Why is the Federal Reserve establishing the TALF?
The asset-backed securities (ABS) market has been under strain for some months. This strain accelerated in the third quarter of 2008 and the market came to a near-complete halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS rose to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and U.S. Small Business Administration (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. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.
How will the TALF work?
Under the TALF, the Federal Reserve Bank of New York will provide non-recourse funding to any eligible borrower owning eligible collateral. On a fixed day each month, borrowers will be able to request one or more three-year TALF loans. Loan proceeds will be disbursed to the borrower, contingent on receipt by the New York Fed's custodian bank of the eligible collateral and a non-recourse loan fee. As the loan is non-recourse, if the borrower does not repay the loan, the New York Fed will enforce its rights in the collateral and sell the collateral to a special purpose vehicle (SPV) established specifically for the purpose of managing such assets.
When will the TALF become operational?
The TALF is expected to commence lending in February 2009, contingent on completion of the work necessary to operationalize it.
Who may borrow under the TALF?
Any U.S. company that owns eligible collateral may borrow from the TALF, provided it maintains an account relationship with a primary dealer. A U.S. company is a business entity that is organized under the laws of the United States or a political subdivision or territory thereof (including such entity that has a non-U.S. parent company), or a branch or agency of a foreign bank. The Federal Reserve continues to evaluate whether U.S.-based investors that are organized outside the United States or invest through a non-U.S. vehicle can qualify as eligible borrowers under the TALF.
What types of ABS are eligible collateral under the TALF?
Eligible collateral (eligible ABS) will include U.S. dollar-denominated cash (that is, not synthetic) ABS 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 below the highest investment-grade rating category from a major NRSRO. Eligible small business ABS also will include U.S. dollar-denominated cash ABS for which all of the underlying credit exposures are fully guaranteed as to principal and interest by the full faith and credit of the U.S. government.
All or substantially all of the credit exposures underlying eligible ABS must be exposures to U.S.-domiciled obligors. The underlying credit exposures of eligible ABS must be auto loans, student loans, credit card loans, or small business loans guaranteed by the SBA. The set of permissible underlying credit exposures of eligible ABS may be expanded over time. The underlying credit exposures must not include exposures that are themselves cash or synthetic ABS.
Eligible ABS must be issued on or after January 1, 2009. All or substantially all of the underlying credit exposures of eligible auto loan ABS must have been originated on or after October 1, 2007. All or substantially all of the underlying credit exposures of eligible SBA-guaranteed loan ABS must have been originated on or after January 1, 2008. All or substantially all of the underlying credit exposures of eligible student loan ABS must have had a first disbursement date on or after May 1, 2007. Eligible credit card ABS must be issued to refinance existing credit card ABS maturing in 2009 and must be issued in amounts no greater than the amount of the maturing ABS.
Are ABS backed by auto leases eligible ABS?
Yes. For TALF purposes, auto loans include retail loans and leases relating to cars, light trucks, or motorcycles and auto dealer floorplan loans.
Are ABS backed by private student loans eligible ABS?
Yes. For TALF purposes, student loans include Federally guaranteed student loans (including consolidation loans) and private student loans.
Why is there no loan origination date restriction for credit card ABS?
Unlike auto and student loan ABS, which are backed by a fixed pool of loans, credit card ABS are backed by a dynamic pool of receivables that changes as customers draw on and repay their credit lines. The pools include both seasoned and recently originated receivables. Due to the revolving nature of the underlying pool, refinancings of existing ABS largely fund newly originated receivables, consistent with the purpose of the TALF.
Are ABS backed by a mixture of consumer and corporate credit card receivables eligible collateral?
Can a company that originates loans securitize them, acquire the AAA-rated tranche of the securitization, and finance it using the TALF?
No. Eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower.
How is "affiliate of the borrower" defined for purposes of determining eligible collateral?
An affiliate of a borrower means any company that controls, is controlled by, or is under common control with the borrower. For this purpose, a person or company controls a company if it (1) owns, controls, or holds with power to vote 25 percent or more of a class of voting securities of the company; or (2) consolidates the company for financial reporting purposes.
May investors borrow against ABS they already own?
Yes, an investor may borrow against any eligible ABS. Eligible ABS must be issued on or after January 1, 2009, but need not be issued on the same day the investor borrows from the TALF.
Will there be a separate facility for each ABS asset class?
No. Borrowers with eligible ABS of all asset types will receive loans from the same facility.
Is there a minimum loan size under the TALF?
The minimum loan size under the TALF will be $10 million.
What is the maturity of a TALF loan?
TALF loans have a three-year maturity.
Are TALF loans prepayable?
May a borrower substitute collateral during the term of its loan?
No, collateral substitution is not permitted.
Will the TALF offer fixed or floating-rate loans?
Borrowers will be able to choose either a fixed or a floating rate on a TALF loan. Floating-rate loans will be based on a spread over LIBOR.
How will the interest rates on TALF loans be determined? When will they be publicly available?
The interest rate on TALF loans will be set with a view to providing borrowers an incentive to purchase newly issued eligible ABS at yield spreads higher than in more normal market conditions but lower than in the highly illiquid market conditions that have prevailed during the recent credit market turmoil. Interest rates will be announced in advance of each monthly loan subscription date.
How will the collateral haircuts be set? When will they be publicly available?
Haircuts will be determined for each type of eligible ABS based on the riskiness of each type of eligible collateral and the maturity of the eligible collateral pledged to the New York Fed. Haircuts will be announced in advance of each monthly loan subscription date.
Will the interest rate and haircuts change from month to month?
The Federal Reserve will periodically review and, if appropriate, adjust the TALF interest rates and haircuts for new loans, consistent with the policy objectives of the TALF.
May a borrower receive multiple loans collateralized by separate ABS collateral on the same date?
Yes, a borrower may receive multiple loans each collateralized by individual ABS collateral, subject to the TALF minimum loan size of $10 million. For example, on the same day, a borrower could borrow $12 million collateralized by student loan ABS and $15 million collateralized by auto loan ABS.
What happens if an investor does not repay its loan?
In the event a borrower does not repay its TALF loan, the New York Fed will enforce its rights in the collateral and sell the collateral to an SPV established by the New York Fed and capitalized by $20 billion in U.S. Treasury TARP funds.
What role are primary dealers expected to play on behalf of investors?
Primary dealers are expected to collect, aggregate, and submit loan requests on behalf of their customers, similar to the role they perform at Treasury auctions. Additionally, they will be expected to pre-screen the proposed ABS collateral for TALF eligibility.
Over what time period will the TALF operate?
The facility will cease making loans on December 31, 2009, unless the Board of Governors extends the facility.
What is the legal basis for the TALF?
The TALF is authorized under section 13(3) of the Federal Reserve Act, which permits the Federal Reserve Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations.
What is Treasury's role in the TALF?
The U.S. Treasury’s Troubled Assets Relief Program (TARP) will invest $20 billion of subordinated debt in an SPV created by the New York Fed. The SPV will purchase and manage any assets received by the New York Fed in connection with any TALF loans. Residual returns from the SPV will be shared between the New York Fed and the U.S. Treasury.
How will the Federal Reserve report lending under the TALF?
Balance sheet items related to the TALF will be reported on the H.4.1 weekly statistical release entitled “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” There will be an explanatory cover note on the release when items are added.
Where should questions regarding the TALF be directed?
Questions should be directed to the New York Fed’s Public Affairs department: 212-720-6130.