Solutions to the issue of relatively poor loan guarantee sale bids in the secondary market for loan guarantees that exceed the former limit of $1.5 million for SBA 7(a) loan guarantees were recently discussed by Bob Judge, Partner of Government Loan Solutions, and Bob Coleman, Editor of the Coleman Report. According to Judge, sometime in 2011, the SBA will allow larger loans to be split into smaller pieces. This will allow pool assemblers to create diversified pools of SBA loan guarantees mitigating prepayment risk (see our 11.2.10 article below) and increasing premiums offered on the smaller pieces. The time frame for approval from the SBA to allowing splitting is an estimated three to six months.
Splitting large loan guarantees into $500,000 increments, as proposed by the SBA, is not anticipated to provide complete pricing recovery for large loan guarantees. This is due to a proposed rule that prohibits more than one piece of a split loan to be included in any one pool. This means a longer holding period while pools are assembled to sell all the pieces, resulting in more risk and hence lower premiums from pool assemblers.
Another idea presented was to request that the SBA allow a lender to split the loan into multiple notes. Despite concern over the inconvenience and increased closing costs, some lenders are making plans in this area. It is unclear, however, that the SBA will allow this as each SBA Authorization clearly states: “One 7(a) loan may not be split into two 7(a) loans merely to benefit the Lender.”
“We will have to stay tuned on the outcome of this situation,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “In the meantime 6 points on a $4.5-million loan guarantee is still not bad.”