[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]



 
                     CONGRESSIONAL OVERSIGHT PANEL
                         MAY OVERSIGHT REPORT 

                               ----------                              



REVIVING LENDING TO SMALL BUSINESSES AND FAMILIES AND THE IMPACT OF THE 
                                  TALF

[GRAPHIC] [TIFF OMITTED] 


                  May 7, 2009.--Ordered to be printed

Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 
             Stabilization Act of 2008, Pub. L. No. 110-343


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                     CONGRESSIONAL OVERSIGHT PANEL

                         MAY OVERSIGHT REPORT *

                               __________



REVIVING LENDING TO SMALL BUSINESSES AND FAMILIES AND THE IMPACT OF THE 
                                  TALF

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                  May 7, 2009.--Ordered to be printed

Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 

             Stabilization Act of 2008, Pub. L. No. 110-343

                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                            Sen. John Sununu
                          Rep. Jeb Hensarling
                           Richard H. Neiman
                             Damon Silvers

                            C O N T E N T S

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                                                                   Page
Executive Summary................................................     1
Section One: Reviving Lending to Small Businesses and Families 
  and the Impact of the TALF.....................................     4
    A. Introduction..............................................     4
    B. Small Business Lending....................................     5
    C. Family Lending............................................    15
    D. Securitization and the TALF...............................    28
    E. Small Business Credit, the TALF, and Other Efforts To 
      Expand Small Business Access to Credit by Jumpstarting 
      Secondary Markets..........................................    42
    F. Household Lending and the TALF............................    49
    G. Conclusion................................................    52
Section Two: Additional Views....................................    55
Section Three: Correspondence with Treasury Update...............    58
Section Four: TARP Updates since Last Report.....................    59
Section Five: Oversight Activities...............................    67
Section Six: About the Congressional Oversight Panel.............    69
Appendices:
    APPENDIX I: LETTER FROM NEW YORK ATTORNEY GENERAL ANDREW 
      CUOMO TO CHAIR ELIZABETH WARREN, AND OTHERS, REGARDING BANK 
      OF AMERICA AND MERRILL LYNCH, DATED APRIL 23, 2009.........    70
    APPENDIX II: INITIAL RESPONSE LETTER FROM SECRETARY TIMOTHY 
      GEITHNER REGARDING AIG, DATED APRIL 20, 2009...............   131
    APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO FEDERAL 
      RESERVE CHAIRMAN BEN BERNANKE AND FEDERAL RESERVE BANK OF 
      NEW YORK PRESIDENT WILLIAM DUDLEY REGARDING AIG, DATED 
      APRIL 16, 2009.............................................   140
    APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY 
      TIMOTHY GEITHNER REGARDING AIG, DATED MARCH 24, 2009.......   157


=======================================================================
                          MAY OVERSIGHT REPORT

                                _______
                                

                  May 7, 2009.--Ordered to be printed

                                _______
                                

                           EXECUTIVE SUMMARY

    If small businesses and households are unable to spend, 
then both the depth and length of the country's economic 
trouble will be intensified. In the past, much of that spending 
has been supported by credit. Even after the widely reported 
credit slowdown in 2008, 40 percent of banks reported further 
tightening of small business lending standards in the first 
quarter of 2009 and no banks reported easing of standards. 
Meanwhile, consumer lending contracted at a rate of 3.5 
percent. The Term Asset-Backed Securities Loan Facility (TALF) 
program is intended to support more lending by financing credit 
through asset-backed securities. These are securities that 
represent interests in pools of loans made to small businesses 
and households for purposes such as buying automobiles or 
funding college. Lenders collect these loans together and then 
sell interests in these pools of loans to investors. With the 
money they receive from investors purchasing the asset-backed 
securities, the lenders have more money available to make more 
loans.
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    * The Panel adopted this report with a 4-1 vote on May 6, 2009. 
Rep. Jeb Hensarling voted against the report. His additional view is 
available in Section Two of this report.
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    The Department of the Treasury's new initiative through 
TALF raises two important questions:
     Is the TALF program well-designed to help market 
participants meet the credit needs of households and small 
businesses?
     Even if the program is well-designed, is it likely 
to have a significant impact on the access to credit of small 
businesses and consumers?
    The first question is whether the TALF program is well-
designed to attract new capital. The program should be 
attractive to investors in asset-backed securities. The 
investors must contribute a portion of the purchase price for 
the securities (5-16 percent in the May offering), with the 
government financing the remainder. If the securities increase 
in value, the investors reap a substantial portion of that 
benefit. If, however, the securities decline in value, the 
investors could default on the government loans, forfeiting 
their investment but leaving the taxpayers to absorb any 
remaining losses with only the collateral to cover the loan 
amount. On the other hand, there are also some reasons why 
investors would not want to participate in the program. There 
are restrictions on sale of the securities, so that investors 
are ``locked in'' to their investment for a number of years. 
The interest rate payable on TALF loans may be higher than the 
investors could get from other lenders. There are also 
restrictions on the internal operations of participants, and 
investors fear that they may be subject to additional 
restrictions in the future. With these uncertainties, and the 
fact that so far there have been fewer issuances under the 
program than expected, it is not yet clear that the program has 
been well-designed to meet its purpose.
    The second question is whether any securitization program, 
no matter how well designed, is likely to help market 
participants meet the credit needs of small businesses and 
households. While small businesses are experiencing significant 
credit constriction, it is not clear whether that constriction 
is primarily the product of reduced creditworthiness of 
borrowers or of tightening in bank lending. TALF cannot address 
the creditworthiness issue. It can provide more funds to the 
lenders for lending, but asset-backed securities have never 
been the source of significant funding for small businesses. 
This report raises the question of whether TALF will have a 
meaningful impact on small business credit.
    Consumer lending raises a very different aspect of the 
question of the likely effect of TALF efforts. Leading into 
this recession, families were already awash in debt. Larger 
economic forces have left families with little savings, while 
declines in the value of housing and in the stock market have 
shrunk household net worth by 20 percent in just over a year. 
As wages have stagnated and unemployment has risen, the ability 
of households to manage ever-larger debt loads is increasingly 
unlikely. Any reduction in consumer lending may be the result 
of reduced demand as families try to cut costs or changes in 
banks' lending decisions as they assess the deteriorating 
creditworthiness of American households.
    Despite these larger concerns, it is noteworthy that even 
with the sharp contraction in the securitization market, 
consumer lending has shown only a modest decrease, with a 
projected annualized downturn of 3.5 percent. The contraction 
has been exclusively in revolving debt (such as credit cards), 
not in installment loans (such as automobile and student 
loans). There is much discussion among finance professionals 
about the negative impact of the current contraction in the 
securitization market, but consumer loans do not seem to have 
been as strongly affected as mortgage loans.
    Another issue that arises when discussing the revival of 
lending deals with the terms of small business and consumer 
lending. Recently, there have been reports of large increases 
in credit card rates by banks that are both Capital Purchase 
Program (CPP) recipients and originators of loans eligible to 
be sold under the TALF program, even for customers who have 
made all their payments according to the terms of their 
agreements. In the three month period from November 2008 to 
February 2009, interest rates on credit cards grew by 8.8 
percent from 12.02 percent to 13.08 percent, while the cost of 
funds declined. This also raises the question: If a bank wants 
taxpayer support through the Troubled Asset Relief Program 
(TARP) or TALF, should the bank be obligated to go beyond what 
the law requires for consumer and small business lending 
standards?
    The resolution of this question involves broader policy 
concerns. For some, Congress is the appropriate body to address 
consumer protections that are more stringent than current law; 
additional conditions set by Treasury outside the legislative 
process could deter industry participation in TARP and TALF, 
undermining the program's goal of ensuring access to affordable 
credit for small businesses and consumers. Others are concerned 
that financial institutions should not take taxpayer support 
and then increase their interest rates on outstanding loans for 
many of the same taxpayers. The Panel takes no position on 
whether conditions should be placed on the terms of credit set 
by TARP recipients, but it hopes that the discussion provided 
here is useful to Congress.

SECTION ONE: REVIVING LENDING TO SMALL BUSINESSES AND FAMILIES AND THE 
                           IMPACT OF THE TALF

                            A. Introduction

    Since the financial crisis began, the connection between 
``Wall Street'' and ``Main Street'' has been a constant 
concern. The TARP, and the Administration's broader Financial 
Stability Plan, will be successful only if they can revive 
lending on economically appropriate terms to meet the credit 
needs of the American people. These needs include credit for 
small businesses, and credit card, student, and auto (and 
similar) loans for families.
    Treasury has recognized that restoring such lending has 
multiplier effects throughout the economy:

          Restarting our economy and job creation requires * * 
        * ensuring through our new Financial Stability Plan 
        that businesses with good ideas have the credit to grow 
        and expand, and working families can get the affordable 
        loans they need to meet their economic needs and power 
        an economic recovery.\1\
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    \1\ U.S. Department of the Treasury, Fact Sheet: Financial 
Stability Plan (Feb. 10, 2009) (online at www.financial stability.gov/ 
docs/ fact-sheet.pdf) (hereinafter ``Treasury Fact Sheet'').

    And since their inception, efforts to rescue the financial 
system and restore health to the economy have emphasized the 
restoration of lending, and hence credit availability, in 
several ways.
    Treasury's original focus--used to justify passage of the 
TARP--was removing illiquid mortgage-based assets that were 
``parked, or frozen, on the balance sheets of banks and other 
financial institutions, preventing them from financing 
productive loans.'' \2\ In early October 2008, soon after the 
enactment of TARP,\3\ Treasury moved instead to more drastic 
action to improve bank balance sheets by making direct capital 
infusions to provide funds for lending and restore credit 
availability under the CPP, Systemically Significant Failing 
Institutions Program (SSFI), Targeted Investment Program (TIP), 
and Capital Assistance Program (CAP).
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    \2\ U.S. Department of the Treasury, Remarks of Secretary Paulson 
on Comprehensive Approach to Market Developments (Sept. 19, 2008) 
(online at www.financialstability.gov/latest/hp1149.html). The plan to 
free bank balance sheets of the overhang of poor loans made during the 
real estate bubble has been reborn in the Public-Private Investment 
Program, announced on March 23, 2009. See U.S. Department of the 
Treasury, Treasury Department Releases Details on Public Private 
Partnership Investment Program (Mar. 23, 2009) (online at 
www.treas.gov/press/releases/tg65.htm).
    \3\ Congress provided Treasury the authority to establish TARP in 
the Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 
110-343.
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    In late November 2008, the Federal Reserve Board announced 
the creation of a new initiative aimed at securitization 
markets, the TALF, which it described as ``a facility that will 
help market participants meet the credit needs of households 
and small businesses by supporting the issuance of asset-backed 
securities (ABS) collateralized by student loans, auto loans, 
credit card loans, and loans guaranteed by the Small Business 
Administration (SBA).'' \4\
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    \4\ Board of Governors of the Federal Reserve System, Press Release 
(Nov. 25, 2008) (online at www.federalreserve.gov/newsevents/press/
monetary/20081125a.htm).
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    A week earlier, the Interim Assistant Secretary of the 
Treasury for Financial Stability, Neel Kashkari, had noted that 
``[t]he consumer securitization market appears to be a 
promising opportunity'' and that re-starting these markets 
``would help bring down rates of auto loans, credit cards and 
student loans and could be achieved with a more modest 
allocation from the TARP.'' \5\ Over the ensuing months 
Treasury and the Federal Reserve Board have emphasized revival 
of the securitization markets, not simply basic bank lending, 
to restore the flow of credit to businesses and families.
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    \5\ U.S. Department of the Treasury, Remarks of Interim Assistant 
Secretary Neel Kashkari on Implementation of the Emergency Economic 
Stabilization Act (Nov. 19, 2008) (online at 
www.financialstability.gov/latest/hp1281.html).
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    In the last 25 years, securitization has played an 
increasing role in the financing of government-guaranteed SBA 
and family lending; its impact is not uniform--for example most 
small business loans are not securitized. The TALF originally 
allocated up to $200 billion to provide highly advantageous 
loans--loans that shift most of the risk to the taxpayer--to 
bring investors back into those markets to buy securities 
backed by small business and family loans. 90 percent of the 
funding for this initiative comes from the Federal Reserve 
System (with a ten percent back-up from the TARP). Yet despite 
the availability of loans from the Federal Reserve Bank of New 
York (FRBNY) on those favorable terms, investor demand for TALF 
loans has only begun to move toward expected levels in the 
third month of TALF offerings.
    Understanding the reasons for the TALF's sluggish start 
requires examining the program's design and the investment and 
loan markets it tries to bring together. On a more basic level, 
evaluating efforts to revive credit availability for small 
businesses and families through the TALF requires understanding 
those borrowers themselves.
    These issues are the subjects of the Panel's May oversight 
report. The report looks first at the credit needs of small 
business and household borrowers and the problems they face in 
trying to obtain that credit. It then examines how 
securitization works, the relative importance of securitization 
in both small business and household lending, and the terms and 
early operation of the TALF, as well as securitization's 
potential strengths and weaknesses, all through the lenses of 
small business and family lending. (In the report, the term 
``family lending'' refers to the type of credit that families 
are most likely to require: credit card, student, and auto 
loans.)

                       B. Small Business Lending


       1. THE IMPORTANCE OF SMALL BUSINESSES IN THE U.S. ECONOMY

    Congress has defined small businesses as those that are: 
(1) organized for profit; (2) independently owned and operated; 
(3) not dominant in their field of operation; and (4) under a 
certain size.\6\ The SBA sets specific size standards for 
various industries based on either revenue streams or number of 
employees.\7\ As a result of industry-specific standards, the 
scale of a small business in one industry may look very 
different from the scale of a business in another. For example, 
while a retail company must have less than $7 million in annual 
revenue to be a small business, a construction company must 
have less than $33.5 million in annual revenue. While a 
manufacturing company must have fewer than 500 employees to 
qualify as a small business, a wholesale company must have 
fewer than 100 employees.\8\
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    \6\ Small Business Act of 1953, Pub. L. No. 85-536 (codified at 15 
U.S.C. 632(a)).
    \7\ See U.S. Small Business Administration, Size Standards (online 
at www.sba.gov/contracting opportunities/officials/size/index.html) 
(accessed May 5, 2009).
    \8\ U.S. Small Business Administration, Size Standards FAQ's 
(online at www.sba.gov/contractingopportunities/officials/size/
SIZE_STANDARDS_FAQS.html) (accessed May 5, 2009).
---------------------------------------------------------------------------
    However, policymakers and businesspeople have long debated 
the precise definition of a small business. This debate has 
resulted in various government agencies using means and methods 
of defining small businesses that differ from those used by the 
SBA. For example, the Internal Revenue Service has developed a 
definition that designates partnerships and corporations 
(including S corporations) with assets of $5 million or less--
as well as all sole proprietorships--as small businesses.\9\ 
Other programs designed to help small businesses use more 
fluid, conceptual definitions.\10\
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    \9\ Government Accountability Office, Tax Administration: IRS Faces 
Several Challenges As It Attempts To Better Serve Small Businesses, at 
3 (Aug. 2000) (GAO/GGD-00-166) (online at www.gao.gov/archive/2000/
gg00166.pdf).
    \10\ National Federation of Independent Business, Small Business 
Policy Guide (online at www.nfib.com/tabid/56/
Default.aspx?cmsid=13787&v=1) (accessed May 5, 2009).
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    Although the SBA's definition is not universal, it is the 
most instructive for the purposes of this report, given the 
SBA's role in expanding credit for small businesses. Moreover, 
the Small Business Act states that ``unless specifically 
authorized by statute, no Federal department or agency may 
prescribe a size standard for categorizing a business concern 
as a small business concern, unless such proposed size 
standard'' is approved by the SBA Administrator.\11\
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    \11\ Small Business Act, supra note 6 (codified at 15 U.S.C. 
632(a)(2)(C).
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    Under any definition, small businesses play a vital role in 
the U.S. economy, and their health in the months ahead will be 
a necessary precondition for economic recovery. They are not 
only the engines of innovation--many of the largest 
corporations began as small businesses--but they are also 
America's largest job producers. Today, more than six million 
small business employers collectively employ more than half of 
all private-sector workers.\12\ Small businesses have generated 
more than half of all new jobs over the past ten years; from 
2004-2005, they created 78.9 percent of new jobs.\13\ Moreover, 
small businesses produce about half of the nation's private, 
nonfarm GDP.\14\
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    \12\ U.S. Small Business Administration, Small Business Profile 
(online at www.sba.gov/advo/research/profiles/08us.pdf) (accessed May 
5, 2009) (hereinafter ``SBA Small Business Profile''). For state-
specific small business employment statistics, see U.S. Small Business 
Administration, Small Business Profiles for the States and Territories 
(online at www.sba.gov/advo/research/profiles) (accessed May 5, 2009).
    \13\ SBA Small Business Profile, supra note 12; Senate Committee on 
Small Business and Entrepreneurship, Testimony of Member of the Board 
of Governors of the Federal Reserve System Frederic S. Mishkin, The 
Impact of the Credit Crunch on Small Business, 110th Cong. (Apr. 16, 
2008) (online at sbc.senate.gov/hearings/testimony/080416-Mishkin-
testimony.pdf) (hereinafter ``Mishkin Testimony'').
    \14\ SBA Small Business Profile, supra note 12.
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    To that end, Secretary of the Treasury Timothy Geithner 
recently met with small business owners to emphasize their 
importance to the economy and discuss the Administration's 
efforts to support them under the Financial Stability Plan. At 
that time, Secretary Geithner stated that:

          Small businesses are the engine of America's 
        dynamism. You create and sustain most of the jobs in 
        this country. You are the anchor of our communities, 
        and you are ever more linked to the global economy. You 
        take the germ of an idea and transform it into products 
        and services that make America more productive. When 
        you prosper the nation prospers. And when the national 
        economy is hurting, you bear that burden heavily.\15\
---------------------------------------------------------------------------
    \15\ U.S. Department of the Treasury, Remarks of Secretary 
Geithner: Unlocking Credit for Small Businesses (Mar. 16, 2009) (online 
at www.treas.gov/press/releases/reports/tg58_tfg_smallbiz_remarks.pdf) 
(hereinafter ``Geithner Small Business Remarks'').
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                  2. SOURCES OF SMALL BUSINESS LENDING

    Credit offers essential funds to entrepreneurs by injecting 
capital for setting-up shop, financing inventory and operations 
during payment cycles, maintaining operations during slow 
seasons or downturns, and expanding operations when business 
booms. Generally, small businesses formally obtain credit 
through: (1) a conventional loan; (2) an SBA-guaranteed loan; 
or (3) credit cards. Other sources of capital include personal 
home equity lines of credit; personal savings; or informal, 
nonbank lending from small-scale ``angel'' investor networks or 
friends and family.\16\
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    \16\ See National Small Business Association, 2008 Year-End 
Economic Report, at 6 (2008) (online at www.nsba.biz/docs/
08trend_eoy.pdf) (hereinafter ``NSBA 2008 Report''). The NSBA survey 
indicated that 16 percent of small businesses used private, individual 
loans for financing during 2008. Id.
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    Through a conventional loan, a bank provides capital to a 
small business in exchange for regular interest payments and 
collateral. While this form of loan is most desirable for small 
business owners, it can be difficult to obtain. One recent 
survey found that only 44 percent of small business owners 
relied on bank loans to finance their business operations.\17\ 
Even in times of economic growth, entrepreneurs may fail to 
acquire a conventional loan because their credit score is too 
low, their endeavor is too risky, or they lack fixed assets to 
provide collateral.\18\ Additionally, small businesses are also 
more likely than larger businesses to be affected by ``credit 
rationing,'' which occurs when lenders lack sufficient 
information to differentiate between creditworthy and non-
creditworthy borrowers, resulting in the possibility of 
creditworthy borrowers being denied access to credit along with 
non-creditworthy borrowers.\19\ In times of downturn, access to 
credit shrinks even further, and otherwise creditworthy 
entrepreneurs may fail to acquire traditional loans--or even 
lose already open lines of credit--as banks tighten lending.
---------------------------------------------------------------------------
    \17\ Id. at 6.
    \18\ In determining whether to award a loan to a small business, 
banks generally consider: (1) a company's balance sheet and income 
statements; (2) the quality of available collateral; (3) the 
creditworthiness of the company's principal; and/or (4) proprietary 
information gained in past dealings. Kenneth Temkin and Roger C. 
Kormendi, U.S. Small Business Administration, An Exploration of a 
Secondary Market for Small Business Loans, at 6 (Apr. 2003) (online at 
www.sba.gov/advo/research/rs227_tot.pdf).
    \19\ Government Accountability Office, Small Business 
Administration: Additional Measures Needed to Assess 7(a) Loan 
Program's Performance, at 4 (July 2007) (GAO07/769) (online at 
www.gao.gov/new.items/d07769.pdf) (hereinafter ``2007 GAO 7(a) 
Report'').
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    If a small business fails to obtain a conventional loan, it 
can seek a loan with the assistance of the SBA. The SBA has two 
major small business loan programs. First, under its 7(a) 
program, the SBA is authorized to guarantee $17.5 billion worth 
of loans each year for working capital. Second, under its 504 
program, the SBA is authorized to guarantee $7.5 billion of 
loans for the development of small assets such as land, 
buildings, and equipment that will benefit local 
communities.\20\ While SBA programs have helped promote lending 
to small businesses, SBA-guaranteed loans constitute only a 
small percentage of total small business lending.\21\ In a 
recent survey of small business owners, only three percent 
reported using SBA-guaranteed loans in 2008.\22\ Moreover, the 
Government Accountability Office (GAO) has calculated that, in 
recent years, only about four percent of the total value of 
outstanding small business loans is guaranteed through the 7(a) 
program.\23\ As a result, any government strategy to promote 
small business access to credit must address conventional loans 
and other sources of credit in addition to SBA-guaranteed 
loans.
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    \20\ 504 projects are generally made up of a senior lien of up to 
50 percent from a private lender combined with a junior lien of up to 
40 percent from a certified development company with at least ten 
percent equity from the small business. The junior lien is backed by a 
100 percent SBA-guaranteed debenture.
    \21\ The SBA approved $23 billion of loans in FY 2007 and, at 
around the same time, estimated that total small business loans 
outstanding at that time were valued at $684.6 billion. U.S. Small 
Business Administration, Table 2--Gross Approval Amount by Program 
(online at www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_bud_lperf_grossapproval.pdf) (accessed May 5, 2009); U.S. Small 
Business Administration, Small Business and Micro Business Lending in 
the United States, for Data Years 2006-2007, at 3 (June 2008) (online 
at www.sba.gov/advo/research/sbl_07study.pdf) (hereinafter ``Small 
Business and Micro Business Lending'').
    \22\ NSBA 2008 Report, supra note 16, at 6.
    \23\ 2007 GAO 7(a) Report, supra note 19, at 7. In an appendix to 
that report, GAO explains how this calculation was made: ``To compare 
the number and amount of outstanding small business loans to 7(a) 
loans, we used the [FDIC call reports] for U.S. banks . . . We 
considered the call report data on loans under $1 million to be a proxy 
for general small business loans, even though there is no attempt to 
directly link the loans to the size of the firm accessing credit in the 
call report data.'' Id.
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    Small businesses that fail to acquire traditional or SBA-
backed loans often obtain credit through credit cards. However, 
small business owners generally view credit cards as 
undesirable because of their high interest rates and frequently 
changing terms.\24\ Although the total outstanding value of 
credit card loans to small businesses is unknown, survey 
information sheds light on trends in this type of lending. 
While 44 percent of small business owners identified credit 
cards as a source of their financing in a 2008 survey, only 16 
percent did so 15 years earlier.\25\ Additionally, the Federal 
Reserve Board's 2007 Survey of Consumer Finances found that 
credit card debt has risen sharply for the self-employed in 
recent years.\26\ The increasing use of credit cards by small 
businesses has concerned policymakers for years, but the 
current crisis has reinforced the importance of a healthy 
market for conventional and SBA-guaranteed loans.
---------------------------------------------------------------------------
    \24\ Senate Committee on Small Business and Entrepreneurship, 
Testimony of President of the National Small Business Association Todd 
McCracken, Perspectives from Main Street on Small Business Lending, 
111th Cong., at 5 (Mar. 19, 2009) (online at sbc.senate.gov/hearings/
testimony/09_03_19_credit_hearing/NSBATestimony.pdf) (hereinafter 
``McCracken Testimony'').
    \25\ Id. at 4; Board of Governors of the Federal Reserve System, 
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the 
Survey of Consumer Finances, Federal Reserve Bulletin, at 45 (Feb. 
2009) (online at www.federalreserve.gov/pubs/bulletin/2009/pdf/
scf09.pdf) (hereinafter ``Survey of Consumer Finance'').
    \26\ Survey of Consumer Finance, supra note 25, at A38 and A40.
---------------------------------------------------------------------------
    While formal sources of credit are an important asset for 
small businesses, they are often complemented by informal 
sources. Of particular relevance to the current crisis is the 
extent to which small business owners take out loans 
collateralized by real estate assets, often their own homes. 
The Survey of Consumer Finances found that 18 percent of 
households that own and actively manage a small business use 
personal assets to guarantee or collateralize business 
loans.\27\ These Federal Reserve Board data also indicate that 
self-employed persons are more likely to have a home equity 
line of credit and to have accessed it.\28\ Further, the 
Federal Reserve Board's 2003 Survey of Small Business 
Finances--the most recent survey conducted--found that 15 
percent of the total value of small business loans in that year 
was collateralized by personal real estate.\29\ More recently, 
the National Federation of Independent Business (NFIB) found in 
its 2008 Small Business Poll that 22 percent of small 
businesses responding to the survey had taken out at least one 
mortgage to fund business activities, with 16 percent using 
real estate to collateralize other business assets and ten 
percent using their personal homes as collateral.\30\ Although 
this source of credit creates considerable risk under any 
economic conditions, small business owners are particularly 
vulnerable when home equity evaporates with declining property 
values.
---------------------------------------------------------------------------
    \27\ House Committee on Small Business, Testimony of Member of the 
Board of Governors of the Federal Reserve System Randall S. Kroszner, 
Effects of the Financial Crisis on Small Business, 110th Cong. (Nov. 
20, 2008) (online at www.federalreserve.gov/newsevents/testimony/
kroszner20081120a.htm) (hereinafter ``Kroszner Testimony'').
    \28\ Survey of Consumer Finances, supra note 25, at A44.
    \29\ Kroszner Testimony, supra note 27.
    \30\ National Federation of Independent Business, National Small 
Business Poll, at 1 (2008) (online at www.411sbfacts.com/files/
Access%20to%20Credit.pdf) (hereinafter ``NFIB Small Business Poll'').
---------------------------------------------------------------------------
    The exact volume of small business financing that comes 
from each of these sources can be difficult to determine beyond 
the rough sketches that survey results provide. For example, a 
home equity line of credit extended to an individual is 
functionally indistinguishable from one extended to an 
entrepreneur. Similarly, a loan from an angel investor, friend, 
or family member will not appear on a bank's call report, nor 
will drawing down on personal savings in order to finance small 
business activity. Despite this difficulty, any analysis of the 
availability of small business financing must account for these 
various sources.

                      3. THE CURRENT CREDIT CRUNCH

    In contrast to large corporations, small businesses are 
generally less able to access the capital markets directly and 
thus are more vulnerable to a credit crunch.\31\ The result of 
reduced access to credit can be that too few small businesses 
start and too many stall--a combination that can hinder 
economic growth and prolong economic downturn.
---------------------------------------------------------------------------
    \31\ Federal Reserve Bank of San Francisco, FRBSF Economic Letter: 
How Will a Credit Crunch Affect Small Business Finance, at 1 (Mar. 6, 
2009) (online at www.frbsf.org/publications/economics/letter/2009/
el2009-09.pdf).
---------------------------------------------------------------------------
    Throughout 2008, small business lenders and borrowers 
reported signs of a credit slowdown. This process of tightening 
credit for small businesses began in early 2008 and worsened 
over the course of the year. Whereas only 5-10 percent of bank 
officers reported tightening standards for small businesses 
throughout 2007 in the Federal Reserve Board's Senior Officer 
Opinion Survey, that number jumped to 30 percent in January 
2008.\32\ Bank officers continued to report tightening 
standards throughout 2008, with 50 percent reporting tighter 
standards in April \33\ and almost 70 percent in July.\34\ In 
January 2009, 70 percent continued to report tighter 
standards.\35\ Moreover, a large percentage of banks also 
reported that they had increased the cost of the credit they 
did provide.\36\ Following this period of widespread and well 
reported tightening in small business lending standards, small 
businesses have continued to face even further tightening. In 
the April survey, 40 percent of banks reported tightening 
standards and no banks reported easing them.\37\
---------------------------------------------------------------------------
    \32\ Board of Governors of the Federal Reserve System, The January 
2007 Senior Loan Officer Opinion Survey on Bank Lending Practices (Feb. 
2007) (online at www.federalreserve.gov/boarddocs/snloansurvey/200701/
fullreport.pdf) (7.1 percent); Board of Governors of the Federal 
Reserve System, The April 2007 Senior Loan Officer Opinion Survey on 
Bank Lending Practices (May. 2007) (online at www.federalreserve.gov/
boarddocs/snloansurvey/200705/fullreport.pdf) (3.8 percent); Board of 
Governors of the Federal Reserve System, The July 2007 Senior Loan 
Officer Opinion Survey on Bank Lending Practices (Aug. 2007) (online at 
www.federalreserve.gov/boarddocs/snloansurvey/200708/fullreport.pdf) 
(9.6 percent); Board of Governors of the Federal Reserve System, The 
October 2007 Senior Loan Officer Opinion Survey on Bank Lending 
Practices (Nov. 2007) (online at www.federalreserve.gov/boarddocs/
snloansurvey/200711/fullreport.pdf) (9.6 percent); Board of Governors 
of the Federal Reserve System, The January 2008 Senior Loan Officer 
Opinion Survey on Bank Lending Practices (Feb. 2008) (online at http://
www.federalreserve.gov/boarddocs/snloansurvey/200801/fullreport.pdf) 
(30.4 percent).
    \33\ Board of Governors of the Federal Reserve System, The April 
2008 Senior Loan Officer Opinion Survey on Bank Lending Practices (May 
2008) (online at www.federalreserve.gov/boarddocs/snloansurvey/200805/
fullreport.pdf).
    \34\ Board of Governors of the Federal Reserve System, The July 
2008 Senior Loan Officer Opinion Survey on Bank Lending Practices (Aug. 
2008) (online at www.federalreserve.gov/boarddocs/snloansurvey/200808/
fullreport.pdf).
    \35\ Federal Reserve Board, The January 2009 Senior Loan Officer 
Opinion Survey on Bank Lending Practices (Feb. 2009) (online at 
www.federalreserve.gov/boarddocs/snloansurvey/200902/fullreport.pdf) 
(``the net fractions of respondents that reported having tightened 
their lending policies on all major loan categories over the previous 
three months stayed very elevated.''). See also Board of Governors of 
the Federal Reserve System, The October 2008 Senior Loan Officer 
Opinion Survey on Bank Lending Practices (Nov. 2008) (online at 
www.federalreserve.gov/boarddocs/snloansurvey/200811/fullreport.pdf).
    \36\ Id.
    \37\ Board of Governors of the Federal Reserve System, The April 
2009 Senior Loan Officer Opinion Survey on Bank Lending Practices (May 
2009) (online at www.federalreserve.gov/boarddocs/snloansurvey/200905/
fullreport.pdf) (hereinafter ``April Senior Loan Officer Opinion 
Survey'').
---------------------------------------------------------------------------
    Not surprisingly, small businesses have reported being at 
the other end of the tightening. In a November 2008 survey of 
small business owners, 85 percent of respondents reported 
feeling the impact of the credit crunch.\38\ In a separate 
survey at around the same time, nearly half of small businesses 
that had applied for credit in the prior two months reported 
being unable to obtain the full amount they requested.\39\ 
Despite TARP and other government actions, small business 
owners continued to express concerns in more recent surveys. In 
an April 2009 survey, for example, only 29 percent of small 
business owners surveyed by the NFIB reported that all their 
borrowing needs were met.\40\
---------------------------------------------------------------------------
    \38\ McCracken Testimony, supra note 24, at 1.
    \39\ NFIB Small Business Poll, supra note 30, at 1.
    \40\ National Federation of Independent Business, Small Business 
Economic Trends, at 2 (Apr. 2009) (online at www.nfib.com/Portals/0/
PDF/sbet200904.pdf) (hereinafter ``NFIB Small Business Economic 
Trends'').
---------------------------------------------------------------------------
    The National Small Business Association (NSBA) has also 
reported that it ``has heard anecdotally from small business 
owners across the country who have had a credit-card limit or 
line of credit arbitrarily reduced due to no fault of their 
own.'' \41\ Similarly, the Panel found compelling reports of 
slowed lending at its recent field hearing in Milwaukee, 
Wisconsin.\42\ At that hearing, small business owners discussed 
their lack of access to credit in recent months. One small 
business owner noted that, even though he has kept current with 
all obligations, his business's ``situation is urgent and time 
is of the essence as [his] financial institution has given 
[him] a very short deadline to pay approximately $2,000,000.00 
or they will call [his] loans and [he] will be placed out of 
business.'' \43\ Another expressed frustration that, since 
September 2008, he has had to spend all his time ``working on 
funding the company rather than addressing opportunities to 
grow.'' \44\
---------------------------------------------------------------------------
    \41\ Id, at 6.
    \42\ Congressional Oversight Panel, Hearing on the Credit Crisis 
and Small Business Lending (Apr. 29, 2009) (online at cop.senate.gov/
hearings/library/hearing-042909-milwaukee.cfm) (full audio recording) 
(hereinafter ``Panel Milwaukee Field Hearing'').
    \43\ Congressional Oversight Panel, Testimony of Wayne Perrins, 
Hearing on the Credit Crisis and Small Business Lending (Apr. 29, 2009) 
(online at cop.senate.gov/documents/testimony-042909-perrins.pdf) 
(hereinafter ``Perrins Testimony'').
    \44\ Congressional Oversight Panel, Testimony of Thomas Klink, 
Hearing on the Credit Crisis and Small Business Lending (Apr. 29, 2009) 
(online at cop.senate.gov/documents/testimony-042909-klink.pdf) 
(hereinafter ``Klink testimony''). While two witnesses representing 
community banks emphasized that they have continued to lend throughout 
the crisis, they acknowledged that they have had no choice but to 
pursue new opportunities cautiously.
---------------------------------------------------------------------------
    SBA lending has also declined considerably, even though 
those loans can provide a fallback for business owners who fail 
to obtain conventional loans. The tightening of credit in the 
SBA lending markets mirrored the tightening of credit in 
conventional markets for small business loans, with loan volume 
decreasing over the course of 2008. By the end of March of 2008 
(the halfway point in FY 2008 for the SBA's purposes), the SBA 
had guaranteed 18 percent fewer 7(a) loans and six percent 
fewer 504 loans than it had guaranteed at the same point a year 
earlier.\45\ At the conclusion of FY 2008, volume was down by 
30 percent in the 7(a) program and 17 percent in the 504 
program when compared to FY 2007.\46\ The decline in SBA 
lending became even more pronounced in the early months of FY 
2009. From October through December of 2008, the SBA guaranteed 
57 percent fewer 7(a) loans and 46 percent fewer 504 loans than 
it did during that period the year before.\47\
---------------------------------------------------------------------------
    \45\ U.S. Small Business Administration, SBA--Business Loan 
Approval (online at www.sba.gov/loans/business/regionaw.html) (accessed 
May 5, 2009).
    \46\ Id.
    \47\ Id. See also McCracken Testimony, supra note 24, at 2.
---------------------------------------------------------------------------
    While surveys, anecdotal information, and SBA data can be 
instructive, actual data on overall small business lending 
rates are limited. In particular, a review of available sources 
of data on small business lending reveals that there is 
currently no comprehensive, timely source of information on 
small business lending trends and terms. This lack of data not 
only makes it difficult to identify problems or assess the 
depth of problems, but it also makes it difficult to evaluate 
attempted policy solutions. The difficulty of tracking less 
visible sources of credit for small businesses, such as home 
equity lines of credit, personal credit cards, and loans from 
friends, family, and angel investors, compounds these 
difficulties.
    Despite the limited availability of data on small business 
lending, there is general consensus that lending has decreased. 
Nonetheless, policymakers have debated the extent to which 
various factors have contributed to the contraction of small 
business lending. Some small business owners and commentators 
have emphasized the impact of bank policies and tougher lending 
standards.\48\ At the Panel's recent field hearing in 
Milwaukee, Wisconsin, one small business owner emphasized that 
he had been unable to find a bank to lend even with an SBA 
guarantee up to 90 percent and despite his past reliability in 
keeping current on his payments.\49\ On the other hand, some 
observers have suggested that reduced lending results more from 
two byproducts of the economic climate: reduced demand as small 
businesses have retrenched and hesitated to take on additional 
debt; and the deteriorating creditworthiness of borrowers.\50\ 
One of the community bankers who testified at the Panel's field 
hearing suggested that many of his customers are ``looking for 
opportunities beyond the moment, but proceeding very 
cautiously.'' \51\ Larger banks have also pointed to reduced 
demand as an explanation for the slowdown.\52\ Of course, these 
various explanations are not mutually exclusive and can in fact 
reinforce each other. For example, poor access to credit for a 
business, its suppliers, and its customers can weaken that 
business's finances and ultimately its creditworthiness.
---------------------------------------------------------------------------
    \48\ See, e.g., McCracken Testimony, Supra note 24.
    \49\ Congressional Oversight Panel, Testimony of David Griffith, 
Hearing on the Credit Crisis and Small Business Lending (Apr. 29, 2009) 
(online at cop.senate.gov/documents/testimony-042909-griffith.pdf) 
(discussing explanations that banks provided for why they would not 
lend to his business even if the SBA guaranteed his loan) (hereinafter 
``Griffith Testimony'').
    \50\ See, e.g., NFIB Small Business Economic Trends, supra note 40, 
at 2 (``Certainly fewer loans are being made, but a substantial share 
of the decline is due to lower demand, not unusual problems on the 
supply side. It is harder to find creditworthy borrowers these days. 
Record sales declines have a way of weakening balance sheets.''). While 
demand has likely increased for loans to help businesses maintain 
operations despite decreased revenues, it has likely decreased for 
expansion projects.
    \51\ Congressional Oversight Panel, Testimony of Robert Atwell, 
Hearing on the Credit Crisis and Small Business Lending (Apr. 29, 2009) 
(online at cop.senate.gov/documents/testimony-042909-atwell.pdf) 
(hereinafter ``Atwell Testimony'').
    \52\ Senate Committee on Small Business and Entrepreneurship, 
Testimony of Wells Fargo Bank's Executive Vice President of SBA Lending 
David Rader, Hearing on Perspectives from Main Street on Small Business 
Lending, at 3(Mar. 19, 2009) (online at sbc.senate.gov/hearings/
testimony/09_03_19_credit_hearing/Rader.pdf) (``With the future unclear 
as it is today, customers aren't borrowing money like they use to . . . 
Our credit-approved customers are halting their projects, cancelling 
their loan and walking away from their dreams prior to their scheduled 
loan closing.'').
---------------------------------------------------------------------------
    Moreover, as they have worked to stabilize the economy, 
policymakers have also spent considerable time debating the 
optimal level of lending moving forward.\53\ While additional 
lending can potentially benefit the economy and help restore 
economic growth, weak underwriting standards and excessive 
high-risk lending contributed to the current crisis by 
increasing default rates. When discussing small business 
lending levels with bankers in March, Secretary Geithner 
suggested that ``[m]any banks in this country took too much 
risk, but the risk now to the economy as a whole is that you 
will take too little risk.'' \54\ Because setting the 
appropriate lending level is not certain and also politically 
charged, banks long have expressed concern about receiving 
mixed signals from regulators calling for more lending on the 
one hand and reduced risk-taking on the other.\55\ Ultimately, 
not until banks strike an appropriate balance of risk--
providing credit to creditworthy borrowers while guarding 
against the excesses that lie at the core of the current 
crisis--will the credit crunch for small businesses be 
resolved.
---------------------------------------------------------------------------
    \53\ See, e.g. House Financial Services Committee, Hearing on 
Exploring the Balance Between Increased Credit Availability and Prudent 
Lending Standards, 111th Cong. (Mar. 25, 2009) (online at 
www.house.gov/apps/list/hearing/financialsvcs_dem/hr030409.shtml).
    \54\ Geithner Small Business Remarks, supra note 15.
    \55\ The American Bankers Association has argued that banks have 
had to reduce lending to satisfy regulators. Senate Committee on Small 
Business and Entrepreneurship, Testimony of Chief Economist of the 
American Bankers Association James Chessen, Hearing on Perspectives 
from Main Street on Small Business Lending, 111th Cong., at 5 (Mar. 19, 
2009) (online at sbc.senate.gov/hearings/testimony/
09_03_19_credit_hearing/Chessen.pdf).
---------------------------------------------------------------------------

                   4. TARP AND SMALL BUSINESS LENDING

    Treasury's programs to expand access to credit for small 
businesses can be separated into three basic categories: (1) 
those designed to stabilize banks through capital injections 
and consequently to keep credit flowing; (2) those designed to 
incentivize banks to participate in SBA programs; and (3) those 
designed to restore secondary markets for securitized loans 
guaranteed by the SBA. While the last category will be 
addressed at length in the TALF section of this report, the 
first two are the focus of this section.
    The principal Treasury program to provide banks with 
capital has been the CPP. Under the CPP, capital injections 
have been weighted toward large, complex, ``systemically 
significant'' financial institutions. This was particularly the 
case during the early days of TARP.\56\ In 2008, 83.5 percent 
of TARP dollars spent by Treasury through the CPP went to 20 
banks.\57\ That has potential implications for small business 
lending because small, regional, and community banks lend a 
disproportionately large share of small business loans. 
Specifically, the SBA has calculated that, in 2007, banks with 
$10 billion or less in total assets held 24.42 percent of total 
domestic bank assets yet provided 52.18 percent of the total 
value of small business loans made by banks.\58\ Larger banks--
those with more than $10 billion in total assets--held 75.59 
percent of total assets and made 47.81 percent of the total 
amount of small business loans made by banks.\59\
---------------------------------------------------------------------------
    \56\ See Congressional Oversight Panel, Accountability for the 
Troubled Asset Relief Program, at 5 (Jan. 9, 2009) (online at 
cop.senate.gov/documents/cop-010909-report.pdf ) (``While a total of 
317 financial institutions have received a total of $194 billion under 
the CPP as of January 23, 2009, eight large early investments represent 
$124 billion, or 64 percent of the total'').
    \57\ See Government Accountability Office, Troubled Asset Relief 
Program: March 2009 Status of Efforts to Address Transparency and 
Accountability Issues, at 55 (Mar. 31, 2009) (GAO09/504) (online at 
www.gao.gov/new.items/d09504.pdf) (hereinafter ``March GAO Report''); 
U.S. Department of the Treasury, Troubled Asset Relief Program: 
Transaction Report for the Period Ending December 31, 2008 (Jan. 5, 
2009) (online at www.financialstability.gov/docs/CPP/001-05-
08CPPChart.pdf). From these documents, it can be determined that the 20 
largest recipients of CPP funding had received $156.6 billion of $187.5 
billion spent under the CPP through December 31, 2008.
    \58\ In these calculations, the SBA defines a small business loan 
as a commercial and industrial loan under $1 million. SBA Small 
Business and Micro Business Lending, supra note 21.
    \59\ Id. at 6.
---------------------------------------------------------------------------
    Perhaps in recognition of that dynamic, Treasury has sought 
to put pressure on recipients of funds under the CPP to 
increase lending to small businesses. Secretary Geithner has 
urged all banks, regardless of whether or not they have 
received capital through the TARP, to make an ``extra effort'' 
to reach out to creditworthy small businesses.\60\ Indirectly, 
Treasury has expanded reporting requirements for TARP 
recipients, presumably so it can bring public attention and 
possibly its own pressures to bear on institutions that do not 
provide adequate lending. Beginning with their April lending 
reports, Treasury will require the 21 largest banks receiving 
money through the TARP to report small business lending 
activity on a monthly basis. Also, Treasury announced that it 
will work with bank regulators to require all banks to report 
small business lending data in their quarterly call reports, as 
opposed to once a year, in order to allow for more accurate, 
real-time analysis of the impact of efforts to expand small 
business access to credit.\61\ The Panel has called on Treasury 
to expand its efforts to track data on lending by TARP 
recipients since its first report last December,\62\ and GAO 
and the Special Inspector General for TARP (SIGTARP) have done 
the same.\63\
---------------------------------------------------------------------------
    \60\ U.S. Department of the Treasury, Fact Sheet: Unlocking Credit 
for Small Businesses (Mar. 17, 2009) (online at www.financial 
stability.gov/road to stability/unlocking Creditfor Small
Businesses.html) (hereinafter ``Treasury Small Business Fact Sheet'').
    \61\ Id. See also House Financial Services Committee, Testimony of 
Office of the Comptroller of the Currency Deputy Comptroller of the 
Northeast District Toney Bland, Hearing on Seeking Solutions: Finding 
Credit for Small and Mid-Size Businesses in Massachusetts, 111th Cong., 
at 6 (Mar. 23, 2009) (online at www.occ.gov/ftp/release/2009-30b.pdf) 
(noting that ``Bank regulators are currently in the process of revising 
the quarterly Report of Condition'' to require banks to provide 
quarterly data on small business lending.).
    \62\ Congressional Oversight Panel, Questions About the $700 
Billion Emergency Economic Stabilization Funds, at 17 (Dec. 10, 2008) 
(online at cop.senate.gov/documents/cop-121008-report.pdf) (hereinafter 
``COP December Oversight Report'').
    \63\ March GAO Report, supra note 57, at 59; SIGTARP, Initial 
Report to Congress, at 25 (Feb. 6, 2009) (online at www.sigtarp.gov/
reports/congress/2009/SIGTARP_Initial_Report_to_ the_Congress.pdf).
---------------------------------------------------------------------------
    Although the Panel welcomes these new requirements, the 
fact that, to date, Treasury's monthly lending snapshots have 
not included data on lending to small businesses makes it 
difficult to assess whether CPP investments have made a marked 
difference in the level of credit that TARP-recipient banks 
have extended to small businesses. However, if lending to small 
businesses mirrors the trend for commercial and industrial 
loans more generally, it is likely that credit to small 
businesses has contracted in recent months. Treasury's Monthly 
Lending and Intermediation Snapshot for February--the most 
recent available--found that commercial and industrial lending 
activity decreased among the largest recipients of TARP funds, 
with both extensions of existing loans and new commitments down 
14 percent.\64\ Anecdotally, small business owners who 
testified at the Panel's Milwaukee field hearing suggested that 
their banks, which had received TARP injections, had been 
unable to fulfill their credit needs, which ranged from 
additional loans to restructuring or even sustaining existing 
lines of credit.\65\ On the other hand, the community bankers 
who testified at the field hearing highlighted their efforts to 
extend credit to their small business customers since receiving 
TARP funds.\66\ Treasury's enhanced effort to collect data on 
small business lending will allow for improved tracking of 
trends in this sector. The data will be especially useful for 
the public and outside analysts if Treasury provides even-
handed, accurate analysis of the information it collects.\67\
---------------------------------------------------------------------------
    \64\ U.S. Department of the Treasury, Treasury Department February 
Monthly Lending and Intermediation Snapshot (Apr. 15, 2009) (online at 
www.financialstability.gov/latest/tg_041509.html) (hereinafter 
``Treasury February Snapshot'').
    \65\ Griffith Testimony, supra note 49; Klink Testimony, supra note 
44; Perrins Testimony, supra note 43.
    \66\ Atwell Testimony, supra note 51; Congressional Oversight 
Panel, Testimony of Peter Prickett, Hearing on the Credit Crisis and 
Small Business Lending (Apr. 29, 2009) (online at cop.senate.gov/
documents/testimony-042909-prickett.pdf).
    \67\ The Wall Street Journal recently reported that its own 
analysis of data collected from TARP recipients ``paints a starker 
picture of the lending environment than the monthly snapshots released 
by the government and is a reminder of the severity of the credit 
contraction.'' David Enrich, Michael Crittenden, and Maurice Tamman, 
Bank Lending Keeps Dropping, Wall Street Journal (Apr. 20, 2009) 
(online at online.wsj.com/article/SB124019360346233883.html). The 
article further stated that ``Treasury crunches the data in a way that 
some experts say understates the lending decline.'' Id.
---------------------------------------------------------------------------
    In addition to encouraging lending to small businesses by 
TARP recipients, the Administration has also sought to 
encourage institutions to participate in SBA programs as part 
of its Small Business and Community Lending Initiative.\68\ The 
American Recovery and Reinvestment Act (ARRA),\69\ for example, 
reduced the risk to private lenders by temporarily increasing 
the government guarantee on loans issued through the SBA's 7(a) 
loan program to as much as 90 percent.\70\ The SBA began 
implementing the increased guarantee program on March 16 and 
intends to continue it through the end of 2009.\71\ Moreover, 
the ARRA included a temporary elimination of up-front fees that 
the SBA charges on 7(a) loans that increase the cost of credit 
for small businesses, as well as temporary elimination of 
Certified Development Company processing fees and third-party 
participation fees typically charged on 504 loans.\72\ These 
fee waivers are to be retroactive to the enactment of the ARRA 
on February 17, 2009, and are intended to be available until 
the end of the calendar year.\73\ Finally, the ARRA also 
includes a Business Stabilization Program--not yet 
implemented--that will allow the SBA to guarantee fully loans 
to ``viable'' small businesses experiencing short-term 
financial difficulty (up to $35,000).\74\ While these efforts 
will encourage banks to lend through the government-guaranteed 
SBA loan programs, the government and taxpayers will ultimately 
be liable if SBA-backed loans go bad. Moreover, as noted above, 
any effort to address SBA-guaranteed loans will have limited 
reach because of the limited overall role of the SBA in small 
business financing.
---------------------------------------------------------------------------
    \68\ Treasury Small Business Fact Sheet, supra note 60.
    \69\ The American Recovery and Reinvestment Act of 2009 (ARRA), 
Pub. L. No. 111-5 (Feb. 17, 2009).
    \70\ U.S. Small Business Administration, Q&A for Small Business 
Owners (Mar. 16, 2009) (online at www.treas.gov/press/releases/reports/
tg58_smallbiz_qa.pdf) (hereinafter ``SBA Q&A for Small Business 
Owners'').
    \71\ U.S. Small Business Administration, Statement by SBA Acting 
Administrator on Recovery Efforts Announced by President Obama Today 
(Mar. 16, 2009) (online at www.sba.gov/idc/groups/public/documents/
sba_homepage/news_release_09-17.pdf) (hereinafter ``SBA March 16 Press 
Release'').
    \72\ Typically, a fee of two percent to 3.75 percent of the SBA-
guaranteed portion of a 7(a) loan is charged up-front to recipients of 
7(a) loans. Certified Development Companies charge a 1.5 percent 
application fee to small business borrowers and the SBA charges the 
holder of the first-lien mortgage affiliated with a 504 loan a fee 
equal to 0.5 percent of that first mortgage. The elimination of these 
fees is designed to expand small business access to credit by reducing 
the barriers to both borrowers and lenders. See SBA Q&A for Small 
Business Owners, supra note 70.
    \73\ SBA March 16 Press Release, supra note 71.
    \74\ ARRA, supra note 69, at Sec. 506.
---------------------------------------------------------------------------

                           C. Family Lending


                 1. HOUSEHOLD BORROWING AND THE ECONOMY

    Families today carry an unprecedented debt load, which has 
affected consumer demand for goods and additional borrowing. 
The historic level of debt held by families also affects their 
creditworthiness for additional borrowing and, when coupled 
with rising job losses and falling home values, affects the 
ability of families to stay current on their existing debt. 
Access to consumer credit is critical because of the role 
played by consumption in economic growth. Consumer spending is 
the largest single element of the American economy, making up 
approximately 70 percent of gross domestic product (GDP) at the 
end of 2008.\75\ By comparison, consumer spending made up 
slightly more than 60 percent of GDP in 1980.\76\ As shown 
below, the money for this increase in consumption comes from 
falling personal savings and rising consumer debt. Over the 
long run, this may not be a sustainable economic structure for 
the United States, a point made by the Panel in its March 
oversight report.\77\ In the fourth quarter of 2008, consumer 
spending on goods and services fell 4.3 percent--a decline 
responsible for nearly half of the reported 6.2 percent 
annualized contraction in GDP. This is the largest spending 
decrease in 29 years.\78\ Recent news is more positive, as 
consumer spending showed a 2.2 percent annualized increase in 
the first quarter of 2009.\79\ An examination of economic data 
from the past few decades for households provides context for 
examining the health of American households as Treasury's 
efforts to revive consumer lending and demand get off the 
ground.
---------------------------------------------------------------------------
    \75\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release Z.1: Flow of Funds Accounts of the United 
States, Flows and Outstanding Fourth Quarter 2008, at 12 (Mar. 12, 
2009) (F.6 Distribution of Gross Domestic Product) (online at 
www.federalreserve.gov/releases/z1/Current/z1.pdf) (hereinafter 
``Fourth Quarter Flow of Funds'').
    \76\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release Z.1: Flow of Funds Accounts of the United 
States, 1975-1984, at 4 (Mar. 12, 2009) (F.6 Distribution of Gross 
Domestic Product) (online at www.federalreserve.gov/releases/z1/
Current/annuals/a1975-1984.pdf).
    \77\ Congressional Oversight Panel, Foreclosure Crisis: Working 
Towards a Solution, at 7 (Mar. 6, 2009) (online at cop.senate.gov/
documents/cop-030609-report.pdf) (``This is not a sustainable economic 
structure, and over time the United States must return to an economy 
where consumption is wage based and there is adequate consumer savings. 
But while the economy cannot be revived based on more asset-based 
consumption, neither can the country afford a continuing asset price 
collapse. An orderly return to a more wage-driven economy requires that 
we have functioning credit markets.'').
    \78\ Bureau of Economic Analysis, GDP and the Economy: Preliminary 
Estimates for the Fourth Quarter of 2008, at 3 (Mar. 2009) (online at 
www.bea.gov/scb/pdf/2009/03%20March/0309_gdpecon.pdf).
    \79\ Bureau of Economic Analysis, Gross Domestic Product: First 
Quarter 2009 (Advance) (Apr. 29, 2009) (online at www.bea.gov/
newsreleases/national/gdp/gdpnewsrelease.htm).
---------------------------------------------------------------------------
    Families are currently holding debt at near historic 
levels. Total household borrowing as a percentage of GDP--the 
ratio of all household debt to the total economic output of the 
nation--has grown since the end of the Second World War, and 
this growth accelerated greatly in the past decade. This debt 
figure includes family borrowing both in the form of: (1) 
credit cards, student and auto loans, and other forms of 
borrowing; and (2) mortgages. Figure 1 illustrates the ratio of 
household debt to GDP in the postwar era. A decade ago, the 
household debt-to-GDP ratio was approximately 2:3; today, that 
ratio is roughly 1:1, meaning that American households are 
holding debt equal to domestic output. This is an unprecedented 
level of debt, and a return to the level of household debt held 
during the 1990s would require a significant period of 
deleveraging, which would reduce borrowing demand and 
contribute to economic contraction.
[GRAPHIC] [TIFF OMITTED] 49573A.001


    The long-term trend has been toward increasing debt, but 
the run up in recent years has been especially sharp. A period 
of deleveraging by households may have already begun, as 
household debt fell by an annualized rate of two percent \81\ 
in the fourth quarter of 2008.
---------------------------------------------------------------------------
    \80\ Fourth Quarter Flow of Funds, supra note 75, at 12 (F.6 
Distribution of Gross Domestic Product); Fourth Quarter Flow of Funds, 
supra note 75, at 8 (D.3 Debt Outstanding by Sector).
    \81\ Fourth Quarter Flow of Funds, supra note 75, at 6.
---------------------------------------------------------------------------
    While the total debt numbers in Figure 1 are significant, 
the impact of this debt on individual households is illustrated 
in Figure 2, which compares average debt per household to 
median income over time. The phenomenon of households owing 
more than their annual income is a recent one. As recently as 
1976, households owed less than their median annual income. 
Today, the average amount owed far exceeds household income. 
The chart reveals that the debt held by individual households 
grew by a significantly faster rate than real income, meaning 
that real wage increases could not keep up with borrowing.
[GRAPHIC] [TIFF OMITTED] 49573A.002


This chart highlights the pressure on families. Over the course 
of the past few decades, even as families increasingly sent two 
workers into the paid work force, total household income 
increased only modestly and families went deeply into debt.
---------------------------------------------------------------------------
    \82\ Fourth Quarter Flow of Funds, supra note 75, at 8 (D.3 Debt 
Outstanding by Sector); U.S. Census Bureau, Historical Income Tables--
Households: Table H-6 (online at www.census.gov/hhes/www/income/
histinc/h06ar.html) (accessed May 5, 2009).
---------------------------------------------------------------------------
    The experiences of the recent boom show that the challenges 
facing families have accelerated. During a boom, income 
typically advances, so the household develops a cushion against 
the upcoming bust. Income grew during the 1960s, 1980s and 
1990s at 33 percent, ten percent, and 11 percent, 
respectively.\83\ But family income advanced by only 1.6 
percent over the course of the economic boom of this decade, 
measured from 2001 to 2007.\84\ This stagnation of income has 
left families in a vulnerable position as the recession 
accelerates.
---------------------------------------------------------------------------
    \83\ Bureau of Economic Analysis, National Income and Product 
Accounts Table 1.1.1: Percent Change From Preceding Period in Real 
Gross Domestic Product (Apr. 29, 2009) (online at www.bea.gov/national/
nipaweb/TableView.asp? SelectedTable=1&View Series=NO&Java= 
no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1961&LastYea
r= 2009&3Place=N&Update=Update&JavaBox=no). This report used the NIPA 
table to determine the periods of growth as the following: 1961q1-
1969q3, 1982q4-1990q3, 1991q2-2000q2, 2001q4-2007q3. For income growth, 
the Panel used Census Bureau data. Income in 1960 and 1969 was 
calculated as a weighted average of family and individual household 
incomes. U.S. Census Bureau, Current Population Reports: P60-37 
(tbl.B), P60-75 (tbl.7), P60-142 (tbl.A), P60-174 (tbl.1), P60-180 
(tbl.A), P60-213 (tbl.A), P60-218 (tbl.1), P60-235 (tbl.1) (online at 
www.census.gov/ prod/www/ abs/income.html).
    \84\ U.S. Census Bureau, Historical Income Tables--Households: 
Table H-10 (online at www.census.gov/hhes/www/income/histinc/
h10AR.html) (accessed May 5, 2009).
---------------------------------------------------------------------------
    As wages stagnated and household debt grew at an 
unprecedented rate, savings by families fell to new lows, 
adding even more risk to the family balance sheet. Figure 3 
shows starkly that households in 2007 entered the recession 
with little put away, unlike households in the 1980s, which 
entered a recession with substantial savings.
[GRAPHIC] [TIFF OMITTED] 49573A.003


    Another metric of the ability and willingness of households 
to take on more debt is the decline in household net worth 
experienced by families over the past year. Of the past 
recessions, only one other was accompanied by a decline in net 
worth over the course of a year: the recession at the beginning 
of this decade. During this downturn, household net worth fell 
by nearly four percent. By contrast, in the current downturn, 
households have seen their net worth fall by approximately 20 
percent, for a loss of nearly $13 trillion in wealth.\86\ This 
loss can damage the creditworthiness of households, affecting 
their ability to obtain credit--a loss of ability reflected in 
the decline in household loans over the past few months. And 
the decline in net wealth may not be over yet, as housing 
prices continue to fall in some parts of the country while the 
rolls of the unemployed swell.
---------------------------------------------------------------------------
    \85\ Bureau of Economic Analysis, 2.1 Personal Income and Its 
Disposition (Oct. 30, 2008) (online at www.bea.gov/national/nipaweb/
TableView.asp?SelectedTable=58&ViewSeries= 
NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&First 
Year=1970& LastYear=2007& 3Place=N&Update=Update& Java Box=no).
    \86\ From peak household net worth in third quarter 2007 to trough 
in fourth quarter 2008. Fourth Quarter Flow of Funds, supra note 75, at 
102 (B.100 Balance Sheet of Households and Nonprofit Organizations).
---------------------------------------------------------------------------
    The data reviewed indicate that consumers may not be ready 
to drive economic recovery or take on additional borrowing, as 
American families are holding high levels of debt with minimal 
savings following a decade of nominal wage growth. While paying 
down debt and increasing savings is good for family balance 
sheets, it is procyclical during a downturn and worsens the 
current recession by reducing aggregate demand. Continued job 
losses, which have mounted at a rate of over a half-million 
jobs each month since October 2008, pushed the national 
unemployment rate to 8.5 percent.\87\ This is the highest rate 
since 1983.\88\
---------------------------------------------------------------------------
    \87\ Bureau of Labor Statistics, The Employment Situation: March 
2009 (Apr. 3, 2009) (online at www.bls.gov/news.release/pdf/
empsit.pdf).
    \88\ Bureau of Labor Statistics, Labor Force Statistics from the 
Current Population Survey (online at data.bls.gov/PDQ/servlet/
SurveyOutputServlet?data_tool=latest_numbers&series_id = LNS14000000) 
(accessed May 5, 2009).
[GRAPHIC] [TIFF OMITTED] 49573A.004


Following  years of debt build-up and stagnant wages, these job 
losses only add to the turmoil faced by households today.
---------------------------------------------------------------------------
    \89\ Id.
---------------------------------------------------------------------------
    There is evidence that households, as in previous 
recessions, are deleveraging, which is contributing to economic 
contraction. Thirty-five percent of banks report that demand 
for all consumer loans decreased during the first quarter of 
2009. Only 17.6 percent reported an increase.\90\ The most 
recent Treasury Monthly Snapshot, released in April, catalogs 
lending activity for the month of February and shows that 
median consumer loan originations fell by nearly half from 
January to February of 2009 while credit card loan balances 
fell by one percent.\91\ In total, Federal Reserve Board data 
revealed an annualized decrease in household borrowing, which 
includes mortgages, of 3.5 percent for the month of 
February.\92\ The total volume of originations of four types of 
consumer loans--first mortgages, home equity loans, credit 
cards, and other consumer loans--at the biggest TARP recipient 
banks was 41 percent lower in February 2009 than it was in 
October 2008.\93\ Total loan balance outstanding grew one 
percent over the same period but would have fallen if not for 
the spike in mortgage refinancings. Current lending data thus 
provide additional evidence that households are deleveraging, 
with implications for the pace of economic recovery and demand 
for consumer lending.
---------------------------------------------------------------------------
    \90\ April Senior Loan Officer Opinion Survey, supra note 37.
    \91\ Treasury February Snapshot, supra note 64.
    \92\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release G.19: Consumer Credit (Apr. 7, 2009) 
(online at www.federalreserve.gov/releases/g19/Current) (hereinafter 
``April 7, 2009 G.19'') (this number excludes real estate loans).
    \93\ U.S. Department of the Treasury, Treasury Monthly 
Intermediation Snapshot (Feb. 17, 2009) (online at www.treas.gov/press/
releases/reports/tg30-122008.pdf) (hereinafter ``Fourth Quarter 2008 
Snapshot''); Treasury February Snapshot, supra note 64. These figures 
exclude Wells Fargo and PNC Bank because their New Years Eve mergers 
with Wachovia and National City, respectively, prevent a good 
comparison between October and February lending activity. The figure 
for loan origination also excludes first mortgage refinancing because 
those figures exaggerate the amount of truly new lending that is taking 
place. Each refinancing adds new credit to the market while also 
removing old credit, but the Treasury data does not account for the 
removal of old credit.
---------------------------------------------------------------------------

                 2. CREDIT AVAILABILITY FOR HOUSEHOLDS

    Consumer credit indicators show the tightening of the 
credit markets and the effect on household borrowing. This 
reduction in credit availability can be seen through rising 
interest rates and higher lending standards, as well as through 
reductions in the rate and overall volume of lending. At the 
same time, the recession has had an impact on demand for 
borrowing as well, as households pay down debts built up during 
the boom years. Overall lending numbers frame the story, as 
household lending began to slow in the second quarter of 2008, 
and contracted tightly in the third quarter.\94\ The most 
recent data, from February 2009, show an annualized decrease of 
3.5 percent in outstanding consumer credit.\95\ Revolving loan 
balances (which are mostly credit cards) decreased at an 
annualized rate of 9.7 percent in February. This is the largest 
drop in over 30 years.\96\ Non-revolving loans (such as auto 
loans and student loans) slowed to a trickle, growing at an 
annualized rate of 0.2 percent during that time period. The 
aggregate decline in consumer lending is likely due to a 
combination of deleveraging by households and reduced access to 
credit. The sections below examine the available evidence of 
reduced access to consumer credit.
---------------------------------------------------------------------------
    \94\ April 7, 2009 G.19, supra note 92.
    \95\ April 7, 2009 G.19, supra note 92.
    \96\ April 7, 2009 G.19, supra note 92.
---------------------------------------------------------------------------

                            a. Credit Cards

    Credit cards are among the most familiar forms of borrowing 
to American households. In recent months, credit card borrowing 
has come under stress, as interest rates have increased while 
the number of people who miss payments or default on their 
debt, measured as charge-offs and delinquencies, is growing 
rapidly. Interest rates are one of the primary indicators of 
tightening lending standards, as issuers have increased rates 
in recent months. According to the Federal Reserve Board's 
Report on Consumer Credit for February 2009, credit card 
interest rates have increased from 12.02 to 13.08 percent 
between November 2008 and February 2009, a period in which the 
total volume of credit card receivables has stayed 
approximately level.\97\ A private survey, by IndexCreditCards, 
confirms the trend.\98\ This upswing in interest rates appears 
similar to a rise in credit card rates observed before the 
previous recession at the outset of this decade, as shown in 
Figure 5. This most recent upswing in rates, however, is 
steeper than the ones households experienced earlier this 
decade.
---------------------------------------------------------------------------
    \97\ However, in recent time periods, this rate has swung between a 
high of 13.38 percent in 2007 to an annualized low of 11.87 percent in 
the second quarter of 2008. April 7, 2009 G.19, supra note 92; Board of 
Governors of the Federal Reserve System, Federal Reserve Statistical 
Release G.19: Consumer Credit (Feb. 6, 2009) (online at 
www.federalreserve.gov/releases/g19/20090206)
    \98\ IndexCreditCards.com, Credit Card Monitor (May 4, 2009) 
(online at www.indexcreditcards.com/creditcardmonitor). Financial 
institutions represented in the survey include Advanta, American 
Express, Bank of America, Capital One, Chase/Washington Mutual, Citi, 
Discover, PNC/National City, Pulaski Bank, U.S. Bank, and Wells Fargo. 
[GRAPHIC] [TIFF OMITTED] 49573A.005


After a reduction in credit card interest rates following the 
dot com collapse, rates rose steadily during the boom. Rates 
are currently on the increase as well, as credit card issuers 
seek to augment revenue in the face of rising defaults and 
delinquencies. At the same time, it must be noted that, during 
the past year, the cost of funds to issuers has declined. The 
effective Federal Funds rate on April 27, 2009 was 0.17 percent 
per year, as compared to 2.37 percent exactly one year 
earlier.\100\ Half of all banks report that spreads between 
interest rates and cost of funds have widened in the first 
quarter of 2009.\101\
---------------------------------------------------------------------------
    \99\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release G.19: Consumer Credit Historical Data 
(online at www.federalreserve.gov/Releases/G19/hist) (accessed May 5, 
2009) (hereinafter ``G.19 Historical Data''). Figure 4 shows interest 
rates for two sets of card users: all users, and only those users who 
were assessed interest. In general, a card user is only assessed 
interest if he carries a balance on his credit card. One can infer that 
users who are assessed interest are a riskier group of borrowers, and 
thus carry higher interest rates on their credit cards.
    \100\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.15: Federal Funds Historical Data (online 
at www.federalreserve.gov/releases/h15/data.htm) (accessed May 5, 
2009).
    \101\ April Senior Loan Officer Opinion Survey, supra note 37, at 
question 16.b.
---------------------------------------------------------------------------
    With the economy worsening, more households are missing 
payments on their credit cards and defaulting on their debt. 
``Charge-offs''--which are loans removed from the books and 
charged against loss reserves \102\--have been increasing in 
recent months. The Federal Reserve Board reported an annualized 
charge-off rate of 6.25 percent in the fourth quarter of 
2008,\103\ compared with a 3.97 percent charge-off rate in the 
fourth quarter of 2006.\104\ The rate at which charge-offs are 
increasing will further impair bank balance sheets, raising the 
question of whether time is on Treasury's side in the planning 
of financial stabilization programs, a question the Panel 
previously discussed in its April report.\105\
---------------------------------------------------------------------------
    \102\ They are adjusted by recoveries on these loans, and shown as 
a percentage of all loans.
    \103\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Charge-Off and Delinquency Rates (online 
at www.federalreserve.gov/releases/chargeoff/chgallsa.htm) (accessed 
May 5, 2009) (hereinafter ``Fed Charge-off and Delinquency Rates'').
    \104\ Id.
    \105\ Congressional Oversight Panel, Assessing Treasury's Strategy: 
Six Months of TARP, at 81 (Apr. 7, 2009) (online at cop.senate.gov/
documents/cop-040709-report.pdf) (hereinafter ``COP April Report'') 
(``The banking system itself creates a possible timing problem. The 
existence of weak institutions that are sustained only by taxpayer 
guarantees and infusions of cash threatens the health of all banks, 
drawing off depositors and undermining public support. Continued 
operation of systemically significant but weakened institutions at the 
heart of a nation's financial system may prevent a robust economic 
recovery of the sort that would cause time be on our side. In such a 
case, delay and half steps would seem to be the main enemy.'').
---------------------------------------------------------------------------
    The American Banker reports a ``sudden'' escalation in 
charge off rates in the first quarter of 2009, ``as 
unemployment and other economic conditions worsened.'' \106\ 
Reports from individual card issuers may give us a preview of 
what the numbers could look like for the first quarter of 2009. 
Capital One reported an annualized charge-off rate of 9.33 
percent in February 2009,\107\ more than a one percent increase 
over February's annualized rate of 8.06 percent.\108\ The March 
rate is nearly as high as the October 2005 peak just before the 
enactment of the Bankruptcy Abuse Prevention and Consumer 
Protection Act of 2005.
---------------------------------------------------------------------------
    \106\ Harry Terris, Card Hits May Prompt Permanent Adjustments, 
American Banker (Apr. 29, 2009) (online at www.americanbanker.com/
article.html?id=20090428WFBO5NUA).
    \107\ Capital One Financial Corporation, Form 8-K, Ex. 99.1 (Apr. 
14, 2009) (online at www.sec.gov/Archives/edgar/data/927628/
000119312509078900/dex991.htm).
    \108\ Capital One Financial Corporation, Form 8-K, Ex. 99.1 (Mar. 
16, 2009) (online at www.sec.gov/Archives/edgar/data/927628/
000119312509054037/dex991.htm).
---------------------------------------------------------------------------
    Federal Reserve Board data also indicate that credit card 
delinquency rates are climbing. In the fourth quarter of 2008, 
the delinquency rate on credit cards climbed to 5.56 percent 
from 4.83 percent in the preceding quarter.\109\ Figure 5 
illustrates the rate of both credit card charge-offs and 
delinquencies since 1991. Prior to the current peak, there are 
two previous peaks in credit card charge-offs: one in October 
2005, and the other in the first quarter of 2002 due to the 
previous recession.
---------------------------------------------------------------------------
    \109\ Fed Charge-off and Delinquency Rates, supra note 103. 
    [GRAPHIC] [TIFF OMITTED] 49573A.006
    

The increase in charge-offs and delinquencies highlights the 
impact of the economic downturn on the loan portfolios of card 
issuers.
---------------------------------------------------------------------------
    \110\ Fed Charge-off and Delinquency Rates, supra note 103.
---------------------------------------------------------------------------
    Declining credit card balances are another prevailing trend 
in the market today. According to the February Treasury 
Snapshot, total used and unused commitments on credit card 
loans held by the 21 participating TARP banks has fallen by 
seven percent since October 2008.\111\ Federal Reserve Board 
data confirm the same trend, revealing an annualized decline of 
nearly ten percent in revolving debt in February 2009.\112\ 
This decline can be caused, in part, by households paying down 
existing balances. As discussed above, deleveraging in this 
manner is good for family finances but procyclical in a 
downturn, contributing to economic contraction by helping 
reduce demand. Some of this decline, however, may be caused by 
the reduction of credit lines by issuers. A recent study by 
FICO found that 16 percent of the population experienced a 
reduction in credit limits from April to October of 2008.\113\ 
Nearly 70 percent of those experiencing a credit limit 
reduction, according to the FICO study, had no triggering risk 
event and otherwise made payments on time or paid down balances 
every month. The Senior Loan Officer Opinion Survey on Bank 
Lending Practices, released in May 2009 by the Federal Reserve 
Board, revealed that 56.5 percent of card issuers reported 
reductions in consumer credit account limits during the first 
quarter of 2009.\114\ Reduced credit limits are one way for 
credit card issuers to reduce potential liabilities to 
increasingly risky borrowers. For many households, however, a 
reduction in credit limits imposed by issuers can have a 
negative impact on the borrower's credit score.\115\
---------------------------------------------------------------------------
    \111\ Fourth Quarter 2008 Snapshot, supra note 93. Treasury 
February Snapshot, supra note 64.
    \112\ April 7, 2009 G.19, supra note 92.
    \113\ Fair Isaac Corporation, Study: How Credit Line Decreases Can 
Affect FICO Scores (Apr. 17, 2009) (online at www.fico.com/en/Company/
News/Pages/credit-line-and-fico-score.aspx) (hereinafter ``FICO 
Study'').
    \114\ April Senior Loan Officer Opinion Survey, supra note 37, at 
question 19.b.
    \115\ FICO Study, supra note 113.
---------------------------------------------------------------------------
    Overall, the trend across the sector is one of debt 
reduction, credit limit decreases, rising delinquencies and 
tightening lending standards. Credit cards remain a vital 
source of liquidity for millions of American households, but 
the economic downturn continues to drive up the risk to credit 
card issuers while rising fees and rates are further 
constricting families' borrowing abilities.

                            b. Auto Lending

    Auto sales have dropped precipitously in the past six 
months. Many prospective buyers have delayed new car purchases 
or turned to the used car market.\116\ In the first quarter of 
2009, light vehicles sold at an annualized pace of just over 
nine million, a 38 percent drop compared to the same period a 
year ago.\117\ This is far below the peak of 17 million new 
cars sold or leased in 2007.\118\ Vehicle production has 
dropped in response to falling sales.
---------------------------------------------------------------------------
    \116\ CNW Marketing Research projects used car sales in 2009 will 
rise 9.5 percent over 2008, to 40 million. They project new car sales 
of ten million, down from 13.2 million in 2008. Greg Gardner, Customers 
Look for New Cars, but Buy Used, Detroit Free Press (Mar. 23, 2009) 
(online at www.freep.com/article/20090323/BUSINESS01/903230382).
    \117\ Ward's Auto, U.S. Light Vehicle Sales Summary (Mar. 2009) 
(online at wardsauto.com/keydata/USSalesSummary0903.xls); Ben Klayman, 
Reuters, April U.S. auto sales plunge near 30-year lows (May 1, 2009) 
(online at www.reuters.com/article/privateEquity/
idUSN0130972820090501).
    \118\ Bureau of Transportation Statistics, New and Used Passenger 
Car Sales and Leases (online at www.bts.gov/publications/
national_transportation_statistics/html/table_01_17.html) (accessed May 
5, 2009).
---------------------------------------------------------------------------
    It is unclear how much of the reduction in auto sales is 
due to constrictions in credit availability and how much is due 
to a reduction in demand caused by macroeconomic conditions. 
Recent data on loan terms appear more favorable, likely due to 
the collapse of the subprime auto loan market.\119\ This means 
that credit is cheaper for people who can get it, but some 
people who would have received loans during boom years are 
unable to qualify for any loans today. Auto finance companies 
offered an average interest rate of 3.17 percent in February, 
an improvement from the previous low of 4.55 percent in the 
fourth quarter of 2007.\120\ Commercial banks are offering 48-
month new car loans for an average of 6.92 percent interest, 
which is lower than at any time since 2004 (6.6 percent), 
except the second quarter of 2008 (6.84 percent). Thus, the 
decline in subprime auto loans and tightening lending standards 
for prime lenders may support the view that tightening credit 
is a factor in reduced auto sales. Nonetheless, increasing job 
losses and overall household debt is playing a role in limiting 
consumer demand for autos as well.
---------------------------------------------------------------------------
    \119\ Fitch Ratings, US Auto: Asset Quality Review 4Q08, at 5 (Feb. 
18, 2009) (hereinafter ``Fitch Auto Asset Quality Review'').
    \120\ These differences are less stark than they appear because 
average maturity in February 2009 was 59 months, whereas it was 63 
months in Q4 2007. April 7, 2009 G.19, supra note 92.
---------------------------------------------------------------------------
    Auto loans have fallen from their peak in the boom years. 
The Federal Reserve Board's most recent data for non-revolving 
consumer credit provide a useful proxy for auto loans.\121\ 
These data indicate that the total amount of non-revolving 
consumer debt was virtually unchanged from the second quarter 
of 2008 through February 2009. In contrast, during the boom 
years for auto sales between 2004 and 2007, non-revolving 
consumer credit outstanding grew an average of $62 billion per 
year. The diminished availability of subprime loans and 
stagnation in auto sales and non-revolving credit indicate that 
a decreasing number of borrowers have access to financing for 
auto loans, but that those terms are growing more favorable as 
auto financing companies offer better rates to a shrinking 
audience of creditworthy borrowers.
---------------------------------------------------------------------------
    \121\ April 7, 2009 G.19, supra note 92, at 2.
---------------------------------------------------------------------------
    Households are also having more trouble keeping current on 
their auto loan payments, as delinquency rates on auto loans 
grew in the fourth quarter of 2008. According to data from a 
survey by TransUnion, auto delinquency rates have increased by 
25 percent since December of 2007.\122\ The national 60-day 
auto delinquency rate, which is the percentage of auto loan 
borrowers 60 days or more past due, increased from 0.80 percent 
in the third quarter of 2007 to 0.86 percent in the fourth 
quarter of 2008. Rising delinquency rates may be another factor 
behind tightening lending standards, and also affect the 
profitability of auto-backed securities, which have proven to 
be an important source of financing for auto lending by both 
banks and non-banks.
---------------------------------------------------------------------------
    \122\ TransUnion, TransUnion.com: National Auto Loan Delinquency 
Rates Increase 7 Percent to Close 2008 (Mar. 17, 2009) (`` `How does 
the rise in auto delinquency compare to the 2001 recession?' asked 
Peter Turek, automotive vice president in TransUnion's financial 
services group. `Although that recession was short by most standards 
(beginning in March of 2001 and ending in November of the same year), 
the auto delinquency ratio increased by almost 10 percent. In contrast, 
in our current recession which began in December of 2007, we see that 
the auto delinquency rate has already increased by 25 percent--more 
than double what occurred in the last recession, with an endgame that 
is still uncertain.' '').
---------------------------------------------------------------------------
    As a result of declining automobile sales and lending, loan 
portfolios of auto lenders, both bank and nonbank, declined in 
the fourth quarter of 2008.\123\ This contraction could be 
coming from the supply-side or the demand-side. As discussed 
below, financing for auto lenders has also been reduced due to 
a steep decline in the volume of auto securitization in 2008. 
This decline may be both a result and a cause of tightened 
lending terms and reduced credit availability. For Americans 
who can qualify for automobile loans today, the terms are 
better than ever. But lending and sales have both dropped off 
steeply. It is hard to determine from the data whether the 
decrease in sales is due more to a reduction in credit 
availability or a drop in demand. Either way, the auto 
companies and the communities they support are struggling.
---------------------------------------------------------------------------
    \123\ Fitch Auto Asset Quality Review, supra note 119.
---------------------------------------------------------------------------

                           c. Student Lending

    Higher education borrowing has also been affected by the 
credit crisis.\124\ Unique to student loans, however, a 
recently-passed legislative act may be playing a role. In order 
to promote direct-to-students federal lending over more costly 
private lending, the College Cost Reduction and Access Act cut 
subsidies for federally guaranteed private loans.\125\ The 
decreased revenue from these subsidies might factor into 
lenders' decisions to cut back on student lending.\126\ In 
addition, the Obama Administration has proposed to eliminate 
the subsidized lending altogether in favor of the government 
lending directly to students.\127\ This puts government policy 
in a potential contradiction. Through TALF, the government is 
effectively lending money to the private lenders to lend to 
students, at the same time that the government is reducing 
incentives for private lenders. Some question why TALF is 
necessary or appropriate in light of the new law and the 
Administration's proposal.
---------------------------------------------------------------------------
    \124\ Finaid.org, Impact of the Subprime Mortgage Credit Crisis on 
Student Loan Cost and Availability (online at www.finaid.org/loans/
creditcrisis.phtml). See also SLM Corp., Form 8-K, at 3 (Jan. 3, 2008) 
(online at sec.gov/Archives/edgar/data/1032033/000110465908000386/a08-
1101_18k.htm) (hereinafter ``SLM 8-K'').
    \125\ College Cost Reduction and Access Act, Pub. L 110-84, 110th 
Cong. (2007).
    \126\ Id.
    \127\ The White House, President Obama Meets with Family Struggling 
with College Costs, Underscores Need to Eliminate Wasteful Spending in 
Federal Student Loan Program, Reinvest Savings in Making College More 
Affordable (Apr. 24, 2009) (online at www.whitehouse.gov/
the_press_office/President-Obama-Meets-with-Family-Struggling-with-
College-Costs). Recent data shows it to be more expensive for the 
government to administer the Federal Family Education Loan program, in 
which it subsidizes private lenders, than it is to make direct loans to 
students. Congressional Budget Office, CBO March 2009 Baseline 
Projections for the Student Loan and Grant Programs (Mar. 20, 2009) 
(online at www.cbo.gov/budget/factsheets/2009b/education.pdf); New 
America Foundation, News Alert: CBO Finds Administrative Costs to be 
Higher in FFEL (Mar. 25, 2009) (online at www.newamerica.net/blog/
higher-ed-watch/2009/news-alert-cbo-finds-administrative-costs-be-
higher-ffel-10775). Student loan lenders might be evaluating this 
information in their decisions to contract lending.
---------------------------------------------------------------------------
    In recent years, the costs of education have grown faster 
than family income. For the 2008-2009 school year, tuition and 
fees at four-year public schools grew by 6.4 percent, and grew 
for private schools by 5.9 percent.\128\ Families pay for 
nearly 40 percent of undergraduate costs through borrowing, 
either by the parents or the student.\129\ Of this, 23 percent 
of loans were taken by students, and 16 percent by parents. 
This borrowing is divided between federal student loan programs 
and private student loan programs. Twenty-eight percent of 
families make use of federal student loan programs.\130\ 
Because financing through the bond markets grows increasingly 
expensive and securitization in the private student loan 
markets has ground to a halt, private lenders are cutting back 
on their federal student loan programs or exiting the market 
altogether.\131\ Changes in private lender interest rates, 
fees, and terms have made private loans more expensive, or even 
ruled out this option completely for some borrowers.
---------------------------------------------------------------------------
    \128\ College Board, Published Tuition and Fee and Room and Board 
Charges (online at www.collegeboard.com/html/costs/pricing).
    \129\ Sallie Mae, How America Pays for College: Sallie Mae's 
National Study of College Students and Parents, Conducted by Gallup, at 
vii (Aug. 2008) (online at www.salliemae.com/content/dreams/pdf/AP-
Report.pdf) (hereinafter ``Sallie Mae Report''). The remainder was 
financed by parental income and savings (32 percent), grants and 
scholarships (15 percent), student income and savings (10 percent) and 
friend and relative support (3 percent).
    \130\ Id. at viii.
    \131\ See, e.g., Fitch Ratings, Private Education Loans: Time for a 
Re-Education (Jan. 28, 2009) (``Higher funding costs and reduced 
margins led many lenders, like CIT, College Loan Corporation, KeyBank, 
and Astrive Student Loans, to exit the business altogether. Those that 
remain have reduced origination volume and re-evaluated underwriting 
criteria.'') (hereinafter (``Fitch Time for a Re-Education'').
---------------------------------------------------------------------------
    The group of banks that received TARP funds decreased their 
loan originations for consumer loans, including student loans, 
from January 2009 to February 2009.\132\ The National Consumer 
Law Center reports that private student loan lending decreased 
as much as 25 percent in early 2009.\133\ Lenders are 
tightening standards and raising interest rates on private 
loans. For example, in December 2007, Sallie Mae announced that 
it would tighten credit standards as well as increase prices 
for private loans.\134\ Default rates are rising as well. The 
Department of Education announced that the FY 2007 default rate 
for federal loans was 6.9 percent, up from 5.2 percent in FY 
2006 and 4.6 percent in FY 2005.\135\
---------------------------------------------------------------------------
    \132\ Treasury February Snapshot, supra note 64.
    \133\ National Consumer Law Center, Too Small to Help: The Plight 
of Financially Distressed Private Student Loan Borrowers, at 6 (Apr. 
2009) (online at www.student loanborrowerassistance.org/uploads/File/
Too Small to Help.pdf).
    \134\ SLM 8-K, supra note 124.
    \135\ U.S. Department of Education, FY 2007 Draft Student Loan 
Cohort Default Rates (Mar. 26, 2009) (online at www.ifap.ed.gov/
eannouncements/032609DraftStudentLoanCohDfltRatesFY07.html).
---------------------------------------------------------------------------
    Students and parents also use borrowing other than student 
lending to finance educations. While only three percent of 
parents use home equity loans to pay tuition costs, those who 
do borrow an average of $10,853.\136\ Also, increasing numbers 
of students are financing education costs with credit cards. 
Nearly one-third of students charged tuition on their credit 
cards. Of those, the average tuition charge to the credit card 
was $2,200, up from $924 in 2004.\137\ When asked why they used 
credit cards to pay tuition, 58 percent of respondents said 
that it was because they ``didn't have enough savings and 
financial aid to cover all the costs.'' Since 82 percent of the 
students surveyed carried balances, they were paying finance 
charges on these amounts.
---------------------------------------------------------------------------
    \136\ Sallie Mae Report, supra note 129.
    \137\ Sallie Mae, How Undergraduate Students Use Credit Cards, at 3 
(Apr. 13, 2009) (online at www.salliemae.com/NR/rdonlyres/0BD600F1-
9377-46EA-AB1F-6061FC763246/10744/SLM Credit Card Usage Study 41309 
FINAL2.pdf).
---------------------------------------------------------------------------

                     D. Securitization and the TALF


                           1. SECURITIZATION

    Most Americans first heard about securitization when they 
learned that the collapse of the value of securities backed by 
subprime mortgages was both a signal and a trigger of the 
financial crisis. It is likely that few people outside of the 
financial sector knew the extent to which money raised through 
securitization of loans had become an important part of the 
process of lending. Until the financial crisis began, 
increasing amounts of loans were securitized, that is, the 
loans were combined in pools that in turn backed securities 
sold to investors. The increase is illustrated in the following 
table.\138\
---------------------------------------------------------------------------
    \138\ As noted above, securitization is also a basic mechanism for 
financing residential and commercial mortgages. Annual issuance of 
asset-backed securities resulting from the securitization of mortgage 
and real estate-related loans exceeded $2 trillion from 2002-2007, 
before the credit crunch took effect. This report does not deal with 
real estate-based securitization, both because the TALF does not at 
present extend to real estate, and because real estate securitization 
raises its own set of issues. 
[GRAPHIC] [TIFF OMITTED] 49573A.007


According to the Federal Reserve Board and Treasury, ``over the 
past few years around a quarter of all non-mortgage consumer 
credit'' has been financed through securitization.\140\
---------------------------------------------------------------------------
    \139\ Securities Industry and Financial Markets Association, U.S. 
ABS Issuance (online at www.sifma.org/uploadedFiles/Research/
Statistics/SIFMA_USABSIssuance.pdf) (based on data from the U.S. 
Department of the Treasury, other Federal agencies, and news agencies) 
(hereinafter ``U.S. ABS Issuance''). U.S. issuance includes only 
securitizations involving loans secured by United States assets or 
receivables owed by United States companies. 2009 shows Q1 issuance 
only. ``Other'' includes account receivables, tax liens, aircraft 
leases, auto floorplan receivables, consumer loans, catastrophe bonds, 
boat loans, motorcycle receivables, utilities-related assets, timeshare 
assets and assets otherwise not categorized.
    \140\ U.S. Department of the Treasury, White Paper: Term Asset-
Backed Securities Loan Facility (Mar. 3, 2009) (online at 
www.treas.gov/press/releases/reports/talf_white_paper.pdf) (hereinafter 
``TALF White Paper'').
---------------------------------------------------------------------------
    Securitization first developed in the 1970s as a way for 
the federal government to tap the capital markets for 
residential mortgage financing. When the Federal Reserve Board 
drastically raised interest rates in 1979 to curtail inflation, 
depository institutions found themselves caught between having 
to pay higher rates for short-term funding (e.g., by 
depositors) relative to the lower rates they were earning on 
their (longer term) investments.\141\ Securitization of 
mortgages provided a way out of this squeeze, because it 
allowed institutions to turn the mortgages they held into cash 
immediately (that is, before the mortgages paid off over the 
long term) by transferring those mortgages to investors in the 
capital markets.
---------------------------------------------------------------------------
    \141\ Lewis S. Ranieri, The Origins of Securitization, Sources of 
Its Growth, and Its Future Potential, in A Primer on Securitization, at 
33 (ed. Leon T. Kendall and Michael J. Fishman, 1996).
---------------------------------------------------------------------------
    Asset securitization grew for many types of loans across 
numerous industries after 1986. As a result, what was initially 
a multi-million dollar alternative financing market became a 
multi-trillion dollar part of the mainstream American and 
global economies. The White Paper issued by Treasury to 
announce the TALF provides a convenient summary of the types of 
loans normally subject to securitization.

      FIGURE 8: ASSET CLASSES THAT HAVE HISTORICALLY BEEN FUNDED IN
                         SECURITIZATION MARKETS
------------------------------------------------------------------------
                                                         Assets Funded
           Categories              Lending Examples         Through
                                                        Securitization
------------------------------------------------------------------------
Auto Lending....................  Consumer loans and  Automobiles, light
                                   leases,             trucks,
                                   dealership          motorcycles and
                                   funding programs.   recreational
                                                       vehicles (RVs).
Student Loans...................  Federally           Students and
                                   guaranteed          education
                                   student loans       providers.
                                   (including
                                   consolidation
                                   loans) and
                                   private student
                                   loans.
SBA Loans.......................  Loans, debentures,  Small businesses.
                                   or pools
                                   originated under
                                   the SBA's 7(a)
                                   and 504 programs.
Credit Cards....................  Consumer and
                                   corporate credit
                                   cards.
Vehicle Leases..................  Rental, commercial  Automobiles and
                                   and government      other fleets
                                   fleet leases.       including
                                                       forklifts, taxis,
                                                       and long-haul
                                                       trucks.
Equipment Loans and Leases......  Small ticket        Phone systems,
                                   equipment loans     computers and
                                   and leases.         copiers to small
                                                       businesses.
                                  Heavy equipment     Cranes,
                                   loans and leases.   excavators, and a
                                                       range of other
                                                       construction
                                                       equipment.
                                  Agricultural        Harvesters,
                                   equipment loans     specialty grape
                                   and leases.         harvesters, and a
                                                       variety of other
                                                       agricultural
                                                       equipment.
Other Floorplan Securitizations.  Floorplan loans     Small equipment
                                   and dealer          showrooms, heavy
                                   inventory           equipment
                                   programs.           showrooms,
                                                       certain lots of
                                                       used car dealers.
Residential Property (RMBS).....  Non-agency          Residential
                                   residential         property.
                                   mortgages and
                                   loans.
Commercial Property (CMBS)......  Commercial          Industrial,
                                   mortgages,          office, retail
                                   commercial loans.   and multi-family
                                                       residential
                                                       property.
------------------------------------------------------------------------

    Securitization involves a simple economic transformation. 
When a financial institution makes loans--to small businesses, 
credit card borrowers, students, or auto buyers, for example--
it transfers the full amount of the loan to the borrower but it 
receives that amount back over time, as the loan is repaid. The 
amount it lends is cash, the most highly liquid of assets, but 
what it receives in return is a stream of payments over time, 
an asset that is valuable (if the institution has judged its 
credit risk correctly) but that ties up the institution's money 
until repayment. That is, the asset the banks receives in 
return is illiquid. Securitization, at its best, provides a way 
out of that mismatch; it converts the institution's loans into 
a pool that converts the loans back to cash--makes them liquid 
again--by transforming them into bonds that are themselves sold 
to investors, who can wait for payments over time. Investors 
are attracted to these bonds because the pooled loans, and 
hence the bonds, often pay higher interest rates than corporate 
or municipal bonds.
    Many aspects of securitization are highly technical, but 
the basic steps in the process are not.
    1. A financial institution--which may or not be a bank--
makes loans. This step is commonly called ``origination,'' and 
the institution making the loan is called the ``originator.''
    2. The originator creates a separate entity (often a trust, 
called a ``special purpose vehicle,'' or ``SPV''). The vehicle 
is legally separate (and, the investors hope, bankruptcy-
remote) from the originator company,\142\ and its purpose is to 
issue debt securities that are backed by the loans transferred 
to it. Hence the debt securities are called ``asset-backed 
securities.'' \143\ In some cases, the SPV issues different 
classes--called ``tranches''--of debt securities, to reflect 
different risk and interest components of the underlying loan 
pool, and to entitle the holders to different priorities of 
payment. Tranched securitizations are more complex and can 
create more difficult risk and pricing terms for investors in 
lower level tranches (who are paid only after investors in 
higher level tranches receive their payments), than single 
level ``plain vanilla'' securitizations.
---------------------------------------------------------------------------
    \142\ Bankruptcy remoteness means that the bankruptcy or the 
regulatory takeover of the originator will not affect the value and 
independence of the special purpose vehicle.
    \143\ Sometimes the SPV is created not by the originator of the 
loans but instead by the underwriter who will sell the securities to 
investors and who wants to create a securitization vehicle to start an 
investment transaction.
---------------------------------------------------------------------------
    3. Because the risk of non-repayment is a critical 
component in the pricing of the debt, rating agencies are hired 
by the originator to determine the default risk of the pool of 
loans the vehicle is to hold.
    4. The originator sells the pool of loans to the SPV.
    5. The debt securities are sold to underwriters, who, in 
turn, sell them to investors. The price the investors pay is 
based on their assessment of the risk that interest rates will 
rise (making the debt securities less valuable) and that 
default rate on the loans backing the debt securities will not 
prove higher than they have estimated.
    6. The investors buy the interests for cash that--after 
subtraction of fees--is paid to the SPV, which in turn pays the 
amount to the originator in return for the pool of loans. (As 
in the case of any investment, the investors may ``leverage'' 
their investments--that is, they may borrow money to pay for 
the asset-backed securities they buy. If the interest rate or 
credit assumptions on which the price of those securities, and 
the amount the investors borrowed, was based prove wrong, the 
investors cannot look to the value of the securities to pay 
back their debts. Eliminating that risk is a key feature of the 
TALF, as discussed below.)
    7. The investors now own interests in the SPV and they 
receive the payments of interest and principal due under the 
debt securities as interest and principal payments are made to 
the SPV on the underlying loans.\144\
---------------------------------------------------------------------------
    \144\ Investors who have doubts about the strength of the asset 
pool that backs the securities they have purchased might seek external 
credit enhancement such as a surety bond or letter of credit.
---------------------------------------------------------------------------
    Although Steps 2-6 are described separately here, they are 
planned and negotiated together and usually happen 
simultaneously at the closing of the transaction.\145\
---------------------------------------------------------------------------
    \145\ This may not be the end of the originator's relationship with 
the securitized assets. Originators sometimes also serve as 
``servicers,'' charging the SPV a fee to collect payments from those 
who owe on the underlying accounts and then forwarding the cash to the 
SPV so it can be used for debt repayment. An originator might 
alternatively contract with a third party to perform those services or 
sell the right to act as servicer outright. 
[GRAPHIC] [TIFF OMITTED] 49573A.008


    Securitization allows originators to generate cash and 
obtain a lower cost of funds by selling long-term assets 
(loans) for the highest price they can obtain that still 
provides investors with the returns necessary to compensate 
them for the credit and interest rate risk they assume. The 
ability to convert illiquid assets into cash increases the 
amount of money originators have available for lending. This is 
especially true as competition for the funds of both corporate 
and individual investors, large and small, has grown over the 
last three decades. Two other benefits often cited for 
securitization are that the risks of default are spread from a 
single originator to a group of investors and that the 
substitution of illiquid assets for cash on the balance sheets 
of originators strengthens the lenders. In the aftermath of the 
current financial crisis, however, the scope of those benefits 
will require thoughtful reevaluation.
    The ways in which small businesses and families benefit 
from securitization are not well documented. There is little 
doubt that the growth of securitization has been associated 
with dramatic growth in the size of credit markets and that 
securitization can increase credit availability. But it is also 
difficult to separate the underlying increases in credit 
availability generated by the classic model of securitized 
vehicles from those increases generated by risky and 
economically unsustainable practices within the securitization 
markets. Such practices include:
     Underwriting Standards. Because the underlying 
loans are reflected on the originator's balance sheet for only 
a short time--until they are sold away--the originator may drop 
underwriting standards, and make less creditworthy loans, in 
order to generate loans that will be immediately sold off for 
cash.\146\
---------------------------------------------------------------------------
    \146\ Fees and other compensation to originators and participants 
in the securitization process rewarded short-term issuance of large 
volumes of such securities without imposing consequences for poor long-
term performance. Likewise, these participants had no ownership stake 
in the security they helped to create, leading to a misalignment of 
incentives. Community bankers who testified at the Panel's Milwaukee 
hearing on April 29, 2009, discussed this point, noting that, in their 
view, securitization can undermine prudent loan underwriting standards 
by creating a barrier between borrowers and the person or entity that 
ends up owning the loans involved. See Panel Milwaukee Field Hearing, 
supra note 42.
---------------------------------------------------------------------------
     Risk, Credit Ratings, and Pricing. The lender 
should receive a lower price for riskier loans, which would 
produce a counter pressure to increase loan underwriting 
standards and the quality of the loans. But counter pressure is 
less likely to arise: (1) when the ratings of creditworthiness 
of the underlying assets are opaque or inaccurate; (2) if asset 
prices are rapidly rising (for example, for real estate during 
the real estate bubble); or (3) if the lender wants the cash 
badly enough in order to generate quick profits, to prop up a 
failing balance sheet, or for other potential uses.
     Originator's SPV Risk. The securitization process 
may mask an originator's exposure to the effect of the 
riskiness of the loans in the SPV pool, and the originator may 
be forced in certain circumstances to bail out the SPV at a 
cost to its own balance sheet.
     Concentration Rather Than Dispersion of Risk of 
Loss. Lax underwriting standards in loan pools are not 
reflected in credit ratings, and this has the effect of 
concentrating--not dispersing--risk.
     Impact on Workout of Individual Loans or Groups of 
Loans. The aggregation of loans into large pools to generate 
composite investment payments may make workouts of individual 
loans or groups of loans extremely difficult, which means that 
the impact of a rise in defaults is magnified in a securitized 
loan pool. This problem is further magnified when careful 
recordkeeping becomes one of the first casualties of an over-
accelerated securitization process. (Several other factors also 
produce difficulties in work-out situations that affect the 
ability to reformulate or grant forbearance to individual 
debtors. These include the terms of pooling and servicing 
agreements, potential litigation risk, and objections by 
investors who hold junior tranches of debt securities and who 
worry that the impact of forbearance will be borne solely by 
their ``lower tier'' investments.) \147\
---------------------------------------------------------------------------
    \147\ The January Regulatory Reform Report adopted by a majority of 
the Panel suggested several possible ways to reform the securitization 
process. These include requiring issuers to retain a portion of their 
offerings to give issuers an economic stake in the validity of their 
underwriting process and phased compensation based on loan or pool 
performance. See Congressional Oversight Panel, Special Report on 
Regulatory Reform, at 49 (Jan. 2009) (online at cop.senate.gov/
documents/cop-012909-report-regulatoryreform.pdf) (hereinafter 
``Panel's January Regulatory Reform Report''). The Panel noted, 
however, that further study would be required before any of these 
reforms could be recommended affirmatively. Id.
---------------------------------------------------------------------------
    The financial crisis illustrated the difficulties facing 
investors in judging the quality of the loans backing their 
debt securities. To perform this function they turned to credit 
rating agencies. For a combination of reasons--including the 
use of flawed models and analytic assumptions--the performance 
of credit rating agencies in dealing with securitized vehicles 
during the last several years has been subject to increasing 
questions and, at least with respect to mortgage-backed 
securities, has proved to be little short of disastrous.
    Thus, securitization has both strong proponents and some 
equally strong critics. Securitization can enhance credit 
availability as the economy grows, even if traditional deposits 
grow at a slower rate. There is, however, general agreement 
that identifiable breakdowns in the system, such as the 
deterioration in underwriting standards, must be addressed.

                              2. THE TALF

    The securitization market has now contracted dramatically, 
with the annual rate of activity in the first quarter of 2009 
running at a level that was 80 percent below the level in 
2007.\148\ Annual issuance of asset-backed securities resulting 
from non-real estate securitization approached $300 billion 
before the credit crunch.\149\ In terms of total debt issuances 
(including Treasury borrowing) in the U.S. credit markets, all 
forms of securitizations accounted for 54 percent of the market 
in 2005.\150\ Securities backed by credit card debt, student 
loans, and auto loans fell from $230 billion in 2007 to only 
$121 billion in issuances in 2008, and most of the $121 billion 
in 2008 occurred in the first half of the year.\151\ Global 
asset-backed securities issuances fell from $4.1 trillion for 
2006 to only $2.8 trillion for 2008.\152\
---------------------------------------------------------------------------
    \148\  See U.S. ABS Issuance, supra note 139.
    \149\ See Figure 7.
    \150\ See U.S. ABS Issuance, supra note 139.
    \151\ See U.S. ABS Issuance, supra note 139.
    \152\ International Financial Services London, Securitisation 2009, 
at 2 (Apr. 2009) (online at www.ifsl.org.uk/upload/
CBS_Securitisation_2009.pdf).
---------------------------------------------------------------------------
    Many investors have fled the market. Where they remain, 
they have demanded increased yields on even the highest-rated 
asset-backed securities (AAA); the interest rate spreads on 
these securities in the first quarter of 2009 stood at record 
highs. Uncertainty in the market about the broader economy and 
the ability of securities to produce their promised payment 
streams only heightens the problem. If the recession worsens, 
even the most creditworthy of small businesses and consumers 
may fall behind or default on their loans. If delinquency and 
default rates increase on these loans, then the value of even 
the highest-rated securities can drop precipitously.
    The Federal Reserve Board and Treasury summarized their 
concerns and solution in March of this year:

          The asset-backed securities market has been under 
        strain for some months. This strain accelerated in the 
        third quarter of 2008 and the market came to a near-
        complete halt in October. At the same time, interest 
        rate spreads on AAA-rated tranches of such securities 
        rose to levels well outside the range of historical 
        experience, reflecting unusually high-risk premiums. 
        The securitization markets historically have funded a 
        substantial share of consumer credit and [SBA]-
        guaranteed small business loans. Continued disruption 
        of these markets could significantly limit the 
        availability of credit to households and small 
        businesses and thereby contribute to further weakening 
        of U.S. economic activity. The TALF is designed to 
        increase credit availability and support economic 
        activity by facilitating renewed issuance of securities 
        backed by small business and family loans at more 
        normal interest rate spreads.\153\
---------------------------------------------------------------------------
    \153\ Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility (TALF) Frequently Asked Questions (online at 
www.newyorkfed.org/markets/talf_faq.html) (accessed May 5, 2009) 
(hereinafter ``TALF FAQs'').

    As noted above, the Financial Stability Plan intends to 
revive small business and family credit by restarting the 
securitization process through the TALF. The TALF, in turn, 
attempts to address the reasons investors are fleeing the 
securitization markets in order to bring them back into those 
markets until economic conditions improve to the point that the 
markets can again become self-sustaining.\154\ Eligible 
investors must be organized in the United States to be eligible 
for TALF financing but may otherwise be any sort of vehicle, 
including hedge funds, private equity funds, mutual funds, or 
investment vehicles created exclusively for the purpose. 
Treasury and the Federal Reserve Board hope that including all 
sorts of investment vehicles within the range of eligible 
investors will itself add to investor demand for securitized 
products.
---------------------------------------------------------------------------
    \154\ U.S. Department of the Treasury, U.S. Treasury and Federal 
Reserve Board Announce Launch of Term Asset-Backed Securities Loan 
Facility (TALF) (Mar. 2, 2009) (online at www.financialstability.gov/
latest/tg45.html).
---------------------------------------------------------------------------
    The TALF works through monthly facilities. Each month, 
until the end of 2009, the FRBNY will make loans to investors 
to buy securities backed by one or more of four classes of 
securities: credit card receivables, student loans, loans 
guaranteed by the SBA, and personal auto loans and leases. The 
asset-backed securities become the collateral--i.e., are 
pledged to the FRBNY as security--for the loans. Significantly, 
the loans are non-recourse; if the investors default, the 
government is left simply with the pledged asset-backed 
securities, which may be worth less than the outstanding loan 
balance.\155\ The total amount devoted to these facilities will 
initially be $200 billion. Treasury agrees to put up as much as 
$20 billion to defray losses realized by the FRBNY if loan 
defaults occur.
---------------------------------------------------------------------------
    \155\ The intended appeal of the program, for investors, lies in 
the fact that there is a fixed, and fairly limited, downside and no 
reflection of the government's subsidy on the upside, as discussed 
below.
---------------------------------------------------------------------------
    The loan pools, except for pools of loans guaranteed by the 
SBA, must all be rated as AAA by two ratings agencies and 
continue to satisfy the requirements for an AAA rating.\156\ No 
third party guarantee may be taken into account in arriving at 
the AAA rating.\157\ The FRBNY will try to control for the risk 
it assumes by discounting the value of the collateral; that is, 
it will fund less than the full value of the asset-backed 
securities being purchased with its loan. This discount is 
called a ``haircut'' and is based on: (1) the asset class of 
the underlying asset; and (2) the duration of the underlying 
loan. For example, current haircuts range from five to 16 
percent (that is, loans will cover between 95 and 84 percent of 
the asset-backed securities being purchased).\158\ The haircut 
effectively represents the amount the investor places at risk 
in return for the loan.
---------------------------------------------------------------------------
    \156\ Only three accredited credit rating agencies are recognized 
by TALF for purposes of determining TALF-eligible asset-backed 
securities: Moody's Investor Service, Standard and Poor's, and Fitch 
Ratings. The FRBNY will ``periodically review its use of NRSROs for the 
purpose of determining TALF-eligible ABS.'' TALF FAQs, supra note 153. 
On May 1, the FRBNY announced that it would reevaluate the rating 
agencies that may be used in evaluating, for TALF purposes, pools of 
loans backed by commercial mortgages. Federal Reserve Bank of New York, 
Term Asset-Backed Securities Loan Facility (CMBS): Frequently Asked 
Questions (May 1, 2009) (online at www.newyorkfed.org/markets/
talf_cmbs_faq.html).
    \157\ This condition appears to rule out the use of letters of 
credit, guarantees, or credit default swaps or other derivatives to 
boost the creditworthiness of a pool of assets sought to be 
securitized.
    \158\ For the May TALF operation, automobile sector haircuts range 
from six percent to 16 percent; fixed interest rates are based on the 
LIBOR swap rate for the comparable period of the loan plus 100 bps and 
floating rates are based on the 1-month LIBOR plus 100 bps. Credit card 
sector haircuts range from five percent to ten percent, with interest 
rates following the same profile as automobile sector. Student loan 
haircuts range from five percent to 14 percent for private loans, with 
only floating rates available at 1-month LIBOR + 50 bps and 1-month 
LIBOR + 100 bps for government and private loans respectively. Small 
business loan haircuts range from five percent to six percent, with 
rates dependent on the whether the loans are 7(a) or 504 loans. For a 
complete list of haircuts and rates, see Federal Reserve Bank of New 
York, Term Asset-Backed Securities Loan Facility: Terms and Conditions 
(Apr. 21, 2009) (online at www.newyorkfed.org/markets/talf_terms.html) 
(hereinafter ``TALF Terms and Conditions'').
---------------------------------------------------------------------------
    The program is administered by the ``primary dealers'' 
through whom the FRBNY normally conducts monetary policy; in 
this case, the primary dealers enter into the actual loan 
agreements, receive payments of interest and principal on 
behalf of the FRBNY, and are responsible for assuring that 
prospective investors meet the requirements for TALF 
participation. Securitized pools still may be issued in 
tranches--usually based on differing times for repayment in the 
case of auto loans and in some cases for student loans.
    These terms represent an improvement over prior 
securitization structures. First, because the Federal Reserve 
Board and Treasury have taken on the ``leveraging'' risk, there 
is only a limited possibility that a precipitous drop in the 
value of asset pools can generate the chain-reaction defaults 
that characterized the financial crisis. Second, the value of 
pools cannot be inflated by cloaking their credit risks through 
the use of third-party instruments such as credit default 
swaps. Third, originators cannot buy the asset pools that they 
originated, a limitation that should prevent originators from 
pumping up market values and stimulating demand for over-
lending. (This feature poses a problem for SBA loans that needs 
to be addressed.) Finally, funds will not be loaned for the 
purchase of synthetic obligations, that is, second-level 
obligations backed by asset-backed securities that are 
themselves backed by assets. The prohibition against synthetic 
securities removes from TALF securitization one of the most 
serious flaws in the securitization system before the crisis 
began.
    Some features of the securitization model that were 
problematic in some contexts before the onset of the financial 
crisis may not be dealt with fully by the TALF. Among these 
issues are the problem of insufficient risk retention by the 
originators of the credit and the reliance on credit rating 
agencies, absent reforms to the credit rating agency model to 
determine credit quality for the purposes of eligibility for 
the TALF program.\159\
---------------------------------------------------------------------------
    \159\ The January Regulatory Reform Report adopted by three of the 
five members of the Panel recommended that a regulatory body, such as 
the Securities Exchange Commission or a newly-created independent 
agency, oversee credit rating agencies in order to defuse the potential 
conflicts of interest that exist in the current system. Panel's January 
Regulatory Reform Report, supra note 147, at 43-44. An alternative 
approach discussed by the Panel was the transfer of credit rating 
functions themselves to a government agency. Id.
---------------------------------------------------------------------------
    But the core of the TALF, as noted above, and the most 
fundamental policy question it raises, is the transfer of the 
risk of loss from the investor to the taxpayer. In a normal 
securitization, the investor bears the risk. Ordinarily the 
investor loses money if the asset-backed security declines in 
value; if the investor has taken out loans to pay for the 
investment, funds to pay back the loan must come from other 
sources if the investor is to avoid default. Under the TALF, 
when the loan matures, the investor may elect to pay the loan 
or remit the collateral to the FRBNY. If the securities decline 
in value, the investor can walk away and leave the FRBNY with 
the asset-backed securities that the investors posted as 
collateral when the loans were made. If the collateral's credit 
rating falls over the course of the loan, moreover, there is no 
requirement that the investor post any additional collateral. 
The investor's loss would be limited to the equity paid to make 
up the shortfall between the asset's purchase price and the 
TALF loan (i.e., the amount of the haircut) plus fees and, in 
certain cases, any interest that has been paid on the loan. If 
the securities increase in value, however, the investor reaps 
any profit. In establishing the loans in the facility as non-
recourse, Treasury and the FRBNY (and ultimately the Federal 
Reserve System) appear to have taken on the lion's share of the 
risk in their effort to entice investors back into these 
markets in what they believe is the necessary volume. It should 
be noted, however, that the risk to the FRBNY and Treasury will 
be offset to some degree not only by the haircut charges but 
also by the interest charged by the FRBNY on the TALF loans.
    (One method of valuing the potential cost of the subsidy 
inherent in the TALF loan terms is not easy. One method may be 
to refer to the cost in the market for credit default swaps for 
private loans with non-recourse financing and interest rate, 
haircut, and other terms similar to TALF terms. A greater 
volume of transactions is required in order to conduct a sound 
valuation using this or other methods.)
    Despite the substantial inducements the TALF is designed to 
provide, the demand for TALF financing to date has been mixed. 
Neither the March nor April facilities generated substantial 
interest, especially in light of the $200 billion set aside for 
the TALF until the end of the year (approximately $20 billion a 
month). Subscription activity increased to $10.6 billion in 
early May.

     FIGURE 10: AMOUNT OF TALF LOANS REQUESTED AT MARCH 17-19, 2009
                              SUBSCRIPTION
------------------------------------------------------------------------
               Sector                               Amount
------------------------------------------------------------------------
                           Auto                       $1,902,404,052
                               Credit Card            $2,804,490,000
                   Student Loan                                    -
                 Small Business                                    -
                          Total                       $4,706,894,052
------------------------------------------------------------------------


 FIGURE 11: AMOUNT OF TALF LOANS REQUESTED AT APRIL 7, 2009 SUBSCRIPTION
------------------------------------------------------------------------
               Sector                               Amount
------------------------------------------------------------------------
                           Auto                      $811,023,487.61
                               Credit Card           $896,780,798.84
                   Student Loan                                    -
                 Small Business                                    -
                      Equipment                                    -
                      Floorplan                                    -
             Servicing Advances                                    -
                          Total                    $1,707,804,286.45
------------------------------------------------------------------------


  FIGURE 12: AMOUNT OF TALF LOANS REQUESTED AT MAY 5, 2009 SUBSCRIPTION
------------------------------------------------------------------------
               Sector                               Amount
------------------------------------------------------------------------
                           Auto                       $2,184,661,172
                               Credit Card            $5,524,840,000
                   Student Loan                       $2,347,482,720
                 Small Business                          $86,564,702
                      Equipment                         $456,075,698
                      Floorplan                                    -
             Servicing Advances                                    -
                          Total                      $10,599,624,291
------------------------------------------------------------------------

    The first two rounds of TALF lending produced only loans 
made to the credit card and the auto sectors. During the March 
17-19 round, a total of $4.7 billion in TALF lending was issued 
with $1.9 billion, or 40 percent, attributable to the auto 
sector and $2.8 billion, or 60 percent, attributable to the 
credit card sector. There were no loans in the student loan or 
small business sectors. During the April 7 round, a total of 
$1.7 billion in TALF loans issued were again divided between 
the auto and credit card sectors: $811 million in auto loans 
and just under $900 million to the credit card sector.
    The May 5 round showed a significant increase in 
participation, both in terms of total lending and sectors 
represented. Credit card securitizations financed by TALF, 
totaling $5.5 billion, were well above the combined total for 
the previous two facilities. For the first time, TALF was used 
to securitize lending in student loans, small businesses, and 
equipment, although the amounts in the latter two categories 
were modest.
    By way of comparison, total non-real estate backed 
securities' originations for 2008 were $135 billion; they were 
$14.6 billion for the first quarter of 2009. The apparent drop 
in monthly originations may be a result of the economic 
climate, tightening terms, or deleveraging.
    If the quantitative results of the TALF have been below 
expectations to date, there are indications that its 
qualitative effects on the securitization markets have begun to 
take hold. In discussions with staff of the Panel, officials of 
the FRBNY have reported that interest rate spreads on new 
securities backed by credit card and auto-loan receivables have 
narrowed since the TALF began operation. As indicated above, 
the level of interest payments investors require to buy asset-
backed securities indicates their relative confidence, or lack 
of confidence, in the health of the loans backing their 
securities. Once the credit crunch began, investors were 
demanding higher levels of interest on asset-backed securities 
than were normally seen, and bringing those interest rate 
levels back into line--and hence raising the price that 
originators could receive for their loans--was a major 
objective of the TALF. It is not surprising that the TALF is 
having this effect, given that the non-recourse nature of the 
TALF loans reduces substantially the risk to investors 
regardless of the health of the asset pool. Investors have been 
willing to buy new securities backed by credit card and auto-
loan receivables that bear lower interest rates, indicating a 
lower assessment of risk. 
[GRAPHIC] [TIFF OMITTED] 49573A.009


    TALF investors are willing to accept lower interest rates 
on the securities that they have purchased through the TALF 
because, in large part, of the favorable financing they have 
received from the FRBNY. This appears to have been a key cause 
of the narrowing of interest rate spreads (see Figure 13). But 
the TALF apparently does not eliminate all concern about 
heightened investment risk. Although spreads have fallen to 
about half of their peak levels, most remain well above 100 
basis points from similar spreads before the crisis and some 
reach upwards of 300 basis points.\161\
---------------------------------------------------------------------------
    \160\ Chart created using subscription-only data (with permission) 
from Morgan Markets, the research and market data portal for J.P. 
Morgan Chase & Co.
    \161\ See Board of Governors of the Federal Reserve System and 
Federal Reserve Bank of New York, Responses to March 20 Inquiry of the 
Congressional Oversight Panel, at 6 (Apr. 10, 2009) (online at 
www.newyorkfed.org/markets/response_040109.pdf) (``Five-year spreads on 
AAA-rated credit card asset-backed securities tightened to 300 basis 
points above Libor in early February 2009, down from 550 to 600 basis 
points in December; 3-year AAA-rated auto ABS spreads tightened to 350 
basis points above swaps in March, down from 600 basis points in early 
January; and FFELP student loans of similar tenors and ratings fell to 
175 basis points in February, down from 350 basis points in early 
January. Market participants noted that spreads on each of these asset 
classes benefitted from inclusion in the original TALF design, even 
before the first subscription date.'').
---------------------------------------------------------------------------
    FRBNY officials also attribute the sale of several ``non-
TALF'' packages of auto-loan receivables to the impact of the 
TALF on spreads. This is an important reminder that the success 
of TALF in generating additional small business and family 
credit should not be judged solely by the volume of TALF 
transactions. And, in conversations with Panel staff, they 
noted that ``traditional investors,'' such as asset management 
firms and pension funds, have begun to return to the market as 
asset-backed securities investors, although banks and insurance 
companies have not done so due to balance sheet constraints. 
But the evidence to support this statement is not 
available.\162\ Officials also argue that many participants 
have stayed away from TALF financing because their regulatory 
regimes do not currently permit them to borrow to buy asset-
backed securities.
---------------------------------------------------------------------------
    \162\ In its April Report, SIGTARP requested more transparency 
regarding the details of TALF transactions. The report states that 
``SIGTARP continues to recommend that Treasury require all TARP 
recipients to report on the actual use of TARP funds in the manner 
previously suggested. This recommendation applies not only to capital 
investment and lending programs involving banks and other financial 
institutions, but also to programs in which TARP funds are used to 
purchase troubled assets, including details of each transaction in the 
Public-Private Investment Program (`PPIP') as well as all transactions 
concerning the surrender of collateral (including the identity of the 
surrendering borrowers) in the Term Asset-Backed Securities Loan 
Facility (`TALF').'' SIGTARP, Quarterly Report to Congress, at 138 
(Apr. 21, 2009) (online at www.sigtarp.gov/reports/congress/2009/
April2009_Quarterly_Report_to_Congress.pdf) (hereinafter ``SIGTARP 
Quarterly Report'').
---------------------------------------------------------------------------
    It is difficult to draw a line in evaluating the level of 
demand for TALF-funded securitizations between systemic 
problems and issues created by the design of the TALF itself. 
The regulatory limitations on the purchase of securitized loans 
existed before the financial crisis began. In addition, 
traditional participants in the asset-backed securities markets 
are now weak; pension funds, for example, are likely to be 
leaving stable fixed income products to rebalance their 
portfolios as a result of equity and alternative asset losses, 
and the TALF cannot change that dynamic. Moreover, if banks are 
weak, they cannot participate in the markets even on the terms 
of the TALF.
    However, FRBNY officials and the Securitization Forum of 
the Securities Industry and Financial Markets Association point 
to what investors may view as problems with the TALF itself. 
These problems affect all potential transactions.
    One problem is the lack of transferability of the asset-
backed securities after the end of 2009. The prohibition means 
that investors are locked into their investments; they can 
neither realize a profit if interest rates drop nor limit a 
drop in value of their securities if interest rates rise. They 
also cannot protect themselves against a loss in the amount of 
the haircut they bore if credit experience proves worse than 
was assumed when the price for the securities was set. Second, 
there was a mismatch between the three-year maximum loan term 
and the five-year maximum range of the underlying assets 
backing the loans, until the Federal Reserve Board acted on May 
1 to extend the loan term to five years.\163\ The mismatch 
meant that the non-recourse financing would expire before the 
debt securities were paid back, leaving the investors to assume 
the full risk for the last two years of the investment. Third, 
some representatives of institutions and investors who normally 
participate in securitizations have indicated that the average 
cost of funds for participating in the program is greater than 
that offered by other federal loan assistance and guarantee 
programs. The FRBNY has not provided any information regarding 
its methodology for setting either the haircuts or the interest 
rates for the loans, and investors may well hesitate to make 
their own funds the test case to determine if the FRBNY has 
estimated the rates correctly.\164\
---------------------------------------------------------------------------
    \163\ See TALF FAQs, supra note 153.
    \164\ Some investors have indicated that the limitation to AAA 
credit ratings on the underlying assets is restricting the growth of 
loan demand. The transfer of liability from investors to taxpayers is 
premised on the fact that only the most secure loans should be subject 
to securitization under those terms. Any revision of this limitation 
would raise the risk for the taxpayer and move the program into the 
financial universe that prevailed before the crisis began.
---------------------------------------------------------------------------
    FRBNY officials have observed that investors have questions 
as to whether or not TALF investors will be subject to 
conditions that have been placed on participants in the TARP 
generally. An example is how the limits on executive 
compensation imposed on recipients of TARP funds would apply to 
TALF. The FRBNY's and Treasury's current position is that 
private parties participating in TALF generally will not be 
subject to either statute-based or policy-based executive 
compensation restrictions.\165\ Before issuing this recent 
guidance, however, the FRBNY and Treasury had made an initial 
policy decision to require TALF sponsors, but not investors, to 
adopt certain executive compensation practices as a requirement 
of participation.\166\ However, financial market participants 
continue to express concern about the potential application of 
executive compensation and other TARP limitations to 
participants.\167\
---------------------------------------------------------------------------
    \165\ SIGTARP Quarterly Report, supra note 162, at 103, 225-28 
(including a Treasury legal memorandum, produced in response to SIGTARP 
questioning on the issue, concluding that private TALF participants 
were not subject to the executive compensation provisions found in 
section 111 of EESA, as amended by ARRA, because of its determination 
that ``the relationship between TALF participants and the TARP program 
was not sufficiently direct to conclude that the TALF participants were 
receiving `financial assistance' from TARP.''); TALF FAQs, supra note 
153 (``Given the goals of the TALF and the desire to encourage market 
participants to stimulate credit formation and utilize the facility, 
the restrictions will not be applied to TALF sponsors, underwriters, 
and borrowers as a result of their participation in the TALF.'') 
Treasury left open the possibility that fund managers in the PPIF's 
Legacy Security Program could be subject to executive compensations 
restrictions if they are deemed active investors when these securities 
receive financing an expanded TALF and that the FRBNY itself may be 
subject to the restrictions. SIGTARP Quarterly Report, supra note 162, 
at 110, 226-27.
    \166\ SIGTARP Quarterly Report, supra note 162, at 103, 226-27.
    \167\ See Federal Reserve Bank of New York, Remarks as Prepared for 
Delivery by President and Chief Executive Officer of the New York 
Federal Reserve Bank William C. Dudley at Vanderbilt University: The 
Federal Reserve's Liquidity Facilities (Apr. 18 2009) (online at 
www.newyorkfed.org/newsevents/speeches/2009/dud090418.html) 
(characterizing fears expressed by some investors that participation in 
TALF may lead to increased regulation of investor practices as 
``misplaced'' but ``understand[able] . . . given the political 
discourse'' and the ``intense scrutiny of bank compensation practices'' 
that arose from TARP investments in financial institutions).
---------------------------------------------------------------------------
    The uncertainty of the application of a provision to TALF 
participants who hire foreign workers also may limit 
participation in the program. TALF investors face restrictions 
on their ability to hire new foreign workers on temporary H-1B 
visas.\168\
---------------------------------------------------------------------------
    \168\ Section 1611 of ARRA, supra note 69, prohibits any recipient 
of funding under Title I of EESA or section 13 of the Federal Reserve 
Act from hiring new H-1B workers unless they had offered positions to 
equally- or better-qualified U.S. workers, and prevents recipients from 
hiring H-1B workers in occupations in which they have laid off U.S. 
workers. U.S. Citizen and Immigration Services, USCIS Announces New 
Requirements for Hiring H-1B Foreign Workers (Mar. 20, 2009) (online at 
www.uscis.gov/files/article/H-1B_TARP_20mar2009.pdf). See also TALF 
FAQs, supra note 153 (``The EAWA applies to all borrowers under the 
TALF. In addition, if the eligible borrower is an investment fund, the 
EAWA also applies to any entity that owns or controls 25% or more of 
the total equity of the investment fund.'').
---------------------------------------------------------------------------
    FRBNY officials have also asserted that a reason for 
investor reluctance is uncertainty surrounding the TALF's terms 
and conditions. Since the TALF was first announced, there have 
been numerous changes to the program. These include potential 
expansion of the TALF to include new classes of assets and 
standardization of master agreements and procedures.
    If the TALF has not been as successful as originally 
projected because potential investors want to loosen its terms 
to resemble those of the old securitization markets, Treasury 
is faced with a Hobson's choice between limiting a critical 
financial mechanism and facilitating market recovery in a way 
that increases the same risks associated with dangerous 
underwriting. These risks can be mitigated through appropriate 
reforms in asset-backed securities markets.
    A different set of issues is presented if the lack of 
demand for the TALF reflects investor demands rather than the 
availability of reasonably creditworthy assets to back the 
proffered asset-backed securities. In that case, the government 
may be facing the unintended effects of its creation of a 
number of different facilities to lower the cost of funds to 
financial institutions. Problems with the terms of proffered 
credit and the economic condition of small businesses and 
families greatly complicate the ability of securitization to 
revive small business and family lending at this point in the 
recovery cycle.\169\
---------------------------------------------------------------------------
    \169\ When details of the program were first rolled out in early 
March, eligible securities were limited to those backed by four 
categories of loans: federally guaranteed student loans; SBA guaranteed 
small business loans; certain auto loans (retail loans and leases 
relating to cars, light trucks, motorcycles and RVs, as well as auto 
dealer floorplan loans); and credit cards. Even at that time, however, 
the Federal Reserve Board had plans to extend the program to include 
securities backed by additional categories of loans. As of the writing 
of this report, TALF-eligible securities include those backed by the 
original four categories, plus those backed by: commercial and 
government fleet auto leases; rental fleet loans; non-auto floorplan 
loans; residential mortgage servicing advances; and certain equipment 
loans and leases. Each of these categories was included in the April 
round of TALF lending. Although these new TALF assets do not reduce the 
$200 billion allocated for small business and family securitization 
transactions under TALF, they may reduce the relative proportion of 
such loans securitized under this part of the TALF. Expansion of the 
TALF to include another $800 billion for securitization of commercial 
assets and purchase of mortgage-backed securities issues before the 
financial crisis began are not within the scope of this report, except 
to note that the allocation of such funds for other purposes reduces 
the potential for increase in the $200 billion ceiling.
---------------------------------------------------------------------------
    The most significant issue this raises for the Federal 
Reserve Board and Treasury is whether the TALF, and a 
restarting of the securitization markets, is the best way to 
revive small business and family lending.

 E. Small Business Credit, the TALF, and Other Efforts to Expand Small 
      Business Access to Credit by Jumpstarting Secondary Markets

    Small business loans have generally provided a less 
attractive target for securitization than mortgage and credit 
card loans because they lack standardized loan performance 
data, documentation, and underwriting procedures.\170\ In 
particular, non-SBA guaranteed portions of 7(a) loans, as well 
as loans made outside the SBA framework, are usually more 
profitable to hold to term than to sell in the secondary 
market.\171\ In addition to the lack of standardization of 
those loans, a recent study has suggested that information gaps 
provide a significant barrier to securitization:
---------------------------------------------------------------------------
    \170\ Devon Pohlman, Federal Reserve Bank of Minneapolis, With 
Support, Securitization Could Boost Community Development Industry 
(Nov. 2004) (online at www.minneapolisfed.org/publications_papers/
pub_display.cfm?id=2416). See also, Ron J. Feldman, Federal Reserve 
Bank of Minneapolis, An Update on the Securitization of Small Business 
Loans (Sept. 1997) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=3632) (``the heterogeneity of 
small business loans has made it difficult for a firm to act as a 
conduit to the securitization market for small business lenders.''); 
Temkin and Kormendi, supra note 18.
    \171\ Id.

          In contrast to the residential and commercial 
        mortgage market, there are much less data available on 
        the performance of conventional small business loans. 
        Lack of data was an issue raised by nearly all of the 
        industry participants we spoke with, including 
        representatives of rating agencies, lenders and 
        investment banks regarding the feasibility of a 
        secondary market for these loans. According to one key 
        informant, the biggest problem in increasing the 
        secondary market volume for conventional small business 
        loans is that historical loan performance and loss rate 
        data are not available.\172\
---------------------------------------------------------------------------
    \172\ Id. at 25.

    While securitization consequently plays a limited role in 
small business financing--especially in comparison to the role 
it plays in the consumer and mortgage credit markets--the 
securitization of SBA-guaranteed portions of 7(a) loans has 
nonetheless accelerated over the past few decades.\173\ In 
recent years, 7(a) loans have often been spliced, with the 
guaranteed portion (up to 75 percent) sold in the secondary 
market and the non-guaranteed portion held on the bank's 
balance sheet.\174\ From 2006 through 2008, between 40 and 45 
percent of the SBA guaranteed portion of 7(a) loans were sold 
into the secondary market.\175\ The SBA estimates that about 
$15 billion of securities backed by 7(a) loans are currently 
outstanding.\176\ As discussed supra, however, SBA-guaranteed 
loans constitute only a small percentage of total lending to 
small businesses. As a result, the overall impact of the 
secondary market on small business financing is limited.
---------------------------------------------------------------------------
    \173\ Id. at 14; Temkin and Kormendi, supra note 18, at 14.
    \174\ Panel staff discussions with GAO and trade groups have 
confirmed that the non-guaranteed portions of the SBA loans are 
generally kept in the lender's portfolio and are not securitized.
    \175\ Government Accountability Office, Small Business 
Administration's Implementation of Administrative Provisions in the 
American Recovery and Reinvestment Act of 2009, at 6 (GAO_09_507R)(Apr. 
16, 2009) (online at www.gao.gov/new.items/d09507r.pdf) (hereinafter 
``April GAO Report on SBA Implementation'').
    \176\ U.S. Small Business Administration, SBA Welcomes Federal 
Reserve and Treasury Actions to Improve TALF Program to Help Unclog 
Secondary Market for Small Business Loans (Mar. 5, 2009) (online at 
www.sba.gov/idc/groups/public/documents/sba_homepage/
news_release_09_15.pdf) (hereinafter ``SBA TALF Press Release'').
---------------------------------------------------------------------------
    Even though secondary markets play only a minor overall 
role in small business financing, the SBA has attributed the 
lending slowdown in part to the stalled securitization market 
for 7(a) loans.\177\ The way small business loans are 
securitized is somewhat different from the mechanisms described 
above, however, and the reasons for investment in pools of 7(a) 
loans are unique. In contrast to other types of loans, SBA 
loans are not securitized by their originators. The most 
important reason for this is that few lenders originate a 
sufficiently large number of 7(a) loans to form a marketable 
pool. But it is also important that the loans generally do not 
have uniform terms or interest rates and are difficult to put 
into a pool that can accurately be priced. A small group of 
specialized broker-dealers has developed the expertise to 
understand what is essentially a niche market and develop risk 
and interest rate assumptions to bridge some of these 
difficulties.
---------------------------------------------------------------------------
    \177\ The secondary market for first lien mortgages associated with 
the SBA's 504 loan program also seized up last year in part because 
broker-dealers who assemble pools of 504 loans found themselves unable 
to secure ``credit enhancements,'' which made the pooled loans more 
attractive to investors. The secondary market for the SBA-guaranteed 
debenture portion of 504 loans remains largely intact.
---------------------------------------------------------------------------
    Generally, these broker-dealers (who function as ``pool 
assemblers'' in this context) buy small business loans from the 
many banks that originate them and assemble the loans into 
pools. The mechanics of the process require that the broker-
dealers hold the loans themselves (in their securities 
inventory) until they can assemble a sufficient number of loans 
to form a pool capable of securitization; the assemblers must 
themselves borrow funds to finance their inventory of loans 
pending their pooling and sale.
    The portion of small business loans that is SBA-guaranteed 
generally carries low interest rates, consistent with its 
guaranteed nature. Investors can generally borrow funds at 
about 50 basis points below the SBA interest rate, so that they 
can earn 50 basis points, or about .05 percent, on their safe 
investment. This return is possible, of course, only if the 
spread between what investors have to pay and the interest rate 
the SBA-backed loans pay remains constant.
    Last fall, the secondary market for 7(a) loans stalled 
largely as a result of: (1) the tightening of the Prime versus 
LIBOR spread, which reduced the attractiveness of investment in 
securitized 7(a) loans (indeed, the return for investors had 
disappeared); \178\ (2) the strained capacity of broker-
dealers, who were unable to sell their current inventory and 
thereby free up capital to buy and pool additional loans; (3) 
the reduced access to and increased cost of credit for broker-
dealers, who could not sell off inventory to pay off existing 
loans; and (4) general uncertainty and fear in the marketplace. 
While individual investors regularly enter and exit the 
secondary market for SBA loans, it is unusual for all actors to 
stop buying simultaneously, as they did last fall. While about 
$4 billion in securities backed by 7(a) loans are normally 
traded in securitization markets each year, the SBA estimates 
that only about a quarter of that volume is currently being 
traded.\179\ According to the SBA, the illiquidity that 
resulted has hampered the ability of institutions to make new 
SBA-backed loans.\180\
---------------------------------------------------------------------------
    \178\ See Coastal Securities, Inc., State of the SBA Market (Dec. 
3, 2008) (online at www.coastalsecurities.com/sbamarketinfo/
State%20of%20the%20SBA%20 Markets_20081203. pdf). While the three-month 
LIBOR rate generally has been about 300 basis points below the Prime 
rate, in October of last year, the spread tightened, with LIBOR 
exceeding the Prime rate for a time.
    \179\ SBA TALF Press Release, supra note 176. See generally, April 
GAO Report on SBA Implementation, supra note 175.
    \180\ Id.
---------------------------------------------------------------------------
    Treasury and the Federal Reserve Board, through TALF, have 
acted on the similar premise that the restoration of the 
securitization markets is essential and perhaps the fastest way 
to restore lending. Specifically, Treasury and the Federal 
Reserve Board have sought to provide loans for the purchase of 
poolable SBA loans to increase demand in the SBA secondary 
market. By doing so, policymakers have stated that their 
intention is to increase the capital available for small 
business loans, reduce costs for lenders, and increase overall 
lending rates.\181\ The SBA has supported this initiative and 
argued that it will help ``unfreeze the secondary market for 
SBA loans, thus making it easier for [lenders] to make new 
loans to America's small businesses.'' \182\
---------------------------------------------------------------------------
    \181\ See U.S. Department of the Treasury, The Consumer and 
Business Lending Initiative: A Note on Efforts to Address 
Securitization Markets and Increase Lending (Mar. 3, 2009) (online at 
www.ustreas.gov/press/releases/reports/talf_white_paper.pdf) 
(hereinafter ``The Consumer and Business Lending Initiative''); U.S. 
Department of the Treasury and Board of Governors of the Federal 
Reserve System, Joint Press Release (Mar. 3, 2009) (online at 
www.federalreserve.gov/newsevents/press/monetary/20090303a.htm).
    \182\ SBA TALF Press Release, supra note 176.
---------------------------------------------------------------------------
    Ultimately, the SBA itself has a critical role to play in 
TALF's success by working with the FRBNY to fit the TALF to SBA 
loan profiles. This is especially important because the size of 
existing pools of SBA-guaranteed loans is different from that 
originally anticipated for TALF products. In addition, the 
flexible characteristics of SBA loans, which are one of their 
most important features, and the manner in which the loans have 
traditionally been securitized, add to the need for a 
sophisticated approach to securitize them effectively. It is 
quite possible that SBA loan pools, as a niche market, require 
a greater lead time to be tested for inclusion in the TALF.
    One broker-dealer of SBA loans has also noted problems in 
the current implementation of the TALF, including that: (1) 
borrowers must access the TALF by way of a primary dealer--many 
of whom are unfamiliar with the smaller, idiosyncratic market 
for pools of SBA loans; and (2) that TALF prohibits borrowers 
from pledging their own securities as collateral, thereby 
complicating the process.\183\ There would be demand from the 
pool assemblers themselves to borrow through the TALF to buy 
small business loans from their originators, but the TALF's 
terms and conditions bar them from doing so.\184\ However, an 
SBA program to provide low-interest loans to systemically 
significant broker-dealers (discussed below) could ultimately 
prove to be more attractive to broker-dealers than the TALF. 
Broker-dealers have also argued that the haircuts on SBA 
securities outlined by the Federal Reserve Board are not 
particularly attractive compared with terms they could receive 
in the open market. Although modest, the inclusion of SBA loans 
in the May subscription may suggest positive movement.
---------------------------------------------------------------------------
    \183\ Chris LaPorte, Coastal Securities, Inc., Commentary on Recent 
Fed Initiatives Related to the SBA 7(a) Secondary Market (Mar. 30, 
2009) (online at www.naggl.org/AM/
Template.cfm?Section=Advocacy&Template=/CM/Content 
Display.cfm&ContentID=10345) (hereinafter ``LaPorte Commentary'').
    \184\ Id.
---------------------------------------------------------------------------
    Beyond TALF, Treasury has also sought to intervene directly 
in the securitization market for small business loans by 
purchasing securities backed by SBA loans. Through this 
program, Treasury plans to dedicate $15 billion of TARP funds 
authorized under the Emergency Economic Stabilization Act of 
2008 (EESA) to the purchase of securities backed by the 
government-guaranteed portion of SBA 7(a) loans and the non-
government-guaranteed first-lien loans affiliated with the 
SBA's 504 loan program. These securities are to be purchased 
directly by the government from broker-dealers who purchase and 
securitize SBA loans to sell into the secondary market, as well 
as from banks and credit unions themselves. The goal of the 
program is to complement the TALF in working to improve the 
liquidity of the secondary market for SBA loans.\185\ Of 
course, increasing liquidity will be effective only if 
illiquidity has contributed to the problem, which some 
observers have questioned.
---------------------------------------------------------------------------
    \185\ U.S. Department of the Treasury, Unlocking Credit for Small 
Businesses: FAQ on Implementation (Mar. 17, 2009) (online at 
www.financialstability.gov/docs/FAQ-Small-Business.pdf) (hereinafter 
``Treasury FAQ on Implementation of the Small Business Lending 
Initiative''). See also SBA Q&A for Small Business Owners, supra note 
70.
---------------------------------------------------------------------------
    It is also of note that, unlike the TALF, Treasury's 
program to purchase these securities would not utilize private-
sector pricing. Rather, Treasury would purchase securities 
directly from ``pool assemblers'' and banks. According to 
Treasury documents, ``Treasury and its investment manager will 
analyze the current and historical prices for these 
securities'' in order to ``identify opportunities to purchase 
the securities at reasonable prices.'' \186\ Treasury defines 
such prices as those that fulfill the dual objective of 
``[providing] sufficient liquidity to encourage banks to 
increase their small business lending and [protecting] 
taxpayers' interest.'' \187\ Treasury has hired Earnest 
Partners, an independent investment manager with experience 
with loans guaranteed by the SBA, to guide its efforts to buy 
the securities.\188\ Additionally, the Bank of New York Mellon 
has been chosen to be Treasury's custodian for the securities. 
While sellers of securities will issue warrants for the 
purchase of stock to the government and will have to abide by 
executive compensation requirements, the details of these 
aspects of the program have not been finalized.\189\ To date, 
Treasury has not made any purchases under this program \190\ or 
disbursed any funds to Earnest Partners.\191\
---------------------------------------------------------------------------
    \186\ Treasury FAQ on Implementation of the Small Business Lending 
Initiative, supra note 185.
    \187\ Id.
    \188\ SIGTARP Quarterly Report , supra note 162, at 131.
    \189\ Treasury FAQ on Implementation of the Small Business Lending 
Initiative, supra note 185.
    \190\ According to Treasury's FAQ on Implementation document, 
purchases of securities backed by SBA 7(a) loans were to begin by the 
end of March 2009, while purchases of securities backed by first-lien 
504 loans were to begin by May due to ``Treasury's need to conduct a 
thorough risk analysis, given that these securities are not government 
guaranteed.'' The direct purchase program is also to be utilized to 
purchase securities guaranteed through a new SBA 504 loan first-lien 
guarantee program, which was established by the ARRA when that program 
becomes operational. However, according to the most recent TARP 
Transactions report, no money has been disbursed as of yet under this 
program. See U.S. Department of the Treasury, Troubled Asset Relief 
Program: Transaction Report for the Period Ending April 13, 2009 (Apr. 
15, 2009) (online at www.financialstability.gov/docs/transaction-
reports/4-15TransactionReport.pdf).
    \191\ SIGTARP Quarterly Report, supra note 162, at 131.
---------------------------------------------------------------------------
    In addition to the TALF and the direct purchase program, 
ARRA includes a provision that authorizes the SBA to make low-
interest loans to systemically important secondary broker-
dealers who pool SBA loans to sell into the secondary 
market.\192\ The goal of this program would likewise be to 
inject liquidity into the secondary market for SBA loans in 
order to free up capital for new loans at banks. While the SBA 
has stated that it plans to implement this program ``as rapidly 
and effectively as possible,'' significant questions still 
exist. Specifically, GAO has noted that issuing regulations for 
these programs is challenging because it requires 
``establishing new programs and related infrastructure, such as 
establishing policies and procedures, hiring and training 
staff, developing information systems, and establishing risk 
mitigation strategies as well as resolving critical policy 
issues.'' \193\
---------------------------------------------------------------------------
    \192\ ARRA, supra note 69.
    \193\ SBA Q&A for Small Business Owners, supra note 70; see also 
April GAO Report on SBA Implementation, supra note 175.
---------------------------------------------------------------------------
    The ultimate success of these programs should be measured 
primarily by the increase in non-SBA bank lending that 
constitutes the overwhelming majority of small business credit, 
and secondarily by the extent to which: (1) the demand for 
securities and, ultimately, the size of the pool of SBA-
guaranteed loans increases; and (2) securitization of non-SBA 
forms of credit, such as credit cards and home equity lines of 
credit, also contributes to the availability of small business 
credit. Treasury should track these metrics and regularly 
report them as a way to gauge the program's success and ensure 
accountability. The use of these metrics will also help 
Treasury and the Federal Reserve Board determine when changes 
in borrowing terms or tactics are necessary. While it will be 
difficult to separate out which program is causing which 
results in the marketplace, Treasury should be clear in stating 
what it intends to accomplish moving forward and what metrics 
should be used to judge its success.
    In pursuing metrics, Treasury will need to overcome several 
specific challenges. First, the general lack of data on small 
business lending, crisis or no crisis, increases the difficulty 
of tracking progress. For years, academics who have studied 
small business lending have cited the lack of concrete data as 
a major limiting factor in conducting rigorous, scholarly 
research on lending to small businesses.\194\ Moreover, as 
discussed earlier in this report, while agencies including the 
SBA and the Federal Reserve Board do compile some information 
on lending to small businesses on a yearly basis, these data 
are outdated, incomplete, and represents only a rough 
approximation of lending to small businesses over time.\195\ 
Although Treasury has begun requiring additional reporting in 
this area from certain TARP recipients, to date, Treasury's 
monthly lending snapshots have not included a category for 
small business lending.\196\ The Federal Reserve Board's Beige 
Book, published eight times per year, includes anecdotal 
evidence on economic conditions, but it also does not include a 
specific category for small business or small business 
lending.\197\
---------------------------------------------------------------------------
    \194\ See Charles Ou, Statistical Databases for Economic Research 
on the Financing of Small Firms in the United States, SBA Office of 
Advocacy, at 2 (Feb. 2004) (online at www.sba.gov/advo/research/
wkp04Ou.pdf) (``Research on small business financing has been much 
hampered by the lack of statistics. Small businesses are reluctant to 
provide information about their finances, and lenders/investors have 
been unwilling or unable to provide lending data classified by the size 
of the borrowing business.'').
    \195\ Even the Federal Reserve Board, in discussing small business 
lending in testimony before the Senate Committee on Small Business and 
Entrepreneurship in 2008, was unable to cite specific metrics for small 
business lending, instead using loans made by smaller U.S. banks and 
loans of $100,000 or less as a proxy for small business lending. See 
Mishkin Testimony, supra note 13, at 3. Also, when banks report data on 
small business lending once a year in their June call reports, they 
classify all commercial loans of less than $1 million as ``small 
business loans''--again merely an approximation of small business 
lending. See SBA Small Business and Micro Business Lending, supra note 
21. Similarly, in the Federal Reserve's quarterly Survey of Terms of 
Business Lending, there is not a category for small business loans; 
rather, information must be inferred from loans of smaller dollar 
amounts and made by smaller banks. See Board of Governors of the 
Federal Reserve System, Survey of Terms of Business Lending, February 
2-6, 2009 (Mar. 17, 2009) (online at www.federalreserve.gov/releases/
E2/current/default.htm).
    \196\ Treasury noted in its Monthly Lending and Intermediation 
Snapshot for January that ``several banks include small business loans 
in their `other consumer loans' ``category.'' See U.S. Department of 
the Treasury, January Monthly Lending and Intermediation Snapshot (Mar. 
16, 2009) (online at www.ustreas.gov/press/releases/tg59.htm#_ftnref1).
    \197\ Board of Governors of the Federal Reserve System, The Beige 
Book: Current Economic Conditions by Federal Reserve District (Apr. 15, 
2009) (online at www.federalreserve.gov/fomc/beigebook/2009/20090415/
fullreport20090415.pdf).
---------------------------------------------------------------------------
    For these and other reasons, the Panel has called for more 
to be done to compile relevant data since its first 
report.\198\ Specifically, Treasury, the Federal Reserve Board, 
the SBA, or some other agency must strive to compile 
comprehensive, timely information on small business lending 
across the country. Both static and flow data should be 
collected, and these data should include the number and amount 
of small business loans (SBA and otherwise) on banks' balance 
sheets, the terms on which credit is being extended to small 
businesses, and statistics on the current default rates on 
small business loans. The data should also be compiled in a way 
that facilitates comparisons across region, types of banks, 
types of small businesses, and sizes of loans being made. 
Federal agencies also must be clear in their definition of a 
small business and small business lending for the purposes of 
this analysis.
---------------------------------------------------------------------------
    \198\ COP December Oversight Report, supra note 62, at 17.
---------------------------------------------------------------------------
    Second, in addition to data challenges, success is also 
difficult to measure because so little time has passed since 
the Administration's launch of the Small Business and Community 
Lending Initiative. While the Administration began implementing 
its programs in March to incentivize SBA lending described in 
the preceding section, initiatives to jump-start the secondary 
markets for pooled SBA loans and to allow banks to make fully 
guaranteed ``business stabilization'' loans have not yet begun.
    Further, to date, Treasury has not yet begun purchasing SBA 
loan-backed securities from banks and broker-dealers even 
though, according to Treasury documents, these purchases were 
to begin by the end of March. The most frequently cited reason 
for this delay is that the banks and broker-dealers that hold 
these securities are reluctant to sell to the government 
because of fears that they would have to submit to executive 
compensation and other requirements that accepting TARP money 
entails.\199\ One of the largest broker-dealers for SBA 7(a) 
loans commented that ``the utilization of this program will be 
hindered significantly by the requirement that participants 
selling securities also grant warrants that would enable 
Treasury to purchase common stock, preferred stock, or senior 
debt obligations.'' \200\ The broker-dealer added that ``other 
potential limiting factors include pricing of the securities to 
be purchased and the potential necessity to comply with 
executive compensation restrictions pursuant to the EESA.'' 
\201\
---------------------------------------------------------------------------
    \199\ See David Cho, Federal Plan to Aid Small Businesses is 
Flawed, Lenders Say, Washington Post (Apr. 1, 2009) (``The conditions 
attached to the program, which require these financial firms to 
surrender ownership stakes to the government and limit executive pay, 
are so off-putting that these companies say they will not 
participate''); Fix for SBA Snagged by TARP's Exec Comp Limits, 
American Banker (Apr. 14, 2009) (``Since the Treasury Department is 
funding the plan with $15 billion of Troubled Asset Relief Program 
funds, broker-dealers and other participants would have to comply with 
executive compensation limits and issue warrants to the government. As 
a result, most of the large broker-dealers have said they do not want 
to participate, according to sources. Without their participation, the 
plan would almost certainly fail, observers said, leading the Treasury 
scrambling to come up with alternatives'').
    \200\ LaPorte Commentary, supra note 183.
    \201\ Id.
---------------------------------------------------------------------------
    While it remains uncertain whether Treasury's strategy will 
succeed in jumpstarting secondary markets for securitized SBA-
backed loans, the fact that SBA-backed loans fulfill a small 
fraction of the overall capital needs of America's small 
businesses and that small business loans not guaranteed by the 
SBA are unlikely to be securitized, suggests that Treasury's 
strategy may not have any meaningful impact on small business 
lending. Indeed, small businesses rely in large part on: (1) 
types of credit that are not readily securitizable, such as 
loans from friends, family, and angel networks; or (2) credit 
which originators often choose not to sell into secondary 
credit markets, such as non-SBA guaranteed loans or portions of 
loans.
    For these reasons, although Treasury has presented its 
strategy as seeking to expand access to credit, it is unclear 
to what extent and in what direction its actions have affected 
or will affect small businesses.\202\ Moreover, policymakers 
are likely to debate whether any increase in small business 
lending moving forward is a result of government action. 
Ultimately, if current efforts to revive securitization fail to 
expand small business access to credit, the Administration 
should consider: (1) reviving SBA direct loans without going 
through bank intermediaries; and/or (2) devoting more funds 
directly to business lending rather than securitization, given 
that secondary markets may have limited impact on the financing 
of small and medium sized firms.
---------------------------------------------------------------------------
    \202\ Treasury has, however, acknowledged a decrease in commercial 
and industrial lending among TARP recipients in January and February. 
It has attributed the decrease in large part to lower demand. Treasury 
February Snapshot, supra note 64.
---------------------------------------------------------------------------

                   F. Household Lending and the TALF

    The overall household debt burden--which includes consumer 
loans and mortgages--has ballooned greatly over the past 
decade, with implications for the TALF. This growing debt 
burden will have an impact on the ability of families to both 
shoulder additional debt and service the debt already held on a 
timely basis, which will affect the risk perceived by potential 
investors targeted by TALF.
    The structural concerns raised in the preceding sections, 
even if addressed by Treasury and the Federal Reserve Board, 
may not be enough to equip TALF to revive securitization 
markets for consumer loans. Treasury and the Federal Reserve 
Board designed TALF, according to a recent White Paper on the 
program, ``to stimulate investor demand for these [asset-backed 
securities], and thereby to reduce the funding costs of the 
issuers of the loans in the eligible classes. Ultimately, the 
program should bring down the cost and increase the 
availability of new credit to consumers and businesses.'' \203\ 
While success of the TALF should not be measured solely by the 
volume of TALF-funded securitizations, the monthly rate of TALF 
subscriptions serves as a useful barometer of investor demand, 
which itself reflects evaluations made by investors of the 
risks in buying securities backed by consumer loans.
---------------------------------------------------------------------------
    \203\ The Consumer and Business Lending Initiative, supra note 181.
---------------------------------------------------------------------------
    As indicated above, to date, the FRBNY has operated three 
TALF facilities that resulted in $17 billion in loans 
supporting credit card, automobile, student loan, small 
business and equipment securitizations.\204\ (Whether the use 
of TALF funding for auto loan-backed securitizations presages a 
substantial increase in auto lending cannot yet be evaluated.) 
No TALF loans supporting student loan-backed securities took 
place in March and April, continuing a drought in student loan 
securitizations that dates to the fall of 2008. However, in the 
most recent round of TALF lending, on May 5, 2009, $2.3 billion 
was requested for securities secured by student loans, 
signaling a possible uptick in this sector.
---------------------------------------------------------------------------
    \204\ Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility Operations (online at www.newyorkfed.org/
markets/talf_operations.html).
---------------------------------------------------------------------------
    TALF may lead to improved access to lending by consumers, a 
central goal of the program, but macroeconomic conditions may 
limit the impact of this additional financing on household 
borrowing as families may continue to deleverage over the 
course of the coming months. Concerns about the economy may 
also temper investor demand for asset-backed securities. While 
TALF could increase credit availability and reduce borrowing 
costs, the burden of existing debt, reduced net worth due to 
declining home values and stock market portfolios, and the 
specter of continued job losses could limit the short-term 
impact of TALF financing on the volume of consumer lending. 
Continued job losses over the course of the year will act as a 
drag on aggregate demand and contribute to the risk of default 
in securities backed by family loans. Thus, there are 
considerable macroeconomic headwinds, as discussed in Section 
C, that could limit TALF's success at reinvigorating investor 
demand for securities backed by loans to families in the early 
months of its existence.
    The increase of TALF offerings may affect Treasury's 
efforts to loosen consumer credit markets, for securitization 
has played an increasingly significant role in consumer 
lending. Federal Reserve Board data show that in the past two 
years, approximately 25 percent of all non-mortgage consumer 
credit was funded through securitization.\205\ Since last 
year's disruption of the credit markets, new securitizations 
have effectively ceased, a change that has coincided with a 
decline in net household borrowing and increased interest 
rates. Auto loans, student loans, credit cards, and home equity 
loans made up the majority of asset-backed securities in recent 
years. Home equity loans were the largest proportion--64 
percent in 2006. Auto loans, credit cards, and student loans 
made up 10.87, 8.87 and 8.9 percent, respectively, of asset-
backed securities in 2006.\206\ One of the primary factors in 
determining the structure of the asset-backed securities is 
whether the underlying debt is revolving, such as credit cards, 
or non-revolving, such as car loans and student loans. Because 
installment loans are non-revolving, they must be paid off over 
a preset period of time and furnish more predictability.
---------------------------------------------------------------------------
    \205\ The Consumer and Business Lending Initiative, supra note 181; 
TALF White Paper, supra note 140, at 1-2.
    \206\ U.S. ABS Issuance, supra note 139.
---------------------------------------------------------------------------
    Revolving debt holds more uncertainty for investors, as 
default and delinquency rates are more sensitive to economic 
conditions. As pre-tax profits for credit card issuers more 
than tripled between 1998 and 2006,\207\ the volume of 
securitization of revolving consumer credit as measured by the 
Federal Reserve Board nearly doubled.\208\ Rising profits and 
securitization helped expand access to credit cards to an 
unprecedented number of households, which improved the short-
term liquidity of households (and made rapid growth of online 
commerce possible) but also generated fundamental pressure for 
the overleveraging of many American families.
---------------------------------------------------------------------------
    \207\ Bank Credit Card Annual Pre-Tax Profits, CardTrak.com, (Apr. 
29, 2009) (hereinafter ``Bank Credit Card Annual Pre-Tax Profits).
    \208\ G.19 Historical Data, supra note 99.
---------------------------------------------------------------------------
    The power of credit card issuers to re-price revolving 
credit card balances is a critical element in this growth. 
Nearly all credit card contracts feature a broad power to 
change the interest rates on existing balances, even if the 
customer makes all payments according to the terms of the 
contract. Estimates vary, but it appears that, as recently as 
2007, re-pricing accounted for at least $12 billion in income 
for credit card issuers,\209\ and it accounted for an estimated 
30 percent of the industry's pre-tax income in 2008, according 
to data from CardTrak.\210\ Re-pricing is also an important 
factor in both the price and the attractiveness of securities 
backed by credit card receivables because it promises 
protection from both interest rate and credit risk. Re-pricing 
as a means for managing risk is an important question for 
consideration given the heightened risk of default and 
delinquency due to the current economic downturn examined in 
section C. Whether the entire amount of re-pricing is justified 
by increased risk or is instead an action either to offset 
other losses or to boost the issuers' net profits is a matter 
about which analysts disagree.
---------------------------------------------------------------------------
    \209\ See Letter from Oliver Ireland, Partner, Morrison & Foerster, 
LLP to Jennifer Johnson, Secretary, Board of Governors of the Federal 
Reserve System, at 3 (Aug. 7, 2008) (online at files.ots.treas.gov/
comments/bdc5cc5c-1e0b-8562-eb23-ff7159e49505.pdf).
    \210\ Bank Credit Card Annual Pre-Tax Profits, supra note 207.
---------------------------------------------------------------------------
    Re-pricing also illustrates an underlying tension between 
families who owe credit card debt on the one hand, and the 
institutions and investors that benefit from securitization of 
their loans on the other. Re-pricing can be burdensome to some 
families and have a potentially crippling economic impact on 
others. According to a recent working paper by the Pew Center, 
re-pricing a credit card balance of $3,500 can cost the average 
family one-fourth of its discretionary income over the course 
of a year.\211\ The lack of transparency in the fee structure 
behind re-pricing has had a negative impact on many households 
experiencing the price shock from the imposition of penalty 
rates and fees. In the current downturn, this price shock can 
prove especially harmful to families on the brink.
---------------------------------------------------------------------------
    \211\ Letter from R. Dwayne Krumme, General Manager, Pew Credit 
Card Standards Project to Leonard Chanin, Assistant Director, Division 
of Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at Exhibit One (Oct. 3, 2008) (online at 
www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Summaries_-
_reports_and_pubs/Fed%20Submission%20for%20Web.pdf).
---------------------------------------------------------------------------
    The impact on families of increasing interest rates and 
fees raises a policy question under the EESA because the six 
major financial institutions holding 90 percent of the U.S. 
credit card business--Citigroup, Bank of America, J.P Morgan 
Chase, Capital One, Discover Card, and American Express--are 
TARP recipients that have received $123.17 billion in TARP 
aid.\212\
---------------------------------------------------------------------------
    \212\ U.S. Department of the Treasury, Transactions Report (Apr. 
22, 2009) (online at financialstability.gov/docs/transaction_reports/
transaction_report_04-22-2009.pdf).
---------------------------------------------------------------------------
    As credit card issuers raise rates and charge a growing 
range of fees while receiving taxpayer support, policymakers 
are considering whether financial institutions accepting 
government money should be subject to new limitations on their 
lending terms. An array of opinions exists on this question, 
both among Panel members and key stakeholders.
    Changes in credit card lending requirements are currently 
on the legislative agenda. On December 18, 2008, the Federal 
Reserve Board announced final rules that will protect credit 
cardholders from unfair practices such as unexpected rate 
increases, double cycle billing, universal default and high-fee 
subprime credit cards.\213\ These rules, which will also amend 
the Truth in Lending regulation by requiring disclosure of, 
among other things, how long it would take to pay off the 
balance using minimum monthly payments and running totals of 
how much customers have paid in fees and interest, are not 
scheduled to go into effect until July 1, 2010. The House has 
passed a bill that would codify the Federal Reserve Board 
regulations and put them into effect three months after the 
bill becomes law.\214\ The Senate is considering an alternative 
version of the bill, while President Obama has indicated his 
support for an accelerated adoption of the Federal Reserve 
Board rules, among other changes. These efforts at reform 
highlight the potential for an emerging consensus among leading 
policymakers on the need for new regulations on re-pricing and 
transparency.
---------------------------------------------------------------------------
    \213\ Board of Governors of the Federal Reserve System, Press 
Release (Dec. 18, 2008) (online at www.federalreserve.gov/newsevents/
press/bcreg/20081218a.htm).
    \214\ Credit Cardholders' Bill of Rights Act of 2009, H.R. 627, 
111th Cong. (2009).
---------------------------------------------------------------------------
    New regulations and reforms under review aside, there are 
several arguments for requiring TARP recipients to adhere to 
expanded consumer protection standards as a condition of public 
funding. The depth of the recession and its impact on families 
may argue for the government's utilizing every resource, 
including the authority granted to it under EESA, to provide 
enhanced protections to households during this time of crisis. 
Additionally, by accepting taxpayer funds through TARP while 
imposing higher fees and rates on the households funding the 
program, banks could be seen as shifting costs to taxpayers 
both directly through re-pricing and indirectly through the 
acceptance of billions in public funds. Credit card issuers may 
also be undermining their argument that re-pricing is risk-
based by shifting much of the risk of default and delinquency 
back to the public despite the acceptance of taxpayer funds.
    On the other hand, leveraging TARP funds to impose new 
conditions on aid would not effect change industry-wide and 
could undermine the purpose of both TARP and TALF. First, the 
imposition of additional conditions on the use of federal funds 
may deter participation in the CPP and other Treasury programs, 
while encouraging healthier TARP recipient banks to repay 
Treasury more quickly, creating the risk of further 
stigmatizing those banks that cannot. Second, imposing terms 
through the TALF may also undermine the program's goal of 
stimulating investor demand for asset-backed securities. 
Finally, imposing new conditions after the TALF has already 
been established creates additional uncertainty for prospective 
TALF investors over both the potential for the imposition of 
future conditions and the value of securities backed by credit 
card receivables. Thus, using TARP or TALF as an instrument for 
new regulations could have the effect of undermining the 
purpose of these programs, and thereby harming Treasury's 
ongoing efforts to ensure access to affordable credit for 
American families in the long term.
    Through its efforts to support consumer lending, Treasury 
is creating value. To what extent should the favorable terms of 
public assistance to financial institutions be reflected in the 
terms of loans to consumers and small businesses? The Panel 
reached no consensus on the resolution of the policy question 
at stake here, but it hopes that its discussion of the issue 
advances this important debate.

                             G. Conclusion

    Since the beginning of the credit crunch and the financial 
crisis, the government has spoken of the paramount need to 
increase lending by the nation's financial institutions. The 
availability of credit is necessary for any broad-based 
economic recovery. But reviving credit is not simple, and 
different strategies have costs as well as benefits. This 
report has focused on those issues by examining the credit 
needs of America's small businesses and families.
    A snapshot of small business credit at the beginning of 
2009 shows credit terms tightening and loan volume dropping, 
based on the limited information available. Small businesses 
also find themselves in a contradictory position: they need 
credit to operate, but the drop in demand for their products or 
services as a result of the country's economic difficulties may 
make lenders unwilling to give them that credit except on terms 
that the businesses cannot accept.
    Families are facing an even more difficult situation. They 
have entered this serious recession with few economic reserves 
and high levels of debt. When credit is available--especially 
through credit cards--interest rates are increasing both on new 
purchases and outstanding balances. Whether this increase 
reflects lenders' reasonable protection against increased rates 
of defaults and charge-offs resulting from the condition of the 
economy, efforts by banks to generate profits to replace income 
streams lost because of the financial crisis, or both, 
available credit terms may make families unwilling to borrow or 
unable to borrow under terms that free up money for purchases, 
rather than forcing them to allocate more income to servicing 
their debt and less to consumption.
    The Federal Reserve Board and Treasury have emphasized the 
securitization markets as an avenue to restore small business 
and family credit and have created the TALF to regenerate 
investor interest in those markets by making loans for the 
purchase of asset-backed securities available on favorable 
terms that shift most of the risk to the taxpayer. Despite 
favorable loan terms, the TALF is only beginning to generate 
significant demand. Some of the slow growth of demand is 
attributable to lack of demand for securitization, some to 
claimed flaws in the program's design, and some to fear of 
political risk. Under those conditions, it is difficult to 
predict at what rate the demand for TALF loans will increase. 
And it is important that any changes in the terms of the TALF 
to increase investor demand not open the door for the abuses in 
the securitization markets that helped cause the financial 
crisis in the first place.
    The TALF also illustrates the difficulties of any one 
approach to reviving credit for small businesses and families. 
The percentage of loans to small business that are securitized 
has historically been small. The securitization of credit card 
loans may provide more funds for lending, but it need not do 
so. More important, credit card lending depends on a number of 
variables--terms such as interest rates and re-pricing, the 
economic condition of families, including default rates, and 
the state of the economy--so that securitization is only one 
factor affecting the degree to which family borrowing needs can 
be met.
    TALF and the revival of the securitization markets can be a 
part of any effective strategy for restarting the credit 
markets. The securitization markets are an important part of 
the nation's financial sector, and ensuring their health 
through strong regulation is important in and of itself, and a 
necessary focus of Treasury policy. But bank lending without 
regard to the possibility of securitization is also critical, 
especially as banks restore their capital condition. Sound 
policy must assure that banks assess their credit risks without 
regard to whether loans can be securitized.
    Ultimately, then, keeping the credit markets open in a 
fair--and economically healthy--manner to small business and 
family borrowers demands a mix of policies that reflect the 
realities that borrowers face. The problem is circular: Until 
the economy improves borrowers will have a limit on the debt 
they can absorb and loan terms may tighten appropriately. The 
securitization markets can play a part in breaking that circle. 
But the TALF cannot be the primary means to stimulate credit 
for small business and family borrowing. Moreover, its shift of 
liability to the taxpayer remains an important policy issue and 
requires that the TALF operate in a carefully monitored and 
fully transparent way.
                     SECTION TWO: ADDITIONAL VIEWS


                          Rep. Jeb Hensarling

    The subject of the May report by the Congressional 
Oversight Panel for TARP was reviving lending to small 
businesses and families. Although this topic poses great 
interest for Panel members and the public at large, I remain 
concerned that this subject matter extends beyond the scope of 
TARP and the proper role of this Panel. This concern over 
potential Panel mission creep is one that I, and other Panel 
members, have discussed before and agreed that we must exercise 
proper diligence in our work to ensure that we remain faithful 
to our charge. Unfortunately, in this instance, I believe that 
the Panel did not. At a time when the SIGTARP has reported that 
it has launched almost 20 preliminary and full criminal 
investigations regarding TARP,\215\ and when there remains a 
continuing lack of transparency from the Treasury Department on 
certain TARP efforts like assistance to the domestic automobile 
manufacturers, it is more important than ever that the Panel 
focus its attention on the administration and mechanics of this 
massive program without deviation to ancillary topics.
---------------------------------------------------------------------------
    \215\ SIGTARP Quarterly Report, supra note 162, at 4.
---------------------------------------------------------------------------
    Instead, in the May report, the Panel strayed too far from 
its rightful TARP oversight role and waded into a public policy 
advocacy role on the question of placing new restrictions on 
credit providers. As Panel colleagues Richard H. Neiman and 
Senator John E. Sununu pointed out in their ``Additional View'' 
to the Panel's April report: ``First and foremost, the Panel is 
charged with evaluating the effectiveness of Treasury's use of 
the new authority granted it under the Emergency Economic 
Stabilization Act. It is not our role to design or approve 
Treasury's strategy, nor should the Panel's mission be expanded 
to encroach on that authority.'' \216\ Moreover, this 
controversial language was added at the eleventh hour after the 
lion's share of the work on the report had been completed, and 
sadly it overshadowed some otherwise laudable portions of the 
May COP report, notably the observation on page 15 that: 
``While additional lending can potentially benefit the economy 
and help restore economic growth, weak underwriting standards 
and excessive high-risk lending contributed to the current 
crisis by increasing default rates.''
---------------------------------------------------------------------------
    \216\ COP April Report, supra note 105, at 88 (additional view of 
Richard H. Neiman and John Sununu).
---------------------------------------------------------------------------
    The heart of the conflict regarding this controversial 
language in this month's report was whether or not the 
government should impose operating restrictions and 
requirements on the providers of credit (especially credit card 
issuers) who have, in some form, accepted TARP assistance and 
dictate the terms on which they can make that credit available 
to consumers. One could argue that the imposition of such 
restrictions is certainly an issue for the Treasury Department 
to consider. Likewise, it is certainly an issue for Congress to 
consider. It is not, however, an issue this Panel should 
consider because every moment we dedicate to issues unrelated 
to our charge is a moment that is spent neglecting our charge. 
By pursuing these extraneous issues, I fear now, more than 
ever, that the Panel is morphing into something more akin to a 
congressional advisory panel rather than a true oversight 
panel.
    In this month's report, the language adopted by the 
majority at the end of Section F. Household Lending and the 
TALF was purported to be neutral on the subject of whether or 
not such requirements should be added. In fact, the report even 
states that the Panel has reached no consensus on the 
resolution of the policy question regarding to what extent 
should the favorable terms of public assistance to financial 
institutions be reflected in the terms of loans to consumers 
and small businesses.
    However, such a conclusion belies the fallacious assumption 
concealed within that statement, namely that the only 
consideration is to what extent such conditionality should be 
applied, and not whether or not such conditionality is 
appropriate. In an attempt to accommodate the differing views 
of Panel members on that subject, earlier draft versions of the 
language made reference to the belief of some Panel members 
that TARP was not the place to initiate changes in lending 
policy. That language was omitted from the final version of the 
report.
    Additionally, beyond the question of whether or not 
policymakers ought to consider such restrictions, there remains 
the question that if such restrictions were added, would that 
be a good thing? Clearly, the majority of the Panel held that 
such restrictions were an inherent benefit to consumers, as 
reflected by the term ``consumer protection standards.'' 
However, such a declaration ignores the most essential question 
in that debate--would such requirements help or harm the 
consumers that TARP and TALF were ultimately designed to 
benefit? As I have suggested elsewhere, I believe the answer to 
that question is that it does not.
    From the perspective of borrowers, the evidence that I have 
seen leads me to believe that leveraging TARP funds to impose 
new conditions on lenders is likely to end up harming, not 
benefitting, consumers. Imposing price controls on the 
providers of credit is undesirable in the best of times, and 
could be particularly injurious in our weakened economy. A 
study by the Congressional Research Service has found that 
efforts to eliminate unpopular credit re-pricing practices, no 
matter how well intended, may result in making credit more 
expensive for both good and delinquent borrowers alike.\217\ 
Comparable attempts elsewhere to force lenders to adopt 
government-mandated rate limits have shown that to have 
occurred. For example, in 2006, the United Kingdom ordered 
credit card issuers to cut their default fees or face legal 
action. As a result, card issuers complied by imposing higher 
interest rates on all borrowers including those in good 
standing, instituting annual fees on accounts, and denying 
credit to scores of new applicants.
---------------------------------------------------------------------------
    \217\ Darryl E. Getter, The Credit Card Market: Recent Trends, 
Funding Cost Issues, and Repricing Practices, Congressional Research 
Service (Feb. 27, 2008).
---------------------------------------------------------------------------
    Further, in its consideration of why credit providers might 
be re-pricing their loans, the report also ignores the current 
impact that recent changes by the government to the rules 
dictating the provision of secured or open-ended credit to 
consumers might be having on the availability of credit. For 
example, on December 18, 2008, the Federal Reserve Board 
announced a set of sweeping rule changes for the credit card 
industry designed, it stated, to prohibit certain credit card 
practices. However, at the press conference announcing those 
new rules, Federal Reserve Board Governor Randall Kroszner 
admitted that while ``consumers might see some costs decline as 
new business models emerge, consumer[s] might see other costs 
increase.'' \218\ Similarly, as Vice Chairman of the Federal 
Reserve Board Dr. Donald Kohn stated in an interview on the 
Fed's new credit card rules: ``I do think there will be some 
reduction in available credit to some people.'' \219\
---------------------------------------------------------------------------
    \218\ Board of Governors of the Federal Reserve System, Statement 
by Governor Randall S. Kroszner (Dec. 18, 2008) (online at 
www.federalreserve.gov/newsevents/press/bcreg/kroszner20081218a.htm).
    \219\ Emily Flitter, Card Rules Done, Now for the Makeover, 
American Banker (Dec. 19, 2008).
---------------------------------------------------------------------------
    As I have stated in the past, the Panel has a unique role 
to play in the accountability of EESA. Time will tell whether 
or not the Panel will prove effective in that role. When I 
agreed to serve on the Panel, my top three goals were to ensure 
that the TARP program works, to ensure that decisions made are 
based on merit and not political considerations, and most 
importantly, to ensure that taxpayers are protected. Those 
goals have not changed. Thus, with those goals in mind and for 
the reasons stated above, and others, I regretfully had no 
choice but to dissent from the majority's report.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    On April 21, 2009, Secretary Geithner publically promised 
that he would establish weekly briefings given by Treasury 
staff to Panel staff on TARP activities. Since then, Treasury 
staff has provided Panel staff with an increased number of 
briefings on TARP activities. Panel staff has been in daily 
communication with Treasury staff on a number of issues. 
Treasury has also designated a liaison for Panel staff to 
direct any formal inquiries.
    On April 20, 2009,\220\ Secretary Geithner responded by 
letter to a request made by Chair Elizabeth Warren on behalf of 
the Panel \221\ regarding the American International Group, 
Inc. (AIG). The letter represented Treasury's initial response 
to the Panel's request. In its response, Treasury produced 
approximately 10,000 pages of documents to the Panel, which 
Panel staff is currently reviewing. Treasury said that its full 
and complete response to the Panel's request would be 
forthcoming. Conversations between Treasury staff and Panel 
staff regarding the request are ongoing.
---------------------------------------------------------------------------
    \220\ See Appendix II, infra.
    \221\ See Appendix IV, infra.
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                  A. Public-Private Investment Program

    On April 6, 2009, Treasury released an update to the Legacy 
Securities portion of the Public-Private Investment Program 
(PPIP) originally announced on March 23, 2009. The update 
announces only two relatively minor changes to the plan as 
described in the March 23 documents issued by Treasury, but 
clarifies some of the original provisions, describes some ways 
in which Treasury contemplates expanding the program in the 
near future, and invites suggestions for ways to improve 
specific aspects of the program.
    On April 29, 2009, Treasury announced the receipt of more 
than 100 applications from potential fund managers interested 
in participating in the Legacy Securities portion of PPIP. 
Treasury said it expects to inform applicants of their 
preliminary qualification around May 15, 2009.

     B. Capital Purchase Program (CPP) for Mutual Holding Companies

    On April 7, 2009, Treasury announced that it would expand 
the TARP to include mutual holding companies in the CPP 
program. This follows an announcement in November 2008 that 
life insurers could participate in the TARP if they had a 
federally regulated affiliate. The program is open to bank 
holding companies and savings and loan holding companies that 
are publicly traded and directly owned and controlled by a bank 
holding company or a savings and loan holding company that is 
organized in mutual form. They also must ``engage solely or 
predominantly in activities permissible for financial holding 
companies.''

                             C. Stress Test

    On Friday, April 24, 2009, the Federal Reserve Board 
released information regarding the design and implementation of 
the stress tests. This testing, called the Supervisory Capital 
Assessment Program (SCAP), is intended to evaluate the capital 
levels over the next two years of the 19 largest bank holding 
companies (BHC). Results of the testing will be released in 
early May.

          D. Term Asset-Backed Securities Loan Facility (TALF)

    The FRBNY held the first three rounds of TALF subscriptions 
as discussed in the Panel's May report. The three rounds 
occurred on March 17-19, April 7, and May 5. Since the April 
subscription, the Federal Reserve has made a handful of 
announcements clarifying and providing updates on various 
aspects of the program. On April 21, the Federal Reserve 
provided additional information with respect to the interest 
rate spreads offered on TALF loans. On April 29, the FRBNY 
clarified parts of the program and published a ten-step how-to 
guide on being a TALF investor. Finally, on May 1, the Federal 
Reserve announced that ``commercial mortgage-backed securities 
(CMBS) and securities backed by insurance premium finance 
loans'' would become eligible collateral under TALF starting in 
June.

                               E. Metrics

    The Panel's April oversight report highlighted a number of 
metrics that the Panel and others, including Treasury and the 
Financial Stability Oversight Board, consider useful in 
assessing the effectiveness of the Administration's efforts to 
restore financial stability and accomplish the goals of EESA. 
Data updates since the Panel's last report, published on April 
7, 2009, indicate that some significant movement has occurred 
in a few of the indicators in recent months.
     Credit Default Swaps. Credit default swap spreads 
for several large banking firms widened during the first 
quarter of 2009, suggesting market unease concerning the 
soundness of these institutions.\222\
---------------------------------------------------------------------------
    \222\ Financial Stability Oversight Board, Quarterly Report to 
Congress Pursuant to Section 104(g) of the Emergency Economic 
Stabilization Act of 2008, at 12 (Apr. 24, 2009) (hereinafter ``FinSOB 
April Report'').
---------------------------------------------------------------------------
     Mortgage Foreclosures/Defaults/Delinquencies. 
Foreclosure filings increased 17 percent in March, likely the 
result of the expiration of industry moratoria.\223\
---------------------------------------------------------------------------
    \223\ RealtyTrac, Foreclosure Activity Increases 9 Percent in First 
Quarter (Apr. 16, 2009) (online at www.realtytrac.com//
ContentManagement/PressRelease.aspx?channelid=9&ItemID=6180).
---------------------------------------------------------------------------
     Overall Loan Originations. Data for February 
showed a significant increase in first mortgage originations, 
reflecting refinancing activity.\224\ Loan originations for 
other consumer lending decreased by a median percentage of 47 
percent from January to February.\225\
---------------------------------------------------------------------------
    \224\ Treasury February Snapshot, supra note 64.
    \225\ Id.
---------------------------------------------------------------------------
     Commercial Paper Outstanding. This rough measure 
of short-term business debt continued to decline in April, with 
total commercial paper outstanding declining again by more than 
ten percent on a seasonally adjusted basis.\226\
---------------------------------------------------------------------------
    \226\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Commercial Paper Outstanding (online at 
www.federalreserve.gov/releases/cp/outstandings.htm) (accessed May 5, 
2009).
---------------------------------------------------------------------------
     Spreads on Overnight Commercial Paper. Reflecting 
the availability of the Federal Reserve Board's Commercial 
Paper Funding Facility, spreads on commercial paper fell to 
pre-crisis levels through the first quarter of 2009.\227\
---------------------------------------------------------------------------
    \227\ FinSOB April Report, supra note 222, at 12.
---------------------------------------------------------------------------

                          F. Financial Update

    In its April oversight report, the Panel assembled a 
summary of the resources the federal government has committed 
to economic stabilization. The following provides (1) an 
updated accounting of TARP, including a tally of dividend 
income and repayments the program has received as of May 4, 
2009, and (2) an update of the full federal resource commitment 
as of May 4, 2009.

                                1. TARP

                 a. Costs: Expenditures and Commitments

    Through an array of programs used to purchase preferred 
shares in financial institutions, offer loans to small 
businesses and auto companies, and leverage Federal Reserve 
loans for facilities designed to restart secondary 
securitization markets, Treasury has spent or committed $593.1 
billion, leaving $106.9 billion available for new programs or 
other needs.\228\ This figure is down from the $670.1 billion 
sum of the upper bounds of all Treasury commitments announced 
to date.\229\ The discrepancy results from Treasury revising 
its estimates of anticipated commitments down from the maximum 
announced program funding levels; for example, Treasury 
initially announced that it would commit $250 billion to CPP 
purchases but now only anticipates spending $218 billion.\230\
---------------------------------------------------------------------------
    \228\ March GAO Report, supra note 57, at 9. This figure accords 
with the Panel's independent accounting.
    \229\ March GAO Report, supra note 57, at 9. This figure accords 
with the Panel's independent accounting.
    \230\ March GAO Report, supra note 57, at 9. Treasury also 
anticipates spending only $55 billion in TALF funding as opposed to the 
$100 billion initially reported. Michael R. Crittenden, Treasury Seeks 
to Free Up Funds by Shuffling Spending in TARP, Wall Street Journal 
(Apr. 2, 2009) (online at online.wsj.com/article/
SB123870719693083971.html) (reporting a Treasury commitment to TALF at 
$55 billion, which would represent a reduction from the $100 billion 
Treasury initially discussed committing to an expanded TALF).
---------------------------------------------------------------------------
    Of the $593.1 that Treasury has announced it will spend, 
$376 billion has already been counted against the statutory 
$700 billion limit.\231\ This includes purchases of preferred 
stock and warrants under the CPP, TIP, SSFI Program, and AIFP 
initiatives, a $20 billion loan to TALF LLC, the special 
purpose vehicle used to guarantee Federal Reserve TALF loans, 
and the $5 billion Citigroup asset guarantee already exchanged 
for a guarantee fee composed of additional preferred stock and 
warrants.\232\ On April 24, Treasury released its sixth tranche 
report pursuant to 105(b) of EESA.\233\ According to Treasury, 
it will release its next tranche report when transactions under 
TARP reach $400 billion.
---------------------------------------------------------------------------
    \231\ EESA limits Treasury to $700 billion in purchasing authority 
outstanding at any one time as calculated by the sum of the purchases 
prices of all troubled assets held by Treasury. EESA, supra note 3, at 
115(a)-(b).
    \232\ U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report For Period Ending April 29, 2009 (May 1, 
2009) (online at www.financialstability.gov/docs/transaction-reports/
transactionReport_050109.pdf ) (hereinafter ``May 1 Transaction 
Report'').
    \233\ EESA, supra note 3, at Sec. 105(b); U.S. Department of the 
Treasury, Sixth Tranche Report to Congress (Apr. 24, 2009) (online at 
www.financialstability.gov/docs/TrancheReports/04242009-
6thTrancheReport-appendix.pdf).
---------------------------------------------------------------------------

                  i. Income: Dividends and Repayments

    Treasury estimates that it has $134.5 billion in TARP funds 
remaining for allocation.\234\ The discrepancy between this 
figure and the numbers independently determined by GAO, 
SIGTARP, and the Panel results from $25 billion in CPP 
investments that Treasury expects recipients to repay or 
liquidate.\235\ Although describing this estimate as 
``conservative,'' neither Secretary Geithner nor Treasury has 
identified the institutions who will supply these anticipated 
repayments, when they will supply these repayments, or any 
methodological basis underpinning this figure.
---------------------------------------------------------------------------
    \234\ Congressional Oversight Panel Hearing, Testimony of Secretary 
of the Treasury Timothy Geithner, (April 21, 2009) (online at 
cop.senate.gov/documents/testimony-042109-geithner.pdf).
    \235\ Id.
---------------------------------------------------------------------------
    Many institutions, including recipients of some of 
Treasury's largest investments, have indicated their desire to 
repay the funds and liquidate Treasury's stake in their 
institutions. Bank of America indicated in March that it could 
liquidate Treasury's investment immediately but for the need to 
retain higher capital ratios,\236\ and it continues to be 
optimistic about plans to repay the money next year.\237\ 
Similarly, Goldman Sachs reportedly plans an imminent stock 
sale in order to cover its own TARP repayment.\238\ The total 
amount repaid currently stands at $1.037 billion.\239\
---------------------------------------------------------------------------
    \236\ Bank of America CEO Says Could Repay TARP in '09: Report, 
Reuters (Mar. 18, 2009) (online at www.reuters.com/article/ousiv/
idUSTRE52H3OD20090318).
    \237\ David Mildenberg and Linda Shen, Bank of America Says TARP 
Repayment Tied to Economy, Bloomberg (Apr. 2, 2009) (online at 
www.bloomberg.com/apps/news?pid=20601087&sid=aXqYLI4UqNbY).
    \238\ Goldman Sachs Mulls Stock Sale to Repay TARP Money: Report, 
Reuters (Apr. 10, 2009) (online at www.reuters.com/article/topNews/
idUSTRE5390ZD20090410).
    \239\ May 1 Transaction Report, supra note 232.
---------------------------------------------------------------------------
    In addition, Treasury's investment in preferred stock 
entitles it to dividend payments from the institutions in which 
it invests, usually five percent per annum for the first five 
years and nine percent per annum thereafter.\240\ Treasury has 
not yet begun officially reporting dividend payments 
systematically on its transaction reports; in its most recent 
report, GAO criticized Treasury for this lack of 
transparency.\241\ According to SIGTARP's April Quarterly 
Report, Treasury has received $3.1 billion in dividend 
income.\242\
---------------------------------------------------------------------------
    \240\ See, e.g., U.S. Department of the Treasury, Bank of New York 
Mellon, Securities Purchase Agreement: Standard Terms, at A-1 (Oct. 28, 
2008) (Annex A).
    \241\ March GAO Report, supra note 57, at 27-28.
    \242\ SIGTARP Quarterly Report, supra note 162.
---------------------------------------------------------------------------
    AIG also owes Treasury an additional $733 million in 
dividends, but because AIG's board of directors had not 
declared a dividend as of the payment date, the institution did 
not pay.\243\ If AIG fails to pay a dividend for an additional 
three quarters, Treasury will have the right to elect at least 
two directors of the AIG board; these quarters need not be 
consecutive.\244\
---------------------------------------------------------------------------
    \243\ March GAO Report, supra note 57, at 27-28.
    \244\ U.S. Department of the Treasury, Term Sheet (Mar. 2, 2009) 
(online at www.treas.gov/press/releases/reports/
030209_aig_term_sheet.pdf) (hereinafter ``AIG Term Sheet''). The terms 
of Treasury's November investment in AIG gave it the right to 
cumulative dividends. U.S. Department of the Treasury, American 
International Group, Inc. (AIG): Fixed Rate Cumulative Perpetual 
Preferred Stock Offering (Nov. 25, 2008). AIG may exchange the 
cumulative dividend preferred stock from the November transaction for 
noncumulative dividend preferred stock upon payment of all outstanding 
dividends. AIG Term Sheet, supra note 244. It is not immediately clear 
what share of the cumulative dividend preferred stock has been 
exchanged for noncumulative dividend preferred stock in this manner.
---------------------------------------------------------------------------

                 ii. TARP Accounting as of May 4, 2009

                                 Figure 14: TARP ACCOUNTING (AS OF MAY 4, 2009)
----------------------------------------------------------------------------------------------------------------
                                                   Maximum     Announced     Purchase                  Dividend
     TARP Initiative  (Dollars in billions)        Funding      Funding       Price      Repayments     Income
----------------------------------------------------------------------------------------------------------------
Total..........................................        670.1        593.1       375.71        1.037  \245\ 3.124
CPP............................................          250          218       199.01        1.037      $2.5179
TIP............................................           40           40           40            0       0.3289
SSFI Program...................................           70           70         69.8            0      \246\ 0
AIFP...........................................         27.6         27.6         27.6            0        .2506
AGP............................................         12.5         12.5            5            0       0.0269
CAP............................................          TBD          TBD            0            0            0
TALF...........................................          100           55           20            0            0
PPIP...........................................          100          100            0            0            0
Supplier Support Program.......................            5            5            0            0            0
Unlocking Credit for Small Business............           15           15            0            0            0
Homeowner Affordability and Stability Plan.....           50           50         14.3            0           0
----------------------------------------------------------------------------------------------------------------
\245\ SIGTARP Quarterly Report, supra note 162.
\246\ Although AIG owes Treasury $733 million in dividends, they have not been paid and are not included in this
  tally.

                  2. OTHER FINANCIAL STABILITY EFFORTS

              a. Federal Reserve, FDIC, and Other Programs

    In addition to the more direct expenditures Treasury has 
undertaken through TARP, the federal government has also 
engaged in a much broader program directed at stabilizing the 
economy. Many of these programs explicitly augment Treasury 
funds, like FDIC guarantees of securitization of PPIF Legacy 
Loans or asset guarantees for Citigroup and Bank of America, or 
operate in tandem with Treasury programs, such as the 
interaction between PPIP and TALF. Other programs, like the 
Federal Reserve's extension of credit through its Sec. 13(3) 
facilities and special purpose vehicles or the FDIC's Temporary 
Liquidity Guarantee Program, stand independent of TARP and seek 
to accomplish different goals.

        b. Total Financial Stability Resources as of May 4, 2009

    In it April report, the Panel broadly classified the 
resources that the federal government has devoted to 
stabilizing the economy in a myriad of new programs and 
initiatives such as outlays, loans, and guarantees. Although 
the Panel calculated the total value of these resources at over 
$4 trillion, this would translate into the ultimate ``cost'' of 
the stabilization effort only if: (1) assets do not appreciate, 
(2) no dividends are received, no warrants are exercised, and 
no TARP funds are repaid, (3) all loans default and are written 
off, and (4) all guarantees are exercised and subsequently 
written off.
    This table accounts for changes announced between the 
release of the April report and May 4, 2009.

                  FIGURE 15: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF MAY 4, 2009)
----------------------------------------------------------------------------------------------------------------
                                                                Treasury     Federal
               Program  (Dollars in billions)                    (TARP)      Reserve        FDIC        Total
----------------------------------------------------------------------------------------------------------------
Total.......................................................          700      2,248.3      1,411.5  \249\ 4,359
                                                                                                              .8
    Outlays \247\...........................................        495.6            0         29.5        525.1
    Loans...................................................           30      1,931.3            0      1,961.3
    Guarantees \248\........................................         67.5          317        1,382      1,766.5
    Uncommitted TARP Funds..................................        106.9            0            0        106.9
AIG.........................................................           70         91.3            0        161.3
    Outlays.................................................     \250\ 70            0            0           70
    Loans...................................................            0   \251\ 91.3            0         91.3
    Guarantees..............................................            0            0            0            0
Bank of America.............................................         52.5         87.2          2.5        142.2
    Outlays.................................................     \252\ 45            0            0           45
    Loans...................................................            0            0            0            0
    Guarantees..............................................    \253\ 7.5   \254\ 87.2    \255\ 2.5         97.2
Citigroup...................................................           50        229.8           10        289.8
    Outlays.................................................     \256\ 45            0            0           45
    Loans...................................................            0            0            0            0
    Guarantees..............................................      \257\ 5  \258\ 229.8     \259\ 10        244.8
Capital Purchase Program (Other)............................          168            0            0          168
    Outlays.................................................    \260\ 168            0            0          168
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Capital Assistance Program..................................          TBD          TBD          TBD    \261\ TBD
TALF........................................................           55          495            0          550
    Outlays.................................................            0            0            0            0
    Loans...................................................            0    \263\ 495            0          495
    Guarantees..............................................     \262\ 55            0            0           55
PPIF (Loans) \264\..........................................           50            0          600          650
    Outlays.................................................           50            0            0           50
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0    \265\ 600          600
PPIF (Securities)...........................................           50            0            0           50
    Outlays.................................................     \266\ 20            0            0           20
    Loans...................................................           30            0            0           30
    Guarantees..............................................            0            0            0            0
Homeowner Affordability and Stability Plan..................           50            0            0     \268\ 50
    Outlays.................................................     \267\ 50            0            0           50
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Automotive Industry Financing Plan..........................         27.6            0            0         27.6
    Outlays.................................................   \269\ 27.6            0            0         27.6
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Auto Supplier Support Program...............................            5            0            0            5
    Outlays.................................................      \270\ 5            0            0            5
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Unlocking Credit for Small Business.........................           15            0            0           15
    Outlays.................................................     \271\ 15            0            0           15
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Temporary Liquidity Guarantee Program.......................            0            0        769.5        769.5
    Outlays.................................................            0            0            0            0
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0  \272\ 769.5        769.5
Deposit Insurance Fund......................................            0            0         29.5         29.5
    Outlays.................................................            0            0   \273\ 29.5         29.5
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Other Federal Reserve Credit Expansion Since September 1,               0        1,345            0        1,345
 2008.......................................................
    Outlays.................................................            0            0            0            0
    Loans...................................................            0  \274\ 1,345            0        1,345
    Guarantees..............................................            0            0            0            0
Uncommitted TARP Funds......................................  \275\ 106.9            0            0        106.9
    Outlays.................................................          TBA            0            0          TBA
    Loans...................................................          TBA            0            0          TBA
    Guarantees..............................................          TBA            0            0          TBA
----------------------------------------------------------------------------------------------------------------
\247\ Treasury outlays are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's anticipated
  funding levels as estimated by a variety of sources, including Treasury pronouncements, GAO estimates, and
  news reports. Anticipated funding levels are set at Treasury's discretion, have changed from initial
  announcements, and are subject to further change. The outlays concept used here is not the same as budget
  outlays, which under Section 123 of EESA are recorded on a ``credit reform'' basis.
\248\ While many of the guarantees may never be exercised or exercised only partially, the guarantee figures
  included here represent the federal government's greatest possible financial exposure.
\249\ This figure differs substantially from the $2,476-2,976 billion range of ``Total Funds Subject to SIGTARP
  Oversight'' reported during testimony before the Senate Finance Committee on March 31, 2009. Senate Committee
  on Finance, Testimony of SIGTARP Neil Barofsky, TARP Oversight: A Six Month Update, 111th Cong. (Mar. 31,
  2009) (hereinafter ``Barofsky Testimony''). It includes neither Federal Reserve credit extensions outside of
  TALF nor FDIC guarantees under the Temporary Liquidity Guarantee Program, but does go up to the full $1
  trillion maximum announced for TALF loans. SIGTARP's accounting, designed to capture only those funds
  potentially under its oversight authority, is both less and more inclusive and thus not directly comparable to
  the Panel's. Among the many differences, SIGTARP does not account for Federal Reserve Board credit extensions
  outside of TALF or FDIC guarantees under the Temporary Liquidity Guarantee Program and sets the maximum
  Federal Reserve guarantees under TALF at $1 trillion.
\250\ March GAO Report, supra note 57, at 9. This number includes a $40 billion investment made on November 25,
  2008 under the SSFI Program and a $30 billion equity capital facility announced on March 2, 2009 that AIG may
  draw down when in need of additional capital in exchange for additional preferred stock and warrants to be
  held by Treasury. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report For
  Period Ending March 31, 2009 (Apr. 2, 2009) (online at www.financialstability.gov/docs/transaction-reports/
  transaction_report_04-02-2009.pdf); AIG Term Sheet, supra note 244.
\251\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.4.1: Factors
  Affecting Reserve Balances (Apr. 30, 2009) (online at http://www.federalreserve.gov/releases/h41/Current/)
  (hereinafter ``Fed Balance Sheet April 30''). This figure, current as of April 29, 2009, includes the AIG
  credit line as well as the Maiden Lane II LLC and Maiden Lane III LLC special purpose vehicles.
\252\ May 1 Transaction Report, supra note 232. This figure includes: (1) a $15 billion investment made by
  Treasury on October 28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9, 2009
  also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16, 2009.
\253\ U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Jan. 15, 2009) (online at
  www.treas.gov/press/releases/reports/011508bofatermsheet.pdf) (granting a $118 billion pool of Bank of America
  assets a 90 percent federal guarantee of all losses over $10 billion, the first $10 billion in federal
  liability to be split 75/25 between Treasury and the FDIC and the remaining federal liability to be borne by
  the Federal Reserve).
\254\ Id.
\255\ Id.
\256\ May 1 Transaction Report, supra note 232. This figure includes: (1) a $25 billion investment made by
  Treasury under the CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under the TIP on
  December 31, 2008.
\257\ U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
  www.treasury.gov/press/releases/reports/cititermsheet_112308.pdf) (hereinafter ``Citigroup Asset Guarantee'')
  (granting a 90 percent federal guarantee on all losses over $29 billion of a $306 billion pool of Citigroup
  assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by
  FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the Treasury, U.S. Government
  Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/
  releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301 billion).
\258\ Id.
\259\ Id.
\260\ March GAO Report, supra note 57. This figure represents the $218 billion Treasury reported anticipating
  spending under the CPP to GAO, minus the $50 billion CPP investments in Citigroup ($25 billion) and Bank of
  America ($25 billion) identified above. This figure does not account for anticipated repayments or redemptions
  of CPP investments, nor does it account for dividend payments from CPP investments. Treasury originally set
  CPP funding at $250 billion and has not officially revised that estimate.
\261\ Funding levels for the CAP have not yet been announced but will likely constitute a significant portion of
  the remaining $109.6 billion of TARP funds.
\262\ March GAO Report, supra note 57; Crittenden, supra note 230. Treasury's initial commitment to TALF was $20
  billion; the increase in funding has coincided with an increase in asset classes eligible for the facility,
  including allowing legacy securities access to the facility, not just new securitizations.
\263\ This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to of the
  value of Federal Reserve loans under TALF. See Treasury Fact Sheet, supra note 1 (describing the initial $20
  billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion
  to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
  responsible for reimbursing the Federal Reserve Board for $55 billion of losses on its $550 billion in loans,
  the Federal Reserve Board's maximum potential exposure under TALF is $495 billion.
\264\ Because the PPIP funding arrangements for loans and securities differ substantially, the Panel accounts
  for them separately. Treasury has not formally announced either total program funding level or the allocation
  of funding between PPIP Legacy Loans Program and Legacy Securities Program. Treasury initially provided a $75-
  100 billion range for PPIP outlays. U.S. Department of the Treasury, Fact Sheet:  Public-Private Investment
  Program, at 2 (Mar. 23, 2009) (online at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf)
  (hereinafter ``Treasury PPIP Fact Sheet''). While SIGTARP has estimated a $75 billion Treasury commitment, we
  adopt GAO's higher estimate of $100 billion. See Barofsky Testimony, supra note 249, at 12; March GAO Report,
  supra note 57, at 9, and assume that Treasury will fund the programs equally at $50 billion.
\265\ Treasury PPIP Fact Sheet, supra note 264, at 2-3 (explaining that, for every $1 Treasury contributes in
  equity matching $1 of private contributions to public-private asset pools created under the Legacy Loans
  Program, FDIC will guarantee up to $12 of financing for the transaction to create a 6:1 debt to equity ratio).
  If Treasury ultimately allocates a lower proportion of funds to the Legacy Loans Program (i.e. less than $50
  billion), the amount of FDIC loan guarantees will be reduced proportionally.
\266\ Treasury PPIP Fact Sheet, supra note 264, at 4-5 (outlining that, for each $1 of private investment into a
  fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity to the
  investment fund; a $1 loan to the fund; and, at Treasury's discretion, an additional loan up to $1). In the
  absence of further Treasury guidance, this analysis assumes that Treasury will allocate funds for equity co-
  investments and loans at a 1:1.5 ratio, a formula that estimates that Treasury will frequently exercise its
  discretion to provide additional financing.
\267\ March GAO Report, supra note 57, at 9.
\268\ Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of
  the Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
  Homeowner Affordability and Stability Plan. See U.S. Department of the Treasury, Making Home Affordable:
  Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/
  housing_fact_sheet.pdf).
\269\ May 1 Transaction Report, supra note 232.
\270\ March GAO Report, supra note 57, at 9.
\271\ March GAO Report, supra note 57, at 9.
\272\ Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance under the Temporary Liquidity
  Guarantee  Program: Debt Issuance under Guarantee Program (Apr. 13, 2009) (online at www.fdic.gov/regulations/
  resources/TLGP/total_ issuance3-09.html). This figure represents the current maximum aggregate debt guarantees
  that could be made under the program, which, in turn, is a function of the number and size of individual
  financial institutions participating. $336.2 billion of debt subject to the guarantee has been issued to date,
  which represents about 44 percent of the current cap. Id.
\273\ This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
  failures in the third and fourth quarters of 2008. See Federal Deposit Insurance Corporation, Chief Financial
  Officer's (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2008) (online at www.fdic.gov/about/
  strategic/corporate/cfo_report_4qtr_08/income.html); Federal Deposit Insurance Corporation, Chief Financial
  Officer's (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008) (online at www.fdic.gov/about/
  strategic/corporate/cfo_report_3rdqtr_08/income.html). As of May 5, 2009, the FDIC had not yet released first
  quarter 2009 data.
\274\ This figure is derived from adding the total credit the Federal Reserve Board has extended as of April 29,
  2009 through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer
  Credit Facility (Primary Dealer and Other Broker-Dealer Credit), Central Bank Liquidity Swaps, Bear Stearns
  Assets (Maiden Lane I LLC), GSE Debt (Federal Agency Debt Securities), Mortgage Backed Securities Issued by
  GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Commercial Paper Funding
  Facility LLC. See Fed Balance Sheet April 30, supra note 251. The level of Federal Reserve lending under these
  facilities will fluctuate in response to market conditions and independent of any federal policy decisions.
\275\ Committed TARP funds listed above total $590.4 billion. $109.6 billion remains uncommitted for the $700
  billion authorization under EESA and is included in this accounting because it will almost certainly be
  allocated in the future.

                   G. Chrysler-Fiat Partnership Plan

    President Obama has brokered a plan for Chrysler L.L.C. to 
combine with the Italian-based Fiat S.p.A. to ensure Chrysler's 
continued viability. As part of the plan Chrysler has entered a 
controlled bankruptcy proceeding; to stabilize it during the 
course of that proceeding Chrysler will receive approximately 
$4.7 billion in TARP funds, with the potential for additional 
lending up to a total of $6 billion. On May 6, 2009, the 
proposed deal cleared its first hurdle as a bankruptcy judge in 
New York issued a ruling permitting Chrysler to start the 
process of selling its assets to Fiat. The plan has created a 
certain amount of controversy as it requires a re-ordering of 
preferences for Chrysler's creditors, sending secured lenders 
to wait in line behind more junior debt, which is contrary to 
standard bankruptcy practice.

                        H. May TALF Subscription

    On May 5, 2009, the FRBNY offered its third TALF 
subscription. In the two hours the facility was open, $10.6 
billion in loans were requested. More than half of the funds 
were secured by assets backed by credit card debt. Just over $4 
billion was secured by assets backed by auto loans and student 
loans, with about half (or just over $2 billion) going to each 
sector. Nearly half a billion dollars went to the equipment 
sector, and the remaining $86.6 million was secured by small 
business loan backed securities.

                       I. Repayment of TARP Funds

    Treasury is expected to publish this week the conditions 
under which TARP fund recipients may repay the money. The 
conditions are expected to include a requirement that the 
institution repaying the funds demonstrate its continued 
ability to issue debt to private investors without a guarantee 
from the Federal Deposit Insurance Corporation.
                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of EESA and formed on November 26, 2008. Since then, the Panel 
has issued five oversight reports, as well as its special 
report on regulatory reform, which was issued on January 29, 
2009.
    Since the release of the Panel's April oversight report, 
the following developments pertaining to the Panel's oversight 
of the TARP took place:
     The Panel held a hearing in Washington, DC on 
April 21, with Secretary Geithner. This was Secretary 
Geithner's first appearance before the Panel and the first 
opportunity for panelists to publicly question the Secretary on 
the various components of Treasury's Financial Stability Plan. 
The Secretary promised Panel Members that he would establish 
weekly briefings given by Treasury staff to Panel staff on TARP 
activities. The Secretary also promised that he would appear 
again before the Panel in an open public hearing format.
     The Panel held a field hearing in Milwaukee, WI on 
April 29, entitled, ``The Credit Crisis and Small Business 
Lending.'' At the hearing, the Panel heard testimony from small 
business owners and representatives from local community banks 
on the state of credit access for small business in the state 
of Wisconsin. The testimony revealed the troubling impact of 
the financial collapse and the ongoing recession on a local 
economy far from the crisis' epicenter on Wall Street. Both 
April hearings played an important role in the Panel's 
evaluation of TARP effectiveness on small business and 
household lending, as reflected in the May report.
     Secretary Geithner sent a letter on April 20, 2009 
to the Panel in response to a letter that Chair Elizabeth 
Warren sent to the Secretary on March 24, 2009 regarding 
AIG.\276\ Treasury's letter provided an update as to the 
Panel's request for information in relation to AIG. Treasury 
also provided the Panel with initial documents and information 
regarding the Panel's request. The Panel is reviewing the 
information contained in the initial set documents that were 
received.
---------------------------------------------------------------------------
    \276\ See Appendix II, infra (Geithner Letter); Appendix IV, infra 
(Warren Letter).
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     On behalf of the Panel, Chair Elizabeth Warren 
sent follow-up letters on April 16, 2009,\277\ to Federal 
Reserve Chairman Ben Bernanke and FRBNY President William 
Dudley with respect to AIG. The Panel awaits their response.
---------------------------------------------------------------------------
    \277\ See Appendix III, infra.
---------------------------------------------------------------------------
     On April 23, 2009,\278\ New York Attorney General 
Andrew Cuomo sent a letter to Chair Elizabeth Warren and others 
about the merger of Bank of America and Merrill Lynch. The 
letter asserts that Bank of America wanted to rescind the 
pending merger because Merrill's deteriorating financial 
condition was a ``material adverse change in condition.'' The 
letter states that Bank of America was strongly pressured not 
to do so by then-Treasury Secretary Paulson, and Federal 
Reserve Chairman Bernanke, and did not disclose to its 
shareholders either its concerns about Merrill or the reasons 
for continuing with the merger. The Panel is reviewing the 
information provided in the letter.
---------------------------------------------------------------------------
    \278\ See Appendix I, infra.
---------------------------------------------------------------------------

                     Upcoming Reports and Hearings

     The Panel will release its next oversight report 
in June. The report will provide an updated review of TARP 
activities and continue to assess the program's overall 
effectiveness. The report will also examine the recent stress 
tests and determine what the results indicate for TARP's stated 
objective of restoring credit to the markets.
     The Panel also plans to hold a field hearing in 
New York on May 28, 2009. The hearing will examine the state of 
our financial markets and assess the effectiveness of TARP.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided Treasury with the authority to spend $700 
billion to stabilize the U.S. economy, preserve home ownership, 
and promote economic growth. Congress created the Office of 
Financial Stabilization (OFS) within Treasury to implement a 
Troubled Asset Relief Program. At the same time, Congress 
created the Congressional Oversight Panel to ``review the 
current state of financial markets and the regulatory system.'' 
The Panel is empowered to hold hearings, review official data, 
and write reports on actions taken by Treasury and financial 
institutions and their effect on the economy. Through regular 
reports, the Panel must oversee Treasury's actions, assess the 
impact of spending to stabilize the economy, evaluate market 
transparency, ensure effective foreclosure mitigation efforts, 
and guarantee that Treasury's actions are in the best interests 
of the American people. In addition, Congress instructed the 
Panel to produce a special report on regulatory reform that 
analyzes ``the current state of the regulatory system and its 
effectiveness at overseeing the participants in the financial 
system and protecting consumers.'' The Panel issued this report 
in January 2009.
    On November 14, 2008, Senate Majority Leader Harry Reid and 
the Speaker of the House Nancy Pelosi appointed Richard H. 
Neiman, Superintendent of Banks for the State of New York, 
Damon Silvers, Associate General Counsel of the American 
Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law 
at Harvard Law School to the Panel. With the appointment on 
November 19 of Congressman Jeb Hensarling to the Panel by House 
Minority Leader John Boehner, the Panel had a quorum and met 
for the first time on November 26, 2008, electing Professor 
Warren as its chair. On December 16, 2008, Senate Minority 
Leader Mitch McConnell named Senator John E. Sununu to the 
Panel, completing the Panel's membership.
APPENDIX I: LETTER FROM NEW YORK ATTORNEY GENERAL ANDREW CUOMO TO CHAIR 
  ELIZABETH WARREN, AND OTHERS, REGARDING BANK OF AMERICA AND MERRILL 
                      LYNCH, DATED APRIL 23, 2009
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 APPENDIX II: INITIAL RESPONSE LETTER FROM SECRETARY TIMOTHY GEITHNER 
                  REGARDING AIG, DATED APRIL 20, 2009
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  APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO FEDERAL RESERVE 
 CHAIRMAN BEN BERNANKE AND FEDERAL RESERVE BANK OF NEW YORK PRESIDENT 
           WILLIAM DUDLEY REGARDING AIG, DATED APRIL 16, 2009
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 APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY 
              GEITHNER REGARDING AIG, DATED MARCH 24, 2009
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