SBA Plan Would Make Lenders Retain Some Risk Exposure

A Small Business Administration proposal would require banks selling the nonguaranteed portion of 7(a) loans to retain a percentage of the credit.

The SBA's plan wants lenders to retain an amount equal to twice their historical loan-loss rate or 2% of the nonguaranteed portion, whichever is greater.

"This encourages lenders to maintain credit quality," said James W. Hammersley, the SBA's director of secondary market sales.

The SBA estimates the 40 highest-volume lenders would be required to retain an average of 5.4% of the nonguaranteed portion of their 7(a) loans, based on their loss rates.

Nonbank lenders have been allowed to sell the guaranteed and nonguaranteed portion of 7(a) loans since 1992, but banks were prohibited until April 1997. Since then, the SBA has approved securitizations on a case-by-case basis.

The proposed rule would apply to banks and nonbank lenders. The SBA will hold a June 16 public hearing on the proposed rule, which was published in the Federal Register on May 18.

So far, only one bank, $800 million-asset SierraWest Bancorp in Truckee, Calif., has securitized the nonguaranteed portion of its 7(a) loans. It securitized $51.3 million in June 1997.

Mr. Hammersley said the rule is designed to encourage more banks to securitize their loans to generate additional capital to fund new small- business loans.

Arthur C. Johnson, president of the $185 million-asset United Bank of Michigan in Grand Rapids, said an established rule rather than individual SBA decisions on securitizations would encourage more banks to try it. United Bank has sold $60 million of the guaranteed portions of 7(a) loans in recent years because loan demand has grown at a faster rate than deposits.

"This is a very important tool for us to find creative ways to bring funds into our community so we can lend it out again," he said.

James Murray, president of Small Business Funding Corp., a Washington company formed to securitize small-business loans made by community banks, said the rule would entice some banks with a large volume of the nonguaranteed portion of 7(a) loans to sell them.

"It should be an encouragement," he said.

W. David Hemingway, Zions Bancorp. executive vice president, said he was pleased the rule would apply equally to banks and nonbank lenders. Zions, based in Salt Lake City, buys and securitizes SBA loans made by other banks. "That's positive," he said. "They should have been on equal footing all along."

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