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AFSA Says TALF Doesn’t Go Far Enough

March 3, 2009

The Department of the Treasury and the Federal Reserve Board today 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, president and CEO of the AFSA. “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 today's 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.

Today 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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