Magazine article Independent Banker

SBA Loan Pools: Learn the Basics

Magazine article Independent Banker

SBA Loan Pools: Learn the Basics

Article excerpt

More than $30 billion in Small Business Administration loan guarantees are outstanding in the secondary market. Almost half were issued during the past 10 years. With full faith and credit backing of the U.S. government, zero percent risk-based capital and floating rates tied to Prime, these loan pools can be excellent additions to community bank investment or loan portfolios.

This month's column will discuss SBA loan pools as investments, and June's column will discuss the advantages of originating SBA loans.

SOME BACKGROUND

The SBA has guaranteed loans to small business borrowers since Congress passed the Small Business Investment Act in 1958. In 1984, Congress passed the Secondary Market Improvements Act, which spawned the SBA loan-pool process.

Today, there are more than 50 licensed poolers, the largest of which is Union Planters Bank, IBAA Securities' clearing broker for SBA loans.

SBA loan pools are made up of the government-guaranteed portion of the SBA loans, the characteristics of which include the following:

* Maturities of seven, 10, 15, 20 or 25 years

* Prime plus or minus a stated spread with no cap unless stated otherwise

* Full faith and credit backing of the U.S. government

* Zero percent risk-based capital requirement

* Monthly or quarterly repricing periods

* Guaranteed remittance of monthly principal and interest by the 25th of each month

* Minimal price volatility

PREPAYMENTS

In today's market, SBA loan pool prices range from par, for Prime minus 2.5 percent pools, to premiums in excess of 110 for Prime plus 1.225 percent pools. Prepayment assumptions are the primary drivers of these prices. As prepayments increase, the higher premium pools yield less. However, the higher prepayment risk of the premium pools usually translates into higher yields for the investor willing to take the chance.

Generally, prepayment rates are driven by the age and maturity of the loans. …

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