SBA Fixed Interest Rate Loans are an Important Product to have at the Ready

By BoeFly Member: Lance Roth, Cohen & Company Securities, LLC (lroth@cohenandcompany.com)

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SBA Lenders who sell their loans are achieving record high premium income by selling variable priced loans. Although increasingly, savvy borrowers are asking about fixed rate loans as concern grows about the prospect of rising interest rates. In the interest of keeping a client happy - and away from a competitor down the road - banks should have a fixed rate loan option in their product mix.

The SBA allows lenders to set a fixed rate (the current maximum allowed for loans greater than $50,000 is set to 8.99%), and although the lender will typically not capture premium income comparable to what is earned on variable loans, buyers do pay significant premiums for these loans and servicing fees.

A recent BoeFly poll of SBA pool assemblers indicated that a newly originated $500,000 loan fixed for 25 years at 9.23% (max rate for May) will earn a premium of 7-9% in addition to 1% servicing. This is approximately 3-5% of premium back from a similar structured variable rate loan. The SBA pool assemblers purchase the majority of SBA Guarantees on the market today. A pool assembler will typically buy a loan with the intention of adding it to a pool of similar loans, soon thereafter, and create a security to sell to an end investor. The requirement that loans have similar structures is one reason why fixed rate loans have lower premiums - there is not a steady supply of this product on the market. If a pool assembler can not readily add the loan to a pool they must either inventory the loan until a pool can be formed or sell the loan to an investor without constructing a pool, which can depress the value. And of course - the premium is also impacted by the ultimate demand from end-investors.

The benefits of keeping a client, earning premium and servicing income, and a healthy interest rate on the unsold portion supports the idea that SBA loans with a fixed rate are an important product to have at the ready. As lenders who sell consider including this option in their product mix, it is always important to understand the expected loan sale premium and ultimate profitability of a fixed rate loan.

Below is a description of how the SBA sets the maximum allowable fixed rate, as published in SBA Information Notice 5000-1128:

The current (June 2010) maximum allowable fixed rate on a 7(a) loan greater than $50,000 is 8.99%

The Fixed Base Rate for a 7(a) guaranteed loan (other than SBA Express and Export Express) is calculated as follows:

The SBA LIBOR Base Rate (defined in 13 CFR 120.214 as the 1-month LIBOR in effect on the first business day of the month as printed in a national financial newspaper each business day PLUS 300 basis points), plus
The average of the 5-year and 10-year LIBOR swap rates in effect on the first business day of the month as printed in a national financial newspaper published each business day.

Thus, the maximum allowable fixed rate for 7(a) loans (other than SBA Express and Export Express) will be the Fixed Base Rate plus the allowable interest rate spreads identified in 13 CFR 120.214 (d) and (e) and 13 CFR 120.215. (For SBA Express and Export Express loans, the maximum allowable interest rate is the prime rate plus 6.5 or 4.5, depending on the loan amount. See SOP 50 10 5(B), Subpart B, Chapter 3. SOP 50 10 5(B) may be found at http://www.sba.gov/aboutsba/sbaprograms/elending/reg/index.html.)

The following is an example of the calculation for 7(a) loans (other than SBA Express and Export Express) submitted to SBA in September 2009 if the new process had been in place:

The SBA LIBOR Base Rate for September was 3.26.
The 5-year LIBOR swap rate on the first business day of September as published in a national financial newspaper was 2.72 (rounded to the second decimal). The 10-year LIBOR swap rate on the first business day of September as published in a national financial newspaper was 3.60 (rounded to the second decimal). The average of these two rates is 3.16.

The SBA Fixed Base Rate for September 2009 would have been 6.42 [3.26 (SBA LIBOR Base Rate) + 3.16 (average of 5-year and 10-year LIBOR swap rates)].

Thus, the maximum allowable fixed rates for September would have been:

For 7(a) loans with a maturity less than 7 years: 6.42 (SBA Fixed Base Rate for September) + 2.25 (maximum spread for loans with a maturity less than 7 years) equals 8.67 (maximum allowable fixed rate). If the loan amount is over $25,000 but not exceeding $50,000, the maximum fixed rate may be increased by one percentage point. If the loan amount is $25,000 or less, the maximum fixed rate may be increased by two percentage points.

For 7(a) loans with a maturity of 7 years or more: 6.42 (SBA Fixed Base Rate for September) + 2.75 (maximum spread for loans with a maturity of 7 years or more) equals 9.17 (maximum allowable fixed rate). If the loan amount is over $25,000 but not exceeding $50,000, the maximum fixed rate may be increased by one percentage point. If the loan amount is $25,000 or less, the maximum fixed rate may be increased by two percentage points.

The maximum allowable fixed rates will be calculated by SBA monthly and posted at www.sba.gov/aboutsba/sbaprograms/elending as well as at www.colsonservices.com.

The mechanism to calculate the maximum allowable fixed rates identified in this Notice will be used to develop the maximum rates for 7(a) applications (other than SBA Express and Export Express) received by SBA on or after October 1, 2009. A new rate will be calculated monthly and put on the web site on the second business day of the month.

Questions on the maximum allowable fixed rates may be directed to the Lender Relations Specialist in the local SBA district office. The local SBA district office may be found at www.sba.gov/localresources.