How To Sell An Sba Loan At A Premium
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- Barnaby Hicks
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1 Selling Your Small Business Administration (SBA) Loans To Coastal Securities March 2014
2 The Role of the Lending Bank Lending Bank - retains customer relationship as they continue to service their SBA loans. - sells the loan to Coastal at a predetermined coupon and price. Customer - will not know that the loan has been sold into the secondary market. The higher the coupon and the longer the maturity of the loan, the higher the price paid to the lending bank. 2
3 The Role of the Lending Bank Books premium received from the sale of the loan as income - In accordance with Generally Accepted Accounting Principles as defined in FAS 166 Retains total (gross) coupon from the borrower on the unsold, unguaranteed portion Retains servicing fee on the sold portion of the loan - at least 1% if loan is sold at a premium - dependent upon the loan parameters on the sold guaranteed portion 3
4 The Role of the Lending Bank Three sources of income from an SBA loan sold into the secondary market at a premium: Premium income Interest income on retained portion Servicing fee income on sold portion 4
5 The Role of the Broker/Dealer Coastal purchases SBA loans in an active negotiated secondary market 5
6 The Role of the Broker/Dealer The lending bank forwards required loan transfer documentation to Coastal for review. Coastal forwards documentation to the registered fiscal and transfer agent for the SBA loan to be placed on a registered loan certificate. Coastal will either: sell the individual loan to an investor or combine the loan with other similar SBA loans into an SBA pool through the fiscal and transfer agent. 6
7 The Fiscal & Transfer Agent Lending bank will forward, on a monthly basis, the prorata share of the borrower s principal and interest payments to the FTA who remits these payments to the ultimate investor. A loan that is certificated by the FTA carries the unconditional full faith and credit guarantee of the U.S. Government for all principal and accrued interest. 7
8 The Fiscal & Transfer Agent Borrower FTA (Colson) Lending Bank Coastal 8
9 Loan Sale Analysis Loan Details Transaction Details Loan Name or Number: ABC Widgets, Inc. Gross Rate: 6.000% Originated: 1/15/2014 Retained Servicing Fee: 1.000% Matures: 1/15/2039 Net Margin: 1.750% P&I Payment Frequency: Monthly Net Rate: 5.000% Rate Adjustment Frequency: Monthly Sale Price: $ Current Index Rate: 3.25% Premium Percentage: % Margin: 2.750% Current Gross Rate 6.000% Current Balance: $ 910,000 Guaranteed Percentage: 75% Unguaranteed Percentage: 25% 9
10 Loan Sale Analysis Guaranteed Portion Sold to Coastal: (Current Loan Balance x Guaranteed Percentage) $ 682,500 Unguaranteed Portion Held By Lender (Invested Funds): (Current Loan Balance x Unguaranteed Percentage) $ 227,500 Premium Forwarded to the SBA: (Guaranteed Portion x 1/2 of Premium over 110) $ 17,063 Premium Earned on Sale: (Guaranteed Portion x Premium Percentage) $ 85,313 Servicing Fee Income on Guaranteed Portion Sold: (Guaranteed Portion x Retained Servicing Fee) $ 6,825 Interest Earned on Unguaranteed Porion Held: (Unguaranteed Portion Held By Lender x Gross Rate) $ 13,650 Year 1 Return: (Premium + Servicing + Interest) $ 105,788 Years 2 and Following Return: (Servicing + Interest) $ 20,475 Return On Invested Funds Year 1: % Years 2 and Following: 9.000% Assumptions: Constant Prime Rate 0% CPR (No amortization of loan balance in excess of scheduled amortization). All premium taken in Year 1 (may not be allowable under FAS 166 Accounting for Premium Income). Per SBA regulations, if sale price exceeds $110, seller receives only 1/2 of the amount greater than 110 with the other 1/2 paid to the SBA. 10
11 Gain on Sale Accounting Report After a loan transaction is completed, a lender may request a Gain on Sale Accounting report. The fair market value is calculated on the following three asset components in a guaranteed loan sale: 1. The Guaranteed Portion 2. The Unguaranteed Portion 3. The Servicing Asset This report is FAS compliant and provides actual entries to be made in the general ledger as well as a level yield amortization/accretion schedule (assumes a static prepayment rate). 11
12 Gain on Sale Accounting Report General Ledger Entries: 12
13 Gain on Sale Accounting Report Level Yield Amortization/Accretion Schedule: 13
14 Bid Sheet SBA GP Number Loan Guaranteed Balance Gross Coupon Net Coupon Fixed or adjustable rate Payment frequency Coupon adjustment frequency Prepayment Penalty Original dated date of loan Maturity date of loan Caps/Floors Bid variable at 110 Bid fixed at par Bid full coupon 14
15 Required Information for Good Delivery REQUIREMENTS FOR GOOD DELIVERY (SBA FORM 1086) LOAN MUST BE PROPERLY CLOSED AND FULLY DISBURSED The broker/dealer will forward or make available the following to the Lender subsequent to Trade Date: A. 1 Blank Form Secondary Participation Guaranty and Certification Agreement: This form must be completed by the Lender and be executed by an appropriate officer of the Lending Institution. It is available for download on the Coastal Securities website. 15
16 Required Information for Good Delivery B. Confirmation Letter: This form includes loan characteristics as well as the standard terms and conditions. You are hereby advised that the SBA, acting through the FTA, will collect fifty percent (50%) of any premium paid in excess of 110 on any loan purchased in the secondary market with a settlement date after August 31, This action by SBA is in accordance with congressional authority. 16
17 Required Information for Good Delivery REQUIREMENTS FOR GOOD DELIVERY (SBA FORM 1086) LOAN MUST BE PROPERLY CLOSED AND FULLY DISBURSED Upon completion and execution by the Lender, please send the following documents to the broker/dealer: SBA Form 1086, completed and executed by Lender. Corrections or whiteouts are not accepted by Colson Services Corp. (The Fiscal and Transfer Agent for SBA) 17
18 Required Information for Good Delivery Copy of SBA Form 147 (Promissory Note). Step 1: The following legend must be printed on the ORIGINAL NOTE, AND BE SIGNED AND DATED BY AN AUTHORIZED OFFICER OF THE BANK: "The guaranteed portion of the outstanding principal balance of this note has been transferred to a Registered Holder for value." Upon completion, make a COPY of the Original Note. THE SIGNATURE ON THE LEGEND WILL THEN BE A PHOTOCOPY. Step 2: On the COPY of the Original Note, the following certification must be printed: "We certify this document to be a true and correct copy of the Original Note." THIS CERTIFICATION MUST ALSO BE SIGNED AND DATED (PREFERABLY IN BLUE INK). SIGNATURE MUST BE AN ORIGINAL SIGNATURE ON THE CERTIFICATION (NOT A PHOTOCOPY). 18
19 Required Information for Good Delivery It is recommended by the SBA that notes dated after February 15, 1986, contain the following language: "Borrower shall provide Lender with written notice of intent to prepay part or all of this loan at least 15 business days prior to the anticipated payment date. A prepayment shall be defined as any payment made ahead of schedule that exceeds 20% of the then outstanding balance. 19
20 Required Information for Good Delivery On variable rate loans, the note must contain an Amortization Clause. Example: If an increase in the interest rate of this Note on the first day of January, April, July or October causes the monthly installment payments of principal and interest to be insufficient to amortize the loan to maturity, then such monthly payments shall be increased to satisfy the interest accruing on the Note each month. 20
21 Required Information for Good Delivery Copy of Authorization and Loan Agreement (SBA Form 529B) Payment History indicating the current status of Borrower; if new loan, please send transcript showing date(s) and amounts of disbursement. Documentation from the SBA approving any changes in the 529B that affect repayment terms (the Note) must accompany this form. 21
22 Required Information for Good Delivery PLEASE SUBMIT THE DOCUMENT PACKAGE TO: (Broker/Dealer Address) Upon receipt and verification of the above information, the broker/dealer will submit the complete document package to the fiscal and transfer agent (FTA). The FTA will review and approve the completed document package and notify the broker/dealer to arrange a settlement date. The broker/dealer will contact the Lender prior to settlement to verify the Borrower's last payment date and remaining principal balance. Settlement will be made by wire transfer of funds on the designated date agreed upon by the broker/dealer and the Lending Institution. 22
23 Disclaimer Nothing contained herein is an offer to sell or the solicitation of an offer to buy any financial instrument. The opinions and recommendations presented do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own independent decisions regarding any securities or financial instruments mentioned herein and seek professional advice, including tax and accounting advice. Any indications of market valuation contained herein are based on current information that we consider reliable, but we do not guarantee it is accurate or complete and users should make whatever additional determinations of market value they deem appropriate. All assumptions, opinions and estimates constitute Coastal Securities, Inc. s (CSI) judgment as of this date and, along with prices and yields, are subject to change without notice. Past performance is not indicative of future results. The yield and/or average life shown on loans, SBA pools, CMOs or mortgage backed securities consider prepayment assumptions that may or may not be met. Changes in prepayments may significantly affect yield and/or average life. CSI does not accept orders or instructions transmitted via or left on any phone voice or text mail system. Please be aware that communications received by or sent from our system are not confidential and subject to review by supervisory personnel. 23
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