[Federal Register Volume 64, Number 27 (Wednesday, February 10, 1999)]
[Rules and Regulations]
[Pages 6503-6510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3122]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
Business Loan Programs
AGENCY: Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA) is promulgating a
final rule to allow all participating Lenders to securitize the
unguaranteed portion of, sell, sell a participating interest in, or
pledge 7(a) loans. The rule has two components: securitizations; and
pledges, sales of participations, and sales other than for the purpose
of securitizing. In the first component, SBA establishes a three level
unified approach to regulating securitizations. In the second
component, SBA sets out rules to govern all pledges of, sales of a
participating interest in, and sales of, other than for the purpose of
securitizing, 7(a) loans. The components apply equally to all
depository and nondepository Lenders, leveling the playing field for
all SBA Lenders. Both components were drafted to protect the safety and
soundness of SBA's 7(a) loan program.
DATES: Effective Date: This rule is effective April 12, 1999.
FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Director,
Secondary Market Sales, (202) 205-6490.
SUPPLEMENTARY INFORMATION:
Background
SBA is promulgating a final rule to govern the securitization of
the unguaranteed portion of and the sale, sale of a participating
interest in, or pledge of 7(a) loans. The rule has two components. The
first component governs securitizations (``securitization component'').
For purposes of this regulation, a securitization is the pooling and
sale of the unguaranteed portion of 7(a) loans, usually to a trust or
special purpose vehicle, and the issuance of securities backed by those
loans to investors in either a private placement or a public offering
(``securitization''). In the securitizations of 7(a) loans to date,
each investor has received an undivided ownership interest in the right
to receive the principal of the unguaranteed portion of the pooled 7(a)
loans, together with interest.
The second component of this final rule governs pledges of, sales
of participating interests in, and sales of, other than for the purpose
of securitizing, 7(a) loans (``other conveyances'').
I. Securitization Component
Regulatory History
Congress and SBA have examined extensively whether and under what
conditions SBA should permit Lenders to securitize the unguaranteed
portion of 7(a) loans. Because Small Business Lending Companies
(``SBLCs''), Business and Industrial Development Companies (``BIDCOs'')
and other nondepository institutions (collectively the ``nondepository
Lenders'') do not have customer deposits to fund 7(a) lending, SBA, in
1992, permitted nondepository Lenders to securitize. Recognizing that
securitization may benefit all Lenders, in 1996, SBA and Congress
considered extending the securitization option to depository Lenders.
On September 29, 1996, Congress enacted legislation requiring SBA to
either promulgate regulations allowing both depository and
nondepository Lenders to securitize or cease approving any
securitizations.
Because securitization and, more particularly, securitization of
the unguaranteed portion of 7(a) loans is relatively new and involves
significant risk, SBA officials went to great lengths to fashion this
final rule responsibly. On November 29, 1996, SBA published the first
of a series of Federal Register notices designed to elicit public
participation in SBA's development of the securitization regulation (61
FR 60649). SBA hoped to receive comments to assist SBA to craft a
regulation allowing all Lenders to reap securitizations' benefits
without compromising the safety and soundness of the 7(a) program.
On February 26, 1997, SBA published its first proposed
securitization regulation (62 FR 8640). The proposed regulation
required all securitizations to include a 5 percent retention. SBA
received approximately 25 comments. The commenters were divided almost
equally on the proposal. Mindful of Congress' mandate to promulgate a
regulation or cease approving all securitizations, on April 2, 1997,
SBA promulgated an interim final rule (62 FR 15601) to govern
securitizations. The regulation allowed all SBA Lenders to securitize
while SBA continued its thorough review of securitization issues. Under
the interim final rule, SBA would review each proposed securitization
on a case-by-case basis for safety and soundness concerns.
Following SBA's promulgation of the proposed regulation, SBA held a
public hearing, met with banking experts, and consulted with bank
regulators from the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the Department of Treasury, the
Federal Reserve Board, the Office of Federal Housing Enterprise
Oversight, and the Office of Thrift Supervision (``bank regulators'').
SBA carefully considered the comments provided by the experts, the bank
regulators, and the industry before drafting another proposed
regulation. SBA tested the economics of the current proposal. A Big Six
accounting firm then validated all calculations.
On May 18, 1998, SBA published the current proposed securitization
regulation (63 FR 27219). It linked SBA securitization approval to a
securitizer's credit quality and incorporated incentives for
securitizers to safely securitize and service loans effectively. It
provided a three level unified regulatory approach to securitizations.
The three levels included: (1) a minimum capital requirement consistent
with that imposed by bank regulators; (2) a retention requirement in
the form of a subordinated tranche; and (3) a monitoring component
whereby a decline in a securitizer's Currency Rate (as defined in the
rule) would trigger PLP loan approval and securitization approval
suspension. The multi-faceted rule: (1) conditioned a securitizer's
ability to securitize on the securitizer's financial strength; (2) set
the required retention based on the individual securitizer's credit
quality history; and (3) invoked PLP benefits as an incentive for a
securitizer to continue underwriting and servicing loans properly. The
rule rewarded securitizers responsibly for past performance, current
performance, and future performance, measuring current performance
against past and that of the industry.
[[Page 6504]]
SBA encouraged feedback from experts, the industry, and the bank
regulators. On June 15, 1998, SBA held a public hearing to discuss the
current proposed regulation. SBA also received and reviewed
approximately 16 written comments. SBA has carefully considered the
oral and written comments, incorporating many recommendations into this
final rule.
Comments
Commenters generally applauded the current proposed securitization
rule (the ``proposed regulation''). Some stated that it ``encouraged
prudent credit quality management by Lenders'' and ``achiev[ed] the
Congressionally-mandated requirement of parity between depository and
nondepository Lenders.'' Commenters declared the proposed regulation a
substantial improvement over the February 1997 proposal, expressing
appreciation to SBA for carefully and deliberately rethinking its
earlier approach. The positive comments were accompanied by suggestions
to refine SBA's three level unified regulatory approach to
securitizations.
Capital Requirement
As stated in the proposed rule preamble, a capital requirement is a
basic component in regulating any financial institution. It is a common
method for measuring a Lender's financial strength. Requiring a
securitizer to maintain a minimum level of capital encourages prudent
underwriting and servicing practices. Credit quality is fundamental to
the maintenance of capital. Loan losses erode capital. Eroding capital
is a measure of reduced financial strength and may signal weakening
credit quality.
SBA's proposed securitization regulation required ``all
securitizers * * * [to] maintain minimum capital consistent with the
requirements imposed on depository Lenders by the bank regulatory
agencies.'' For depository institutions, SBA would consider compliance
with the capital requirements of the bank regulatory agencies as
compliance with the regulation. The proposal also required that
nondepository institutions meet the capital requirements of the bank
regulatory agencies and, in addition, maintain minimum unencumbered
paid in capital and paid in surplus of at least $1 million.
SBA received some comments recommending that SBA clarify its
proposed capital requirement. Commenters pointed out that bank capital
requirements were complex and varied among regulators. In addition,
they noted that nondepository Lenders were not familiar with the
capital requirements of bank regulatory agencies. The commenters
suggested that SBA simplify its capital requirement for nondepository
institutions in the final rule. SBA agrees.
SBA also received comments recommending that SBA increase its
proposed capital level to 10 percent of a securitizer's unguaranteed
loan assets consistent with SBA's policy of reducing risk discussed in
the proposed rule. By requiring the slightly higher minimum capital
requirement, SBA limits securitization to financially strong Lenders.
It is these Lenders that will best be able to weather a downturn in the
economy, lessening SBA's exposure to risk. Finally, commenters
requested that SBA clarify that the capital charge applies not only to
the unguaranteed portion of the securitizer's 7(a) loans in the
portfolio but also to the remaining balance outstanding in the
securitization pools. SBA also agrees with both of these
recommendations and has incorporated them into the final rule.
The final rule provides that all securitizers must be considered to
be ``well capitalized'' by their regulator. SBA will consider a
depository institution to be in compliance with this section if it
meets the definition of ``well-capitalized'' used by its bank
regulator. SBA will consider a nondepository institution to be ``well
capitalized'' and have met this requirement if it maintains a minimum
unencumbered paid in capital and paid in surplus equal to at least 10
percent of its assets, excluding the guaranteed portion of its 7(a)
loans. SBA eliminated the $1 million minimum capital requirement for
nondepository institutions contained in the proposed regulation to make
the final rule more consistent between nondepository and depository
institutions.
The Subordinated Tranche
The second level of SBA's unified approach to regulating
securitizations is risk retention in the form of a subordinated
tranche. In the final rule, a securitizer must retain a tranche of the
securities in the securitization (``subordinated tranche'') equal to
the greater of two times the securitizer's loss rate on the
securitizer's 7(a) loans disbursed for the preceding 10-year period or
2 percent of the principal balance outstanding at the time of
securitization of the unguaranteed portion of the loans in the
securitization. The Securitization Committee may modify the formula for
determining the tranche size for a securitizer creating a
securitization from a pool of loans located in a region affected by a
severe economic downturn if the Securitization Committee concludes that
enforcing this section might exacerbate the adverse economic conditions
in the region. SBA will monitor the initial retention level contained
in the final rule and, should economic conditions and policy
considerations warrant, SBA may modify the multiplier or minimum level
to protect the safety and soundness of the 7(a) program. SBA will
publish notice of any modification in the Federal Register and provide
an opportunity to comment.
Tying the required retention to a securitizer's historical
performance is fair and a common industry practice. It gives
securitizers a greater incentive to originate and service high quality
loans. The subordinated tranche would be subordinate to all other
tranches issued. SBA believes the minimum subordinated tranche is
necessary to counter the potential risks of securitizing elaborated in
the proposed rule's preamble.
Generally, commenters praised SBA's proposed tranche noting ``it
has great merit'' in that it: 1) ``ties benefits directly to
performance;'' and 2) is ``a credit enhancement tool.'' Commenters
recognized the importance of requiring an ``originating lender to
maintain an economic interest in [its] loan.'' Some praised the
subordinated tranche for offering flexibility to securitizers in their
``asset/liability management'' and as a ``fail safe'' to ``ensure that
even the top quality securitizers retain some measure of principal at
risk until the securitization matures.''
The comments SBA received addressing the details of the tranche
varied greatly. Many commenters supported the use of a loss-based
formula. Some suggested that SBA should decrease the loss multiple.
Others recommended that SBA increase required retention. SBA determined
to keep the proposed rule retention level, allowing for changes as
economic conditions and policy considerations warrant. Empirical
evidence supports the proposed rule retention level. Historical data
reveals that most securitizers' retention levels would fall between 12
and 2 percent. The average is expected to be approximately 5.4 percent.
SBA believes that this retention level is reasonable at this time. The
2 percent minimum also is reasonable at this time because it
approximates twice the cumulative loss rate of the best performing 7(a)
loan originators.
[[Page 6505]]
A few commenters suggested that SBA set retention at 2 percent of
the securitization plus any part of the securitization that does not
receive an investment grade rating. In addition, some commenters
suggested that SBA only approve a securitization if it contains no non-
investment grade securities. SBA believes that these requirements might
be too restrictive, as some securitizers have chosen to structure their
securitizations to include non-investment grade rated securities which
they may sell. As stated in the proposed rule preamble, SBA will not
rely solely on rating agencies to set retention levels.
Some commenters suggested that SBA shorten the 10-year ``look
back'' period. SBA has decided to retain the 10-year ``look back''
period because it considers the securitizer's loan performance over
several economic cycles. The 10-year ``look back'' period provides a
securitizer ample opportunity to demonstrate quality lending and
servicing without unduly penalizing the securitizer for cyclical
economic downturns.
At least one commenter recommended that SBA shorten the 6-year
holding period proposed in the rule. Conversely, other commenters
supported the 6-year holding period. The final rule includes the 6-year
holding period. SBA's historical loss data indicates that SBA Lenders
incur most losses between years three and five of a loan. If the loans
do not perform as expected, not only may the securitizer suffer losses,
but the tranche will have significantly less value if the securitizer
tries to sell it after the holding period ends. The holding period
reinforces the incentive to originate and service high quality loans.
PLP Loan Approval Suspension
In response to many comments, SBA has revised the formula
triggering PLP unilateral loan approval privilege suspension. The
proposed rule provided that ``[i]f a PLP securitizer's currency rate
declines, SBA may suspend the securitizer's PLP unilateral loan
approval privileges (PLP approval privileges) under either of the
following circumstances: 1) If the decline is more than 110 percent of
the rate of the decline of the currency rate of all loans approved
under the PLP program (PLP Program Loans) as calculated from quarter to
quarter; or 2) If the decline is more than five percentage points and
the currency rate for the PLP Program remains stable or increases. In
the event of a severe downturn in a regional economy, a securitizer's
currency rate is adversely affected, SBA may waive privilege suspension
for all securitizers in the region, if it concludes that enforcing this
section might exacerbate the adverse economic conditions in the
region.''
Many commenters stated that the 110 percent benchmark was too
sensitive and that the five-percentage point benchmark was too large.
SBA agrees. Several commenters noted that the proposed rule failed to
consider cumulative deterioration in a securitizer's Currency Rate.
Others requested that securitizers that perform better than the SBA
portfolio should not be unduly penalized. To accommodate these
concerns, SBA modified the benchmark to provide greater flexibility to
securitizers.
The final rule provides that SBA will calculate an Initial Currency
Rate (``ICR'')--the securitizer's benchmark Currency Rate as of the end
of the calendar quarter immediately prior to the first securitization
completed after SBA promulgates these regulations, and an Initial
Currency Rate Percentage (``ICRP'')--the securitizer's Initial Currency
Rate compared to that of the SBA portfolio as of the end of the
calendar quarter immediately prior to the first securitization
completed after SBA promulgates these regulations. Each quarter, SBA
will compare each securitizer's Currency Rate to its ICR. If a
securitizer's Currency Rate on all of its 7(a) loans declines, SBA may
suspend the securitizer's PLP unilateral loan approval privileges (PLP
approval privileges) if: 1) the decline from the ICR is more than the
Benchmark Number as published in the Federal Register from time to
time; and 2) the securitizer's Currency Rate Percentage is less than
its ICRP.
The Benchmark Number referred to in the rule is the maximum number
of percentage points that a securitizer's Currency Rate can decrease
without triggering the PLP suspension provision contained in 13 CFR
120.425. The flexibility contained in the final rule is consistent with
the concept proposed in 13 CFR 120.425(c)(2). SBA will publish the
Benchmark Number in the Federal Register from time to time. SBA will
monitor the Benchmark Number and, if economic conditions or policy
considerations warrant, SBA may modify it to protect the safety and
soundness of the 7(a) program.
SBA will establish a Benchmark Number of 2.5 percentage points
initially. The 2.5 percentage points Benchmark Number was proposed by
some commenters. SBA considers a 2.5 percentage point decline in
Currency Rate a significant event warranting action. Some commenters
requested that SBA clarify the ``due process'' procedures in the PLP
suspension provision. Other commenters suggested that SBA incorporate
an intermediate step before suspending PLP approval privileges. SBA
agrees with both suggestions.
The final rule provides that a securitizer will first be placed on
probation for one quarter. At the end of the probationary quarter, if:
1) the securitizer has improved its Currency Rate to above its ICR less
the Benchmark Number; or 2) its Currency Rate Percentage is either the
same or greater than its ICRP, the probation will end. If at the end of
the probationary quarter, the securitizer has not met either condition
1 or 2, SBA will suspend the securitizer's PLP approval privileges and
will not approve additional securitization requests from that
securitizer. SBA will provide written notice at least 10 days prior to
the effective date of the suspension. The suspension will last a
minimum of three months. During the suspension period, the securitizer
must use Certified Lender or Regular Procedures to process 7(a) loan
applications.
The suspension will remain in effect until the securitizer meets
either condition 1 or 2 as discussed above. If the securitizer meets
either condition by the end of the 3-month period, notifies SBA with
acceptable documentation, and SBA agrees, SBA will reinstate the
securitizer. If the securitizer cannot meet either condition, the
suspension will remain in effect and the securitizer may then petition
the SBA Securitization Committee (to be formed after SBA publishes this
rule) for reinstatement. The Securitization Committee may consider the
economic conditions in the securitizer's market area, the securitizer's
efforts to improve its Currency Rate and the quality of the
securitizer's 7(a) loan packages and servicing. This language is
intended to replace the economic waiver provision in the proposed rule.
This provision was broadened in response to comments to allow the
Securitization Committee to consider additional factors warranting
waiver. The Securitization Committee will consider only one petition by
a securitizer per quarter. SBA will calculate Currency Rate and
Currency Rate Percentages quarterly from financial information
securitizers provide using SBA Form 1502.
By incorporating an ICR into the PLP formula, the formula takes
cumulative decline into account. SBA incorporated the ICRP ``safe-
harbor'' in response to the requests that securitizers who perform
better than the SBA portfolio should not be unduly penalized. SBA
[[Page 6506]]
believes the ICRP safe-harbor is fair and consistent with the proposed
rule's provision to monitor Currency Rate in relation to the SBA
portfolio. SBA does not want to preclude a securitizer's use of PLP
approval privileges if the securitizer's and the industry's portfolios
are both declining due to general economic conditions.
[GRAPHIC] [TIFF OMITTED] TR10FE99.000
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Percent Change
-------------------------------------------------------\1\--------\2\---
Year ending:
1980........................................... 80.20
1981........................................... 77.70 2.50
1982........................................... 76.20 1.50
1983........................................... 75.50 0.70
1984........................................... 76.80 -1.30
1985........................................... 78.00 -1.20
1986........................................... 81.30 -3.30
1987........................................... 80.90 0.40
1988........................................... 83.50 -2.60
1989........................................... 84.70 -1.20
1990........................................... 86.90 -2.20
1991........................................... 86.20 0.70
1992........................................... 87.60 -1.40
1993........................................... 88.80 -1.20
1994........................................... 90.90 -2.10
1995........................................... 90.60 0.30
1996........................................... 89.40 1.20
Average Change............................... .......... 1.59
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\1\ SBA portfolio currency rate.
\2\ Value of year to year change.
Some commenters suggested that SBA adopt a numeric ``safe-harbor,''
such as a 95 percent Currency Rate. If the securitizer's Currency Rate
remained above the numeric safe harbor, the PLP suspension provision
would not be triggered. SBA chose not to select a numeric safe harbor.
Doing so might encourage good securitizers with a Currency Rate above
the safe harbor level to accept lower quality credits.
A few commenters suggested that SBA's quarterly review of Currency
Rates may be too short. After reviewing the matter, SBA reaffirmed its
decision to review Currency Rates quarterly. This third level of the
unified regulatory approach is intended to be an early warning trigger
to alert SBA and a securitizer of the securitizer's declining
performance. Ideally, SBA will be able to identify declining loan
performance before it can threaten a securitizer's entire portfolio and
financial condition. This monitoring may assist the securitizer to
improve credit practices while protecting the safety and soundness of
the 7(a) program.
Several commenters conveyed concern over SBA's ability to calculate
Currency Rates accurately. SBA, with the assistance of private sector
contractors, has overhauled its financial data management system. This
system will perform the Currency Rate calculations. Securitizers will
forward loan status data to SBA monthly. SBA will use this data to
calculate securitizers' Currency Rates. SBA will give securitizers the
opportunity to verify the calculations.
A few commenters suggested that the third level was unnecessary--
that SBA's PLP Reviews would uncover a securitizer's decline in credit
quality. PLP review and securitization Currency Rate tracking are two
separate, though complementary components, of SBA's overall Lender
oversight program. The PLP suspension provision is designed as an early
warning trigger to notify SBA and the securitizer of declining Currency
Rates and possible declining credit quality. SBA reviews all PLP
Lenders (approximately 500) annually. The PLP review is an in-depth
review geared to assess the long-term policy compliance and credit
quality of our PLP Lenders.
Finally, SBA received some requests to extend the securitization
regulation's PLP suspension provision to all PLP Lenders. At this time,
SBA declines to extend the provision. As elaborated in the proposed
rule preamble, SBA has imposed this level of protection in the
securitization regulation because securitization, in conjunction with
PLP approval privileges, magnifies risk to SBA. The PLP suspension
provision is
[[Page 6507]]
designed to serve as an incentive to securitizers to maintain or
improve their lending and sends a timely warning signal to SBA that a
securitizer's credit quality may be declining. If SBA were to extend
this to all PLP Lenders, it would require a separate rulemaking.
Additional Level
In the current proposed regulation, SBA requested comments and
suggestions for adding a fourth level to SBA's securitization
regulation. SBA envisioned that under a fourth level, SBA would monitor
a securitizer's loss rate after the securitization and assess a
supplemental payment against securitizers who experience long-term
performance declines. The fourth level would have provided securitizers
an additional incentive to maintain credit quality.
Many commenters rejected SBA's proposal for a fourth level
reasoning that the level, as discussed, could impair the securitizer,
force a compromise in servicing ability, and perhaps prevent the
securitization from receiving true sale treatment. Commenters further
opined that the market will exact sufficient penalties for deficient
portfolios. For these reasons, SBA has not added a fourth level to this
securitization regulation.
Additional Clarifications
One commenter recommended that SBA clarify its Currency Rate
definition. SBA has done so, clarifying that a securitizer's Currency
Rate is that of its entire 7(a) loan portfolio, not just PLP loans.
Using a securitizer's 7(a) loan portfolio as its Currency Rate baseline
measurement is a fair approach to monitoring a securitizer's
performance.
Two commenters suggested that SBA compute a securitizer's Loss Rate
and Currency Rate using the static curve rather than the pooling
method. SBA disagrees. SBA believes that the static curve method
introduces unnecessary complexity. SBA believes that any marginal
improvement to accuracy the static curve method may provide does not
justify the added complexity.
A few commenters requested that SBA reconsider its earlier position
to disallow securitized loan prefunding. SBA has reconsidered this
issue and will allow loans to be included in a securitization that are
closed within 90 days of the securitization.
Finally, SBA has always retained sole discretion to approve
securitizations within its regulatory framework. SBA does not intend
the regulatory framework in the final regulation to include every point
that SBA may consider in the future when evaluating a securitization
request. SBA recognizes that securitization methodologies and financial
markets are fluid. As securitization structures and financial markets
change, SBA may establish certain policies from time to time as part of
its securitization review which reflect the changes. For example, SBA
may establish a minimum Currency Rate that a securitizer must maintain
in order to securitize, SBA may require securitizers to maintain
additional capital for loans purchased from other lenders, and SBA may
establish requirements with respect to excess interest. SBA's intent in
allowing such policies to be established is to encourage securitization
for those Lenders that are financially strong and to protect the safety
and soundness of the 7(a) program.
II. Other Conveyances Component
The Other Conveyances component governs pledges and sales other
than sales for the purpose of securitizing.
Sales
This final rule requires that Lenders obtain SBA's prior written
consent for the sale of a Lender's entire interest in a loan to another
participating Lender. The final rule clarifies that SBA does not permit
sales to nonparticipating Lenders. The rule also requires that Lenders
obtain SBA's prior written consent to sales if the Lender will retain
less than 10 percent of the principal outstanding on the loan. However,
the rule requires only that Lenders provide written notice to SBA prior
to a sale after which the SBA Lender would continue to own a portion of
the unguaranteed interest equal to at least 10 percent of the
outstanding principal amount of the loan. The rules for sales of
participating interests mirror those for sales.
Pledges
This final rule also requires a Lender to obtain SBA's prior
written consent to all pledges of 7(a) loans except for certain types
of pledges enumerated in SBA's Loan Guaranty Agreement (SBA Form 750)
as amended from time to time and in 13 CFR 120.435. Except for such
enumerated pledges, the SBA Lender must use proceeds of the loan
secured by the 7(a) loans solely for the purpose of financing 7(a)
loans.
The final rule requires that a Lender be in good standing as
determined by SBA. All documentation, including the multi-party
agreement, must be satisfactory to SBA. Finally, the final rule also
requires that a Lender or a third party acceptable to SBA hold the
original promissory notes.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this final rule does not constitute a
significant rule within the meaning of Executive Order 12866, since it
is not likely to have an annual effect on the economy of $100 million
or more, result in a major increase in costs or prices, or have a
significant adverse effect on competition or the United States economy.
SBA certifies that this final rule does not have a significant
economic impact on a substantial number of small entities within the
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. This
final rule replaces SBA's Interim Final Rule published on April 2,
1997. Like the Interim Final Rule, it allows depository Lenders to
securitize loans (as nondepository Lenders have done for the last six
years). Since the publication of SBA's Interim Final Rule, only a very
small number of depository Lenders have securitized. Moreover, those
Lenders do not qualify as small under SBA's size standards. 13 CFR
121.201.
SBA certifies that this final rule does not impose any additional
reporting or recordkeeping requirements under the Paperwork Reduction
Act, 44 U.S.C. chapter 35.
For purposes of Executive Order 12612, SBA certifies that this
final rule has no federalism implications warranting preparation of a
Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this
final rule has been drafted, to the extent practicable, to accord with
the standards set forth in section 2 of that Order.
List of Subjects in 13 CFR Part 120
Loan programs--business.
For the reasons set forth above, SBA amends 13 CFR part 120 as
follows:
PART 120--[AMENDED]
1. The authority citation for part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6) and 636(a) and (h).
2. Revise the undesignated center heading immediately preceding
Sec. 120.420 to read as follows:
Participating Lender Financings
3. Revise Sec. 120.420 to read as follows:
Sec. 120.420 Definitions.
(a) 7(a) Loans--All references to 7(a) loans under this subpart
include loans
[[Page 6508]]
made under section 7(a) of the Small Business Act (15 U.S.C. 631 et
seq.) and loans made under section 502 of the Small Business Investment
Act (15 U.S.C. 661 et seq.), both of which may be securitized under
this subpart.
(b) Bank Regulatory Agencies--The bank regulatory agencies are the
Federal Deposit Insurance Corporation, the Federal Reserve Board, the
Office of the Comptroller of the Currency, and the Office of Thrift
Supervision.
(c) Benchmark Number--The maximum number of percentage points that
a securitizer's Currency Rate can decrease without triggering the PLP
suspension provision set forth in Sec. 120.425. SBA will publish the
Benchmark Number in the Federal Register.
(d) Currency Rate--A securitizer's ``Currency Rate'' is the dollar
balance of its 7(a) guaranteed loans that are less than 30 days past
due divided by the dollar balance of its portfolio of 7(a) guaranteed
loans outstanding, as calculated quarterly by SBA, excluding loans
approved in SBA's current fiscal year.
(e) Currency Rate Percentage--The relationship between the
securitizer's Currency Rate and the SBA 7(a) loan portfolio Currency
Rate as calculated by dividing the securitizer's Currency Rate by the
SBA 7(a) loan portfolio Currency Rate.
(f) Good Standing--A Lender is in ``good standing'' with SBA if it:
(1) Is in compliance with all applicable:
(i) Laws and regulations;
(ii) Policies; and
(iii) Procedures;
(2) Is in good financial condition as determined by SBA;
(3) Is not under investigation or indictment for, or has not been
convicted of, or had a judgment entered against it for a felony or
fraud, or charges relating to a breach of trust or violation of a law
or regulation protecting the integrity of business transactions or
relationships; and
(4) Does not have any officer or employee who has been under
investigation or indictment for, or has been convicted of, or had a
judgment entered against him for a felony or fraud, or charges relating
to a breach of trust or violation of a law or regulation protecting the
integrity of business transactions or relationships unless, the
Securitization Committee has determined that good standing exists
despite the existence of such person.
(g) Initial Currency Rate--The Initial Currency Rate (ICR) is the
securitizer's benchmark Currency Rate. SBA will calculate the
securitizer's ICR as of the end of the calendar quarter immediately
prior to the first securitization completed after April 12, 1999. This
calculation will include all 7(a) loans which are outstanding and were
approved in any fiscal year prior to SBA's current fiscal year. Each
quarter, SBA will compare each securitizer's Currency Rate to its ICR.
(h) Initial Currency Rate Percentage--The Initial Currency Rate
Percentage (ICRP) measures the relationship between a securitizer's
Initial Currency Rate and the SBA 7(a) loan portfolio Currency Rate at
the time of the first securitization after April 12, 1999. The ICRP is
calculated by dividing the securitizer's Currency Rate by the SBA 7(a)
loan portfolio Currency Rate. SBA will calculate the securitizer's ICRP
as of the end of the calendar quarter immediately prior to the first
securitization completed after April 12, 1999.
(i) Loss Rate--A securitizer's ``loss rate,'' as calculated by SBA,
is the aggregate principal amount of the securitizer's 7(a) loans
determined uncollectable by SBA for the most recent 10-year period,
excluding SBA's current fiscal year activity, divided by the aggregate
original principal amount of 7(a) loans disbursed by the securitizer
during that period.
(j) Nondepository Institution--A ``nondepository institution'' is a
Small Business Lending Company (``SBLC'') regulated by SBA or a
Business and Industrial Development Company (``BIDCO'') or other
nondepository institution participating in SBA's 7(a) program.
(k) Securitization--A ``securitization'' is the pooling and sale of
the unguaranteed portion of SBA guaranteed loans to a trust, special
purpose vehicle, or other mechanism, and the issuance of securities
backed by those loans to investors in either a private placement or
public offering.
4. Add Secs. 120.421 through 120.428 to read as follows:
Sec. 120.421 Which Lenders may securitize?
All SBA participating Lenders may securitize subject to SBA's
approval.
Sec. 120.422 Are all securitizations subject to this subpart?
All securitizations are subject to this subpart. Until additional
regulations are promulgated, SBA will consider securitizations
involving multiple Lenders on a case by case basis, using the
conditions in Sec. 120.425 as a starting point. SBA will consider
securitizations by affiliates as single Lender securitizations for
purposes of this subpart.
Sec. 120.423 Which 7(a) loans may a Lender securitize?
A Lender may only securitize 7(a) loans that will be fully
disbursed within 90 days of the securitization's closing date. If the
amount of a fully disbursed loan increases after a securitization
settles, the Lender must retain the increased amount.
Sec. 120.424 What are the basic conditions a Lender must meet to
securitize?
To securitize, a Lender must:
(a) Be in good standing as determined by the Associate
Administrator for Financial Assistance (AA/FA);
(b) Use a securitization structure which is satisfactory to SBA;
(c) Use documents acceptable to SBA, including SBA's model multi-
party agreement, as amended from time to time;
(d) Obtain SBA's written consent, which it may withhold in its sole
discretion, prior to executing a commitment to securitize; and
(e) Cause the original notes to be stored at the FTA, as defined in
Sec. 120.600, and other loan documents to be stored with a party
approved by SBA.
Sec. 120.425 What are the minimum elements that SBA will require
before consenting to a securitization?
A securitizer must comply with the following three conditions:
(a) Capital Requirement--All securitizers must be considered to be
``well capitalized'' by their regulator. SBA will consider a depository
institution to be in compliance with this section if it meets the
definition of ``well capitalized'' used by its bank regulator. SBA's
capital requirement does not change the requirements that banks already
meet. For nondepository institutions, SBA, as the regulator, will
consider a non-depository institution to be ``well capitalized'' if it
maintains a minimum unencumbered paid in capital and paid in surplus
equal to at least 10 percent of its assets, excluding the guaranteed
portion of 7(a) loans. Each nondepository institution must submit
annual audited financial statements demonstrating that it has met SBA's
capital requirement.
(b) Subordinated Tranche--A securitizer or its wholly owned
subsidiary must retain a tranche of the securities issued in the
securitization (subordinated tranche) equal to the greater of two times
the securitizer's Loss Rate or 2 percent of the principal balance
outstanding at the time of securitization of the unguaranteed portion
of the loans in the securitization. This tranche must be subordinate to
all other securities issued
[[Page 6509]]
in the securitization including other subordinated tranches. The
securitizer or its wholly owned subsidiary may not sell, pledge,
transfer, assign, sell participations in, or otherwise convey the
subordinated tranche during the first 6 years after the closing date of
the securitization. The securities evidencing the subordinated tranche
must bear a legend stating that the securities may not be sold until 6
years after the issue date. SBA's Securitization Committee may modify
the formula for determining the tranche size for a securitizer creating
a securitization from a pool of loans located in a region affected by a
severe economic downturn if the Securitization Committee concludes that
enforcing this section might exacerbate the adverse economic conditions
in the region. SBA will work with the securitizer to verify the
accuracy of the data used to make the Loss Rate calculation.
(c) PLP Privilege Suspension.
(1) Suspension: If a securitizer's Currency Rate declines, SBA may
suspend the securitizer's PLP unilateral loan approval privileges (PLP
approval privileges) if the decline from the securitizer's ICR is more
than the Benchmark Number as published in the Federal Register from
time to time and the securitizer's Currency Rate Percentage is less
than its ICRP. The securitizer will first be placed on probation for
one quarter. If, at the end of the probationary quarter the securitizer
has not met either of the following conditions in paragraph (c)(1)(i)
or (c)(1)(ii) of this section, SBA will suspend the securitizer's PLP
approval privileges and will not approve additional securitization
requests from that securitizer. SBA will provide written notice at
least 10 days prior to the effective date of suspension. The suspension
will last a minimum of 3 months. During the suspension period, the
securitizer must use Certified Lender or Regular Procedures to process
7(a) loan applications. The prohibition will end if, at the end of the
probationary quarter: (i) the securitizer has improved its Currency
Rate to above its ICR less the Benchmark Number; or (ii) its Currency
Rate Percentage is either the same or greater than its ICRP.
(2) Reinstatement: The suspension will remain in effect until the
securitizer meets either the condition in paragraph (c)(1)(i) or
(c)(1)(ii) of this section. If the securitizer meets either condition
by the end of the 3-month period, notifies SBA with acceptable
documentation, and SBA agrees, SBA will reinstate the securitizer. If
the securitizer cannot meet either condition, the suspension will
remain in effect. The securitizer may then petition the SBA
Securitization Committee (Committee) for reinstatement. The Committee
will review the reinstatement petition and determine if the
securitizer's PLP approval privilege and securitization status should
be reinstated. The Committee may consider the economic conditions in
the securitizer's market area, the securitizer's efforts to improve its
Currency Rate, and the quality of the securitizer's 7(a) loan packages
and servicing. The Committee will consider only one petition by a
securitizer per quarter.
(3) The Benchmark Number. SBA will monitor the Benchmark Number. If
economic conditions or policy considerations warrant, SBA may modify
the Benchmark Number to protect the safety and soundness of the 7(a)
program.
(4) Data. SBA will calculate Currency Rate and Currency Rate
Percentages quarterly from financial information that securitizers
provide. SBA will work with a securitizer to verify the accuracy of the
data used to make the Currency Rate calculation.
Sec. 120.426 What action will SBA take if a securitizer transfers the
subordinated tranche prior to the termination of the holding period?
If a securitizer transfers the subordinated tranche prior to the
termination of the holding period, SBA will suspend immediately the
securitizer's ability to make new 7(a) loans. The securitizer will have
30 calendar days to submit an explanation to SBA's Securitization
Committee (``Committee''). The Committee will have 30 calendar days to
review the explanation and determine whether to lift the suspension. If
an explanation is not received within 30 calendar days or the
explanation is not satisfactory to the Committee, SBA may transfer the
servicing of the applicable securitized loans, including the
securitizers' servicing fee on the guaranteed and unguaranteed portions
and the premium protection fee on the guaranteed portion, to another
SBA participating Lender.
Sec. 120.427 Will SBA approve a securitization application from a
capital impaired Securitizer?
If a securitizer does not maintain the level of capital required by
this subpart, SBA will not approve a securitization application from
that securitizer.
Sec. 120.428 What happens to a securitizer's other PLP
responsibilities if SBA suspends its PLP approval privilege?
The securitizer must continue to service and liquidate loans
according to its PLP Supplemental Agreement.
5. Redesignate current section 120.430 as section 120.414.
6. Revise the undesignated center heading immediately preceding
newly designated Sec. 120.414 to read MISCELLANEOUS PROVISIONS.
7. Redesignate current section 120.431 as section 120.415.
8. Add a new undesignated center heading and Secs. 120.430 through
120.435 to read as follows:
Other Conveyances
Sec. 120.430 What conveyances are covered by Secs. 120.430 through
120.435?
Sections 120.430 through 120.435 cover all other transactions in
which a Lender sells, sells a participating interest in, or pledges an
SBA guaranteed loan other than for the purpose of securitizing and
other than conveyances covered under Subpart F, Secondary Market, of
this part.
Sec. 120.431 Which Lenders may sell, sell participations in, or pledge
7(a) loans?
All Lenders may sell, sell participations in, or pledge 7(a) loans
in accordance with this subpart.
Sec. 120.432 Under what circumstances does this subpart permit sales
of, or sales of participating interests in, 7(a) loans?
(a) A Lender may sell all of its interest in a 7(a) loan to another
Lender operating under a current Loan Guarantee Agreement (SBA Form
750) (``participating Lender''), with SBA's prior written consent,
which SBA may withhold in its sole discretion. A Lender may not sell
any of its interest in a 7(a) loan to a nonparticipating Lender. The
purchasing Lender must take possession of the promissory note and other
loan documents, and service the sold 7(a) loan. The purchasing Lender
purchases the loan subject to SBA's existing rights including its right
to deny liability on its guarantee as provided in Sec. 120.524. After
purchase, the purchased loan will be subject to the purchasing Lender's
Loan Guarantee Agreement.
(b) A Lender may sell, or sell a participating interest in, a part
of a 7(a) loan to another participating Lender. If the Lender retains
ownership of a part of the unguaranteed portion of the loan equal to at
least 10 percent of the outstanding principal balance of the loan, the
Lender must give SBA prior written notice of the transaction, and the
Lender must continue to hold the note and service the loan. If a Lender
retains ownership of a part of the unguaranteed portion of the loan
equal to less than 10 percent of the outstanding principal balance of
the loan, the Lender must obtain SBA's prior written consent to the
transaction,
[[Page 6510]]
which consent SBA may withhold in its sole discretion. The Lender must
continue to hold the note and other loan documents, and service the
loan unless SBA otherwise agrees in its sole discretion.
(c) For purposes of determining the percentage of ownership a
Lender has retained, SBA will not consider a Lender to be the owner of
the part of a loan in which it has sold a participating interest.
Sec. 120.433 What are SBA's other requirements for sales and sales of
participating interests?
SBA requires the following:
(a) The Lender must be in good standing as determined by the AA/FA;
and
(b) In transactions requiring SBA's consent, all documentation must
be satisfactory to SBA, including, if SBA determines it to be
necessary, a multi-party agreement.
Sec. 120.434 What are SBA's requirements for loan pledges?
(a) Except as set forth in Sec. 120.435, SBA must give its prior
written consent to all pledges of any portion of a 7(a) loan, which
consent SBA may withhold in its sole discretion;
(b) The Lender must be in good standing as determined by the AA/FA;
(c) All loan documents must be satisfactory to SBA and must include
a multi-party agreement among SBA, Lender, the pledgee, FTA and such
other parties as SBA determines are necessary;
(d) The Lender must use the proceeds of the loan secured by the
7(a) loans only for financing 7(a) loans and for costs and expenses
directly connected with the borrowing for which the loans are pledged;
(e) The Lender must remain the servicer of the loans and retain
possession of all loan documents other than the original promissory
notes;
(f) The Lender must deposit the original promissory notes at the
FTA; and
(g) The Lender must retain an economic interest in and the ultimate
risk of loss on the unguaranteed portion of the loans.
Sec. 120.435 Which loan pledges do not require notice to or consent by
SBA?
Notwithstanding the provisions of Sec. 120.434(d), 7(a) loans may
be pledged for the following purposes without notice to or consent by
SBA:
(a) Treasury tax and loan accounts;
(b) The deposit of public funds;
(c) Uninvested trust funds;
(d) Discount borrowings at a Federal Reserve Bank; or
(e) Advances by a Federal Home Loan Bank.
9. In Sec. 120.453 revise paragraphs (a) and (b) and remove
paragraph (c) to read as follows:
Sec. 120.453 What are the requirements of a PLP Lender in servicing
and liquidating SBA guaranteed loans?
* * * * *
(a) Take any action that confers a Preference on the Lender; and
(b) Accept a compromise settlement without prior written SBA
consent.
Dated: December 31, 1998.
Aida Alvarez,
Administrator.
[FR Doc. 99-3122 Filed 2-5-99; 9:29 am]
BILLING CODE 8025-01-P
