The attractive premium income achieved by selling the guaranteed portion of variable rate SBA 7(a) loans has kept fixed-rate 7(a) loans from becoming a significant portion of overall 7(a) loan origination. SBA lenders have been known to suggest to borrowers that fixed-rate 7(a) loans “don’t exist.”
Variable and fixed rates are available in the 7(a) program. Both are subject to a maximum rate set by the SBA (currently Prime + 2.75% for variable and 8.26% for fixed rates on long-term loans > $50,000 as of April 2014). Both the fixed and floating rate maximums are in excess of market rates.
With competition fierce for owner-occupied commercial loans with good credit characteristics, some SBA 7(a) lenders are adding the fixed-rate option to their 7(a) product line. Helping advance the market are 7(a) loan guarantee dealers that are making markets on the buying and pooling of fixed-rate 7(a) guarantees for sale to investors. One dealer is offering to buy 7(a) guaranteed loans with initial fixed-rate periods of 3 years and 5 years, followed by quarterly adjustments for the balance of the 25-year term. In addition, the dealer is offering a 25-year fixed for life purchase; however, the par price is a 6.25% rate.
Although fixed-rate premiums are significantly lower than floating rates, some borrowers simply will not close a floating rate deal. A banker recently told me that he closed a 5-year fixed-rate deal with a 25-year term at 5.25% for a good client, sold the guaranty for 103 and now services the loan for a 1% fee. While not a great execution, the banker did not want the client to close elsewhere and potentially lose the relationship.