WASHINGTON, D.C. — The Department of Treasury and the Federal Reserve Board officially announced the launch of the Term Asset-Backed Securities Loan Facility this morning, saying the program has the potential to generate up to $1 trillion of lending for businesses and households.

TALF, a component of the Consumer and Business Lending Initiative, is designed to help the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities. This includes auto asset-backed securities.

In a joint statement, the Treasury Department and Federal Reserve said, "These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October. By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy."

Based on the announcement today, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans and SBA-guaranteed small business loans.

"Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009" the government explained.

"On March 25, 2009, those new securitizations will be funded by the programs, creating new lending capacity for additional future loans," the Treasury and Fed said.

Basically, the program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board elects to extend TALF.

The Fed also released revised terms and conditions for the facility today, along with a revised set of frequently asked questions.

"The revisions include a reduction in the interest rate and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by the government-guaranteed student loans," officials indicated. "The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees and by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students."

The Treasury department also provided a new white paper outlining its efforts to unlock the credit markets. In early February of this year, the Treasury and Fed announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending.

"Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program," the government said in its statement.

"The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government," officials highlighted.

The Federal Reserve and Treasury said they anticipate that the ABS backed by rental, commercial and government vehicle fleets, along with ABS backed by small ticket equipment, heavy equipment and agricultural equipment loans and leases will be eligible for the April funding period.

"Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations and other ABS not included in the initial rollout such as ABS backed by non-auto floor plan loans and ABS backed by mortgage-servicer advances," the joint release stated.

"As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program," the government continued.

Not surprisingly, the increased TALF lending and other actions to stabilize the financial system could ramp up the Federal Reserve's balance sheet.

"In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system," officials explained.

"The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives. Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and other key credit-easing programs," the statement concluded.

The basic March outline of deadlines for the first round of funding is as follows:

March 3: Launch of TALF, publication of details for first funding

March 3 to 17: Marketing first funding to investors

March 17: Subscriptions for first funding for TALF recorded

March 25: First funds from TALF dispersed

Schedule for second funding:

March 24: Announcement of details of second funding

March 24 to April 7: Marketing second funding to investors

April 7: Subscriptions for second funding for TALF recorded

April 14: Second funds from TALF dispersed

Under the "Frequently Asked Questions" paper released by the government, a bit more insight was handed out as to how the TALF program works.

For instance, under the program, the Federal Reserve Bank of New York will provide non-recourse funding to any eligible borrower owning eligible collateral.

Basically, officials said, "On a fixed day each month, borrowers will be able to request one or more three-year TALF loans. Loan proceeds will be disbursed to the borrower, contingent of the receipt by the FRBNY's custodian bank of the eligible collateral, an administrative fee and margin, if applicable.

"As the loan is non-recourse, if the borrower does not repay the loan, the FRBNY will enforce its rights in the collateral and sell the collateral to a special purpose vehicle established specifically for the purpose of managing such assets," the government indicated.

Furthermore, the Fed explained that a newly formed investment fund can borrower from the TALF as long as it satisfies all the eligible borrower requirements. The rating agencies that are considered "Nationally Recognized Statistical Organizations" for the purpose of TALF, who can decide if ABS meets requirements, includes Fitch Ratings, Moody's Investors Service and Standard & Poor's.

"The FRBNY will periodically review its used of NRSROs for the purpose of determining TALF-eligible ABS," officials stated.

The government noted that the average life for a credit card or auto loan ABS cannot be greater than five years. Auto-related receivables eligible for the program include retail loans and leases on cars, light trucks, motorcycles and recreational vehicles. It will also include auto dealer floor plans, which was strongly urged by the National Auto Dealers Association. Officials indicated that commercial, government and rental fleet leases of cars, trucks and light trucks will not be eligible.

"Eligible ABS must be cleared through the Depository Trust Company and except for the SBA Pool Certificates or Development Company Participation Certificates, must be issued on or after January 1, 2009," officials said. "All, or substantially all of the credit exposures underlying eligible auto loan ABS (except auto dealer floor plan ABS) must have been originated on or after Oct. 1, 2007."

So, what happens if a NRSRO downgrades a pool of auto ABS? According to the government, nothing will happen.

"However, the ABS may not be used as collateral for any new TALF loans until it regains its status as eligible collateral," the Fed highlighted.

There is no requirement on loan origination date on dealer floor-plan ABS because these are backed by dynamic pools of receivables that constantly change as customers and vehicle dealerships draw on and repay their credit lines, the government said.

"Due to the quick turnover and revolving nature of the underlying pools, the refinancing of existing credit card and dealer floor plan ABS largely fund newly originated receivables, consistent with the policy goal of TALF," officials explained.

Another frequently asked question the Fed laid out was, "Does the requirement that eligible auto dealer floor plan and credit card ABS be issued to refinance existing ABS maturing in 2009 apply at the individual master trust level or at the issuer level?"

In response, officials said, "The refinancing limitation applies at the issuer level rather than at the individual trust level. For example, if an issuer has four master trusts with a total of $20 billion in ABS maturing in 2009, the maximum amount of TALF-eligible ABS the issuer could issue in 2009 is $20 billion; it may issue that $20 billion in ABS from one trust or from multiple trusts."

Furthermore, the Fed stated, "Issuers of credit card ABS and auto dealer floor plan ABS must state in their prospectuses that the aggregate amount of eligible ABS they have issued does not exceed the amount of their 2009 ABS maturities. Issuers may issue ABS in excess of their 2009 maturities; however, these excess amounts will not be eligible collateral for TALF loans."

Offering a bit more insight into the Treasury and Fed's decision to offer the TALF program, the Fed stated, "Continued disruption of the ABS markets could result in a reduction in the availability and an increase in the cost of credit for consumers and businesses. Although some lenders that relied heavily on securitization for funding might be able to fund new credits on their balance sheets, many are seeking to ration their capital by not acquiring any new assets or extending new loans.

"In the current environment, those lenders that fund new credits on their balance sheet are only willing to do so at markedly higher interest rates," the Fed continued. "The reduction in the availability and the increase in cost of credit is one of the causes of the deepening recession. While part of the decline in borrowing and lending in these markets reflects the general reduction in demand for credit that always accompanies a recession, a portion reflects the historically intense pressures bearing on participants in these markets. Restoring more normal functioning to these markets and to other segments of the financial system is an essential step toward establishing a solid recovery of economic activity."

Industry Reaction

In a response after the initial SubPrime Auto Finance News story went live, the American Financial Services Association put out a statement saying that the restrictions with TALF may prevent many auto finance companies from participating in the program. 

In particular, AFSA believes the TALF program must be expanded to permit eligibility for securities beyond those with an AAA rating. Without additional changes, lenders will continue to face funding challenges — and many potential borrowers may still find themselves unable to buy or lease a car.

Chris Stinebert, president and chief executive officer of AFSA, said, "Of particular concern is the effect on floor-plan financing, which auto dealers use to buy their inventory. Without an expansion of TALF's eligibility requirements, 50 percent of floor-plan ABS will be shut out of the program, creating a domino effect that will impact all lenders and dealers. 

"Going forward, AFSA will continue to emphasize the important role played by the auto finance sector in any type of economic recovery program.  We call upon the Treasury and Federal Reserve to expand TALF's eligibility requirements beyond those that are AAA rated.  These modifications are urgently needed for the TALF program to be successful for auto-backed ABS and to avoid systemic risk for the entire auto finance market," he added.

For specific details as to how the first round of funding impacts the auto industry, visit www.newyorkfed.org/markets/talf_operations.html. The frequently asked question paper provided by the Fed is available at www.federalreserve.gov/newsevents/press/monetary/monetary20090303a2.pdf.