The TALF will be a Federal Reserve credit facility authorized under section 13(3) of the Federal Reserve Act. The TALF is intended to make credit available to consumers and small businesses on more favorable terms by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally.
The Federal Reserve Bank of New York (New York Fed) will make up to $200 billion of loans under the TALF. TALF loans will have a term of three years; will be non-recourse to the borrower; and will be fully secured by eligible ABS. The U.S. Treasury Department will provide $20 billion of credit protection to the Federal Reserve in connection with the TALF, as described below.
Eligible collateral 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 loan 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 initially must be auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration. For these purposes, auto loans will include retail loans and leases relating to cars, light trucks, or motorcycles, and will include auto dealer floorplan loans; student loans will include Federally guaranteed student loans (including consolidation loans) and private student loans. The set of permissible underlying credit exposures of eligible ABS may be expanded later to include commercial mortgages, non-Agency residential mortgages, or other asset classes. 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.
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.
All U.S. companies that own eligible collateral may borrow from the TALF, provided they maintain an account relationship with a primary dealer. A U.S. company is a business entity or institution that is 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.
Transaction Structure and Pricing
Credit extensions under the TALF will be in the form of non-recourse loans secured by eligible collateral. TALF loans will have a three-year term, with interest payable monthly. TALF loans will not be subject to mark-to-market or re-margining requirements.
TALF loans will be pre-payable at the option of the borrower, but substitution of collateral during the term of the loan will not be allowed. Any remittance of principal on eligible collateral must be used immediately to reduce the principal amount of the TALF loan.
Borrowers will be able to choose either a fixed or floating interest rate on TALF loans. The New York Fed will set the interest rates on TALF loans so as to provide borrowers an incentive to purchase eligible ABS at yield spreads higher than in more normal market conditions but lower than in the highly illiquid conditions that have prevailed during the recent turmoil in the financial markets. The New York Fed also will assess a non-recourse loan fee at the inception of each loan transaction.
Collateral haircuts will be established by the New York Fed for each type of eligible collateral. Haircuts will be determined based on the riskiness of each type of eligible collateral and the maturity of the eligible collateral pledged to the New York Fed.
The New York Fed will offer loans under the TALF on a monthly basis. On a fixed day each month, borrowers will be able to request one or more TALF loans by indicating for each loan the eligible ABS collateral, the desired loan amount, and the desired interest rate format (fixed or floating). Loan proceeds will be disbursed to the borrower, contingent on receipt by the New York Fed’s custodian banks of the eligible ABS collateral. The minimum size for each TALF loan will be $10 million.
The New York Fed will reserve the right to reject any request for a loan, in whole or in part, in its discretion. In this regard, the New York Fed will develop and implement procedures to identify for further scrutiny potentially high-risk ABS that a borrower proposes to pledge to the New York Fed under the TALF.
Roles of Primary Dealers and Custodian Bank
Each borrower must use a primary dealer, which will act as agent for the borrower, to access the TALF and must deliver eligible collateral to the New York Fed’s custodian bank.
Role of the U.S. Treasury Department
The New York Fed will create an SPV to purchase and manage any assets received by the New York Fed in connection with any TALF loans. The New York Fed will enter into a forward purchase agreement with the SPV under which the SPV will commit, for a fee, to purchase all assets securing a TALF loan that are received by the New York Fed at a price equal to the TALF loan amount plus accrued but unpaid interest. The U.S. Treasury’s Troubled Assets Relief Program (TARP) will purchase subordinated debt issued by the SPV to finance the first $20 billion of asset purchases. If more than $20 billion in assets are purchased by the SPV, the New York Fed will lend additional funds to the SPV to finance such additional purchases. The New York Fed’s loan to the SPV will be senior to the TARP subordinated loan, with recourse to the SPV, and secured by all the assets of the SPV. All cash flows from SPV assets will be used first to repay principal and interest on the New York Fed senior loan until the loan is repaid in full. Next, cash flows from assets will be used to repay principal and interest on the TARP subordinated loan until the loan is repaid in full. Residual returns from the SPV will be shared between the New York Fed and the U.S. Treasury.
Executive Compensation Requirements
The sponsor, as such term is defined in 17 C.F.R. § 229.1101 (Regulation AB), of the eligible ABS 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.
The facility will cease making new loans on December 31, 2009, unless the Board extends the facility.
1The Federal Reserve reserves the right to review and make adjustments to these terms and conditions – including size of program, pricing, loan maturity, and asset and borrower eligibility requirements – consistent with the policy objectives of the TALF.