SBA proposes new regs in 7(a) secondary market

The U.S. Small Business Administration has proposed a new regulatory structure linking sales of the unguaranteed portions of SBA-backed loans to the credit quality of lenders' SBA loan portfolios, according to a press release from the SBA.

The proposal is an effort to improve the safety and soundness of its securitization program.

Under proposed rules published in the Federal Register for public comment May 18, SBA would require each lender that pools and sells the unguaranteed portion of SBA-backed 7(a) general business loans to retain a percentage of the loans' value equal to twice the lender's historical loan-loss rate.

The rule would apply to regulated commercial banks, as well as to non-depository lenders that make SBA loans.

"The SBA is taking steps that will help create and sustain a viable secondary market for small business loans," said Aida Alvarez, SBA administrator, in the release.

"These steps will improve liquidity for SBA lenders, and increase the loan capital available to small businesses. The requirements of protecting the interests of taxpayers, ensuring the safety and soundness of the loan programs, and turning the SBA into a 21st century leading-edge financial institution demand this approach," Alvarez added.

She also said the proposed rule "strikes a prudent balance between the desire of lenders to participate profitably in the sale of SBA loans and the need for the SBA to maintain consistent and acceptable credit standards in making and servicing new loans."

Under SBA's 7(a) general business loan program, SBA partially guarantees repayment of loans made to small businesses, sharing the risk of default with private sector lenders. SBA guarantees up to 80 percent of the loan, with the lender accepting the risks of the remaining unguaranteed portion.

The secondary market in SBA-backed loans in which pooled loans are securitized and sold to investors who wish to profit from the income stream produced by loan repayments was created to increase the attractiveness of small-business lending.

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