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

Term Asset-Backed Securities Loan Facility, or TALF, was a program created by the U.S. Federal Reserve in November, 2008 to boost consumer spending in order to help jumpstart the economy. It did this by issuing loans to banks using asset-backed securities (ABS) as collateral. The collateral for these securities was made up of auto loans, student loans, credit card loans, equipment loans, floor plan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration (SBA), residential mortgage servicing advances, or commercial mortgage loans. This increased banks' liquidity as they issued more credit to consumers and small businesses, which increased economic activity. The backing for these loans came from funds provided by the Federal Reserve Bank of New York. A new version of the program was started in 2020 to purchase ABS during the economic disruption of the COVID-19 crisis.

Key Takeaways

  • Asset-Backed Securities (ABS) are illiquid assets, like business loans, that are packaged into salable securities.
  • In the 2008 financial crisis, the Federal Reserve launched the Term Asset-Backed Securities Loan Facility (TALF) to increase the availability of consumer credit.
  • A new TALF program was started during the 2020 COVID-19 crisis for the same reason.

TALF 2020

The Federal Reserve restarted the program in 2020 during the COVID-19 crisis. The revived TALF program is a special purpose vehicle that the Fed will lend money to. The SPV initially will make up to $100 billion in loans on a non-recourse basis, with a maturity of 3 years. Unless the new TALF is expanded, it will stop making loans by September 30, 2020. The Treasury department will give $10 billion to the TALF program to cover loan losses. 

To be eligible to get loans from the facility, a business needs 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 has to meet the following qualifications:

  • It needs to be U.S. dollar-denominated.
  • It cannot be synthetic.
  • It has to have the highest long-term investment grade credit ratings from at least two eligible nationally recognized statistical rating organizations (NRSROs). If there are no long-term ratings available, two NRSRO ratings of the highest short-term investment-grade ratings, and no NRSRO ratings below that grade are also acceptable.
  • All (or substantially all) of its underlying credit (except for CMBS) must be newly issued.
  • It must have been issued on or after March 23, 2020, with three exceptions. Eligible commercial mortgage‐backed securities (CMBS) must be issued before March 23, 2020 and eligible SBA Pool Certificates and Development Company Participation Certificates (types of securitized small business loans) must be issued on or after January 1, 2019.
  • Its underlying credit exposure must be one of the following: auto loans and leases; student loans; credit card receivables (both consumer and corporate); equipment loans and leases; floorplan loans; premium finance loans for property and casualty insurance; certain small business loans that are guaranteed by the Small Business Administration (SBA); leveraged loans; or commercial mortgages. 

All collateral will be valued using various haircuts established in 2008, and borrowers will be assessed an administrative fee equal to 10 basis points on the loan amount.

TALF 2008

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

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 COVID-19 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 October 2014.

TALF's Success

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.