This Legal Update explores why, in order for an underlying loan to be included in a warehouse facility’s borrowing base, the underlying loan’s obligor cannot be a governmental authority.

Example of Eligibility Criteria:

• The Obligor of such loan is not a Governmental Authority.

What is a “Governmental Authority”?

Although somewhat negotiable, a “Governmental Authority” is typically a bona fide governmental authority—including any nation or government; any state, province, territory, or other political subdivision thereof; any central bank; or any other entity exercising executive, legislative, judicial, regulatory, or administrative functions.

Why does it Matter if the Obligor is a “Governmental Authority”?

Although there are numerous considerations, two primary concerns associated with lending against an asset for which the obligor is a Governmental Authority are (i) the capacity and authority of such entity to validly enter into the underlying loan, and (ii) the enforceability of remedies with respect to the underlying loan following (a) any event of default by the borrower under the warehouse facility, such as the transferability of the underlying loan from the warehouse facility’s borrower to a third party (e.g., the warehouse lender or its transferee), or (b) any event of default by the Governmental Authority under the underlying loan, such as direct enforceability against such entity.

The capacity and authority of an obligor that is a Governmental Authority is typically derived from one or more authorizing statutes or regulations. For example, if the obligor is a local US municipality, its authority may originate from a state constitution and be implemented through a combination of state statutes, county ordinances, city codes, and local municipal regulations. Additionally, such entities may be governed by one or more boards, each of which may adopt policies or mandates with which the obligor must comply. Each level of statutory or regulatory authority may impose...