[Federal Register: September 21, 2004 (Volume 69, Number 182)]
[Notices]
[Page 56472-56473]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se04-97]
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SMALL BUSINESS ADMINISTRATION
Notice of Changes to SBA Secondary Market Program
AGENCY: U.S. Small Business Administration (``SBA'').
SUMMARY: The purpose of this notice is to provide the public with
notice of program changes in SBA's Secondary Market Loan Pooling
Program. These changes are being made to conform the timely payment
guaranty of this program to the budgetary effects of having this
program under the Federal Credit Reform Act of 1990. The changes
described in this notice will be incorporated, as needed, into the
Guaranteed Loan Pool Certificates for the 7(a) loan program (the ``Pool
Certificates''), the Secondary Market Program Guide, and all other
appropriate secondary market documents.
DATES: The changes in the Notice will apply to loan pools with an issue
date on or after October 1, 2004.
ADDRESSES: Address comments concerning this notice to James W.
Hammersley, Director, Loan Programs Division, U.S. Small Business
Administration, 8th floor, 409 3rd St. SW., Washington, DC 20416 or
james.hammersley@sba.gov.
FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Director, Loan
Programs Division, U.S. Small Business Administration, 8th floor, 409
3rd St. SW., Washington, DC 20416 or james.hammersley@sba.gov.
SUPPLEMENTARY INFORMATION: When Congress enacted the Small Business
Secondary Market Improvements Act of 1984, it authorized SBA to
guarantee the timely payment of principal and interest on trust
certificates representing an ownership interest in a pool of guaranteed
portions of loans made under SBA's section 7(a) guaranteed loan program
(``SBA 7(a) loans''). Congress anticipated that the timely payment
guarantee could be structured so that SBA would have no additional
budgetary exposure and no need for any direct taxpayer subsidy of this
cost.
SBA established the Master Reserve Fund (``MRF''), which has served
as a self-funding mechanism to cover the cost of the timely payment
guaranty. Borrower payments on the guaranteed portion of pooled SBA
7(a) loans, as well as any SBA guaranty payments on defaulted SBA 7(a)
loans, are deposited into the MRF and all payments to investors
(``Registered Holders'') are made from the MRF. Interest earned while
the payments are in the MRF is used, as needed, to make the timely
payments to the Registered Holders. In its 18 year existence, there
have always been sufficient funds in the MRF to meet SBA's timely
payment obligations.
However, SBA, in consultation with the Office of Management and
Budget, and the SBA's financial statement auditor, recently determined
that the timely payment guaranty must conform to the requirements of
the Federal Credit Reform Act of 1990 (``FCRA''), 2 U.S.C. 661 et seq.
Under FCRA, SBA is required to develop a model of MRF activity to
estimate whether there will
[[Page 56473]]
be sufficient funds in the MRF to meet the timely payment obligations
to the Registered Holders for each loan pool. This is the same process
that SBA follows every year to estimate the subsidy cost of the section
7(a) and section 504 loan programs. This subsidy model is developed
based on assumptions related to several factors, including interest
rates and prepayments over the life of the pools. SBA used the same
loan performance and economic assumptions to develop the subsidy rate
for the section 7(a) program. SBA's forecast for pools to be originated
in FY 2005 (the ``FY 2005 pools'') indicates that the interest that
will be earned in the MRF in connection with the FY 2005 pools will not
be sufficient to make all timely payments of principal and interest due
to the Registered Holders under the current program terms. Under FCRA,
SBA must address this shortfall. Therefore, SBA has decided to make
minor program changes that will allow the program to operate at no cost
to the taxpayers rather than seek authority to assess a fee. These
changes will affect how certain payments are passed through to the
Registered Holders, including the first principal payment as well as
the amounts paid to the Registered Holders after prepayments are made
in whole or in part. These changes will cause an increase in the
constant prepayment rate.
To understand the program changes, it would be helpful to first
summarize certain features of the loan pooling program. To facilitate
the formation of loan pools, SBA permits loans of differing maturities
to be put into the same pool. The Pool Certificates have the maturity
of the longest loan in the pool. Borrower payments are received based
on the amortization schedule in the borrower's note and paid out to
Registered Holders based on the amortization schedule of the Pool
Certificate. Loans with a maturity shorter than the maturity of the
pool add more money each month to the MRF than is being paid out for
that particular loan to the Registered Holders each month. When a loan
with a maturity shorter than the pool maturity is paid in full, the
excess that has accumulated in the MRF is paid to Registered Holders
over the remaining life of the pool. This process is followed for each
loan in a pool until pool maturity or until the last loan in the pool
is prepaid, if earlier. At that time, all funds owed to Registered
Holders are paid to them. Although this practice allows an excess of
funds to accumulate in the MRF in the short run (the ``amortization
excess''), it results in a long-term cost to the MRF because the
amortization excess earns interest at a lower rate than the rate that
is ultimately paid to the Registered Holders. SBA expected earnings on
other cash flows to offset this shortfall.
The following is a description of pool payment under the system
that has been in place since SBA began to issue Pool Certificates in
1985:
1. The first payment to a Registered Holder is interest only.
2. Beginning with the second payment and continuing over the life
of the pool, payments to the Registered Holder consist of principal and
interest.
3. When a loan in a pool is prepaid in full (whether through
voluntary borrower prepayment or SBA guaranty payment upon the loan's
default), the amount that is passed through to Registered Holders is
the principal and interest that was received at the time of prepayment.
Thus, if a seven year loan in a 10-year pool is prepaid in year three,
the Registered Holder receives only that borrower's prepayment. The
amortization excess that had accumulated on that loan in years one
through three remains in the MRF and is paid out in years seven through
ten or when the pool expires, whichever is earlier.
4. If a borrower makes a partial prepayment, the amount paid is
deposited in the MRF and, like the amortization excess, is paid to the
Registered Holders over the life of the pool. (In the case of the above
example, payout would be in years seven through ten or when the pool
expires if earlier.)
In order to ensure that this program can be maintained on a self
funding basis, SBA is making the following three changes to the
program: (1) The first payment to Registered Holders will now consist
of principal and interest instead of being interest only; (2) SBA will
now pass through with a prepayment in full all funds related to the
prepaid loan, including the amortization excess from the loan if it has
a shorter maturity than the pool; (3) partial prepayments made during
the life of the loan will be passed through on the next scheduled
payment date. SBA is making these changes pursuant to its authority
under section 5(g)(2) of the Small Business Act, 15 U.S.C. 634(g)(2).
Thus, effective for all pools with an issue date on or after
October 1, 2004, the following will be the procedures used to govern
payments to Registered Holders:
1. The first payment to a Registered Holder will consist of
principal and interest.
2. All subsequent payments made to the Registered Holder will also
consist of principal and interest.
3. When a loan in a pool is prepaid in full, the amount that is
passed through to Registered Holders will be the principal and interest
that was received at the time of prepayment plus any amortization
excess associated with that loan that has accumulated in the MRF. Thus,
if a seven year loan in a 10-year pool is prepaid in year three, the
prepayment will be passed through to Registered Holders along with the
amortization excess on that loan that had accumulated in the MRF. The
timing of the pass through of the prepayment funds will not change.
4. If a borrower makes a partial prepayment, the principal and
interest prepaid will be passed through to Registered Holders with the
next scheduled payment. Any amortization excess will remain in the pool
to term or expiration.
These program changes will be incorporated as necessary into the
appropriate secondary market documents. The language above will
supercede any previous description of pool payments, including that in
the SBA Secondary Market Program Guide.
It is important to note there is absolutely no question or doubt
that SBA will honor its obligation to guaranty the timely payment of
amounts owed to Registered Holders under the full faith and credit of
the United States on those pools issued prior to October 1, 2004 and
any subsequent pools. SBA has modeled the pre-FY2005 pools and, based
on current assumptions and predictions, determined that there are
sufficient funds in the MRF to meet the timely payment obligation
through 2017 for the pools originated through FY 2004. However, SBA
projects that after 2017 the MRF will be short in meeting this
obligation by about $105 million, in current dollars, or about .8% of
the total obligation. Because the program is under FCRA, this shortfall
will be covered by money advanced from the U.S. Treasury. If any
shortfall were to occur in a pool issued after October 1, 2004, it
would also be covered by funds from the U.S. Treasury, per the FCRA.
Authority: 15 U.S.C. 634(g)(2).
Dated: September 15, 2004.
Hector V. Barreto,
Administrator.
[FR Doc. 04-21126 Filed 9-20-04; 8:45 am]
BILLING CODE 8025-01-P