Capital Briefs: ABA Likes Plan for Partial Sale of SBA Loans

The American Bankers Association generally supports a proposal by the Small Business Administration that would let banks sell the nonguaranteed portion of 7(a) loans if they retain a percentage of the credit.

"ABA applauds the SBA for formulating a proposal based on credit performance which is equally applied to both banks and nondepository lenders," wrote John C. Rasmus, ABA's senior federal administrative counsel, in a July 17 letter to the agency.

However, the trade group asked the SBA to eliminate a provision that would toughen standards on preferred lenders, and to make other technical changes.

Nonbank lenders have been allowed to sell the nonguaranteed portion of 7(a) loans since 1992, but a two-year-old law says that banks must receive the same power. The SBA has let banks securitize the nonguaranteed portion of these loans on a case-by-case basis since April 1997 while it developed a permanent rule.

Under the plan issued in May, lenders would have to keep an amount equal to twice their historical loan-loss rate on SBA loans over 10 years, or 2% of the nonguaranteed portion, whichever is greater.

The ABA letter suggested that the calculation be based on a bank's loss rate for all its small-business loans, not just SBA loans. ABA also requested that the period for measuring loan-loss rates be reduced to three years.

Also, the group called unfair a provision that would toughen standards for preferred lenders that sell the nonguaranteed portions of 7(a) loans. A lender's preferred status, which allows expedited loan approvals, would be revoked if the performance of the loan portfolio deteriorated.

Mr. Rasmus wrote that the existing standards for all preferred lenders are sufficient, and that banks have enough incentive to make sound loans. "SBA should employ procedures which ensure that all lenders are dealt with equally."

The ABA letter urged the agency to back off consideration of a 1% fee on the outstanding balance of a lender's securitized loans if they are performing poorly. Congress would have to enact such a fee, Mr. Rasmus said.

Finally, the ABA complained that the proposal does not create a way for small banks to pool the nonguaranteed portion of loans for sale jointly. An SBA spokesman said Monday that the agency is considering a plan to help small banks, but that proposal would be offered separately.

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