Federal Reserve Acts to Bolster Auto Finance, Credit Card, Student Lending IndustriesIn 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.

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Photo of Andrew J. Narod Andrew J. Narod

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation…

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation matters in some of the most difficult venues in the country.

Photo of C. Meade Hartfield C. Meade Hartfield

Meade Hartfield has represented clients nationwide in a variety of industries, including financial services, drug and medical device, automotive, aviation, industrial equipment, insurance, and environmental. Her financial services practice includes representing financial institutions and mortgage companies in defensive litigation matters throughout the country.

Meade Hartfield has represented clients nationwide in a variety of industries, including financial services, drug and medical device, automotive, aviation, industrial equipment, insurance, and environmental. Her financial services practice includes representing financial institutions and mortgage companies in defensive litigation matters throughout the country. View articles by Meade.

Photo of Lee Gilley Lee Gilley

Lee Gilley represents financial institutions, including banks, mortgage companies, debt collectors, small dollar lenders, and payment systems providers (credit cards, debit cards, prepaid cards, mobile payments, etc.) in litigation and regulatory matters related to compliance with the Card Act, ECOA, EFTA, FCRA, FDCPA…

Lee Gilley represents financial institutions, including banks, mortgage companies, debt collectors, small dollar lenders, and payment systems providers (credit cards, debit cards, prepaid cards, mobile payments, etc.) in litigation and regulatory matters related to compliance with the Card Act, ECOA, EFTA, FCRA, FDCPA, GLBA, HPA, RESPA, TILA, TCPA, CFPB regulations, and numerous other state laws and regulations. Lee is a member of Bradley’s Banking and Financial Services Practice Group, as well as the firm’s Payments and Small Dollar & Unsecured Lending industry teams.

Photo of J. Riley Key J. Riley Key

Riley Key works with financial services clients across the country facing regulatory and enforcement challenges related to obligations imposed by the CFPB, as well as various other federal and state laws. Specifically, Riley helps clients navigate compliance with the Mortgage Servicing Final Rules…

Riley Key works with financial services clients across the country facing regulatory and enforcement challenges related to obligations imposed by the CFPB, as well as various other federal and state laws. Specifically, Riley helps clients navigate compliance with the Mortgage Servicing Final Rules in Regulations X and Z and the TILA-RESPA Integrated Disclosure Rule, as well as a host of federal and state regulations, including TILA, RESPA, FDCPA, FCRA, and ECOA. View articles by Riley.