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Program Details

As part of the American Recovery and Reinvestment Act (AKA the Stimulus Bill), Congress authorized the SBA to create a temporary program that provides a guarantee on an eligible pool of SBA 504 first liens. The program was originally authorized for a period of two years from the date of bill passage – February, 2009. The eligibility of each loan is dependent on the date of the SBA Debenture funding. To be eligible, the Debenture must have been funded on or after February 17, 2009, and prior to September, 2012. The total guarantee allocation is $3 Billion. 

 

The SBA announced that they will begin issuing the first pool guarantees in September, 2010.

 

UPDATE:  As part of the “Small Business Bill” (HR 5297), the program has been extended for two years from the creation of the first pool in September, 2010.  Therefore, the program has been extended to September, 2012.

 

For the purposes of the program, a pool is defined as 2 or more loans. A pool must be either fixed (for life) or adjustable (any period adjustment including 5 or 10 years). If the pool is comprised of adjustable rate loans, all loans must have the same base rate (e.g. Prime, LIBOR, LIBOR Swaps, FHLB, etc.). Finally, each loan must be current for the lesser of 6 months or from the time of loan funding.

 

Congress mandated that this be a zero subsidy program to the SBA (and the US taxpayer). The SBA has determined the program cost (management and expected losses) can be covered by an ongoing subsidy fee of .167%.  The subsidy fee will increase to .245% for pools issued on or after October 1st, 2010.

 

Note:  For more details on the program, please view this excerpt from the Federal Register, Volume 74, Number 209, dated October 30th, 2009, here.

 

Each loan pool will have three participants: the Seller, the Pool Originator, and the Investor:

 

1.  The Seller is the bank that either made the loan or purchased the loan from the original, or subsequent, lender. The Seller will hold 15% of each loan. The Seller will be paid a premium for the participation interest sold (equal to 85% of each loan), and will receive at least .50 basis points in servicing as mandated by SBA. The Seller's Loan Interest is not guaranteed by the SBA but can be resold at a later date subject to SBA approval and 100% divestment of the loan (including servicing). The Seller will receive a Seller Certificate at pool formation.

 

2.  The Pool Originator will purchase the 85% participation interest in individual loans in order to form eligible loan pools. The Pool Originator must hold 5% of each loan for the life of the loan. This portion will not be guaranteed by the SBA and cannot be resold. The Pool Originator will receive a Pool Originator certificate at pool formation.

 

3.  The Investor will purchase 80% of each loan pool which will be guaranteed by the SBA. Unlike the SBA 7A loan, an originating bank may not fund a loan, or pool of loans, and then apply for a guarantee as part of a portfolio strategy. The guarantee is finalized only when an unaffiliated buyer (or buyers) agrees to be an Investor in a loan pool. Two other key differences to the 7A program are that the prepayment penalty will flow to the investor (not SBA), and there is no cap on the interest rate charged other than what is mandated for a normal 504 first lien. The Investor's interest can be resold. The Investor will receive an Investor certificate at the time of pool formation.

 

Some lenders may elect to be both the Seller and the Pool Originator. If lenders choose this option, they must hold 20% of each loan and 5% for life.

 

The SBA has also required that each loan have a payment date of the first of each month, and that each loan payment be automatically deducted via ACH (as is required for the SBA Debenture). Once a loan pool is executed, Colson Services will automatically draw 100% of each payment and will distribute the proceeds to the Investor, the Pool Originator, the Seller, and the SBA.

Secondary Market Access

Helping lenders access the 504 secondary market.