[Federal Register Volume 73, Number 220 (Thursday, November 13, 2008)]
[Rules and Regulations]
[Pages 67099-67102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26999]



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  Federal Register / Vol. 73, No. 220 / Thursday, November 13, 2008 / 
Rules and Regulations  

[[Page 67099]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AF83


Business Loan Program Regulations: Incorporation of London 
Interbank Offered Rate (LIBOR) Base Rate and Secondary Market Pool 
Interest Rate Changes

AGENCY: Small Business Administration (SBA).

ACTION: Interim final rule.

-----------------------------------------------------------------------

SUMMARY: To address extraordinary market conditions limiting credit 
availability for small businesses, SBA is issuing an interim final rule 
to make adjustments on an emergency basis to certain of its regulations 
in order to make the secondary market for loans guaranteed under 
section 7(a) of the Small Business Act (7(a) loans) more efficient with 
regard to loan pricing and the formation of secondary market loan 
pools. Specifically, the interim final rule will permanently add an 
additional base rate of LIBOR for lenders to use when pricing 7(a) 
loans, and will allow for secondary market loan pools to be formed with 
weighted average coupon rates. This interim final rule is necessary to 
help ensure continued availability of capital to small businesses and 
to improve liquidity in and efficiency of the secondary market.

DATES: This rule is effective November 13, 2008. Comments on the 
interim final rule must be received on or before December 15, 2008.

ADDRESSES: You may submit comments, identified by RIN number 3245-AF83 
by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Grady Hedgespeth, Director, Office of Financial 
Assistance, U.S. Small Business Administration, 409 3rd Street, SW., 
8th Floor, Washington, DC 20416.
     Hand Delivery/Courier: Grady Hedgespeth, Director, Office 
of Financial Assistance, U.S. Small Business Administration, 409 3rd 
Street, SW., 8th Floor, Washington, DC 20416.
All comments will be posted on  http://www.Regulations.gov. If you wish 
to include within your comment, confidential business information (CBI) 
as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you 
must submit the comment by either Mail or Hand Delivery and you must 
address the comment to the attention of Grady Hedgespeth, Director, 
Office of Financial Assistance. In the submission, you must highlight 
the information that you consider is CBI and explain why you believe 
this information should be held confidential. SBA will make a final 
determination, in its discretion, of whether the information is CBI 
and, therefore, will not be published.

FOR FURTHER INFORMATION CONTACT: Grady Hedgespeth, Director, Office of 
Financial Assistance, 202-205-7562, or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    In October 2008, the President's Working Group on Financial Markets 
announced that the U.S. government would deploy all of its tools in a 
strategic and collaborative manner to address the current instability 
in the financial markets and mitigate the risks that instability poses 
for broader economic growth. Subsequently, the U.S. Treasury 
Department, the Federal Deposit Insurance Corporation, and the Federal 
Reserve announced actions to help protect the U.S. economy, to 
strengthen public confidence in our financial institutions, and to 
foster the robust functioning of our credit markets.
    The U.S. Small Business Administration is issuing this Interim 
Final Rule to address the impact of the current economic situation on 
the Agency's lending partners and the small businesses that participate 
in the Agency's lending programs. The Agency is issuing these 
regulations with the goals of helping to ensure continued access to 
capital by America's small businesses and increasing the liquidity in 
the market for SBA-backed secondary market securities.
    Under SBA's 7(a) loan guaranty program, borrowers are able to 
obtain partially guaranteed loans from banks, small business lending 
companies, credit unions, and other participating financial 
institutions. In order to make new loans, our lending partners must 
have the tools they need to be able to afford to deliver capital to 
small businesses. In recent months, SBA's programs have been impacted 
by the broader credit market disruptions. Many SBA lenders are having 
immediate liquidity and profitability challenges, causing small 
businesses to be less able to access new sources of credit. This 
problem has led to sharp declines in SBA guaranteed lending to small 
businesses and severely limited activity in buying and selling SBA 
loans and loan pools by secondary market investors.
    For many SBA lenders, the cost of funds or internally allocated 
cost of funds is based partially or entirely on the London Interbank 
Offered Rate (LIBOR). Under SBA regulations, however, the interest rate 
on 7(a) loans is typically based on the Prime rate. Historically, there 
has been an approximate 300 basis point spread between short-term LIBOR 
rates and the Prime rate. In recent weeks, however, this spread has 
sharply declined and on some days LIBOR exceeded the Prime rate. The 
declining Prime and rising LIBOR rates have largely eliminated profit 
margins for SBA lending institutions that borrow funds at LIBOR rates 
and lend at Prime rates. Under these circumstances, these lenders are 
reducing the number of 7(a) loans they will make.
    Additionally, lenders who participate in secondary market 
activities are impacted by the mismatch between Prime and LIBOR rates 
again when trying to sell loans to investors. Usually, over 40% of SBA 
loan guarantee dollars are sold into the secondary market, which 
provides a critical source of liquidity for SBA lenders, particularly 
non-depository lenders. Investors willing to buy SBA loans in the 
secondary market also frequently use LIBOR rates to make investment 
decisions. The mismatch between the Prime and LIBOR rates may be a 
limiting factor and, with the current turmoil, may limit the number of

[[Page 67100]]

investors willing to buy SBA loans in the secondary market. This 
secondary market situation reduces the demand for SBA guaranteed loans 
which results in lower secondary market prices and a severe lack of 
liquidity for lenders that typically sell their loans in the secondary 
market.
    Due to the change in the relationship between LIBOR and Prime, many 
lenders today do not have access to funds at a cost that justifies 
originating new 7(a) loans. At the same time, under current conditions, 
SBA guaranteed loans cannot easily or quickly be converted to cash in 
the secondary market. Consequently, some lenders are facing an 
immediate liquidity crisis and will not be able to make loans or 
continue their SBA business lending without immediate action. For small 
businesses, this means the capital needed to start, maintain or expand 
operations will be more difficult to obtain.
    For these reasons, SBA is proposing two regulatory changes to 
address problems that are impeding lending partners from originating 
new 7(a) loans at this time. SBA believes that adjustments to certain 
interest rates set out in SBA regulations for SBA guaranteed loans can 
help solve short and long run problems impeding small businesses from 
having access to capital through SBA's guaranteed loan program. These 
interest rate adjustments include: allowing the interest rate on 7(a) 
loans to be based on a LIBOR rate and allowing SBA pool assemblers to 
create Weighted Average Coupon (WAC) pools under SBA's Secondary Market 
Guarantee Program. These changes will help small businesses over the 
short term to manage through the current economic situation by 
facilitating a continued flow of capital and over the long term by 
structuring SBA's guaranteed loan program to include current market 
indices making it more attractive for lenders and secondary market 
investors to participate. SBA currently collects data on rates set for 
individual 7(a) loans. SBA will monitor the LIBOR rates offered to 
borrowers and compare them with Prime rates until the base rates 
stabilize.
    Specific changes included in this interim final rule are as 
follows:
    (1) Including the London Interbank Offered Rate (LIBOR) as an 
additional base interest rate by changing 13 CFR 120.214(c) to allow 
lenders to price 7(a) loans based on a spread over the 30 day LIBOR in 
addition to the currently allowable Prime rate and Optional Peg rate.
    (2) Allowing Weighted Average Coupon (WAC) Pools by changing the 
regulations governing the allowable interest rate on a pool. SBA policy 
guidance is being revised to outline procedures and guidelines for 
these WAC pools.

II. Section by Section Analysis

    Section 120.214. This regulation is being revised to permit SBA 
lenders the flexibility to price 7(a) loans using the thirty-day (1-
month) LIBOR plus 300 basis points as a base rate. Specifically, 
Section 120.214(c) is being amended to include the thirty-day (1-month) 
LIBOR rate plus 300 basis points as a base rate, in addition to the 
existing base rates which are the Prime rate and the SBA Optional Peg 
rate. For many SBA lenders, costs of funds or internal costs of funds 
are partially or entirely tied to LIBOR and they use this rate as a 
standard index for borrowing and lending. However, they are only 
permitted to lend at Prime rates or the Optional Peg Rate for 7(a) 
loans. This mismatch between funding and lending rates has become 
particularly acute in the current economic environment where LIBOR has 
increased while Prime has remained constant or declined--effectively 
making the cost of funding a loan higher and dramatically reducing or 
eliminating the profitability of making a loan. This imbalance is 
limiting small businesses' access to capital and the financing needed 
to sustain and grow their businesses.
    In the short term, allowing LIBOR index flexibility will encourage 
lenders to continue to participate in or re-enter the SBA market. In 
the long term, allowing this option keeps SBA lending aligned with 
current market practices by expanding into a broader range of resources 
from the global financial marketplace, where LIBOR is a standard 
interest rate base. Historically, Prime and LIBOR rate shifts have 
moved correspondingly, with LIBOR approximately 300 basis points below 
Prime rates. Accordingly, the LIBOR base rate for 7(a) loans is being 
established as the thirty-day (1-month) LIBOR index plus 300 basis 
points in order to roughly equate Prime and LIBOR rates. The thirty-day 
(1-month) LIBOR index was selected as it historically most closely 
tracks Prime rates in terms of its movements and variability. SBA 
currently collects data on rates set for individual 7(a) loans. SBA 
will monitor the LIBOR rates offered to borrowers and compare them with 
Prime rates until the base rates stabilize. In addition, maximum 
interest rate spreads over the base rates will remain in place, 
ensuring borrowers receive reasonable rates that are largely driven by 
market competition.
    Sections 120.600, 120.610(e) and Section 120.611(a). The specific 
changes to these sections are described in more detail below. The 
overall reason for the changes to these sections is to allow weighted 
average coupon (WAC) pools. SBA loans are usually sold in the secondary 
market by grouping them into pools. Currently, the interest rate on the 
pool is the lowest net rate of all of the loans in a given pool. WAC 
pools will allow loans with approximately the same net rates to be 
grouped together, and the interest rate on the pool will be the 
weighted average of the net rates of the loans in the pool. WAC pools 
will be easier for pool assemblers to create than traditional pools by 
providing additional flexibility in grouping loans into pools for sale. 
This flexibility will help expand the secondary market by permitting 
pool assemblers to create more products for investors.
    Section 120.600. Section 120.600 is being amended to include the 
definitions of dollar-weighted average net rate and weighted average 
coupon (WAC) pool. These definitions are needed for clarity as part of 
incorporating WAC pools into the secondary market.
    Section 120.610(e). This section of the regulations is being 
amended to allow a different interest rate for WAC pool certificates. 
The current regulation requires that the interest rate on a pool 
certificate must be equal to the lowest individual interest rate of the 
loans in the pool. The change will add a dollar-weighted average net 
rate of all the loans in the pool.
    Section 120.611(a). This section of the regulations is being 
amended to add a new paragraph (7) to allow for a maximum allowable 
difference in the net rates on the loans in WAC pools. Specifically, 
paragraph (7) includes the requirement for WAC Pools to have a maximum 
allowable difference between the highest and lowest Net Rate on the 
guaranteed portions that are placed in the pool. A technical amendment 
is also being made to paragraphs (5) and (6) of this section to delete 
and re-insert the word ``and.''

III. Justification for Publication as Interim Final Rule

    In general, SBA publishes a rule for public comment before issuing 
a final rule, in accordance with the Administrative Procedure Act (APA) 
and SBA regulations. 5 U.S.C. 553 and 13 CFR 101.108. Section 
553(b)(3)(B) of the APA provides an exception to this standard 
rulemaking process, however, where an agency finds good cause to adopt 
a rule without prior public participation. The good cause

[[Page 67101]]

requirement is satisfied when prior public participation is 
impracticable, unnecessary, or contrary to the public interest. Under 
such circumstances, an agency may publish an interim final rule without 
soliciting public comment.
    In enacting the good cause exception to standard rulemaking 
procedures, Congress recognized that emergency situations arise where 
an agency must issue a rule without public participation. The current 
turmoil in the financial markets is having a negative impact on the 
availability of financing for small businesses in two ways. The current 
increased cost of funds banks are facing, coupled with established rate 
limits for 7(a) loans, is causing costs for originating such loans to 
become higher, creating a situation where SBA program participation is 
not in a lender's financial interest. At the same time, many SBA 
lenders sell loans on the secondary market in order to manage their 
liquidity. SBA's current regulations governing base interest rates SBA 
lenders can charge on their SBA guaranteed loans are resulting in loans 
being originated at interest rates that do not make it economical to 
sell them on the secondary market. Without secondary market sales, many 
lenders are not able to fund loans. The net effect is that lenders are 
less and less willing to extend credit to small business borrowers at a 
time when it is critically needed.
    Further, the secondary market for 7(a) loans is experiencing 
disruptions due to the current economic environment. SBA believes that 
the introduction of an additional base rate and the allowance of 
weighted average coupon pools will assist in enabling lenders to 
continue flows of capital to small businesses and stabilizing the 
secondary market. Because of the extraordinary situation in the credit 
markets severely limiting the availability of financing for small 
businesses, there is an urgent need to make the changes immediately to 
ensure continued access to capital for small businesses. Small 
businesses are responsible for approximately two-thirds of all new job 
creation and are essential to a stable economy.
    Accordingly, SBA finds that good cause exists to publish this rule 
as an interim final rule in light of the urgent need. Advance 
solicitation of comments for this rulemaking would be impracticable and 
contrary to the public interest, as it would harm those small 
businesses that need immediate access to capital. Any such delay would 
be extremely prejudicial to the affected businesses.
    Although this rule is being published as an interim final rule, 
comments are hereby solicited from interested members of the public. 
These comments must be received on or before December 15, 2008. SBA may 
then consider these comments in making any necessary revisions to these 
regulations.

IV. Justification for Immediate Effective Date of Interim Final Rule

    The Administrative Procedure Act requires that ``publication or 
service of a substantive rule shall be made not less than 30 days 
before its effective date, except as otherwise provided by the agency 
for good cause found and published with the rule.'' 5 U.S.C. 553(d)(3). 
SBA finds that good cause exists to make this final rule effective the 
same day it is published in the Federal Register.
    The purpose of the APA provision is to provide interested and 
affected members of the public sufficient time to adjust their behavior 
before the rule takes effect. For the reasons set forth above in the 
section on Justification for Publication as Interim Final Rule, SBA 
finds that good cause exists for making this interim final rule 
effective immediately, instead of observing the 30-day period between 
publication and effective date. SBA believes that many entities--SBA 
lenders and small businesses alike--will be assisted by the immediate 
adoption of this rule and that no delay in effective date is necessary 
for the public to adjust its behavior. The changes adopted in this rule 
extend additional choices and options to lenders and small businesses; 
however, current program options and practices remain available.

V. Comments Request

    SBA requests comments on all aspects of this interim final rule, 
including the underlying policies.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C., Ch. 35) and the Regulatory Flexibility Act (5 
U.S.C. 601-612)

    Executive Order 12866: The Office of Management and Budget (OMB) 
has determined that this rule constitutes a significant regulatory 
action under Executive Order 12866.
    Executive Order 12988: For the purposes of Executive Order 12988, 
Civil Justice Reform, SBA has determined that this rule is crafted, to 
the extent practicable, in accordance with the standards set forth in 
Sec. Sec.  3(a) and 3(b)(2), to minimize litigation, eliminate 
ambiguity, and reduce burden.
    Executive Order 13132: For the purposes of Executive Order 13132, 
the SBA determined that this rule has no federalism implications 
warranting preparation of a federalism assessment.
    Paperwork Reduction Act: SBA certifies that this interim final rule 
does not impose any additional reporting or recordkeeping requirements 
under the Paperwork Reduction Act, 44 U.S.C. Chapter 35.
    Regulatory Flexibility Act: Because the rule is an interim final 
rule, there is no requirement for SBA to prepare an Initial Regulatory 
Flexibility Act (IRFA) analysis. The Regulatory Flexibility Act (RFA), 
5 U.S.C. 601, requires administrative agencies to consider the effect 
of their actions on small entities, small non-profit businesses, and 
small local governments. Pursuant to the RFA, when an agency issues a 
rule, the agency must prepare an IRFA which describes whether the 
impact of the rule will have a significant economic impact on a 
substantial number of small entities. However, the RFA requires 
analysis of a rule only where notice and comment rulemaking are 
required. Rules are exempt from Administrative Procedure Act (APA) 
notice and comment requirements and therefore from the RFA requirements 
when the agency for good cause finds that notice and public procedure 
thereon is impracticable, unnecessary, or contrary to the public 
interest. In this case it would be contrary to the public interest to 
delay the promulgation of the rule.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.

0
For the reasons set forth above, SBA amends 13 CFR part 120 as follows:

PART 120--BUSINESS LOANS

0
1. The authority citation for part 120 continues to read as follows:

    Authority: 15 U.S.C. 634(b)(6), 634(b)(7), 634(b)(14), 
633(b)(3), 636(a) and (h), 650, and 696(3) and 697(a)(2).


0
2. Amend Sec.  120.214 by revising paragraph (c) to read as follows:


Sec.  120.214  What conditions apply for variable interest rates?

* * * * *
    (c) Base rate. The base rate will be one of the following: ( i) The 
prime rate; (ii) the thirty-day (1-month) London Interbank Offered Rate 
(LIBOR) plus 3 percentage points, or (iii) the Optional Peg Rate. The 
prime or LIBOR rate will be that which is in effect on the first 
business day of the month, as printed in a national financial newspaper 
published each business day. SBA

[[Page 67102]]

publishes the Optional Peg Rate quarterly in the Federal Register.
* * * * *

0
3. In Sec.  120.600 redesignate paragraphs (c) through (j) as 
paragraphs (d) through (k) and add new paragraphs (c) and (l) to read 
as follows:


Sec.  120.600  Definitions.

* * * * *
    (c) Dollar-Weighted Average Net Rate of a Pool is calculated by 
multiplying the interest rate of each loan in the Pool by the ratio of 
that loan's current outstanding guaranteed principal to the current 
outstanding guaranteed principal of all loans in the Pool, and adding 
the sum of the resulting products. The Dollar-Weighted Average Net Rate 
of a Pool will fluctuate over the life of the Pool as loan defaults, 
prepayments and normal loan repayments occur.
* * * * *
    (l) Weighted Average Coupon (WAC) Pool is a Pool where the interest 
rate payable to the investor is equal to the Dollar-Weighted Average 
Net Rate of the Pool.

0
4. Amend Sec.  120.610 by revising paragraph (e) as follows:


Sec.  120.610  Form and terms of Certificates.

* * * * *
    (e) Interest rate on Pool Certificate. The interest rate on a Pool 
Certificate will be either the lowest Net Rate of any individual 
guaranteed portion of a loan in the Pool or the Dollar-Weighted Average 
Net Rate of the Pool.

0
5. Amend Sec.  120.611 by revising paragraphs (a)(5) and (6) and adding 
new paragraph (a)(7) as follows:


Sec.  120.611  Pools backing Pool Certificates.

    (a) * * *
    (5) A maximum allowable difference between the remaining terms to 
maturity of the loans in the Pool;
    (6) A minimum weighted average maturity at Pool formation; and
    (7) A maximum allowable difference between the highest and lowest 
Net Rate on the guaranteed portions that are placed in a WAC Pool.
* * * * *

Sandy K. Baruah,
Acting Administrator.
[FR Doc. E8-26999 Filed 11-7-08; 4:15 pm]
BILLING CODE 8025-01-P