Investing in government guaranteed loans
Backed by the full faith and credit of the U.S. Government, SBA, USDA, and FSA loans are attractive on the secondary market. We’ll walk you through the differences and explain the advantages of each asset type.
Investing in SBA 7(a) Loan Pool Securities
Small Business Association (SBA) Pools are modified pass-through securities assembled from the guaranteed portions of SBA 7(a) loans. Unlike individual loan portions, which are purchased for the loan portfolio, SBA Pools are booked in the investment portfolio.
Principal and accrued interest are fully guaranteed, but premiums are not — as such, premiums are the primary risk exposure to investors. Diversification is the most effective safeguard against premium risk exposures. The greater the number of underlying loans, the lesser the effect of one prepayment.
Benefits of SBA Pools
0% risk weighting
SBA Pools are 0% risk-weighted and unconditionally guaranteed as to timely principal and interest payments by the full faith and credit of the US Government. Payments are automatically deposited in your depository trust company (DTC) account on the 25th of every month.
Rate sensitivity
Variable-rate SBA Pool coupons adjust on a monthly or quarterly basis, typically with no interest rate caps.
Liquidity and marketability
SBA Guaranteed Interest Certificates trade in an active secondary market. Since SBA loans have variable interest rates that reset frequently and are not subject to interest rate caps, their rates are reasonably reflective of the prevailing interest rate environment.
Bloomberg modeling
SBA Pools are modeled on Bloomberg with regularly updated descriptions, performance data, yield calculators, and ticket writing capabilities. Each pool has a unique six-digit pool number and a CUSIP number.
SBA Pools are modeled on Bloomberg with regularly updated descriptions, performance data, yield calculators, and ticket writing capabilities. Each pool has a unique six-digit pool number and a CUSIP number.
Bloomberg tracks the prepayment performance of all SBA Pools issued over the past 10 years. The monthly report provides a valuable tool for analyzing investments.
Pledgeability
SBA Pools are generally considered pledgeable as collateral for public funds, Federal Reserve and Federal Home Loan Bank advances, and treasury, tax and loan accounts. Check with your regulators for specifics, as treatment may vary..
Floating spreads
Prime Rate has historically correlated with short-term rates such as SOFR, T-Bills, and the overnight federal funds rate. SBA Pool investments offer attractive floating spreads over the cost of funds.
Investing in individual SBA 7(a) guaranteed loans
SBA Guaranteed Interest Certificates represent beneficial ownership of the entire guaranteed portion of a specified SBA Guaranteed loan. Denominations typically range from $100M to $3.7MM. These are carried as loans for call reporting purposes.
As with SBA pools, premium dollars are not covered by the government guarantee. and are at risk of loss in the event of prepayment. For government guaranteed loans, premiums are the primary risk exposure.
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.
Benefits of SBA 7(a) loans
High credit quality
SBA Guaranteed Interest Certificates are unconditionally guaranteed as to principal and accrued interest by the full faith and credit of the United States Government.
Low risk weighting
SBA Guaranteed Interest Certificates qualify as either 0% or 20% risk weighted assets, depending on your federal regulator.
Interest rate sensitivity
Most SBA Guaranteed loans feature adjustable interest rates tied to the national Prime Rate that adjust on a monthly or quarterly basis with no interest rate caps.
Liquidity and marketability
SBA Guaranteed Interest Certificates trade in an active secondary market. Since variable SBA loan interest rates reset frequently and are not subject to interest rate caps, their rates are always fairly reflective of the prevailing interest rate environment.
Pledgeability
SBA Guaranteed Interest Certificates are generally pledgeable as collateral for public funds, Federal Reserve and Federal Home Loan Bank advances, and treasury, tax & loan accounts. Check with your regulators for specifics, as treatment may vary.
Fiscal Transfer Agent
The SBA’s Fiscal Transfer Agent (FTA), Guidehouse, handles all settlements, transfers, and cash flows. Investors receive a monthly statement with accounting details for each loan.
Spreads
Variable rate SBA Guaranteed Interest Certificates are offered at spreads comparable to short-term rates, such as fed-funds or SOFR. Fixed-rate loan spreads are typically comparable to the U.S. Treasury curve.
CRA benefits
SBA Guaranteed Interest Certificates purchased in the secondary market may be eligible for CRA credit. Check with your regulators for specifics, as regulatory treatment may vary.
Investing in USDA loans
USDA B&I (Business & Industry), CF (Community Facility), and FSA (Farm Service Agency) guaranteed loan portions are traded in an active secondary market. These are booked in the loan portfolio, and the government guarantee protects investors against loss of principal and accrued interest.
Premium dollars are not covered by the government guarantee. As with all government guaranteed assets, premium loss is the primary risk exposure. These loans may be broken down into denominations as small as $500,000, making them an attractive choice for investors looking to diversify.
Benefits of USDA loans
Low risk weighting
USDA guaranteed loans qualify as either 0% or 20% risk-weighted assets, depending on your federal regulator.
Interest rate sensitivity
Many USDA loans feature adjustable interest rates that adjust frequently and are not subject to periodic or lifetime interest rate caps.
Liquidity and marketability
Variable USDA loan interest rates reset frequently and are not subject to caps, so they reflect the prevailing interest rate environment.
Prepayment penalties
Many USDA loans are subject to prepayment penalties (often 5-4-3-2-1%) that are passed through to investors on a pro-rata basis.
Pledgeability
USDA guaranteed loans are generally pledgeable as collateral for public funds, Federal Reserve and Federal Home Loan Bank advances, and treasury, tax & loan accounts. Check with your regulators for specifics, as regulatory treatment may vary.
Spreads
Variable-rate USDA guaranteed loans are offered at spreads comparable to short-term rates, such as fed-funds or SOFR. Fixed-rate loans are typically offered at spreads comparable to the U.S. Treasury curve.
Direct payments
Originating lenders remit principal and interest payments directly by wire transfer. Some investors prefer to take delivery of their loans on a Colson Depositary Receipt Series “C” (DR-C).
Colson guarantees timely monthly payments, and investors receive all payments from a single source. Colson charges a one-time certification fee and an ongoing fee of 0.125% of the coupon rate.
CRA benefits
Guaranteed loan portions purchased in the secondary market may be eligible for CRA credit. Check with your regulators for specifics, as regulatory treatment may vary.
