investigations, it admitted that its backlogs were too large to allow increased attention to new cases.  Provisions to add anti-fraud funding to the American Recovery and Reinvestment Act (“Recovery Act”) were stricken before its passage.  Congress has now responded by authorizing substantial funding increases for 2010 and 2011 to the Department of Justice ($165 million), the Securities and Exchange Commission ($40 million) and other agencies in the housing and financial sectors ($80 million).  The intended effect is to add 300 federal agents  to the current 250 FBI agents, 200 more prosecutors, and 200 forensic analysts. 

The legislation, styled the Fraud Enforcement and Recovery Act (“FERA”), also specifically includes all recipients under the Emergency Economic Stabilization Act of 2008 (“EESA”) and the Recovery Act as subject to all federal fraud laws, including the False Claims Act.  And, to assure that none of the participants in the housing meltdown escape the full range of regulatory examination, the statute includes mortgage brokers and initial lenders in the definition of “financial institution.”

This legislation comes on the heels of the establishment and recent additional powers of the Special Inspector General for the Toxic Asset Recovery Program (“SIGTARP”), who has auditing, investigative and criminal referral authority over every recipient and participant in TARP funding programs, including, not only the Department of Treasury’s capital enhancement funding activities, but entities created under the Term Asset-Backed Loan Program (“TALF”): the Legacy Loan Program and the Legacy Security Program under the Public-Private Investment Program (“PPIP”).  SIGTARP Neil Barofsky has initiated a monthly average of 10 criminal investigations and numerous audits in the first quarter of his activities.

Details of the FERA Provisions Expanding Coverage of the Criminal Code

Private Mortgage Lending Added Under the Criminal Code

• The definition of “financial institution” in 18 U.S.C. §20 is expanded to include a mortgage lending business, defined (in a new provision, 18 U.S.C. §27) as “an organization which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries,” whose “activities affect interstate commerce.”  Thus, federal criminal code provisions now reach private mortgage firms and their affiliates.
• The current provision criminalizing false statements in loan and credit applications, 18 U.S.C. §1014, is revised to include specifically false statements made to influence any action by a mortgage lending businesses.  Coupled with the definitional changes, this amendment clarifies that the statute will extend beyond its current reach of frauds affecting federal agencies, banks and credit unions to include those affecting private mortgage brokers and companies.

TARP, Stimulus Programs Added Under the Criminal Fraud Statute

• The federal criminal code is also amended in18 U.S.C. § 1031, prohibiting fraud against the United States, to include both funds received under the various TARP programs and funding under the Recovery Act.

Commodities Fraud Added to the Criminal Securities Fraud Statute

• The securities criminal fraud statute (18 U.S.C. § 1348) is expanded to include fraud involving commodities options or futures, which the Committee report notes have included derivatives and other financial products that contributed to the current financial crisis.

All Proceeds of Money Laundering Are Covered

• The money laundering statute is revised to reverse the Supreme Court’s Santos decision that suggested that “proceeds” of unlawful activity included only actual profits.  The definition of “proceeds” is amended to confirm that it includes the entire gross receipts of illegal activity, not just the “profit” component.
• Movement of money across international borders in furtherance of tax evasion is now subject to money laundering statute.

Civil False Claims Act (FCA)

• The current FCA is expanded to reach any request or demand for payment that is presented to contractors, grantees or others if the money is to be spent or used on the government’s behalf, or “to advance a government program or interest” if the U.S. has provided any portion of the money or will reimburse the recipient.
• Treble damages actions can now be based on the use of any false records or statements that are “material to” the submission of a false claim.  Previously the FCA reached only those false statements “made or used” to get a false claim paid, a narrower category of actionable false statements.
• These amendments are designed to reverse the effects of the Supreme Court’s decision in Allison Engine Co. v. U.S. ex rel. Sanders, holding that the government must prove that a defendant specifically intended that the government itself would pay a claim, and the D.C. Circuit decision in United States ex rel. Totten v. Bombardier Corp., which held that false claims liability required presentment of a claim to an officer or employee of the government and not to a grantee.
• The “reverse” false claims provision is revised by adding a section that includes any action designed to conceal, avoid, or decrease a payment obligation to the government, expanding the current provision that reaches only the making, use, or causing the use of a false record.  “Obligations” of the government are now defined to include not only fixed but also contingent obligations, codifying existing Department of Justice policy.  A specific statement is added that retention of overpayments is an “obligation” for purposes of the FCA.
• The conspiracy provision of the FCA is expanded to include conspiracies to violate any requirement of the statute, not only conspiracy to get a false claim paid as provided in the current statute.
• The existing scienter standard is retained:
  • Liability will attach for the “knowing” submission of a false claim, use of a false statement or record in making a claim or in reducing an amount otherwise owed, or retention of money due and owing to the government.
  • “Knowing” is defined as a person acting, with respect to information, with actual knowledge that the information is false, or with deliberate ignorance or reckless disregard of the truth or falsity of the information.
  • No specific intent to defraud is required.
     

CONTACTS

Michael Leichtling
212.704.625

Jake Lutz
804.697.1490

Miles A. Borden
212.704.6161

Robert A. Friedman
212.704.6048

Rory S. Clark
212.704.6056

Revised Interest Rates

Interest rates applicable to fixed rate loans for the May operation have been amended on the basis that the 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.

The following chart summarizes the revised collateral haircuts, with red font indicating the changes since the April TALF operation.

Other Key Changes

In determining who are eligible borrowers under the TALF, the definition of U.S.-domiciled obligors has been clarified to include those who are domiciled in a U.S. political subdivision or U.S.-organized territory.

Within the array of acceptable eligible collateral, zero coupon ABS are not eligible under the program.

In order to obtain TALF funding, each issuer and sponsor must submit a certification as to the eligibility of the underlying collateral.  Assertions pertaining to collateral eligibility must be made as of the date of the final prospectus or offering document, when possible.  Should this not be feasible, assertions as of the date of the “red” prospectus or offering document are acceptable.  Similarly, the assertions made by the auditors in the auditor attestation form that must be submitted in order to obtain TALF funding should be as of the same date the issuer and sponsor make their respective assertions.  The link to both documents can be found here [http://www.newyorkfed.org/markets/talf_docs.html].

Contact:

Rory S. Clark

How TALF Works

Every month (See Key Dates below), the Federal Reserve Bank of New York (New York Fed) will accept applications from primary dealers acting on behalf of eligible borrowers who own qualifying collateral for three-year TALF loans to help fund the purchase of additional ABS.  Leverage available to each borrower will be an amount equal to the lesser of the par or market value of the pledged ABS minus a haircut, which is essentially risk capital determined by the class of collateral and the degree of risk associated with the collateral.  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 ranging from 5% to 16%, and the borrower will periodically prepay a portion of the loan.  Initial collateral haircuts are as follows:

In the event the borrower does not repay the TALF 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.  Using funds allocated from the Troubled Assets Relief Program (TARP), the Treasury will purchase $20 billion of subordinated debt in the SPV created by the New York Fed.

General TALF Terms and Conditions

• Loans have a term of 3 years (interest payable monthly), are non-recourse to the borrower, and will not be subject to mark-to-market or re-margining requirements.

• There is no limit on the amount of loans a borrower may request, subject to the minimum loan requirement of $10 million, with no maximum.

• Eligible borrower must be a U.S. company that owns eligible collateral and maintains an account relationship with a primary dealer.  U.S. company includes:
  • Any business entity or institution organized under U.S. laws or a political subdivision or territory thereof that conducts operations or activities in the U.S., including any U.S.-organized subsidiary of a foreign parent so long as such entity conducts significant operations or activities in the U.S. and is not directly or indirectly controlled by a foreign government.
  • A U.S. branch or agency of a foreign bank that maintains reserves with a Federal Reserve Bank.
  • An investment fund that is U.S.-organized and managed by an investment manager that has its principal place of business in the U.S., including a U.S.-organized investment fund subsidiary of a foreign entity so long as such entity is not directly or indirectly controlled by a foreign government and the investment manager is not directly or indirectly controlled by a foreign government.

• Eligible collateral includes AAA-rated (i) auto loans, (ii) student loans, (iii) credit card loans, (iv) equipment loans, (v) floorplan loans, (vi) small business loans fully guaranteed as to principal and interest by the U.S. Small Business Administration and (vii) receivables related to residential mortgage servicing advances.  All collateral must be issued on or after January 1, 2009.  Eligible collateral does not include ABS that obtain AAA-rated credit ratings based on a third-party guarantee or ABS placed on review or watch for downgrade by a nationally recognized ratings organization.

• An administrative fee of 5 basis points of the loan amount will be assessed on the settlement date.

• Recently imposed executive compensation restrictions will not be imposed on TALF sponsors, underwriters and borrowers should they participate in TALF.

In order to provide more insight into the TALF and respond to common concerns regarding the program, Chairman Bernanke released a joint statement with William C. Dudley, the President of the New York Fed on April 7. The text of the Joint Response to the Congressional Oversight Panel’s inquiry into the TALF can be found here.

Expansion of TALF – The Public-Private Investment Program

On March 23, 2009, the Treasury – in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve – announced the initial details of its Public-Private Investment Program, intended to partner public and private funding to the troubled real estate-related assets that helped spur the current financial crisis.  While the program has two components, the TALF was expanded by the Legacy Securities Program which is expected to include commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS) issued prior to 2009 with a rating of AAA by two or more nationally recognized ratings organizations at origination.  This expansion can lead to an increase in lending of up to $1 trillion.  For more information regarding the Legacy Securities Program, please refer to our advisory that can be found here.

Key Dates

The New York Fed will announce TALF loan subscription and settlement dates on the first Tuesday of every month through December 2009, unless the TALF is extended.  The first offering of TALF funding closed on March 19, with a modest $1.9 billion in auto loans and $2.8 billion in credit card loans being requested.  The second offering of TALF funding closed on April 7, resulting in $1.7 billion requested between auto and credit card loans.  Interest rates applicable to the second offering of TALF were as follows:

While the date and details of the next TALF funding have not been released, interested borrowers may obtain a pre-certification review by the New York Fed in advance of the next subscription date by having their primary dealer submit their name and details.

The Master Loan and Security Agreement and other forms that apply to TALF loans can be downloaded at http://www.newyorkfed.org/markets/talf_docs.html.

Troutman Sanders Role

Troutman Sanders has already assembled an experienced multi-disciplinary team to guide clients through the TALF, as well as other programs established as part of Treasury’s Financial Stability Plan.  We look forward to assisting existing clients and new clients with opportunities that have been created through the TALF.

Please continue to check our website, as we will continue to follow developments related to the TALF and to update this advisory with additional relevant information as soon as it is released.

CONTACTS

Michael Leichtling
212.704.625

Jake Lutz
804.697.1490

Miles A. Borden
212.704.6161

Robert A. Friedman
212.704.6048

Rory S. Clark
212.704.6056

This Advisory addresses the Legacy Securities Program.  For more information regarding the Legacy Loans Program, please refer to our Advisory that can be found here.

The following links lead to more information regarding this program:

Equity Investment in the Legacy Securities Program

Debt Financing Available to Private Vehicles

Governance of Private Vehicles

A Sample Legacy Securities Program Investment

Process for Application for Private Fund Managers

Questions Raised by the Legacy Securities Program

Troutman Sanders’ Role

Troutman Sanders has already assembled an experienced multi-disciplinary team to guide clients through the Legacy Securities Program, as well as other programs established as part of Treasury’s Financial Stability Plan.   We look forward to assisting existing clients and new clients with opportunities that will be created through the new Public-Private Investment Program. 

Please continue to check our website, as we will continue to follow developments related to Legacy Securities Program and to update this advisory with additional relevant information as soon as it is released.  If you have any questions or would like to contact a member of our Legacy Securities Program team, please feel free to call any of the Troutman Sanders lawyers listed above.

CONTACT

Michael “Mike” A. Leichtling
212.704.6257

Jake Lutz
804.697.1490

Miles M. Borden
212.704.6161

Anthony D. Greene
212.704.6194

On March 26, 2009, the FDIC held a conference call with market participants to provide an overview of the Legacy Loans Program and to commence a two week comment period (ending April 10) in which market participants’ input is welcome to help structure the program. Troutman Sanders participated on this conference call and will continue to participate in the structuring phase of the Legacy Loans Program.

This Advisory addresses the Legacy Loans Program.  For more information regarding the Legacy Securities Program, please refer to our Advisory that can be found here.

The following links lead to more information regarding this program:

Synopsis of Legacy Loans Program

Step-by-Step Process for Purchasing Eligible Loan Pools

A Sample Legacy Loans Program Investment

Questions Raised by the Legacy Loans Program

Troutman Sanders’ Role

While FDIC officials have alluded to a time period of 8-10 weeks before the first auction occurs, Troutman Sanders has already assembled an experienced multi-disciplinary team to guide clients through the Legacy Loans Program, as well as other programs established as part of Treasury’s Financial Stability Plan. We look forward to assisting existing clients and new clients with opportunities that will be created through the new Public-Private Investment Program. Specifically, our team can assist Participant Banks and private investors with involvement during the two week comment period and with their future participation in the Legacy Loans Program.

Please continue to check our website, as we will continue to follow developments related to Legacy Loans Program and to update this advisory with additional relevant information as soon as it is released. If you have any questions or would like to contact a member of our Legacy Loans Program team, please feel free to call any of Troutman Sanders lawyers listed above.

CONTACT

Michael “Mike” A. Leichtling
212.704.6257

Jake Lutz
804.697.1490

Miles M. Borden
212.704.6161

Anthony D. Greene
212.704.6194

The Legacy Loan Program will involve FDIC auctions for pools of eligible whole loans identified by participating banks.  FDIC will provide guaranteed debt financing collateralized by the purchased loans and Treasury will provide equity coinvestment.  Private Asset Managers will control and manage the pools subject to FDIC oversight. 

The Legacy Securities Program will be incorporated into the previously announced Term Asset-Backed Securities Loan Facility (TALF) and will provide nonrecourse debt financing for private sector purchases of pre-2009 residential and commercial mortgage-backed securities originally rated AAA.  Treasury will select up to five asset managers to raise capital and receive matching funds. 

While Treasury’s announcement includes the basic program structure, many details of implementation are still under development by Treasury, the Fed, and the FDIC.  The FDIC has announced plans to release more details in the near future through a process providing for public comment prior to implementation. 

Troutman Sanders will assist clients in all relevant areas and will provide additional information to clients regarding these programs as it becomes available.  Fact sheets involving the program as well as FAQs, Private Asset Manager Applications, and Summary of Terms for Legacy Securities and Legacy Loans are available at:

• White Paper
• Legacy Securities Summary of Terms
• Legacy Securities FAQs
• Application for Private Assets Managers
• Legacy Loans Summary of Terms
• Legacy Loans FAQs

CONTACT

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286

Key bank supervisory components of the Plan are enhanced financial analysis and comprehensive stress testing of banks, a revised capital assistance program, and expanded disclosures by banks and regulators.  There are no specifics for the comprehensive stress test although the guidance and recent practice indicate a focus on testing core earnings against anticipated loan losses and capital.  Banking agencies are charged with developing coordinated, accurate, and realistic assessment criteria, as well as procedures for a forward looking assessment designed to indicate whether banks are prepared to withstand future risks.  The Treasury announcement cautions supervisors against overly conservative positions or steps that would inappropriately constrain lending. 

A revised capital assistance program will be available to institutions that survive a comprehensive stress test.  Treasury will provide a capital buffer to help absorb losses and serve as a bridge to receiving increased private capital.  Participating banks will receive preferred investments from Treasury in the form of preferred securities that can convert to common equity if needed to preserve lending in a worse than anticipated economic downturn.  These investments will be held by a Financial Stability Trust.

Additional restrictions will apply to banks participating in the revised capital assistance program.  Until the government investment is repaid, participating banks may not: (i) pay dividends in excess of $.01 per share; (ii) purchase any privately held shares; or (iii) make cash acquisitions of healthy banks.  Further, executive compensation is limited in essentially the same manner presented by Treasury on February 4.  Participating institutions are also required to participate in mortgage foreclosure mitigation programs consistent with guidelines that Treasury will release based on industry standards best practices. 

The Plan’s transparency and accountability agenda requires banks to show how capital assistance will expand their lending and how every dollar of capital they receive is enabling them to preserve or generate new lending compared to what would have been possible without the assistance.  Each applying bank is required to submit a plan for its use of capital to preserve and strengthen its lending capacity.  This increased disclosure includes a monthly report to Treasury detailing loan volume by loan type, the number of new loans provided to businesses and consumers, and how many asset-backed and mortgage-backed securities were purchased. 

Signaling new levels of disclosure, the “taxpayers’ rights to know component” provides that all information disclosed or reported to Treasury by recipients of capital assistance will be posted on FinancialStability.gov.  The rational is that taxpayers have the right to know whether these programs are succeeding in creating and preserving lending and financial stability.  Any political interference with investment decisions or involvement of politician or lobbyist influence on an application will be disclosed.  Finally, contracts and investment information will be posted for each bank participating in the program.

The Consumer and Business Lending Initiative will rely principally on the Term Asset Backed Securities Loan Facility (TALF) with the goal of leveraging a $100 billion investment to create $1 trillion of funding for purposes of promoting increased lending.  This initiative recognizes the power of secondary markets and securitization, which, through leveraging, can be expanded by reinvesting the same dollars multiple times throughout the economy.  This initiative will support the purchase of loans by providing the financing to private investors to help unfreeze and lower interest rates for small businesses, autos, credit cards, and other consumer and business credit businesses. 

A Public-Private Investment Fund will seek to combine public-private capital to facilitate public financing, leveraging private capital alongside public capital with private sector pricing of assets.  Importantly, newly packaged AAA rated loans or securities are the only type that Treasury is offering to purchase from this program, thus minimizing risks to taxpayers. 

Housing Support and Foreclosure Prevention will be accomplished by programs for institutions recovering from the current crisis.  The Plan provides $50 billion to prevent avoidable foreclosures and includes measures to help bring order and consistency to the foreclosure process, to require all Plan recipients to participate in foreclosure mitigation plans, and to build flexibility and hope for homeowners and the FHA. 

The Small Business and Community Lending Initiative recognizes the need for increased capital for SBA lending which includes the use of a consumer and business lending initiative to finance the purchase of AAA rated SBA loans, increasing the guaranty for SBA loans to 90%, and reducing fees for SBA 7(a) and 504 lending as well as providing funds for both oversight and speedier and less burdensome processing of loan applications. 

More information regarding the Financial Stability Plan will be provided as the details are released.  Copies of the press announcement and fact sheet are available by clicking below or on the links embedded in the first paragraph above. 

Financial Stability Plan

Fact Sheet

*The Financial Stability Plan and Fact Sheet are vague in many key areas.  This Alert summarizes important features of the Plan as announced on February 10, 2009.

CONTACT

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286