2017-15180. Notice of Changes to SBA Secondary Market Program

AGENCY:

U.S. Small Business Administration (“SBA”).

SUMMARY:

The purpose of this Notice is to provide the public with notification of program changes to SBA's Secondary Market Loan Pooling Program. The changes described in this Notice are being made to ensure that there are sufficient funds to cover the estimated cost of the timely payment guaranty for newly formed SBA 7(a) loan pools. The changes in this Notice will be incorporated, as needed, into the SBA Secondary Market Program Guide, and all other appropriate SBA Secondary Market documents.

DATES:

The changes in this Notice will apply to SBA 7(a) loan pools with an issue date on or after October 1, 2017.

ADDRESSES:

Address comments concerning this Notice to John M. Wade, Chief Secondary Market Division, U.S. Small Business Administration, 409 3rd Street SW., Washington, DC 20416, or [e-mail].

FOR FURTHER INFORMATION CONTACT:

John M. Wade, Chief, Secondary Market Division, U.S. Small Business Administration, 409 3rd Street SW., Washington, DC 20416, or [e-mail].

SUPPLEMENTARY INFORMATION:

The Secondary Market Improvements Act of 1984 authorized SBA to guaranty the timely payment of principal and interest on Pool Certificates. A Pool Certificate represents a fractional undivided interest in a “Pool,” which is an aggregation of SBA guaranteed portions of loans made by SBA Lenders under section 7(a) of the Small Business Act, 15 U.S.C. 636(a). In order to support the timely payment guaranty requirement, SBA established the Master Reserve Fund (“MRF”), which serves as a mechanism to cover the cost of SBA's timely payment guaranty. Borrower payments on the guaranteed portions of pooled loans, as well as SBA guaranty payments on defaulted pooled loans, are deposited into the MRF. Funds are held in the MRF until distributions are made to investors (“Registered Holders”) of Pool Certificates. The interest earned on the borrower payments and the SBA guaranty payments deposited into the MRF supports the timely payments made to Registered Holders.

To facilitate the formation of SBA loan Pools and to enhance the marketability of the SBA Secondary Market (as defined in 13 CFR 120.601), SBA allows loans with different maturity dates to be placed in the same Pool. From time to time, SBA provides instruction to SBA Pool Assemblers on the required loan and pool characteristics necessary to form a Pool. These characteristics include, among other things, the minimum number of guaranteed portions of loans required to form a Pool, the allowable difference between the highest and lowest gross and net note rates of the guaranteed portions of loans in a Pool, and the minimum maturity ratio of the guaranteed portions of loans in a Pool. The minimum maturity ratio is equal to the ratio of the shortest and the longest remaining term to maturity of the guaranteed portions of loans in a Pool.

In November of 2008, SBA published changes to the regulations governing SBA's Secondary Market to allow SBA Pool Assemblers to form and initiate the sale of Weighted Average Coupon (WAC) Pools. See 73 FR 67099, November 13, 2008. A WAC Pool is a Pool where the interest rate payable to the Registered Holder is equal to the Dollar-Weighted Average Net Rate of the Pool (as defined in 13 CFR 120.600(l)). All other Pools formed by SBA Pool Assemblers are considered Standard Pools. The minimum maturity ratio for Standard Pools and WAC Pools is currently 80% and 76%, respectively. The minimum maturity ratio for Standard Pools was last adjusted by SBA in 2005. The minimum maturity ratio for WAC Pools was established by SBA in 2008 and has remained unchanged.

Based on SBA's expectations as to future Pool performance, SBA has determined that, in order to lower the costs associated with SBA's Secondary Market Loan Pooling Program, it is necessary to increase the minimum maturity ratio—in other words, to reduce the difference between the shortest and the longest remaining term of the guaranteed portions of loans in a Pool. A higher minimum maturity ratio will decrease the difference between the amortization rates of the guaranteed portions of loans in a Pool. This will cause the cash flows from the guaranteed portions of loans in the Pool to be more homogenous, and will more closely match the amortization rate of the Pool Certificate. This is an important driver in reducing the cost of SBA's timely payment guaranty on Pool Certificates.

Therefore, effective October 1, 2017, all guaranteed portions of loans in a Pool presented for settlement with SBA's Fiscal Transfer Agent will be required to have a minimum maturity ratio of at least 94% for Standard Pools and WAC Pools. SBA has monitored Pools formed over the last 6 months, and has observed that many existing Pools have a minimum maturity ratio of at least 94%.

SBA will continue to monitor loan and pool characteristics and will provide notification of additional changes as necessary. It is important to note that there is no change to SBA's obligation to honor its guaranty of the amounts owed to Registered Holders of Pool Certificates and that such guaranty continues to be backed by the full faith and credit of the United States.

This program change will be incorporated as necessary into SBA's Secondary Market documents. As indicated above, this change will be effective for Pools with an issue date on or after October 1, 2017, and will modify any previous description or guidance regarding the minimum maturity ratio for Standard Pools or WAC Pools. SBA is making this change pursuant to Section 5(g)(2) of the Small Business Act, 15 U.S.C. 634 (g)(2).

Authority: 15 U.S.C. 634 (g)(2).

William M. Manger

Associate Administrator Office of Capital Access.