The Small Business Administration has approved a rule that will make it easier for banks to securitize the non-guaranteed portion of 7 a loans.

Effective April 15, well-capitalized banks will be permitted to sell the nonguaranteed portion of loans they make under the SBA's 7a loan guarantee program if they retain a small percentage of the credit.

The rule, which applies to both depository institutions and nonbanks, will help level the playing field between the two groups.

Nonbanks have been allowed to sell the non-guaranteed portion of 7a loans since 1992, when the Money Store, now a subsidiary of First Union Corp., requested the SBA's permission.

Banks gained the right in April 1997, but only on a case-by-case basis - and the process was time-consuming.

As proof, just three banks have done so: SierraWest Bank, Truckee, Calif.; First National Bank of New England, Hartford, Conn.; and BYL Bank Group, Yorba Linda, Calif. The total volume sold in 1998 was $282 million, compared with $2.9 billion of the guaranteed portion.

An SBA official predicted that the new rule would draw more banks but not create a "big jump" in non-guaranteed securitizations. Approximately three-quarters of all 7a loans are made by banks.

One of the few unpopular parts of the new regulation may be the retention requirement.

Under the rule, a lender seeking to securitize the non-guaranteed portion must retain 2% or twice the lender's loss rate on 7a loans over a 10-year period, whichever is greater. For example, a bank with a 3% historic loss rate would be required to retain 6% of the credit.

Moreover, if the delinquency rate on the loans securitized by the bank rose significantly, the SBA could suspend the bank's "preferred lender" status.

Commenting on the plan last July, the American Bankers Association objected to the potential suspensions and suggested a different framework for determining a historic loss rate. The SBA rejected both requests.

This summer, the SBA expects to propose a rule that would allow small lenders to pool and securitize the non-guaranteed portion of their 7a loans.

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