Today, the Federal Reserve announced the creation of a new Term Asset-Backed Securities Loan Facility (TALF). The new program will specifically support “the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).” The TALF will terminate on December 31, 2009; although the Federal Reserve has the discretion to extend the term of the facility after that date.

Previously, Treasury Secretary Paulson had indicated that the Treasury, in conjunction with the Federal Reserve, was considering alternatives to supporting key markets that securitize consumer credit(besides mortgage loans). In today’s announcement, the Federal Reserve noted that “ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.”

Under the terms of the TALF, the Federal Reserve Bank of New York (FRBNY) “will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.” Invoking its TARP funding authority, Treasury “will provide $20 billion of credit protection to the FRBNY in connection with the TALF.” Each borrower deemed eligible to participate in the program will use a primary dealer “which will act as agent for the borrower.” The primary dealer will also be responsible for delivering the eligible collateral to a clearing bank. Each loan made under the TALF will have a one-year term, be non-recourse as to the borrower and be secured by the eligible ABS collateral.

A brief summary of other applicable terms and conditions under the TALF include:  

  • Eligible Collateral: New or recently originated AAA rated ABS by U.S. domiciled originators, which have underlying credit exposures related to auto loans, student loans, credit cards or small business loans. 
  • Eligible Borrowers: The Facility is open to all U.S. persons that own eligible collateral, including U.S. persons who are foreign owned.  
  • Haircuts: The FRBNY will establish collateral haircuts for each class of eligible collateral. The haircuts “will be determined based on the price volatility of each class of eligible collateral.”  
  • Pricing and Allocation: The FRBNY will offer on a monthly basis a fixed amount of loans under the TALF. The loans will be awarded based on a competitive bid auction process.  
  • Executive Compensation Requirements: Originators of the credit exposures that underlie eligible ABS must agree to comply or already be subject to the executive compensation standards outlined under Section 111 of the Emergency Economic Stabilization Act.

The terms and conditions of the TALF as described above are subject to change over the next weeks based on discussion and feedback received from market participants by the Board.