During the 2008 financial crisis, there was a drastic reduction in the availability of business and consumer credit. It was difficult to get loans for small businesses, or even cars and student loans. As a result, the Federal Reserve instituted the Term Asset-Backed Securities Loan Facility (TALF), which helped to mitigate market pressure and encouraged continued investor trading. It did so by issuing non-recourse loans of eligible asset-back securities (ABS) for up to five years. The goal was to enhance demand for ABS, which would increase credit availability for businesses and consumers, thus increasing consumer spending and reviving the economy. To protect the U.S. government against loss, the loan amounts were less than the market value of the collateral put up by its borrower. This was referred to as a “haircut” and provided a buffer if the value of the collateral declined during the life of the loan.
Though TALF was announced at the end of November 2008, it did not begin its lending operations until March 2009. Despite this delay, it was successful in achieving its intended goal. Before the current economic crisis, ABS funded approximately half of all credit cards and a third of auto loans.
Now in our COVID-19 induced economic crisis, the Federal Reserve has revived TALF in hopes of similar success in 2020. The Fed provided its revised terms for TALF 2020 on April 9th, and it began operation on June 17th. This new TALF is similar to the original one, but with some notable changes.
The current TALF is set up to provide $100 billion in loans to consumers. Again, the loans will be non-recourse and fully secured against eligible ABS with varying haircut rates. However, the terms of loans have gone from five years down to three years.
There are also a few additions to the TALF terms such as including specific AAA-rated static CLO securities and legacy CMBS as eligible collateral; however, single asset single borrower CMBS and commercial real estate CLOs are ineligible. Benchmark prices for CLOs are now based on secured overnight financing (SOFR), and other eligible ABS rates reflect the two-year federal funds overnight index swap (IOS). Unless extended, the cut-off date for 2020 TALF loans is set for September 30th, 2020.