COVID-19Impact on Consumers, Businesses and Structured FinanceMarch 30, 2020

2

COVID-19 Impact: Consumers, Businesses and Structured Finance

Introduction: SFA on COVID-19• Kristi Leo, President

View from Capitol Hill• Leslie Sack, Head of Government Relations

TALF 1.0 vs. TALF 2.0• Jen Earyes, Head of Policy

• Elen Callahan, Head of Research

Impact of COVID-19 on Securitization Markets• Elen Callahan, Head of Research

SFA: Next Steps• Michael Bright, CEO

3

Structured Finance EcosystemFederal Reserve’s Lending/Purchase Programs

Fed lending facilities Securitization Collateral

ABS Issuers

TALF: Term Asset-Backed Securities Loan Facility

CPFF: Commercial Paper Funding Facility

TALF includes ABS backed by auto loans and leases, student loans, credit card receivables, equipment loans, floorplan loans, insurance premium finance loans, certain small business loans that are guaranteed by SBA and eligible servicing advance receivables

CPFF includes ABCP

Primary Dealers PDCF: Primary Dealer Credit FacilityIncludes ABCP, Agencies, MBS, ABS (In the case of ABS, only AAA-rated CMBS, CLOs and CDOs)

Banks/Depository Institutions Discount Window

Includes ABCP, Agencies, MBS, ABS (In the case of ABS, only AAA-rated CMBS, CLOs and CDOs)

Investors: Money Market Mutual Funds

MMLF: Money Market Mutual Fund Liquidity Facility Includes Agencies and ABCP

Dealers and Investors Agency MBS & CMBS Purchase Programs Includes the purchase of Agency debt

4

Federal Reserve Lending ProgramsConstraints since 2008/09

• Revised Section 13(3) of Federal Reserve Act⎯ Fed’s use of section 13(3) during 2008-09 financial crisis was successful in maintaining

financial stability

• Dodd Frank Act amended this provision narrowing the Fed’s authority⎯ Lending must be made in connection with “a program or facility with broad-based

eligibility”⎯ Cannot “aid a failing financial company” or “borrowers that are insolvent”⎯ Cannot have “a purpose of assisting a single and specific company avoid bankruptcy”⎯ Cannot establish a section 13(3) program without the prior approval of the secretary of

Treasury⎯ Within seven (7) days after the Fed authorizes a program, it must provide Congress with a

detailed report⎯ GAO to audit any of the Fed’s emergency lending programs

5

SFA on COVID-19Short-term Focus

• TALF: Term Asset-Backed Securities Loan Facility⎯ Include “legacy securities” ⎯ Expand eligible asset classes⎯ Allow senior-most securities with rating of at least investment grade⎯ Operational efficiencies⎯ Clarifications on term differences from TALF 2008

• Establish Servicer Liquidity Facility

• CPFF: Commercial Paper Funding Facility⎯ Request technical fix to maximum facility size⎯ Reduce/Eliminate upfront free

• Other ⎯ Facilitate the CARE Act funding of SBA Paycheck Protection Program⎯ Institute uniform delay of CECL final implementation date⎯ IRS guidance on tax implications of forbearance programs (REMICs and Grantor Trusts)⎯ Clarity on CRT deals and accounting for wide-scale forbearance ⎯ Expand PMCCF and SMCCF to include other collateral

6

Get InvolvedSFA Committee Structure

Industry Participant CommitteesOur industry participant committees are a key component of our governance structure by:

⎯ Providing a forum for individual constituency groups to separately discuss a wide-range of industry matters

⎯ Evaluating relevant policy, regulatory, legislative and market developments to provide the participant group’ perspective in building Association consensus positions

⎯ Engaging in select advocacy, with Association staff, to promote Association consensus positions⎯ As such, membership in these participant committees are open to primary members in the related

participant class or who are outside counsel who regularly advise the related participant class.

• Issuer Committee

• Issuer Subcommittee: Auto• Issuer Subcommittee: Bank Securitized Lending &

ABCP• Issuer Subcommittee: CLO• Issuer Subcommittee: CMBS• Issuer Subcommittee: Credit Card• Issuer Subcommittee: Equipment• Issuer Subcommittee: Esoteric• Issuer Subcommittee: RMBS• Issuer Subcommittee: Student Loan• Issuer Subcommittee: Unsecured Personal Loans

• Financial Intermediary Committee

• Government Relations Committee

• Investor Committee

• Legal Counsel Committee

• Rating Agency Committee

• Servicer Committee

• Trustee Committee

https://structuredfinance.org/join-a-committee-or-task-force/

View From Capitol Hill

8

Congressional Action to DateThree major legislative responses to the coronavirus pandemic

H.R. 748 — The Coronavirus Aid, Relief, and Economic Security

(CARES) Act

– Major $2 trillion stimulus package– $454 billion for Federal Reserve

programs and facilities– Direct payments to individuals and

families– Became law on 3/27/20

Initial support and vaccine development

Paid leave, unemployment and food

assistance

Major economic stimulus package

H.R. 6074 — Coronavirus Preparedness & Response

Supplemental Appropriations Act

‒ $8.3 billion in COVID-19 response funding for developing a vaccine and preventing further spread of the virus

‒ Became law on 3/6/20

H.R. 6201 — Families First Coronavirus Response Act

‒ $100 billion in worker assistance, including emergency paid sick leave, food assistance, and unemployment payments

‒ Became law on 3/18/20

IPhase

IIPhase

IIIPhase

House Democrat

Origination

Senate RepublicanOrigination

House Democrat

Origination

9

Political Partisanship Impacted Legislative Timeline

Passed Senate3/25/20

Amended3/23/20

To President3/27/20

Passed House3/27/20

Signed into law3/27/20

• Senate Democrats disagreed with several provisions in the bill and criticized Leader Mitch McConnell (R-KY) for not protecting individuals from eviction, foreclosure, or forbearance, and blocked a key procedural vote on March 22.

– With 4 Republican Senators self-quarantined and no provision for remote voting, the majority margin was slim.

• On March 25, Senate leaders announced they had reached a bipartisan framework on a modified $2 trillion bill making it the largest economic relief bill in U.S. history, but 24 hours were needed to resolve remaining differences and hash out technical drafting errors in the bill.

• Republican Senators Lindsey Graham (R-SC), Tim Scott (R-SC), Ben Sasse, (R-NE) and Rick Scott (R-FL) had concerns on unemployment provisions, resulting in a threat to block the bill. Senator Bernie Sanders (I-VT) then threatened to block the legislation if the Republicans got their way.

• After clearing the Senate 96-0 on March 25, the House of Representatives was expected to pass the bill by unanimous consent, which was later changed to a voice vote. Another dangerous political drama emerged when Rep. Thomas Massie (R-KY) threatened to force a recorded vote March 27 and further stall passage.

• Rep. Massie’s actions received bipartisan criticism, but nonetheless compelled hundreds of lawmakers to return to Capitol Hill from their home districts.

• A few hours after the House passed the bill on March 27, it was signed into law by President Trump.

10

CARES Act Funding Provisions

Total Cost: $2.3 trillion

Sources: Summaries and bill text provided by Congressional legislative offices, Joint Committee on Taxation, and Center for a Responsible Federal Budget estimates.

Levered up 10x, the CARES Act provides the Federal Reserve

$4.5 trillion in liquidity to keep

credit flowing and make direct loans to U.S. businesses

through newly created lending

facilities.

Provisions Included in the CARES Act Cost ($B)Expands & Extends Unemployment Benefits

Boosts all unemployment benefits by $600/week, cover additional workers, provides an additional 13 weeks of benefits, etc.

Direct Payments/Rebates

Provides tax rebates of $1,200/adult ($2,400/couple) & $500/child, phased out above $75,000 of income ($150,000/couple)

Provides Small Business Loans & Grants $377Supports Loans & Loan Guarantees for Large Businesses & Governments

$454 billion for loans to businesses, states, & municipa lities via new Federa l Reserve 13(3) facility

State, Local & Tribal Government Funding $150Increases Health-Related Spending $180Supports the Social Safety Net $42Increases FEMA Disaster Assistance $45Increases Education Spending $32Supports the Transportation Providers & Industries $72Reduces Individual Taxes $20Cuts Business Taxes $280Other spending $25

$260

$290

$510

11

CARES Act Funding Provisions (cont.)

Federal Reserve Programs and Facilities

• Since the beginning of March, the Federal Reserve’s emergency actions included the following:

• Lowered interest rates to near zero to help assist consumers and businesses weather a period of economic slowdown.

• Re-ignited Quantitative Easing (QE) to buy back “at least” $700 billion of Treasury securities and Agency Mortgage-backed securities.

• Cut interest rate at the discount window to 0.25% to support borrowing by commercial banks.

• Announced the establishment of liquidity facilities to support the flow of credit in several markets. The Federal Reserve’s programs include:

– Money Market Mutual Fund Liquidity Facility– Commercial Paper Funding Facility– Primary Dealer Credit Facility– Primary Market Corporate Credit Facility– Secondary Market Corporate Credit Facility– Term Asset-Backed Securities Loan Facility

Additional information on federal facilities is available here.

Terms and Conditions for Loans or Loan Guarantees

• Although the Act provides broad lending authority to the Secretary, there are substantial conditions attached to loans or loan guarantees.

• Recipients of loans or loan guarantees must be created, organized, and have a significant presence in the United States.

• Borrowers are restricted from engaging in stock repurchases or issuing of dividends for one year following repayment of any obligation under these programs.

• There are considerable restrictions on executive compensation for one year following repayment of any obligation.

• Loans or loan guarantees to publicly traded companies require the government takes an equity interest in the business. In the case of a non-publicly traded business, either an equity interest or senior debt interest can serve as collateral for the loan.

• Sen. Banking Chairman asks Fed and Treasury guidance on Title IV of the CARES Act.

12

CARES Act Funding Provisions (cont.)

Foreclosure Moratorium and Right to Request Forbearance

• Section 4022 of the Act allows borrowers with a “Federally-backed mortgage loan” to request forbearance, regardless of delinquency status and without penalties, fees, or interest, by submitting a request to the borrower’s servicer and affirming financial hardship due to COVID-19.

• Forbearance must be granted for up to 180 days and extended for an additional period of up to 180 days at the request of the borrower (the initial or extended forbearance can be shortened). It is worth noting the bill provides the structure for 12 months of forbearance but does not supply additional liquidity for mortgage servicers.

• Section 4023 allows multifamily borrowers with a “Federally-backed multifamily mortgage loan” that was current on February 1, 2020 may also request a forbearance for up to 30 days, with two additional 30-day extensions.

• Full analysis is available here.

Delay of Current Expected Credit Loss (CECL) Standard Implementation

• The bill extends the final implementation date of FASB’s CECL standard for insured depository institutions or bank holding companies through December 31, 2020 or the declared end of the national emergency.

• During the 24 hours of negotiations, SFA worked to have all institutions (including but not limited to banks, non-banks, captive finance companies such as auto finance companies, etc.) included in a provision delaying implementation of the CECL standard.

• Although the final bill remained limited to insured depositories and bank holding companies, SFA and industry allies remain committed to exploring regulatory and additional legislative alternatives for a uniform delay of CECL for all institutions.

• Delay is optional for those institutions ready to comply with original implementation date.

• View SFA’s CECL delay letter here.

13

SFA Engagement & Future Congressional Considerations

SFA Member and Congressional Engagement

• Regular GR updates on Committee and Task Force calls, as well as blogs on SFA website and SFA alerts

• Continuous contact with GR reps of SFA member companies

• Served as prominent resource to provide staff with details on industry needs

• TALF 2020 implementation and expansion

• CECL delay

• Engage Members of Congress to support outstanding and needed regulatory actions as well as technical clean up of legislative package

Future Congressional Action

• Consideration of potential “Phase IV” & “Phase V” legislation

• Oversight of Federal Reserve lending facilities and programs

• Reassess the status of legislative priorities prior to the pandemic when appropriate

SFA staff will continue to monitor legislative and regulatory developments in D.C.

Please reach out to the Government Relations team with any questions.

Term Asset-Backed Securities Loan Facility (TALF)

15

Term Asset-Backed Securities Loan Facility (TALF)TALF helped jumpstart the economy to boost lending to consumers & businesses

What is the Term Asset-Backed Securities Loan Facility (TALF)?

• As a result of the Great Recession, new issuance of ABS declined, ceasing entirely by October 2008

‒ Consumers and businesses were unable to access the funding they needed without the flow of credit between banks, borrowers, and capital markets

• TALF was created by the Federal Reserve, with the support of the US Treasury, under section 13(3) of the Federal Reserve Act

• Since the Federal Reserve does not have the operational capacity to make loans directly to individuals, TALF was designed to help market participants meet the credit needs of households and small businesses by providing loans to invest in asset-backed securities (ABS) backed by predefined loan types

How Did TALF Work?

• Detailed eligibility requirements existed for TALF participants, for the ABS, as well as the underlying loan collateral of the ABS

• TALF borrowers could request a TALF loan in exchange for the pledging of eligible ABS

‒ The amount of the loan was equal to the market value of the pledged security, less a “haircut” and administration fee

• TALF facilitated renewed issuance of ABS at more normal interest rate spreads, and the program did not incur a single dollar of loss

16

TALF 2008Impact on New Issue ABS

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

TALF's impact on new issue ABS ($ billions)

Credit Cards Auto Student Loans Equipment Floorplan Unsecured Consumer Other ABS

TALF Launched TALF Terminated

Source: JPMorgan, Deutsche Bank, Bloomberg

17

TALF 2008Impact on ‘AAA’ ABS Spreads

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1/4/

2008

2/4/

2008

3/4/

2008

4/4/

2008

5/4/

2008

6/4/

2008

7/4/

2008

8/4/

2008

9/4/

2008

10/4

/200

8

11/4

/200

8

12/4

/200

8

1/4/

2009

2/4/

2009

3/4/

2009

4/4/

2009

5/4/

2009

6/4/

2009

7/4/

2009

8/4/

2009

9/4/

2009

10/4

/200

9

11/4

/200

9

12/4

/200

9

1/4/

2010

2/4/

2010

3/4/

2010

4/4/

2010

5/4/

2010

6/4/

2010

7/4/

2010

8/4/

2010

9/4/

2010

10/4

/201

0

11/4

/201

0

12/4

/201

0

TALF's Impact on AAA ABS spreads

3yr Card 3yr Auto 2yr Subprime Auto 3yr Equip 7yr Private Credit SL

TALF Announced TALF Launched TALF Extended

Source: JPMorgan, Deutsche Bank, Bloomberg

18

TALF 2008Loan Amounts by Asset Class

Collateral asset class Collateral asset sub-class Sum of Loan AmtAuto Commercial and government fleets 2.2

Motorcycle/other recreational vehicles 0.3Prime retail lease 2.0Prime retail loan 7.9Subprime retail loan 0.3

Auto Total 12.8Commercial Mortgage Legacy 12.0

New Issue 0.1Commercial Mortgage Total 12.1Credit Card Prime 13.7

Subprime 12.7Credit Card Total 26.3Equipment Loans and Leases 1.6Equipment Total 1.6Floorplan Auto 2.5

Non-Auto 1.4Floorplan Total 3.9Premium Finance Property and casualty 2.0Premium Finance Total 2.0Servicing Advances Residential mortgages 1.3Servicing Advances Total 1.3Small Business SBA 504 1.2

SBA 7(a) 1.0Small Business Total 2.2Student Loan Private 9.0Student Loan Total 9.0Grand Total ($ billions) 71.1

Source: Federal Reserve Bank of New York

19

TALF 2008Haircuts by Asset Class

Sector Subsector 0-<1 1-<2 2-<3 3-<4 4-<5 5-<6 6-<7

Auto Prime retail lease 10% 11% 12% 13% 14%Auto Prime retail loan 6% 7% 8% 9% 10%Auto Subprime retail loan 9% 10% 11% 12% 13%Auto Motorcycle/other recreational vehicles 7% 8% 9% 10% 11%Auto Commercial and government fleets 9% 10% 11% 12% 13%Auto Rental fleets 12% 13% 14% 15% 16%Credit Card Prime 5% 5% 6% 7% 8%Credit Card Subprime 6% 7% 8% 9% 10%Equipment Loans and leases 5% 6% 7% 8% 9%Floorplan Auto 12% 13% 14% 15% 16%Floorplan Non-auto 11% 12% 13% 14% 15%Premium Finance Property and casualty 5% 6% 7% 8% 9%Servicing Advances Residential mortgage 12% 13% 14% 15% 16%Small Business SBA loans 5% 5% 5% 5% 5% 6% 6%Student Loan Private 8% 9% 10% 11% 12% 13% 14%Student Loan Gov’t guaranteed 5% 5% 5% 5% 5% 6% 6%

ABS Average Life (years)

Source: Federal Reserve Bank of New York

20

SFA Comparison of Term Asset-Backed Loan Facility

Source: Federal Reserve Bank of New York

21

SFA Comparison of Term Asset-Backed Loan FacilityContinued

Source: Federal Reserve Bank of New York

22

SFA Comparison of Term Asset-Backed Loan FacilityContinued

Source: Federal Reserve Bank of New York

SFA Contact Information

24

SFA Contact Information

Michael Bright, CEOMichael.Bright@structuredfinance.org(202) 524-6301

Kristi Leo, PresidentKristi.Leo@structuredfinance.org(917) 415-8999

Elen Callahan, Head of ResearchElen.Callahan@structuredfinance.org(347) 529-4553

Jen Earyes, Head of PolicyJen.Earyes@structuredfinance.org(202) 524-6302

Leslie Sack, Head of Government RelationsLeslie.sack@structuredfinance.org(202) 524-6304