On March 23, 2020, the Federal Reserve Bank of New York (“FRBNY”) established the Term Asset-Backed Securities Loan Facility (“TALF 2.0 Program”) to support the flow of credit to consumers and businesses. The FRBNY expects that the TALF 2.0 Program will enable the issuance of asset-backed securities (“ABS”) backed by underlying credit exposures in specified assets classes (student loans, auto loans and leases, commercial and consumer credit card receivables, equipment loans, floorplan loans, insurance premium finance loans, certain loans guaranteed by the Small Business Administration and eligible servicing advance receivables) during this time of economic uncertainty caused by the COVID-19 pandemic. The FRBNY expects many of the details of the TALF 2.0 Program to mirror the TALF established in 2008, which was enacted to alleviate liquidity problems caused by the Great Recession.
Under the TALF 2.0 Program, FRBNY will commit to lend to a special purpose vehicle (SPV), which will make up to $100 billion in non-recourse three-year loans to investors in ABS, which loans will be secured by a pledge of those ABS as collateral. The Department of the Treasury, using the Exchange Stabilization Fund, will make an initial equity investment of $10 billion in the SPV. The pledged eligible collateral will be valued and assigned a haircut based on the asset class and the historical volatility and weighted average life of the pledged ABS.
To be eligible as collateral for TALF, the ABS must: (1) have a credit rating in the highest investment grade category (long term-or short term) from at least two rating agencies; and (2) be issued on or after March 23, 2020. All or substantially all of the underlying credit exposures must have been originated by a U.S. company and must be “newly issued.” Implementing guidance is necessary to determine how to interpret this requirement for each of the specified asset classes above. For example, guidance would be needed as to what constitutes a “newly issued” credit card receivables given that new extensions of credit within existing credit card accounts cannot be securitized separately from the older receivables within the same accounts.
The Structured Finance Association (“SFA”), in a letter sent to the FRBNY and Treasury yesterday, had urged the FRBNY to provide more flexibility under the TALF 2.0 Program, in particular the SFA had requested the FRBNY to add other allowable collateral such as certain private label residential mortgage, unsecured personal loans and commercial mortgage assets to the program as soon as possible.
A similar sentiment was expressed by Carol Hitselberger, co-head of Mayer Brown’s finance practice, in a Bloomberg report earlier today: “With the growth of online personal loans and small business loans in recent years, TALF has left out a whole group of non-bank lenders that can be critical in helping the economy. ‘Give them a rope.’”
The SFA and other market participants have also urged the FRBNY to consider allowing legacy ABS to be pledged as collateral and to relax the ratings requirement for eligible collateral.
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