SBA loan guarantee assemblers (often referred to as “poolers”) buy SBA loan guarantees [primarily SBA 7(a)] at a premium from banks and other originators usually on a one-off basis. Banks sell the guarantees to earn up-front income that flows to the bank’s bottom line and are able to reduce the capital required to hold the loan by the amount of the loan guarantee sale. In addition, the bank earns servicing income on the entire loan amount. In today’s low interest-rate environment, loan guarantee sale premiums are very high, exceeding 10% of the loan guarantee for a Prime + 2% loan on a 25-year SBA 7(a) loan.
Loan premiums on individual loan sales to poolers are a function of markets rates and other factors, including the diversity of the loan guarantee amounts within a pool. Historically, SBA loan pool assemblers have created diversified pools of SBA loan guarantees based on the former guarantee limit of $1.5 million and pool sizes that exceeded $30 million for larger pool assemblers. This means that if a $30-million pool of loan guarantees contained a few $1.5-million loan guarantees, the largest concentration in the example pool would be 5% ($1.5 million divided by $30 million). Diversified loan guarantee pools are very important to investors as the more diversified pools mitigate prepayment risk. If loans within a pool prepay and investors have paid a premium to invest in the pool, then the investor will suffer a loss on the prepayment because any prepayment penalty goes to the SBA. For example, if a $1-million pool has four $250,000 loans, and an investor pays 110% for the securities backed by the pool ($1.1 million), and one loan pays off immediately, then the investor takes a $25,000 loss because the investor received prepayment of $250,000 on a security that cost $275,000 (110%). But if the pool contained forty $25,000 loans, the prepayment of one or two loans does not create a significant loss relative to the income earned from the pool.
Now consider the effects of the new higher guarantees created by the Jobs Act. ValueXpress just received approval of a $5-million loan that obtained a $4.5-million loan guarantee. If this loan was placed in a typical $30-million pool, the concentration would be 15%. This level creates a prepayment risk level that is of concern to investors, and therefore, the premium on the loan is being bid much lower than smaller loans, on the order of 105% for a Prime + 2% loan.