In a further effort to improve liquidity in the credit market, today the Treasury Department (“Treasury”) announced the creation of a new Term Asset- Backed Securities Loan Facility (the “Facility”) under which the Federal Reserve Bank of New York (“FRBNY”) will lend up to $200 billion on a non-recourse basis to holders of qualifying asset-backed securities. In connection with the establishment of the Facility, Treasury will provide $20 billion of credit protection to the FRBNY out of the Treasury’s TARP authorization.

The new Facility is intended to jumpstart lending to consumers and small businesses by facilitating the issuance of asset-backed securities secured by qualifying loans to consumers and small businesses. The underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration. In its announcement, Treasury indicated that the Facility may be expanded over time to include other assets, such as commercial mortgage-backed securities, nonagency residential mortgage-backed securities or other asset classes.

The basic terms of the Facility are as follows:

  • Eligible participants include U.S. citizens, business entities that are organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank.
  • Loans under the Facility will have a one-year term with interest payable monthly, will be non-recourse to the borrower, and will be fully secured by eligible asset-backed securities. The term of the loans may be extended at the government’s discretion. The FRBNY will assess a non-recourse loan fee at the inception of each loan transaction. Loans will cease to be made after December 31, 2009 unless the Facility is extended.
  • The FRBNY will offer a fixed amount of loans under the Facility on a monthly basis. Loans will be awarded to borrowers each month based on a competitive, sealed bid auction process. Each bid must include a desired amount of credit and an interest rate spread over one-year overnight interest targets. The FRBNY will set minimum spreads for each auction. The FRBNY will develop and implement procedures to identify for further scrutiny potentially high-risk securities that a borrower proposes to pledge to the FRBNY under the Facility.
  • Eligible collateral will include U.S. dollar-denominated cash (that is, not synthetic) asset-backed securities that have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more major nationally recognized statistical rating organizations (“NRSROs”) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO.
  • All or substantially all of the credit exposures underlying eligible assetbacked securities ABS must be newly or recently originated exposures to U.S.-domiciled obligors.
  • The underlying credit exposures of eligible ABS initially must be auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration. Those eligibility requirements may be expanded to include commercial mortgage-backed securities, non- Agency residential mortgage backed securities or other asset classes.
  • Originators of the credit exposures underlying eligible asset-backed securities (or, in the case of SBA guaranteed loans, the sponsor) must have agreed to comply with, or already be subject to, the executive compensation requirements in section 111(b) of the Emergency Economic Stabilization Act of 2008.
  • Eligible collateral for a particular borrower must not be backed by loans originated by the borrower or by an affiliate of the borrower.
  • Loans will not be subject to mark-to-market or re-margining requirements.
  • Collateral haircuts will be established by the FRBNY for each class of eligible collateral. Haircuts will be determined based on the price volatility of each class of eligible collateral.
  • Each borrower must use a primary dealer, which will act as agent for the borrower, to access the Facility and must deliver eligible collateral to a clearing bank.