Fed Launches $200 Billion Consumer Credit Facility

The U.S. Federal Reserve, with the backing of the Treasury, launched a $200 billion lending facility to support the market for consumer debt securities.

Following are details of the plan, called the Term Asset-backed Securities Loan Facility (TALF):

• Federal Reserve Bank of New York will lend up to $200 billion on non-recourse basis to holders of certain triple-A rated asset backed securities backed by newly originated and recently originated consumer and small business loans.
• ABS issuance in consumer categories such as auto loans, student loans and credit cards were roughly $240 billion in 2007 but essentially ground to a halt in October, according to the U.S. Treasury Department.
• The new Fed facility is intended to assist credit markets by facilitiating issuance of ABS and improving ABS market conditions.
• The Treasury will provide $20 billion in credit protection to the New York Fed for the program. The Treasury will purchase subordinated debt issued by a New York Fed special purpose vehicle to finance the first $20 billion of asset purchases. The New York Fed will fund any purchases above that amount by lending additional funds to the vehicle up to $200 billion.
• The Treasury funds will come from the unallocated portion of the first tranche of its $700 billion financial rescue fund, known as the Troubled Asset Relief Program (TARP). The action leaves the Treasury just $20 billion in unallocated funds before it must seek Congressional approval to access the TARP's second $350 billion.
• All cash flows from assets in the program will be used to first repay principal and interest to the New York Fed, and second, to repay principal and interest on the $20 billion from the Treasury TARP fund. Any residual returns will be shared between the New York Fed and the Treasury.
• The New York Fed will apply a "haircut" to the value of the securities used as collateral for loans under the program, based on the rpice volatility of each class of eligible collateral.
• The New York Fed will offer a fixed amount of loans from the facility on a monthly basis.

These loans will be awarded to borrowers each month based on a competitive, sealed bid auction process and the bank will set minimum interest rate spreads for bidding.

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