Changes may make SBA lending profitable again

The Small Business Administration hopes to encourage lenders to resume making 7(a) business loans by letting them charge higher interest rates to borrowers..

Tue 18 Nov 2008

Previously, lenders typically based their interest rates on government-guaranteed 7(a) loans on the prime rate. Recently, however, the London Interbank Offer Rate (Libor) -- which lenders often must pay in order to obtain capital -- has matched or even exceeded the prime rate. As a result, SBA lending has become unprofitable for many lenders.

This is one reason why 7(a) lending -- an important source of long-term financing for small businesses -- has declined dramatically. In October, for example, the number of 7(a) loans was down 58 percent when compared with October 2007.

To address this problem, the SBA now will allow lenders to use Libor as the base rate for pricing 7(a) loans.

This change also will help SBA lenders sell their government-guaranteed 7(a) loans on the secondary market, which provides them with capital to make new loans.

The SBA also made another change designed to boost the dormant secondary market for 7(a) loans: It will allow pools of 7(a) loans to be sold at one interest rate through weighted average coupons. Under previous rules, the interest rate on a pool had to be the lowest net rate of any of the loans in the pool. The change will provide pool assemblers with more flexibility in grouping loans into pools for sale and create more products for investors, according to the SBA.

The regulatory changes are unusual in that they are effective immediately.

“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,” the SBA stated in its filing, which was published Thursday in the Federal Register.

SBA lenders and members of Congress had been pushing for these changes.

“We’re confident these solutions will help free up capital so lenders can continue to make SBA-backed loans,” said Eric Zarnikow, who heads the SBA’s Office of Capital Access.

“The SBA deserves tremendous credit for its innovative effort to eliminate and modify burdensome regulations to promote capital access,” said Sen. Olympia Snowe of Maine, the ranking Republican on the Senate Small Business and Entrepreneurship Committee. “We must ensure regulations are properly tailored and do not stand in the way of job creation.”

Snowe said the SBA needs to take additional steps, however, including allowing the government-guaranteed portion of large loans to be split up and sold in separate loan pools and providing more flexibility on what kinds of businesses qualify as small businesses.

Source: http://www.bizjournals.com/washington/stories/