Fed extends consumer-loan plan since credit remains tight

WASHINGTON — With banks limiting the availability of auto, student and other consumer loans, the Federal Reserve said Monday it would extend a program intended to help spur more lending at low rates.

The program is set up to provide up to $1 trillion in low-cost financing to investors to buy securities backed by consumer and commercial loans. But private economists said the program, Term Asset-Backed Securities Loan Facility, or TALF, has so far provided little benefit for consumers and businesses still struggling to get credit.

The program, originally set to expire at the end of the year, has two parts.

The part aimed at boosting consumer and business lending is being extended through March. The part geared toward boosting new commercial real-estate lending will run through June, because of the extra time typically needed to complete such deals. Delinquency rates on such loans have soared as companies have downsized or closed their doors, the Fed has said.

TALF was created in March, part of the efforts by the Fed and the Obama administration to ease credit, stabilize the financial system and fight the recession. Under the program, the Fed allows for low-rate financing for investors to buy securities backed by credit-card debt, auto loans, student loans and loans to small businesses. The market for such loans essentially froze up last fall with the eruption of the worst financial crisis since the Great Depression.

The program has the potential to generate up to $1 trillion in lending, according to the government. But participation has been scant: As of Aug. 12, the value of loans outstanding stood at just $29.6 billion.

Many economists said the market for securities backed by consumer and business loans has improved only slightly with TALF. Still, they say the Fed should continue the effort.

"Asset-backed securities are a key way for investors to supply credit to U.S. households and businesses, and that method was essentially shut down when the financial crisis hit last year," said Mark Zandi, chief economist at Moody's Economy.com. "If we can't get the credit markets restarted, the economy won't be able to recover."

Zandi said the Fed could extend TALF further next year. Still, he and other economists said the severity of the recession continues to weigh on lending. The downturn has led banks to tighten lending standards to guard against further losses. The recession also has depressed consumer spending and business expansion, further dampening loan demand.