May 26, 2016
By Bob Coleman
Editor, Coleman Report
Breaking News — Senate Introduces Bill to Lower SBA 7(a) Premium Split from 110 to 108
In this morning’s hearing, Senate Small Business Chair David Vitter (R-LA) introduced legislation to reduce the SBA 7(a) premium split from 110 to 108 and impose a 3 basis point fee on outstanding SBA 7(a) loan portfolios.
The bill contains sweeping changes to the relationship between the lender and SBA:
SBA will formally be given oversight tools to suspend and revoke PLP status and deny the lender’s ability to sell to the secondary market.
SBA will have the authority to impose civil fines up to $250,000 on lenders who fail to document the credit available elsewhere rule.
Fines can be issued if the lender sells the guaranteed portion of the loan to the secondary market when the proceeds have not been fully disbursed in accordance with “program requirements.”
FInes can also be issued to lenders who charge unauthorized fees and re-amortize a loan to make it appear current.
To fund SBA’s new oversight responsibilities, SBA 7(a) lenders will pay a 3 basis point fee per year of the portfolio guaranteed loan balance.
The SBA 7(a) 50% premium tax will apply to loans sold over 108.
The lender may not sell more than 85% of the loan to the secondary market, e.g. the lender must retain a minimum of 15% of the loan. (For 90% export related loans, the lender must retain the unguaranteed 10% portion of the loan.)
If a lender has more than 15% of its portfolio in an industry segment (e.g. hotels), the lender may not provide additional funding to the industry. If the lender’s annual volume is less than 1% market share (e.g. $235 million in 2015), than they are exempt.
The lender is capped at 100% commercial real estate financing for 20% of its loan portfolio.
Loans that provide financing in excess of 100% of project costs will be prohibited.
Importantly, the credit elsewhere rule will shift from from the lender’s to the borrower’s ability to obtain credit on reasonable terms from other conventional lending sources.
To be eligible for SBA financing the applicant must fall into one of the following categories:
- Conventional credit is not available to the applicant’s industry’s
- The applicant has been in business less than two years
- There is not enough collateral to fully secure the loan
- The applicant cannot match the amortization with a conventional loan offered by the SBA loan
The bipartisan legislation is supported by NAGGL, ABA and ICBA.
My view is lowering the premium split from 110 to 108 is simply another tax on small business — a bizarre course of action by the “small business” committee.
The user of the SBA 7(a) secondary market are the smaller lenders, community banks, credit unions, CDCs and non-bank lenders. They are all small businesses in their own right.
Wall Street and regional banks avoid the tax by portfolioing their loans.
If Congress wants a slice of lender profits to fund new SBA oversight activities, I believe the only fair tax is to assess a fee on ALL SBA 7(a) lender portfolios.
The sweeping changes will be discussed and analyzed further in the coming weeks.
Please offer your thoughts in the Coleman Small Business Lending Group