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AFSA Says TALF Doesn't Go Far Enough

March 05, 2009

WASHINGTON — On Tuesday, the Department of

the Treasury and the Federal Reserve Board announced the launch of the Term

Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and

Business Lending Initiative (CBLI). But although the TALF has the potential to generate up to $1 trillion of lending for businesses and households, one association said it doesn’t go far enough.

While the TALF is

intended to revive the ABS markets by generating funding for creditors, the

American Financial Services Association said its restrictions will 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,” said Chris Stinebert, AFSA's president/CEO. “Without additional changes, lenders will continue to face

funding challenges – and many potential borrowers may still find themselves unable to buy a car.”

The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). However, the AFSA said the TALF needs to be expanded to address floorplan financing.

“Of particular concern is the effect on floorplan financing,” Stinebert said. “Without an expansion of TALF’s eligibility requirements, 50 percent of floorplan ABS will be shut out of the program, creating a domino effect that will impact all

lenders and dealers.”

Under the terms of the announcement, 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. On March 25, 2009, those new

securitizations will be funded by the program, creating new lending capacity for additional future loans.

The program will

hold monthly fundings through December 2009 or longer if the Federal Reserve

Board chooses to extend the facility.

The Board

also released revised terms and conditions for the facility and a revised set

of frequently asked questions. The revisions include a reduction in the

interest rates and collateral haircuts for loans secured by asset-backed

securities guaranteed by the Small Business Administration or backed by

government-guaranteed student loans.

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 Federal

Reserve and Treasury currently anticipate that ABS backed by rental,

commercial, and government vehicle fleet leases, and ABS backed by small ticket

equipment, heavy equipment, and agricultural equipment loans and leases will be

eligible for the April funding of the TALF.

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

floorplan loans and ABS backed by mortgage-servicer advances. 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.

Additional details

of the TALF and the CBLI can be found at www.FinancialStability.gov.

Further information on the Federal Reserve's credit and liquidity programs is

available at

www.federalreserve.gov/monetarypolicy/bst.htm. The Treasury Department also

released a new white paper outlining efforts to unlock credit markets.

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