Talf

Key Takeaways

• TALF was created by the Federal Reserve in 2008 to improve consumer credit access.
• The program accepted loans backed by asset-backed securities as collateral.
• TALF 2020 restarted with similar objectives during the coronavirus crisis, but ended in December 2020.
• The 2008 and 2020 TALF programs successfully repaid all loans without losses to the Treasury.
• TALF was part of measures to stabilize the economy during financial crises.

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

The Term Asset-Backed Securities Loan Facility (TALF) was launched by the U.S. Federal Reserve in November 2008 during the financial crisis to support consumer spending and stabilize the economy by improving bank liquidity. It did this by making loans backed by asset-backed securities (ABS) as collateral, which encouraged more lending to households and small businesses. TALF was revived in 2020 during the COVID-19 disruption, but it stopped making new loans after Dec. 31, 2020.

Understanding TALF 2020: Key Features and Impact

The Federal Reserve restarted the program in 2020 during the coronavirus crisis. The revived TALF program was a special purpose vehicle (SPV) that the Fed lent 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 needed to be "created or organized in the United States or under the laws of the United States, have significant operations in and a majority of their employees based in the United States, and maintain an account relationship with a primary dealer."

To be be used as collateral, an ABS had to meet the following qualifications:

It needed to be U.S. dollar-denominated.

It could not be synthetic.

It had to have the highest long-term investment grade credit ratings from at least two eligible nationally recognized statistical rating organizations (NRSROs). If there were no long-term ratings available, two NRSRO ratings of the highest short-term investment-grade ratings, and no NRSRO ratings below that grade, were also acceptable.

All (or substantially all) of its underlying credit (except for CMBS) must have been newly issued.

It must have been issued on or after March 23, 2020, with three exceptions. 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 following: auto loans and leases, student loans, credit card receivables (both consumer and corporate), equipment loans and leases, 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 using various haircuts established in 2008, and borrowers were assessed an administrative fee equal to 10 basis points on the loan amount.

TALF 2008: Origins and Objectives

TALF was a funding facility that helped market participants meet the credit needs of households and small businesses by supporting the issuance of ABS collateralized by loans of various types to consumers and businesses of all sizes, according to the Federal Reserve.

Important

During the 2008 financial crisis, TALF was one of the government programs that helped to unfreeze credit and stabilize the economy. The program was restarted in 2020 during the global crisis.

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

The U.S. Treasury Department under the Troubled Asset Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008 provided $20 billion of credit protection to the FRBNY in connection with the TALF. The TALF began operation in March 2009 and was closed for new loan extensions on June 30, 2010. The final outstanding TALF loan was repaid in full in Oct. 2014.

Success of TALF: Achievements and Outcomes

Over the life of the program, all TALF loans were repaid in full at or before their respective maturity dates. The New York Fed did not incur a loss on any TALF loan, according to the Fed. As all TALF loans were repaid in full, no TALF collateral was surrendered to the New York Fed, and TALF LLC acquired no such assets during its existence.

The Treasury received 90% of the monthly 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 help stabilize the economy and unfreeze credit during the financial crisis. Economists generally agree that the measures taken achieved their intended purpose without massive losses to the Treasury.