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. This was accomplished through the issuance of asset-backed securities. 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, residential mortgage servicing advances, or commercial mortgage loans. Backing for these loans came from funds provided by the Federal Reserve Bank of New York.
The Federal Reserve restarted the program in 2020 during the COVID-19 crisis. The revived TALF program is a special purpose vehicle which the Fed will lend money to. The SPV will then initially 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.
How TALF Worked
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.
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.