SBA Secondary Market changes - Warranty Period and Premiums on New Larger Loans

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Market experts gathered in Anaheim, CA this week at the annual National Association of Government Guaranteed Lenders (NAGGL) conference to discuss several issues relevant to lenders selling SBA 7(a) guaranteed loans, here is a brief summary.

Large Loan Size Likely to Achieve Lower Premiums

With the increase in the maximum loan size from $2,000,000 to $5,000,000, lenders can sell a much larger guaranteed portion. In connection with the larger loan size, new rules will soon allow SBA pool assemblers to break the larger loans into $500,000 pieces to help in the pooling process. While the larger loan size may seem like an obvious benefit, there was consensus from SBA pool assemblers that large loans will trade at lower premiums than typical loans. Poolers anticipate lower demand for pools with large loans and are limited by the rule that a loan can only be broken into $500,000 pieces, of which only one piece from each loan can be placed into a given pool. For example, a $3,000,000 guaranteed portion broken into six $500,000 portions, the pooler must create six pools. To do so, the pooler assembler must hold the loan for a longer period resulting in higher costs (in capital and risk). Restricting the size of the portion to $500,000 and one piece per pool is a primary driver for lower premiums. Solutions to increase premium were discussed including increasing the split from $500,000 to $1,500,000 - similar to what exists now on a single loan - or increasing the number of portions that can be included in a pool.

Additional concerns around the technical implementation of this new portioning capability for buyers, Colson Services (SBA's fiscal transfer agent) and the SBA were raised and still need to be worked out. Rules, regulations and programming updates need to be finalized â€“ and an early 2011 rollout of this capability for buyers is a best case scenario.

One alternative suggested to avoid the large loan, lower premium issue is to split the loan into multiple notes. Despite concern over the inconvenience and increased closing costs, some lenders are making plans in this area.

SBA Form 1086 Warranty Period Removal to Remove the Delay in Sale Treatment

As part of the new rule change, SBA is removing the 90- day warranty period from form 1086, the participation form required on SBA 7(a) loan sales. While the warranty is in effect, the seller is prevented from taking sale treatment, in accordance with FAS 166. The changed form is now under review in accordance with federal rules and an update to form 1086 is expected in the next 60-90 days. It seems unlikely that the changes will be implemented in time for sellers to enjoy sale treatment before calendar year end.