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CUNA Regulatory Comment Call

November 19, 2008

• To address the current conditions that have limited the availability of business loans, the Small Business Administration (SBA) has issued an interim final rule that will make changes to loan pricing and to the formation of secondary market loan pools for SBA loans under Section 7(a). Specifically, the rule will allow loans to be priced based on the London Interbank Offered Rate (LIBOR) and will allow secondary market loan pools to be priced based on the weighted average coupon rate.
• For many SBA lenders, the cost of funds is based at least in part on LIBOR, while the interest rate for Section 7(a) SBA loans is typically based on the Prime Rate. Recently, the spread between LIBOR and the Prime Rate has narrowed significantly, which has essentially eliminated the profit margin for lenders making SBA loans. As a result, many lenders have reduced the number of such loans that they are willing to make and this has reduced the amount of capital and financing that is now available to small businesses.
• For similar reasons, this narrowing of the spread between LIBOR and the Prime Rate has also impacted those lenders who participate in secondary market activities because the reduced profits have limited the number of investors who are now willing to buy SBA loans in the secondary market.
• Under the interim final rule, SBA lenders will have the option to price loans at the thirty day (1 month) LIBOR rate plus 300 basis points. This is an additional option, and SBA lenders will still be able to price their loans using the Prime Rate and other rates, as currently permitted under the SBA rules. The maximum interest rate spreads over the base rates that are outlined under the current rules will remain in place.
• For SBA loan pools sold into the secondary market, the interest rate on a loan pool is currently the lowest net rate of all the loans in the pool. The interim final rule will allow “weighted average coupon” pools. This will allow loans with approximately the same net rates to be grouped together, and the interest rate on the pool will be the weighted average of the net rates of the loans in the pool.
• The interim final rule is effective as of November 13, 2008, and comments will be accepted until December 15, 2008. Please submit your comments to CUNA by December 8, 2008.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may contact us at 800-356-9655, ext. 6732, if you would like a copy of the interim final rule. You may also access it here.