[Federal Register Volume 75, Number 53 (Friday, March 19, 2010)]
[Notices]
[Pages 13329-13330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-6101]
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SMALL BUSINESS ADMINISTRATION
[Docket No. SBA-2010-0005]
Implications of Financial Accounting System (FAS) 166 on SBA
Guaranteed Loan Programs
AGENCY: Small Business Administration.
ACTION: Notice; request for comments.
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SUMMARY: The Small Business Administration (SBA) is soliciting
information and views from the public on: (1) The effect that the
accounting changes mandated by the Financial Accounting Standards Board
(FASB) in Financial Accounting Standard (FAS) 166 have on SBA Lender
and investor participation in the SBA 7(a) loan program and the SBA
Secondary Market Program; and (2) the need to modify the structure of
the 7(a) loan program and/or the SBA Secondary Market program as well
as related guidelines and governing documents as a result of FAS 166.
DATES: Comments must be received on or before April 19, 2010.
ADDRESSES: You may submit comments, identified by docket number SBA-
2010-0005 by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail, Hand Delivery/Courier: James W. Hammersley, Acting
Assistant Administrator for Policy and Strategic Planning, Office of
the Administrator, Small Business Administration, 409 Third Street,
SW., Washington, DC 20416.
SBA will post all comments on http://www.regulations.gov. If you
wish to submit confidential business information (CBI) as defined in
the User Notice at http://www.regulations.gov, please submit the
information to James W. Hammersley, Acting Assistant Administrator for
Policy and Strategic Planning, Office of the Administrator, Small
Business Administration, 409 Third Street, SW., Washington, DC 20416 or
send an e-mail to [email protected]. Highlight the information
that you consider to be CBI and explain why you believe SBA should hold
this information as confidential. SBA will review the information and
make the final determination as to whether the information will be
published.
FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Acting Assistant
Administrator for Policy and Strategic Planning, Office of the
Administrator, (202) 205-7505; [email protected].
SUPPLEMENTARY INFORMATION: Under SBA's 7(a) business loan program,
private sector lenders (SBA Lenders) make loans to small businesses
(7(a) loans) that do not qualify for conventional credit. The SBA
guaranty provides the credit enhancement necessary for the SBA Lender
to make the 7(a) loan. Through the SBA Secondary Market described in 13
CFR 120.601, SBA Lenders sell the guaranteed portion of 7(a) loans
(guaranteed portions) to investors and use the funds to make additional
loans. The Secondary Market is a major source of liquidity for many SBA
Lenders. SBA estimates that SBA Lenders sell the guaranteed portion of
almost 50% of the 7(a) loans they make.
The Secondary Market for 7(a) loans developed in the early 1970s
when SBA Lenders began to sell guaranteed portions to other lenders.
SBA realized the importance of a stable and reliable liquidity option
and took steps to formalize and expand the market for the sale of
guaranteed portions, including providing a full faith and credit
guaranty for the investors in the mid 1970s. Throughout the 1970s and
early 1980s the market continued to grow as more lenders used the funds
from Secondary Market sales to make additional loans. In 1984, in
recognition of the value of the Secondary Market, Congress added a
pooling option that included a timely payment guaranty by SBA. The
pooling option allowed small business loans to be purchased by an even
greater number of investors. The Secondary Market was clearly one of
the drivers in the growth of the 7(a) loan program from $2 billion per
year of loan originations in the early 1980s to almost $15 billion of
loan originations per year prior to the recent economic crisis.
Historically, there has been strong demand for Secondary Market
certificates backed by the guaranteed portion of 7(a) loans. Due to
this strong demand, SBA Lenders are able to sell the guaranteed portion
at a premium and/or retain an income stream in excess of the servicing
fee that must be retained. Many lenders prefer to retain a significant
ongoing cash flow rather than to receive a premium at the time of sale.
This ongoing cash flow provides a steady flow of income that is not
based on current loan production.
On May 17, 1994, SBA modified the agreement signed by the lender,
investor, and SBA at the time of sale (SBA Form 1086, Secondary
Participation Guaranty Agreement--referred to below as the Form 1086
available at http://www.sba.gov/tools/forms/index.html) to include a
requirement that the selling lender
[[Page 13330]]
would have to return any premium received under certain conditions.
These conditions are: (1) If the borrower prepays the loan for any
reason during the first 90 days after the settlement of the Secondary
Market sale; or (2) if the borrower fails to make when due, the first
three monthly payments within the month after the Secondary Market sale
and the borrower enters uncured default within 275 days after the
settlement date of the Secondary Market sale. This warranty provision,
added to the Form 1086, helped to encourage investor participation in
the Secondary Market by extending investment protection beyond the
principal amount of the guaranteed portion to the premium paid by the
investor.
It is SBA's understanding that under new FASB guidelines for the
accounting treatment of a Secondary Market sale, as detailed in FAS
166, a lender may not treat any premium received as income until the
expiration of the warranty period. In addition, if the lender sells the
loan and retains cash flow in excess of the minimum servicing fee, the
transaction is considered a borrowing and the lender must continue to
retain capital to support it. As a result, the lender would have to
hold more capital because the original loan would still be on the books
along with the new borrowing.
In light of the foregoing, SBA is soliciting views from the public
on the effect of FAS 166 on SBA Lender and investor participation in
the SBA 7(a) loan program and the SBA Secondary Market Program. In
addition, SBA is soliciting views from the public on the need to modify
the structure of the 7(a) loan program and/or the SBA Secondary Market
program. Commenters are encouraged to submit suggestions that could
minimize any adverse impact of FAS 166 on the 7(a) loan program and/or
SBA Secondary Market participants.
SBA has received several unsolicited suggestions on how to address
this issue. Some of the suggestions may require regulatory changes;
others may require form or contractual changes. SBA has not taken a
position on any of these proposals. SBA is seeking additional
suggestions and ideas on how to address the ramifications of FAS 166 on
the 7(a) loan program and the SBA Secondary Market Program, as well as
comments on the specific proposals received to date, which are as
follows:
1. Eliminate the warranty period from the Form 1086 and the SBA
Secondary Market Program. Under this proposal, SBA would modify the
Form 1086 to remove the warranty language. The warranty provision
afforded investors some protection against early prepayment and may
have discouraged lenders from selling guaranteed portions of loans they
knew were susceptible to early default. However, after the warranty
language was implemented, Congress added a subsidy recoupment fee
(prepayment penalty) for borrowers, which may have reduced the need for
the warranty provision. The subsidy recoupment fee is charged to the
borrower if it prepays a loan in the first three years of the life of
the loan. Secondary Market sales tend to occur in the first year of the
life of the loan. Thus, borrowers have a financial incentive not to
prepay early in the life of the loan that did not exist when the
warranty language was originally added to the Form 1086. It is also
possible that SBA's establishment of the Office of Credit Risk
Management (OCRM) has reduced the need for the warranty provision as
OCRM monitors lender activity and has the ability to scrutinize
prepayment activity, including a pattern of early prepayments.
2. Permit or Require SBA Secondary Market Broker Dealers to provide
the warranty to their customers. If SBA were to permit or require
broker dealers to provide the warranty protection, the selling lender
would no longer be in the position of having to return any funds
received from a secondary market sale. SBA understands that many broker
dealers are currently holding many loans in excess of ninety (90) days
while they create pools, so many loans may actually be in the broker
dealer's inventory during the warranty period. While this change would
result in a liability for the broker dealers, the broker dealer may be
in a good position to know which lender's loans tend to prepay or
default during the warranty period. This option would require
modification of the Form 1086 by SBA.
3. Permit a private sector insurance fund to repay investors when a
premium is lost during the 90 day warranty period. Under this proposal,
lenders would pay a portion of the premium received into an insurance
fund that would be run by an entity not related to SBA or to SBA
participating lenders. If a borrower prepays or defaults, the investor
would file a claim with the insurance fund. SBA's role in the
implementation of such an option would consist only of removing the
warranty language from the Form 1086; the fund would be established and
run by a private sector entity.
4. Make the warranty period optional. Under this proposal, SBA
would modify the Form 1086 and related documents to allow the buyers
and sellers to decide whether they wanted a warranty included in the
terms of the agreement for a particular sale. Commenters are requested
to provide suggestions on how warranty information for a particular
sale could be communicated to potential purchasers under this proposal
as such purchasers would need to know in advance whether a particular
certificate included a warranty. Implementing this change would require
modifications to both the Form 1086 and SBA's contract with its Fiscal
and Transfer Agent.
Commenters are encouraged to submit other suggestions or actions
that could minimize any adverse impact of FAS 166 on the 7(a) loan
program and/or SBA Secondary Market participants. SBA is also seeking
comments on whether the existing warranty should be left in place as it
is currently structured.
Authority: 15 U.S.C. 634(b)(7)
Dated: March 5, 2010.
Eric R. Zarnikow,
Associate Administrator of Capital Access.
[FR Doc. 2010-6101 Filed 3-18-10; 8:45 am]
BILLING CODE 8025-01-P