[Federal Register Volume 75, Number 53 (Friday, March 19, 2010)]
[Notices]
[Pages 13329-13330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-6101]


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SMALL BUSINESS ADMINISTRATION

[Docket No. SBA-2010-0005]


Implications of Financial Accounting System (FAS) 166 on SBA 
Guaranteed Loan Programs

AGENCY: Small Business Administration.

ACTION: Notice; request for comments.

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SUMMARY: The Small Business Administration (SBA) is soliciting 
information and views from the public on: (1) The effect that the 
accounting changes mandated by the Financial Accounting Standards Board 
(FASB) in Financial Accounting Standard (FAS) 166 have on SBA Lender 
and investor participation in the SBA 7(a) loan program and the SBA 
Secondary Market Program; and (2) the need to modify the structure of 
the 7(a) loan program and/or the SBA Secondary Market program as well 
as related guidelines and governing documents as a result of FAS 166.

DATES: Comments must be received on or before April 19, 2010.

ADDRESSES: You may submit comments, identified by docket number SBA-
2010-0005 by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail, Hand Delivery/Courier: James W. Hammersley, Acting 
Assistant Administrator for Policy and Strategic Planning, Office of 
the Administrator, Small Business Administration, 409 Third Street, 
SW., Washington, DC 20416.
    SBA will post all comments on http://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at http://www.regulations.gov, please submit the 
information to James W. Hammersley, Acting Assistant Administrator for 
Policy and Strategic Planning, Office of the Administrator, Small 
Business Administration, 409 Third Street, SW., Washington, DC 20416 or 
send an e-mail to [email protected]. Highlight the information 
that you consider to be CBI and explain why you believe SBA should hold 
this information as confidential. SBA will review the information and 
make the final determination as to whether the information will be 
published.

FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Acting Assistant 
Administrator for Policy and Strategic Planning, Office of the 
Administrator, (202) 205-7505; [email protected].

SUPPLEMENTARY INFORMATION: Under SBA's 7(a) business loan program, 
private sector lenders (SBA Lenders) make loans to small businesses 
(7(a) loans) that do not qualify for conventional credit. The SBA 
guaranty provides the credit enhancement necessary for the SBA Lender 
to make the 7(a) loan. Through the SBA Secondary Market described in 13 
CFR 120.601, SBA Lenders sell the guaranteed portion of 7(a) loans 
(guaranteed portions) to investors and use the funds to make additional 
loans. The Secondary Market is a major source of liquidity for many SBA 
Lenders. SBA estimates that SBA Lenders sell the guaranteed portion of 
almost 50% of the 7(a) loans they make.
    The Secondary Market for 7(a) loans developed in the early 1970s 
when SBA Lenders began to sell guaranteed portions to other lenders. 
SBA realized the importance of a stable and reliable liquidity option 
and took steps to formalize and expand the market for the sale of 
guaranteed portions, including providing a full faith and credit 
guaranty for the investors in the mid 1970s. Throughout the 1970s and 
early 1980s the market continued to grow as more lenders used the funds 
from Secondary Market sales to make additional loans. In 1984, in 
recognition of the value of the Secondary Market, Congress added a 
pooling option that included a timely payment guaranty by SBA. The 
pooling option allowed small business loans to be purchased by an even 
greater number of investors. The Secondary Market was clearly one of 
the drivers in the growth of the 7(a) loan program from $2 billion per 
year of loan originations in the early 1980s to almost $15 billion of 
loan originations per year prior to the recent economic crisis.
    Historically, there has been strong demand for Secondary Market 
certificates backed by the guaranteed portion of 7(a) loans. Due to 
this strong demand, SBA Lenders are able to sell the guaranteed portion 
at a premium and/or retain an income stream in excess of the servicing 
fee that must be retained. Many lenders prefer to retain a significant 
ongoing cash flow rather than to receive a premium at the time of sale. 
This ongoing cash flow provides a steady flow of income that is not 
based on current loan production.
    On May 17, 1994, SBA modified the agreement signed by the lender, 
investor, and SBA at the time of sale (SBA Form 1086, Secondary 
Participation Guaranty Agreement--referred to below as the Form 1086 
available at http://www.sba.gov/tools/forms/index.html) to include a 
requirement that the selling lender

[[Page 13330]]

would have to return any premium received under certain conditions. 
These conditions are: (1) If the borrower prepays the loan for any 
reason during the first 90 days after the settlement of the Secondary 
Market sale; or (2) if the borrower fails to make when due, the first 
three monthly payments within the month after the Secondary Market sale 
and the borrower enters uncured default within 275 days after the 
settlement date of the Secondary Market sale. This warranty provision, 
added to the Form 1086, helped to encourage investor participation in 
the Secondary Market by extending investment protection beyond the 
principal amount of the guaranteed portion to the premium paid by the 
investor.
    It is SBA's understanding that under new FASB guidelines for the 
accounting treatment of a Secondary Market sale, as detailed in FAS 
166, a lender may not treat any premium received as income until the 
expiration of the warranty period. In addition, if the lender sells the 
loan and retains cash flow in excess of the minimum servicing fee, the 
transaction is considered a borrowing and the lender must continue to 
retain capital to support it. As a result, the lender would have to 
hold more capital because the original loan would still be on the books 
along with the new borrowing.
    In light of the foregoing, SBA is soliciting views from the public 
on the effect of FAS 166 on SBA Lender and investor participation in 
the SBA 7(a) loan program and the SBA Secondary Market Program. In 
addition, SBA is soliciting views from the public on the need to modify 
the structure of the 7(a) loan program and/or the SBA Secondary Market 
program. Commenters are encouraged to submit suggestions that could 
minimize any adverse impact of FAS 166 on the 7(a) loan program and/or 
SBA Secondary Market participants.
    SBA has received several unsolicited suggestions on how to address 
this issue. Some of the suggestions may require regulatory changes; 
others may require form or contractual changes. SBA has not taken a 
position on any of these proposals. SBA is seeking additional 
suggestions and ideas on how to address the ramifications of FAS 166 on 
the 7(a) loan program and the SBA Secondary Market Program, as well as 
comments on the specific proposals received to date, which are as 
follows:
    1. Eliminate the warranty period from the Form 1086 and the SBA 
Secondary Market Program. Under this proposal, SBA would modify the 
Form 1086 to remove the warranty language. The warranty provision 
afforded investors some protection against early prepayment and may 
have discouraged lenders from selling guaranteed portions of loans they 
knew were susceptible to early default. However, after the warranty 
language was implemented, Congress added a subsidy recoupment fee 
(prepayment penalty) for borrowers, which may have reduced the need for 
the warranty provision. The subsidy recoupment fee is charged to the 
borrower if it prepays a loan in the first three years of the life of 
the loan. Secondary Market sales tend to occur in the first year of the 
life of the loan. Thus, borrowers have a financial incentive not to 
prepay early in the life of the loan that did not exist when the 
warranty language was originally added to the Form 1086. It is also 
possible that SBA's establishment of the Office of Credit Risk 
Management (OCRM) has reduced the need for the warranty provision as 
OCRM monitors lender activity and has the ability to scrutinize 
prepayment activity, including a pattern of early prepayments.
    2. Permit or Require SBA Secondary Market Broker Dealers to provide 
the warranty to their customers. If SBA were to permit or require 
broker dealers to provide the warranty protection, the selling lender 
would no longer be in the position of having to return any funds 
received from a secondary market sale. SBA understands that many broker 
dealers are currently holding many loans in excess of ninety (90) days 
while they create pools, so many loans may actually be in the broker 
dealer's inventory during the warranty period. While this change would 
result in a liability for the broker dealers, the broker dealer may be 
in a good position to know which lender's loans tend to prepay or 
default during the warranty period. This option would require 
modification of the Form 1086 by SBA.
    3. Permit a private sector insurance fund to repay investors when a 
premium is lost during the 90 day warranty period. Under this proposal, 
lenders would pay a portion of the premium received into an insurance 
fund that would be run by an entity not related to SBA or to SBA 
participating lenders. If a borrower prepays or defaults, the investor 
would file a claim with the insurance fund. SBA's role in the 
implementation of such an option would consist only of removing the 
warranty language from the Form 1086; the fund would be established and 
run by a private sector entity.
    4. Make the warranty period optional. Under this proposal, SBA 
would modify the Form 1086 and related documents to allow the buyers 
and sellers to decide whether they wanted a warranty included in the 
terms of the agreement for a particular sale. Commenters are requested 
to provide suggestions on how warranty information for a particular 
sale could be communicated to potential purchasers under this proposal 
as such purchasers would need to know in advance whether a particular 
certificate included a warranty. Implementing this change would require 
modifications to both the Form 1086 and SBA's contract with its Fiscal 
and Transfer Agent.
    Commenters are encouraged to submit other suggestions or actions 
that could minimize any adverse impact of FAS 166 on the 7(a) loan 
program and/or SBA Secondary Market participants. SBA is also seeking 
comments on whether the existing warranty should be left in place as it 
is currently structured.

    Authority: 15 U.S.C. 634(b)(7)

    Dated: March 5, 2010.
Eric R. Zarnikow,
Associate Administrator of Capital Access.
[FR Doc. 2010-6101 Filed 3-18-10; 8:45 am]
BILLING CODE 8025-01-P