New Credit Facility Aims to Support Common Asset-Backed Securities – Student Loans, Auto Loans, Credit Cards and SBA Loans

    December 2008
    On Tuesday, November 25 the Federal Reserve Board (Board) announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), which is aimed to 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). These commonplace consumer and small business credit vehicles have stalled in recent months or otherwise have experienced historically high costs. The Board's facility is thus aimed to restart the ABS markets and to bring costs down to more normal levels.

    Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to US$200 billion on a nonrecourse basis to holders of certain AAA-rated ABS that are backed by newly and recently originated consumer and small business loans in the eligible collateral classes. The FRBNY will lend an amount equal to the market value of the ABS, less a "haircut" based on the price volatility of the ABS classes involved. The TALF loans will be secured at all times by the ABS. The US Treasury Department – under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008 – will provide US$20 billion of credit protection to the FRBNY in connection with the TALF. The TALF loans will not be subject to mark-to-market or remargining requirements. The eligible ABS collateral classes for the TALF might be expanded later to include commercial mortgage-backed securities, among others. The Board's term sheet describes the basic terms and operational details of the facility.

    The one-year loans will be offered to borrowers on a monthly basis based on a competitive, sealed bid auction process. Borrowers must access the TALF through a primary dealer. Originators of the credit exposures that underlie the eligible ABS must have agreed to comply with the executive compensation standards under the TARP's Capital Purchase Program. This program is a direct effort by the Board and the Treasury to resuscitate the consumer credit markets.

    For further information contact one of the Squire Sanders partners listed in this alert.