[Federal Register Volume 73, Number 220 (Thursday, November 13, 2008)]
[Rules and Regulations]
[Pages 67099-67102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26999]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 73, No. 220 / Thursday, November 13, 2008 /
Rules and Regulations
[[Page 67099]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AF83
Business Loan Program Regulations: Incorporation of London
Interbank Offered Rate (LIBOR) Base Rate and Secondary Market Pool
Interest Rate Changes
AGENCY: Small Business Administration (SBA).
ACTION: Interim final rule.
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SUMMARY: To address extraordinary market conditions limiting credit
availability for small businesses, SBA is issuing an interim final rule
to make adjustments on an emergency basis to certain of its regulations
in order to make the secondary market for loans guaranteed under
section 7(a) of the Small Business Act (7(a) loans) more efficient with
regard to loan pricing and the formation of secondary market loan
pools. Specifically, the interim final rule will permanently add an
additional base rate of LIBOR for lenders to use when pricing 7(a)
loans, and will allow for secondary market loan pools to be formed with
weighted average coupon rates. This interim final rule is necessary to
help ensure continued availability of capital to small businesses and
to improve liquidity in and efficiency of the secondary market.
DATES: This rule is effective November 13, 2008. Comments on the
interim final rule must be received on or before December 15, 2008.
ADDRESSES: You may submit comments, identified by RIN number 3245-AF83
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Grady Hedgespeth, Director, Office of Financial
Assistance, U.S. Small Business Administration, 409 3rd Street, SW.,
8th Floor, Washington, DC 20416.
Hand Delivery/Courier: Grady Hedgespeth, Director, Office
of Financial Assistance, U.S. Small Business Administration, 409 3rd
Street, SW., 8th Floor, Washington, DC 20416.
All comments will be posted on http://www.Regulations.gov. If you wish
to include within your comment, confidential business information (CBI)
as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you
must submit the comment by either Mail or Hand Delivery and you must
address the comment to the attention of Grady Hedgespeth, Director,
Office of Financial Assistance. In the submission, you must highlight
the information that you consider is CBI and explain why you believe
this information should be held confidential. SBA will make a final
determination, in its discretion, of whether the information is CBI
and, therefore, will not be published.
FOR FURTHER INFORMATION CONTACT: Grady Hedgespeth, Director, Office of
Financial Assistance, 202-205-7562, or [email protected].
SUPPLEMENTARY INFORMATION:
I. Background Information
In October 2008, the President's Working Group on Financial Markets
announced that the U.S. government would deploy all of its tools in a
strategic and collaborative manner to address the current instability
in the financial markets and mitigate the risks that instability poses
for broader economic growth. Subsequently, the U.S. Treasury
Department, the Federal Deposit Insurance Corporation, and the Federal
Reserve announced actions to help protect the U.S. economy, to
strengthen public confidence in our financial institutions, and to
foster the robust functioning of our credit markets.
The U.S. Small Business Administration is issuing this Interim
Final Rule to address the impact of the current economic situation on
the Agency's lending partners and the small businesses that participate
in the Agency's lending programs. The Agency is issuing these
regulations with the goals of helping to ensure continued access to
capital by America's small businesses and increasing the liquidity in
the market for SBA-backed secondary market securities.
Under SBA's 7(a) loan guaranty program, borrowers are able to
obtain partially guaranteed loans from banks, small business lending
companies, credit unions, and other participating financial
institutions. In order to make new loans, our lending partners must
have the tools they need to be able to afford to deliver capital to
small businesses. In recent months, SBA's programs have been impacted
by the broader credit market disruptions. Many SBA lenders are having
immediate liquidity and profitability challenges, causing small
businesses to be less able to access new sources of credit. This
problem has led to sharp declines in SBA guaranteed lending to small
businesses and severely limited activity in buying and selling SBA
loans and loan pools by secondary market investors.
For many SBA lenders, the cost of funds or internally allocated
cost of funds is based partially or entirely on the London Interbank
Offered Rate (LIBOR). Under SBA regulations, however, the interest rate
on 7(a) loans is typically based on the Prime rate. Historically, there
has been an approximate 300 basis point spread between short-term LIBOR
rates and the Prime rate. In recent weeks, however, this spread has
sharply declined and on some days LIBOR exceeded the Prime rate. The
declining Prime and rising LIBOR rates have largely eliminated profit
margins for SBA lending institutions that borrow funds at LIBOR rates
and lend at Prime rates. Under these circumstances, these lenders are
reducing the number of 7(a) loans they will make.
Additionally, lenders who participate in secondary market
activities are impacted by the mismatch between Prime and LIBOR rates
again when trying to sell loans to investors. Usually, over 40% of SBA
loan guarantee dollars are sold into the secondary market, which
provides a critical source of liquidity for SBA lenders, particularly
non-depository lenders. Investors willing to buy SBA loans in the
secondary market also frequently use LIBOR rates to make investment
decisions. The mismatch between the Prime and LIBOR rates may be a
limiting factor and, with the current turmoil, may limit the number of
[[Page 67100]]
investors willing to buy SBA loans in the secondary market. This
secondary market situation reduces the demand for SBA guaranteed loans
which results in lower secondary market prices and a severe lack of
liquidity for lenders that typically sell their loans in the secondary
market.
Due to the change in the relationship between LIBOR and Prime, many
lenders today do not have access to funds at a cost that justifies
originating new 7(a) loans. At the same time, under current conditions,
SBA guaranteed loans cannot easily or quickly be converted to cash in
the secondary market. Consequently, some lenders are facing an
immediate liquidity crisis and will not be able to make loans or
continue their SBA business lending without immediate action. For small
businesses, this means the capital needed to start, maintain or expand
operations will be more difficult to obtain.
For these reasons, SBA is proposing two regulatory changes to
address problems that are impeding lending partners from originating
new 7(a) loans at this time. SBA believes that adjustments to certain
interest rates set out in SBA regulations for SBA guaranteed loans can
help solve short and long run problems impeding small businesses from
having access to capital through SBA's guaranteed loan program. These
interest rate adjustments include: allowing the interest rate on 7(a)
loans to be based on a LIBOR rate and allowing SBA pool assemblers to
create Weighted Average Coupon (WAC) pools under SBA's Secondary Market
Guarantee Program. These changes will help small businesses over the
short term to manage through the current economic situation by
facilitating a continued flow of capital and over the long term by
structuring SBA's guaranteed loan program to include current market
indices making it more attractive for lenders and secondary market
investors to participate. SBA currently collects data on rates set for
individual 7(a) loans. SBA will monitor the LIBOR rates offered to
borrowers and compare them with Prime rates until the base rates
stabilize.
Specific changes included in this interim final rule are as
follows:
(1) Including the London Interbank Offered Rate (LIBOR) as an
additional base interest rate by changing 13 CFR 120.214(c) to allow
lenders to price 7(a) loans based on a spread over the 30 day LIBOR in
addition to the currently allowable Prime rate and Optional Peg rate.
(2) Allowing Weighted Average Coupon (WAC) Pools by changing the
regulations governing the allowable interest rate on a pool. SBA policy
guidance is being revised to outline procedures and guidelines for
these WAC pools.
II. Section by Section Analysis
Section 120.214. This regulation is being revised to permit SBA
lenders the flexibility to price 7(a) loans using the thirty-day (1-
month) LIBOR plus 300 basis points as a base rate. Specifically,
Section 120.214(c) is being amended to include the thirty-day (1-month)
LIBOR rate plus 300 basis points as a base rate, in addition to the
existing base rates which are the Prime rate and the SBA Optional Peg
rate. For many SBA lenders, costs of funds or internal costs of funds
are partially or entirely tied to LIBOR and they use this rate as a
standard index for borrowing and lending. However, they are only
permitted to lend at Prime rates or the Optional Peg Rate for 7(a)
loans. This mismatch between funding and lending rates has become
particularly acute in the current economic environment where LIBOR has
increased while Prime has remained constant or declined--effectively
making the cost of funding a loan higher and dramatically reducing or
eliminating the profitability of making a loan. This imbalance is
limiting small businesses' access to capital and the financing needed
to sustain and grow their businesses.
In the short term, allowing LIBOR index flexibility will encourage
lenders to continue to participate in or re-enter the SBA market. In
the long term, allowing this option keeps SBA lending aligned with
current market practices by expanding into a broader range of resources
from the global financial marketplace, where LIBOR is a standard
interest rate base. Historically, Prime and LIBOR rate shifts have
moved correspondingly, with LIBOR approximately 300 basis points below
Prime rates. Accordingly, the LIBOR base rate for 7(a) loans is being
established as the thirty-day (1-month) LIBOR index plus 300 basis
points in order to roughly equate Prime and LIBOR rates. The thirty-day
(1-month) LIBOR index was selected as it historically most closely
tracks Prime rates in terms of its movements and variability. SBA
currently collects data on rates set for individual 7(a) loans. SBA
will monitor the LIBOR rates offered to borrowers and compare them with
Prime rates until the base rates stabilize. In addition, maximum
interest rate spreads over the base rates will remain in place,
ensuring borrowers receive reasonable rates that are largely driven by
market competition.
Sections 120.600, 120.610(e) and Section 120.611(a). The specific
changes to these sections are described in more detail below. The
overall reason for the changes to these sections is to allow weighted
average coupon (WAC) pools. SBA loans are usually sold in the secondary
market by grouping them into pools. Currently, the interest rate on the
pool is the lowest net rate of all of the loans in a given pool. WAC
pools will allow loans with approximately the same net rates to be
grouped together, and the interest rate on the pool will be the
weighted average of the net rates of the loans in the pool. WAC pools
will be easier for pool assemblers to create than traditional pools by
providing additional flexibility in grouping loans into pools for sale.
This flexibility will help expand the secondary market by permitting
pool assemblers to create more products for investors.
Section 120.600. Section 120.600 is being amended to include the
definitions of dollar-weighted average net rate and weighted average
coupon (WAC) pool. These definitions are needed for clarity as part of
incorporating WAC pools into the secondary market.
Section 120.610(e). This section of the regulations is being
amended to allow a different interest rate for WAC pool certificates.
The current regulation requires that the interest rate on a pool
certificate must be equal to the lowest individual interest rate of the
loans in the pool. The change will add a dollar-weighted average net
rate of all the loans in the pool.
Section 120.611(a). This section of the regulations is being
amended to add a new paragraph (7) to allow for a maximum allowable
difference in the net rates on the loans in WAC pools. Specifically,
paragraph (7) includes the requirement for WAC Pools to have a maximum
allowable difference between the highest and lowest Net Rate on the
guaranteed portions that are placed in the pool. A technical amendment
is also being made to paragraphs (5) and (6) of this section to delete
and re-insert the word ``and.''
III. Justification for Publication as Interim Final Rule
In general, SBA publishes a rule for public comment before issuing
a final rule, in accordance with the Administrative Procedure Act (APA)
and SBA regulations. 5 U.S.C. 553 and 13 CFR 101.108. Section
553(b)(3)(B) of the APA provides an exception to this standard
rulemaking process, however, where an agency finds good cause to adopt
a rule without prior public participation. The good cause
[[Page 67101]]
requirement is satisfied when prior public participation is
impracticable, unnecessary, or contrary to the public interest. Under
such circumstances, an agency may publish an interim final rule without
soliciting public comment.
In enacting the good cause exception to standard rulemaking
procedures, Congress recognized that emergency situations arise where
an agency must issue a rule without public participation. The current
turmoil in the financial markets is having a negative impact on the
availability of financing for small businesses in two ways. The current
increased cost of funds banks are facing, coupled with established rate
limits for 7(a) loans, is causing costs for originating such loans to
become higher, creating a situation where SBA program participation is
not in a lender's financial interest. At the same time, many SBA
lenders sell loans on the secondary market in order to manage their
liquidity. SBA's current regulations governing base interest rates SBA
lenders can charge on their SBA guaranteed loans are resulting in loans
being originated at interest rates that do not make it economical to
sell them on the secondary market. Without secondary market sales, many
lenders are not able to fund loans. The net effect is that lenders are
less and less willing to extend credit to small business borrowers at a
time when it is critically needed.
Further, the secondary market for 7(a) loans is experiencing
disruptions due to the current economic environment. SBA believes that
the introduction of an additional base rate and the allowance of
weighted average coupon pools will assist in enabling lenders to
continue flows of capital to small businesses and stabilizing the
secondary market. Because of the extraordinary situation in the credit
markets severely limiting the availability of financing for small
businesses, there is an urgent need to make the changes immediately to
ensure continued access to capital for small businesses. Small
businesses are responsible for approximately two-thirds of all new job
creation and are essential to a stable economy.
Accordingly, SBA finds that good cause exists to publish this rule
as an interim final rule in light of the urgent need. Advance
solicitation of comments for this rulemaking would be impracticable and
contrary to the public interest, as it would harm those small
businesses that need immediate access to capital. Any such delay would
be extremely prejudicial to the affected businesses.
Although this rule is being published as an interim final rule,
comments are hereby solicited from interested members of the public.
These comments must be received on or before December 15, 2008. SBA may
then consider these comments in making any necessary revisions to these
regulations.
IV. Justification for Immediate Effective Date of Interim Final Rule
The Administrative Procedure Act requires that ``publication or
service of a substantive rule shall be made not less than 30 days
before its effective date, except as otherwise provided by the agency
for good cause found and published with the rule.'' 5 U.S.C. 553(d)(3).
SBA finds that good cause exists to make this final rule effective the
same day it is published in the Federal Register.
The purpose of the APA provision is to provide interested and
affected members of the public sufficient time to adjust their behavior
before the rule takes effect. For the reasons set forth above in the
section on Justification for Publication as Interim Final Rule, SBA
finds that good cause exists for making this interim final rule
effective immediately, instead of observing the 30-day period between
publication and effective date. SBA believes that many entities--SBA
lenders and small businesses alike--will be assisted by the immediate
adoption of this rule and that no delay in effective date is necessary
for the public to adjust its behavior. The changes adopted in this rule
extend additional choices and options to lenders and small businesses;
however, current program options and practices remain available.
V. Comments Request
SBA requests comments on all aspects of this interim final rule,
including the underlying policies.
Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork
Reduction Act (44 U.S.C., Ch. 35) and the Regulatory Flexibility Act (5
U.S.C. 601-612)
Executive Order 12866: The Office of Management and Budget (OMB)
has determined that this rule constitutes a significant regulatory
action under Executive Order 12866.
Executive Order 12988: For the purposes of Executive Order 12988,
Civil Justice Reform, SBA has determined that this rule is crafted, to
the extent practicable, in accordance with the standards set forth in
Sec. Sec. 3(a) and 3(b)(2), to minimize litigation, eliminate
ambiguity, and reduce burden.
Executive Order 13132: For the purposes of Executive Order 13132,
the SBA determined that this rule has no federalism implications
warranting preparation of a federalism assessment.
Paperwork Reduction Act: SBA certifies that this interim final rule
does not impose any additional reporting or recordkeeping requirements
under the Paperwork Reduction Act, 44 U.S.C. Chapter 35.
Regulatory Flexibility Act: Because the rule is an interim final
rule, there is no requirement for SBA to prepare an Initial Regulatory
Flexibility Act (IRFA) analysis. The Regulatory Flexibility Act (RFA),
5 U.S.C. 601, requires administrative agencies to consider the effect
of their actions on small entities, small non-profit businesses, and
small local governments. Pursuant to the RFA, when an agency issues a
rule, the agency must prepare an IRFA which describes whether the
impact of the rule will have a significant economic impact on a
substantial number of small entities. However, the RFA requires
analysis of a rule only where notice and comment rulemaking are
required. Rules are exempt from Administrative Procedure Act (APA)
notice and comment requirements and therefore from the RFA requirements
when the agency for good cause finds that notice and public procedure
thereon is impracticable, unnecessary, or contrary to the public
interest. In this case it would be contrary to the public interest to
delay the promulgation of the rule.
List of Subjects in 13 CFR Part 120
Loan programs--business, Small businesses.
0
For the reasons set forth above, SBA amends 13 CFR part 120 as follows:
PART 120--BUSINESS LOANS
0
1. The authority citation for part 120 continues to read as follows:
Authority: 15 U.S.C. 634(b)(6), 634(b)(7), 634(b)(14),
633(b)(3), 636(a) and (h), 650, and 696(3) and 697(a)(2).
0
2. Amend Sec. 120.214 by revising paragraph (c) to read as follows:
Sec. 120.214 What conditions apply for variable interest rates?
* * * * *
(c) Base rate. The base rate will be one of the following: ( i) The
prime rate; (ii) the thirty-day (1-month) London Interbank Offered Rate
(LIBOR) plus 3 percentage points, or (iii) the Optional Peg Rate. The
prime or LIBOR rate will be that which is in effect on the first
business day of the month, as printed in a national financial newspaper
published each business day. SBA
[[Page 67102]]
publishes the Optional Peg Rate quarterly in the Federal Register.
* * * * *
0
3. In Sec. 120.600 redesignate paragraphs (c) through (j) as
paragraphs (d) through (k) and add new paragraphs (c) and (l) to read
as follows:
Sec. 120.600 Definitions.
* * * * *
(c) Dollar-Weighted Average Net Rate of a Pool is calculated by
multiplying the interest rate of each loan in the Pool by the ratio of
that loan's current outstanding guaranteed principal to the current
outstanding guaranteed principal of all loans in the Pool, and adding
the sum of the resulting products. The Dollar-Weighted Average Net Rate
of a Pool will fluctuate over the life of the Pool as loan defaults,
prepayments and normal loan repayments occur.
* * * * *
(l) Weighted Average Coupon (WAC) Pool is a Pool where the interest
rate payable to the investor is equal to the Dollar-Weighted Average
Net Rate of the Pool.
0
4. Amend Sec. 120.610 by revising paragraph (e) as follows:
Sec. 120.610 Form and terms of Certificates.
* * * * *
(e) Interest rate on Pool Certificate. The interest rate on a Pool
Certificate will be either the lowest Net Rate of any individual
guaranteed portion of a loan in the Pool or the Dollar-Weighted Average
Net Rate of the Pool.
0
5. Amend Sec. 120.611 by revising paragraphs (a)(5) and (6) and adding
new paragraph (a)(7) as follows:
Sec. 120.611 Pools backing Pool Certificates.
(a) * * *
(5) A maximum allowable difference between the remaining terms to
maturity of the loans in the Pool;
(6) A minimum weighted average maturity at Pool formation; and
(7) A maximum allowable difference between the highest and lowest
Net Rate on the guaranteed portions that are placed in a WAC Pool.
* * * * *
Sandy K. Baruah,
Acting Administrator.
[FR Doc. E8-26999 Filed 11-7-08; 4:15 pm]
BILLING CODE 8025-01-P