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Tuesday, November 18, 2008

Daily Observation - There Is A Choice

SBA has shared more guidelines as to the upcoming change from Prime to LIBOR and in the nutshell a Lender has the option of staying with Prime or changing to LIBOR. I am now going to copy a great deal from the SBA Update Notice that we just received so you can get a true flavor of what is going on and more importantly as to why it is being changed. Enjoy the balance of the article. For more on SBA financing visit loanforbiz.com and make sure you sign up for your 10 FREE Special Reports on Getting Your Loan Closed.


Under SBA’s loan guaranty program, greater numbers of small businesses can obtain loans from banks, small business lending companies, credit unions, and other participating financial institutions, because the Agency provides various incentives and risk mitigators to make these loans profitable for lenders. However, the recent turmoil and uncertainty in the financial markets have seriously affected SBA lenders’ cost of funds, their ability to sell SBA loans in the Secondary Market, and their liquidity. This has led to severely reduced small business access to capital (including SBA lending) at a critical juncture for the U.S. economy.

Due to the globalization of the financial markets, many SBA lenders’ source and cost of funds (and/or internal yield model) is partially or completely based on the London Interbank Offered Rate (LIBOR) rather than the Prime Rate, which traditionally has been SBA’s base interest rate for establishing the maximum interest rate lenders can charge for SBA-guaranteed loans. As a result, increasing numbers of lenders use LIBOR as the base rate for their internal business models and for pricing their loans. SBA’s requirement for lenders to use the Prime Rate to price 7(a) loans unnecessarily complicates their business practices and expands their risk, which increases their costs for making such loans.

Historically, LIBOR rates, which are shorter term interbank lending rates, have consistently been about 3 percentage points less than the Prime Rate, which has historically been the lending rate charged by U.S. banks to their best customers. This 3 percentage point differential between many of SBA’s lenders’ cost of funds and the Prime Rate, which is the basis for SBA’s interest rate maximums, has helped SBA lenders to profitably make small business loans. However, due to the recent volatility and uncertainty of the international financial markets, the 3 percent spread between LIBOR and Prime has been greatly reduced, and on some days LIBOR has actually exceeded the Prime Rate. As LIBOR rates more closely approximate the Prime Rate, SBA’s lenders cannot profitably make SBA loans based on the Prime Rate. As a result, they have substantially reduced or eliminated their SBA lending in recent months.

With the uncertainty in the financial markets, the convergence of Prime and LIBOR rates, and the allowable interest rate charged on SBA loans being based on the Prime Rate, SBA lenders are encountering significant problems with selling their SBA loans on the secondary market. Also, with LIBOR based funds being the source of funds for many secondary market investors, the convergence of LIBOR and Prime Rates has reduced the demand for SBA backed securities. As a result, many lenders are experiencing major liquidity problems and have greatly limited or discontinued their secondary market activities, which has limited their capacity to make SBA loans.

Changes in SBA Regulation and SOP

As a result of these issues, and following discussions with the lending industry, SBA has concluded that allowing lenders to use an adjusted thirty day (one month) LIBOR rate as a base rate for pricing SBA loans will ameliorate several of the factors that are impeding small businesses’ access to capital through SBA’s guaranteed loan programs. SBA is allowing an adjustment of 3 percentage points to the thirty day (one month) LIBOR rate to reflect the historical 3 percentage point spread between the LIBOR and the Prime Rate and to help reduce the uncertainty and the financial risk to lenders and to secondary market participants.

The Agency has therefore revised its regulation at 13 CFR 120.214(c) and, henceforth, the allowable base rate establishing the maximum interest rate lenders may charge for SBA 7(a) loans will be the following: 1) Prime Rate; 2) Thirty day (1 Month) London Interbank Offered Rate plus 3 percentage points; or 3) Optional Peg Rate. The Prime or LIBOR rate will be that rate which is in effect on the first business day of the month, as identified in a national financial newspaper or newspaper website each business day. These changes are applicable to 7(a) loan applications that lenders may currently have in process, but they are not applicable to loan applications that have already been received by SBA.


Alexander said...

I have a question: are there any loan brokers I could acess online for getting independent advice and good rates? I remember there was something at the beginning of 2000 (called Livecapital.com), being acquired by DB. There must be something like this for small businesses (like eloan or so). Would be happy about an answer. Thanks! Alexander

Harlan A. Friedman said...

I beleive that for Small Business Loans there is no equivalent service as there is for commercial loans, You can try the grapevine as part of Broker Magazine, or just ask us and I will attempt to help you to the best of my ability.