There are two new government programs in the queue that aim to revive the frozen secondary market for loans guaranteed by the Small Business Administration.

The Term Asset-Backed Securities Loan Facility would accept SBA pools as collateral through the Federal Reserve Bank of New York and is scheduled to commence operations this month. The economic recovery bill passed by Congress last week contains a provision that would establish an SBA Secondary Market Lending Authority that would provide favorably priced financing lines to broker-dealers that specialize in this niche market.

I propose that secondary purchases by banks might prove equally effective at reviving the market.

Every SBA 7(a) guaranteed loan portion sold into the secondary market is transferred following the same procedure. The originating lender makes the initial transfer by delivering the required documents. When good delivery has been made to the SBA's fiscal and transfer agent, the settlement is approved by the agent, money is wired from purchaser to seller (through the agent) and the initial transfer takes place.

From that point forward, the fiscal and transfer agent retains all the documents delivered as part of the initial transaction. The agent issues an SBA Guaranteed Interest Certificate, which is delivered to the purchasing dealer.

Many of the certificates are subsequently used to form SBA guaranteed loan pool securities, but not all the certificates are pooled; they may be sold individually. In fact, many portions of SBA loans are traded this way in the secondary market.

There are some distinct differences between the pools and the certificates.

SBA pools have Cusip numbers and may be purchased in fractional interests. They are traded on the DTC wire, carried in the investment portfolio, modeled on Bloomberg, guaranteed as to timely P&I payments by the full faith and credit of the U.S. government, and eligible collateral for Talf.

The certificates do not have Cusip numbers, cannot be broken into fractional interests, and are not eligible collateral for Talf. They are traded in physical form and are guaranteed as to principal and accrued interest by the full faith and credit of the U.S. government. (Payments are not guaranteed on a timely basis, as they are with pools.)

Also, because the certificates cannot be broken into fractional interests and represent the entire guaranteed portion of a specified loan, federal regulators have determined that they have more of the characteristics of loans than securities. As such, depository institutions are required to book them in their loan portfolios for call reporting purposes.

Bankers are under increasing pressure to make loans. The Treasury Department is now requiring the top 20 recipients of capital under the Troubled Asset Relief Program to provide monthly reports of their lending activities.

Banks can increase their loan portfolios by purchasing the SBA certificates in the secondary market. They are unconditionally guaranteed as to principal and accrued interest and are low-risk-weighted assets. As such, the purchased loans do not put a large burden on a bank's capital position.

Federal officials need only to communicate to depository institutions that they would view the purchase of certificates as a favorable activity consistent with increased lending activities. This would likely result in a substantial surge in the demand for the certificates, which would be completely consistent with the objectives of Talf and the proposed SBA Secondary Market Lending Authority. It would not require any new legislation or regulation. It would cost nothing.

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