[Federal Register Volume 69, Number 182 (Tuesday, September 21, 2004)]
[Notices]
[Pages 56472-56473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21126]


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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 
[email protected].

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 [email protected].

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