Q: How are SBA Guaranteed Interest Certificates treated on my books?
A: SBA Guaranteed Interest Certificates are carried as loans for call reporting purposes.
Q: What is the credit quality and risk weighting of purchased SBA Guaranteed Interest Certificates?
A: SBA loans purchased in the secondary market are unconditionally guaranteed as to principal and accrued interest by the full faith and credit of the US Government. Depending on your federal regulator, purchased SBA Guaranteed Interest Certificates carry either a 0% or 20% risk weighting.
Q: Are the premiums I pay for the loans covered by the full faith and credit guarantee?
A: No. Premium dollars are not covered by the government guarantee, and are at risk of loss in the event of early prepayment. Premiums represent the primary risk exposure associated with the government guaranteed loan asset class.
Q: How do I receive payments on purchased SBA loan guarantees?
A: Payments on secondary market SBA loans are sent by Colson Services. The P&I payments for a portfolio consisting of any number of purchased SBA loans are satisfied by a single remittance from Colson. A monthly statement provides the investor with accounting details for each loan.
Q. What denominations are typically available?
A. SBA guaranteed loan portions cannot be broken in to smaller interests. Investors must purchase the entire guaranteed portion of a given loan. The amounts typically range from $100M to $3.7MM.
Q. If my loan demand improves, can I resell the guaranteed portion back into the secondary market?
A. Yes. SBA guaranteed loan portions are traded in an active secondary market through a network of broker-dealers. Investors wishing to resell into the market are able to collect a number of competitive bids and confirm transactions with the winners on any given business day. Pricing, of course, is subject to market conditions.
Q: Are there CRA benefits associated with secondary market SBA guaranteed loans?
A: Assuming the loan qualifies and that the borrower is in your institutions CRA assessment area, you may derive a CRA benefit for SBA guaranteed loans that are purchased in the secondary market. Regulatory treatment may vary. Please check with your regulators for specifics.
Q: Can a secondary market claim be denied for any reason?
A: Only if the investor has been involved in perpetuating a fraud with the lender. Otherwise, the guarantee is an incontestable full faith and credit guarantee of the US Government as to principal and accrued interest.
Q: What if an SBA loan that I have purchased becomes past due?
A: Once you have at least one secondary market SBA loan on your books, you will qualify for a free Loan List account with Colson Services. If a loan that you have purchased becomes delinquent (or at any other time), you will be able to log on to Loan List where you will find a report on the current status of the loan. If you don’t find the answer there, simply call Colson’s customer service line. Their staff can find out what is going on with the loan.
Q: Should I agree to a modification request that has been submitted to me from the originating lender via Colson?
A: Sometimes, when a borrower is either struggling to service the debt, or considering refinancing with better terms, a modification of terms may be proposed by the originating lender (via Colson) in an attempt to remedy the situation. The lender may, for example, request an interest only period for a time to assist the struggling borrower. Or, in some cases, a modification is requested to lower the interest rate to prevent the borrower from refinancing the loan with another institution. Don’t hesitate to contact your broker for assistance when considering such a request. The broker can tell you what the market value of the loan under the revised scenario to assist you in reaching a decision. If you determine that the proposed change of terms would be preferable to the alternative scenario, please communicate your concurrence to Colson Services.
Q: How do I collect on the guarantee, if necessary?
A: If it becomes necessary to collect on a guarantee, simply contact Colson Services customer support line. They will instruct you to return the SBA Guaranteed Interest Certificate, and will then remit the amount that is due to you.
Q: Are there prepayment penalties on SBA loans?
A: The SBA mandates that all SBA loans with original maturities of 15 years or longer have 5-3-1% prepayment penalties (25% annual exclusion) for the first three years.