On Tuesday, March 3, 2009, the U.S. Department of the Treasury and Federal Reserve announced the launch of the Term Asset-Backed Securities Loan Facility (TALF). Initially established in November 2008 as part of the Bush Administration’s implementation of the Emergency Economic Stabilization Act (EESA), the TALF program is designed to encourage consumer lending through support of securitization markets -- primarily asset-backed securities (ABS) for consumer debt. TALF provides financing to investors to support their purchases of certain AAA-rated ABS. Under the announced program, the Federal Reserve Bank of New York (New York Fed) will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and Small Business Administration-guaranteed small business loans. Though earlier versions of TALF imposed executive compensation restrictions on participants, the program as launched does not include these restrictions.
Under TALF, the New York Fed will provide non-recourse funding to any eligible borrower owning eligible collateral. On a fixed day each month, borrowers will be able to request up to two three-year TALF loans. Loan proceeds will be disbursed to the borrower, contingent on receipt by the New York Fed’s custodian bank (custodian) of the eligible collateral, an administrative fee, and margin, if applicable. The New York Fed has published a Master Loan and Security Agreement (MLSA) which provides further details on the terms that apply to borrowings under the TALF. The MLSA is available at http://www.newyorkfed.org/markets/TALF_MLSA.pdf. If a borrower chooses not to repay the TALF loan at maturity and surrenders the collateral, the TALF loan is non-recourse except for breaches of representations, warranties and covenants, as further specified in the MLSA.
Issuers and investors in ABS are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted under the program on March 17. On March 25, those new securitizations will be funded by the program, creating new lending capacity for additional future loans. This monthly funding scheme will continue through the current sunset of TALF in December 2009. Prior to that time, the Federal Reserve and the Treasury may choose to extend the program beyond its sunset date.
The current schedule of TALF program deadlines is included here.
On Feb. 10, 2009, as part of the Obama Administration’s announcement of a Financial Stability Program, Treasury Secretary Tim Geithner suggested that TALF could be expanded to a larger universe of underlying collateral, including commercial mortgage-backed securities (CMBS). The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, as well as ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF. Other types of securities under consideration include private-label residential mortgage-backed securities (RMBS), collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances. With respect to the collateral requirements, all or substantially all of the credit exposures underlying eligible auto loan ABS (except auto dealer floorplan ABS) must have been originated on or after Oct. 1, 2007, all or substantially all of the credit exposures underlying eligible student loan ABS must have had a first disbursement date on or after May 1, 2007, and the majority of SBA credit exposures must have been originated on or after Jan. 1, 2008.
A copy of a fact sheet on TALF is available at http://www.ustreas.gov/press/releases/reports/talf_white_paper.pdf. The terms and conditions for participation can be found at http://www.newyorkfed.org/markets/talf_terms.html.