Term Asset-Backed Securities Loan Facility (TALF)

What Is Term Asset-Backed Securities Loan Facility (TALF)?

Term Asset-Backed Securities Loan Facility (TALF) was a program made by the U.S. Federal Reserve in Nov. 2008 to support consumer spending to assist with jumpstarting the economy. It did this by giving loans to banks utilizing asset-backed securities (ABS) as collateral. The collateral for these securities was comprised of car loans, student loans, credit card loans, equipment loans, floor plan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration (SBA), residential mortgage servicing advances, or commercial mortgage loans. This increased banks' liquidity as they issued more credit to consumers and small businesses, which increased economic activity. The backing for these loans came from funds given by the Federal Reserve Bank of New York. Another rendition of the program was begun in 2020 to purchase ABS during the economic disruption of the global crisis.

On Nov. 19, 2020, Treasury Secretary Steven Mnuchin said he wouldn't reauthorize expanding TALF 2020 past Dec. 31, 2020. The program stopped making new loans as of Dec. 31, 2020.

TALF 2020

The Federal Reserve restarted the program in 2020 during the coronavirus crisis. The restored TALF program was a special purpose vehicle (SPV) that the Fed loaned money to. This SPV initially made up to $100 billion in loans on a non-recourse basis, with a maturity of three years. It stopped making loans as of Dec. 31, 2020. The Treasury department gave $10 billion to the TALF program to cover loan losses.

To be eligible to get loans from the facility, a business should have been "made or organized in the United States or under the laws of the United States, have critical operations in and a majority of their employees situated in the United States, and keep an account relationship with a primary dealer."

To be utilized as collateral, an ABS needed to meet the accompanying capabilities:

• It should have been U.S. dollar-designated.
• It couldn't be synthetic.
• It needed to have the highest long-term investment grade credit ratings from something like two eligible nationally recognized statistical rating organizations (NRSROs). Assuming there were no long-term ratings accessible, two NRSRO ratings of the highest short-term investment-grade ratings, and no NRSRO ratings below that grade, were likewise acceptable.
• All (or substantially) its underlying credit (with the exception of CMBS) must have been all recently issued.
• It must have been issued on or after March 23, 2020, with three special cases. Eligible commercial mortgage‐backed securities (CMBS) must have been issued before March 23, 2020, and eligible SBA Pool Certificates and Development Company Participation Certificates (types of securitized small business loans) must have been issued on or after Jan. 1, 2019.
• Its underlying credit exposure was required to be one of the accompanying: vehicle loans and rents, student loans, credit card receivables (both consumer and corporate), equipment loans and rents, floor plan loans, premium finance loans for property and casualty insurance, certain small business loans that were guaranteed by the Small Business Administration (SBA), leveraged loans, or commercial mortgages.

All collateral was valued utilizing different haircuts laid out in 2008, and borrowers were assessed an administrative fee equivalent to 10 basis points on the loan amount.

TALF 2008

TALF was a funding facility that assisted market participants with meeting the credit needs of families and small businesses by supporting the issuance of ABS collateralized by loans of different types to consumers and businesses, everything being equal, as per the Federal Reserve.

During the 2008 financial crisis, TALF was one of the government programs that assisted with thawing credit and balance out the economy. The program was restarted in 2020 during the global crisis.

Under the TALF, the Federal Reserve Bank of New York (FRBNY) loaned up to $200 billion on a non-recourse basis to holders of certain AAA-evaluated ABS backed by recently and as of late originated consumer and small business loans. The FRBNY extended loans in an amount equivalent to the market value of the ABS, less a retained percentage known as a haircut, and these loans were secured consistently by the ABS.

The U.S. Treasury Department under the Troubled Asset Relief Program (TARP) of the [Emergency Economic Stabilization Act of 2008](/emergency-economic-solidness act) gave $20 billion of credit protection to the FRBNY regarding the TALF. The TALF started operation in March 2009 and was closed for new loan extensions on June 30, 2010. The last outstanding TALF loan was repaid in full in Oct. 2014.

TALF's Success

Over the life of the program, all TALF loans were repaid in full at or before their separate maturity dates. The New York Fed didn't cause a loss on any TALF loan, as per the Fed. As all TALF loans were repaid in full, no TALF collateral was given up to the New York Fed, and TALF LLC acquired no such assets during its presence.

The Treasury received 90% of the month to month distributions and the New York Fed received 10%. In the aggregate, TALF LLC paid a total of $745.7 million in such distributions to the Treasury and New York Fed, the Fed reported.

TALF was one of a number of government programs to assist with balancing out the economy and thaw credit during the financial crisis. Financial specialists generally concur that the measures taken accomplished their intended purpose without enormous losses to the Treasury.

Features

• In the 2008 financial crisis, the Federal Reserve sent off the Term Asset-Backed Securities Loan Facility (TALF) to increase the availability of consumer credit.
• Another TALF program was begun during the 2020 crisis for a similar explanation, which ended on Dec. 31, 2020.
• Asset-Backed Securities (ABS) are illiquid assets, similar to business loans, that are packaged into attractive securities.