In an action somewhat lost amidst the unprecedented $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Federal Reserve’s Board of Governors announced a series of five “extensive new measures” to provide liquidity for certain sectors of the nation’s economy. One of those liquidity facilities, the reintroduced Term Asset-Backed Securities Loan Facility (TALF), promises to provide immediate relief to portions of the consumer financial services industry, including automobile finance, credit cards, and student loans.
The 2020 iteration of TALF, as authorized under Section 13(3) of the Federal Reserve Act, is in many ways similar to the 2008-2009 iteration. Twelve years ago, the Federal Reserve took action to provide non-recourse funding to collateralized lenders through the Federal Reserve Bank of New York. In 2020, TALF similarly promises to help meet the credit needs of collateralized lenders by enabling the issuance of asset-backed securities, thereby supporting the flow of credit to consumers and businesses, beginning March 23, 2020, and ending September 30, 2020 (with possible extensions). The Federal Reserve will initially offer up to $100 billion in loans with a term of three years, which will be fully secured by the related eligible asset-backed securities.
TALF’s connection to the consumer financial services industry is derived from the types of “eligible” asset-backed securities outlined in the Federal Reserve’s TALF term sheet. Of the eight eligible types of credit exposures, at least four enumerated eligible credit exposures implicate consumer finance: auto loans and leases, student loans, credit card receivables, and floorplan loans.
From a practical perspective, what does this infusion of funding mean for the auto finance, student lending, and credit card industries? TALF generally attempts to thaw the securities markets backed by those types of loan products. Asset backed securities markets generally account for a significant portion of the auto lending, student lending, and credit card marketplaces. The goal of TALF is, therefore, to ease fears that consumers and small businesses may default on auto loans, student loans, and credit cards in light of COVID-19, which would ordinarily drive the cost of funding loans much higher as investors demanded more compensation for the risk of holding related securities.
The net result of this program should be that auto loans, student loans, and credit card loans should continue to benefit from a liquid secondary market that might have otherwise become illiquid during the ongoing COVID-19 pandemic. From a business perspective, the continued access to the secondary market should mean lenders in these market segments will have the continued ability to provide credit to millions of consumers. For example, in its 2008-2009 iteration, TALF allowed lenders to offer three million auto loans, one million student loans, and millions of credit card loans that would have been otherwise unavailable. The net benefits to consumers are significant as well, including increased access to affordable lines of credit. And, in the context of auto lending, the ability for dealers to continue to access floorplan credit lines will remain critical to moving inventory and, therefore, increasing originations of auto loans.
It will be interesting to see how the 2020 iteration of TALF compares in impact to the previous version. Perhaps the impact will be in many ways unnoticed, given the Federal Reserve’s extraordinarily quick action to prevent particular secondary markets from drying up. Either way, the intent of the legislation is to give auto lenders, student lenders, and credit card lenders the continued ability to originate loans to consumers during COVID-19, which should help the consumer financial services industry counter some of the business challenges it had otherwise anticipated.