Fed opens TALF ratings to more agencies

AP News
Posted: Dec 04, 2009 3:22 PM

The Federal Reserve has expanded the field of credit rating agencies that determine the eligibility of securities pledged for loans in a government program aimed at sparking more consumer and business lending.

The Fed on Friday announced it had adopted a rule allowing rating agencies that have registered with the Securities and Exchange Commission and that have experience with the securities being rated to participate in the Term Asset-Backed Securities Loan Facility.

The move is intended to promote competition among credit rating agencies, which have been blamed for contributing to the worst financial crisis since the Great Depression. The change is expected to bring an expansion of rating agencies participating in the TALF beyond the dominant three: Standard & Poor's, Moody's Investors Service and Fitch Ratings. Together they account for around 95 percent of the securities ratings market.

Regulators and industry critics maintain that the rating agencies failed to accurately assess risk on the complex mortgage-backed securities at the heart of the crisis. Those investments soured, wracking up huge losses at banks and other financial institutions. The fallout damaged the U.S. financial system and the economy.

The agencies are crucial financial gatekeepers. Their grades of creditworthiness can be key factors in determining at what cost securities will be purchased by banks, mutual funds, state pension funds or local governments.

Under the TALF, which began in March, investors secure loans from the Fed. They use the money to buy securities backed by, among other things, auto and student loans, credit cards, and loans guaranteed by the Small Business Administration. Securities backed by commercial real estate loans also are included, but the new rule on rating agencies doesn't apply to them.

The TALF is intended to spur more lending to consumers and businesses at cheaper rates. But many are still having trouble getting loans. The government says the program has the potential to generate as much as $1 trillion in lending for households and businesses. Under the first phase of the program, $200 billion was available, but only $44.5 billion of that has been requested.

The Fed proposed the ratings agencies change in October, giving the public and industry groups the chance to weigh in on it.

In a related move, the central bank started last month to add another layer of risk assessment of all proposed collateral pledged to the TALF. The Fed has said this change will improve its ability to ensure that the collateral complies with Fed provisions for credit quality and transparency.