In 2009 and 2010, the SBA provided notice that it was increasing its level of supervision over certain higher risk SBA lenders that participate in the secondary market. Specifically, the notices covered all SBA lenders that seek to sell loans into the secondary market and are subject to (1) a Cease & Desist order, (2) a Consent Agreement affecting capital or commercial lending issues, (3) other supervisory action that cites unsafe and unsound banking practices or other items of concern to SBA, or (4) where the SBA lender’s auditor issued a Going Concern opinion in the audited financial statements (collectively, the “Actions”).
The SBA is concerned that once the Guaranteed Portion of an SBA loan is sold, the guarantee effectively changes from a conditional guarantee to the SBA lender to an unconditional guarantee to the guarantee buyer (“registered holder”). If a borrower defaults, SBA generally purchases the Guaranteed Portion from the registered holder out of the Secondary Market and, as appropriate, pursues the SBA lender for any repairs or denials based on a post-purchase review. However, if an SBA lender is placed in receivership by the Federal Deposit Insurance Corporation (FDIC), SBA may be limited in its ability to receive its entitled reimbursement of the portion of the purchase amount denied or repaired from the failed institution.
Effective June 30, 2011, SBA will, in general, no longer review each individual loan prior to sale. Instead, SBA lenders subject to any one or more of the four Actions defined above will be required to enter into a Reserve Account Agreement (“Agreement”) with SBA prior to requesting SBA approval to sell loans into the Secondary Market. Under the Agreement, before SBA will approve the sale of any Guaranteed Portion on the Secondary Market, the SBA lender will be required to establish a Reserve Account at a well-capitalized FDIC-insured depository financial institution and fund the account as follows:
- Make an initial deposit in the amount of either:
a. Two (2) times an SBA lender’s average 7(a) loan size (determined by dividing the SBA lender’s gross dollars outstanding by the number of 7(a) loans outstanding) if the SBA lender’s gross dollars outstanding for its active loans is $10 million or greater, or
b. One (1) times an SBA lender’s average 7(a) loan size (determined by dividing the SBA lender’s gross dollars outstanding by the number of 7(a) loans outstanding) if the SBA lender’s gross dollars outstanding for its active loans is less than $10 million.
- In addition to the initial deposit, the SBA lender will be required to deposit a Reserve Amount for each sale of a Guaranteed Portion in the Secondary Market. The Reserve Amount equals the total gross dollar amount of the Guaranteed Portions to be sold, multiplied by the greater of (1) SBA’s overall 7(a) loan guarantee repair/denial rate as calculated by SBA for the most recent available quarter or (2) the SBA lender’s 7(a) loan guarantee repair/denial rate as calculated by SBA for the most recent available quarter.