[Federal Register Volume 70, Number 143 (Wednesday, July 27, 2005)]
[Notices]
[Page 43497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14753]



[[Page 43497]]

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SMALL BUSINESS ADMINISTRATION


Notice of Change to SBA Secondary Market Program

SUMMARY: The purpose of this notice is to inform the public of a 
program change in SBA's Secondary Market Loan Pooling Program. This 
change is being made to permit the SBA Loan Pooling Program to continue 
to operate at a zero subsidy. The change described in this notice will 
be incorporated, as needed, into the Secondary Market Program Guide, 
and all other appropriate secondary market documents.

DATES: The change in the notice will apply to loan pools with an issue 
date on or after October 1, 2005.

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, telephone 202-205-7505 or e-mail at 
[email protected].

SUPPLEMENTARY INFORMATION: When Congress enacted the Small Business 
Secondary Market Improvements Act of 1984, it authorized SBA to 
guaranty the timely payment of principal and interest on pool 
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 
guaranty 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 portions 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 borrower and guaranty payments are in the MRF is used, as needed, 
to make the timely payments to the Registered Holders.
    Under the Federal Credit Reform Act of 1990 (``FCRA''), 2 U.S.C. 
661 et seq., SBA was required to develop a model of Secondary Market 
activity to estimate whether there will be sufficient funds in the MRF 
to meet the timely payment obligations to the Registered Holders of 
pool certificates. 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. The subsidy model was developed based on assumptions related 
to several factors, including interest rates and prepayments over the 
lives of the pools.
    Last year, SBA's forecast for pools expected to be originated in FY 
2005 (the ``FY 2005 pools'') indicated that the interest that would be 
earned in the MRF in connection with those pools would not be 
sufficient to make all timely payments of principal and interest due to 
the Registered Holders. Consequently, effective October 1, 2004, SBA 
published in the Federal Register three minor changes to the Secondary 
Market Loan Pooling Program. See 69 FR 56472, September 21, 2004.
    SBA's current forecast for pools to be originated in FY 2006 (the 
``FY 2006 pools'') indicates that the interest that will be earned in 
the MRF in connection with the FY 2006 pools will not be sufficient to 
make all timely payments of principal and interest due to the 
Registered Holders under the current program terms implemented on 
October 1, 2004. Under FCRA, SBA must address this shortfall. Without 
statutory authority to charge a fee for this purpose, SBA must address 
the shortfall by making an administrative change to the requirements 
for a loan pool that will allow the program to operate at no cost to 
the taxpayers. The change being adopted will reduce the maximum 
variation in the remaining term to maturity between loans in the same 
pool.
    To understand this program change, it would be helpful to first 
summarize certain features of the loan pooling program. To facilitate 
the formation of loan pools, SBA permits loans with different remaining 
terms to maturity to be put into the same pool. The pool certificates 
have the maturity of the loan with the longest remaining term to 
maturity in the pool. Currently, the remaining term on the loan with 
the shortest remaining maturity of any loan in a pool must be at least 
70 percent as long as the maturity of the loan with the longest 
remaining term. For example, if the longest remaining term of a loan in 
a pool is 120 months (10 years), the loan with the shortest remaining 
term must have at least 84 months until the maturity of the loan. The 
extent of the average maturity difference between a pool certificate 
and its underlying loans is an important driver of the loan pooling 
program costs. Larger differences increase the disparity in the 
amortization rates between the pool certificate and the underlying 
loans. This increases principal that accumulates in the MRF. Costs 
result as the MRF must make interest payments to Registered Holders at 
pool certificate interest rates while earning interest on accumulated 
loan principal at Treasury rates.
    To keep the program at a zero subsidy, SBA is reducing the maximum 
spread permitted between the longest and shortest remaining term on 
loans in each pool. For pools with an issue date on or after October 1, 
2005, the shortest remaining term of any loan in a pool must be at 
least 80 percent of the remaining term on the loan with the longest 
remaining term to maturity. Reducing the maximum allowed loan-to-pool 
certificate maturity spread to 80 percent will reduce the program costs 
associated with the loan and pool amortization disparities. This 
reduction occurs because the program costs attributable to the MRF's 
payment of interest at pool certificate interest rates from funds 
invested at Treasury rates is reduced. The 80 percent minimum was 
calculated in compliance with the requirements of FCRA, based on loan 
and pool characteristics and SBA's forecast of future program 
performance.
    Although this change is expected to affect approximately 93 percent 
of future pools, SBA believes that pool assemblers will be able to 
continue forming pools. Some pools may be smaller due to the new 
requirement; however, in Calendar Year 2004, the average pool size was 
$8,300,000, well in excess of the $1,000,000 minimum size required by 
SBA.
    This program change will be incorporated as necessary into the 
appropriate secondary market documents. The change will be effective on 
October 1, 2005, and will modify the guidance on loan pool 
characteristics included in the SBA Secondary Market Program Guide. SBA 
is making this change pursuant to its authority under Section 5(g)(2) 
of the Small Business Act, 15 U.S.C. 634 (g)(2).
    It is important to note that there is no change to SBA's obligation 
to honor its guaranty of the timely payment of amounts owed to 
Registered Holders on all SBA loan pools and that such guaranty 
continues to be backed by the full faith and credit of the United 
States.

    Authority: 15 U.S.C. 634(g)(2).

    Dated: July 20, 2005.
Hector V. Barreto,
Administrator.
[FR Doc. 05-14753 Filed 7-26-05; 8:45 am]
BILLING CODE 8025-01-P