Monday, February 11, 2019

The SBA and pro rata

pro rata
pro RAY-tuh, RAH-
adverb: Proportionally.
adjective: Proportional.

From Latin pro rata according to the calculated share or literally ‘according to the rate’.


SBA loans are all about being pro rata.

SBA and the Lender share pro rata (in accordance with their respective interests in a loan).  The 7(a) program provides a 50 percent to 85 percent and in some cases a 90 percent federal guarantee on small business loans. If a loan defaults, the bank, after the liquidation of collateral, receives from the SBA the remaining unpaid principal and interest of the guaranteed loan portion on a pro rata basis.

Lenders can sell the guarantee portion of the loan.  After the loan is sold, payments from the borrower are split on a pro rata basis, generally equal to the percent of the SBA guarantee.  The SBA Form 1086 Secondary Market Participation Guaranty agreement states, “Lender agrees to deposit the pro rata share of borrower’s payment due to the FTA in a trust account with the name ‘Colson Services Corp., FTA, in trust for the individual security beneficiaries’.”

Loans that are sold are assembled into a SBA secondary market pool that includes a number of loans with various maturities and interest rates.  The Pool Certificates issued for such a pool, however, have one maturity date and an initial interest (coupon) rate.  These differences in maturities and interest/coupon rates, together with timing differences between the payment of principal on a pool loan and the payment of principal on Pool Certificates, result in what is referred to as “amortization excess.”  When a pool loan prepays in full, the amount of amortization excess attributable to the loan is equal to the difference between the loans’ pro rata share of the remaining pool principal balance and the amount of the loan’s principal prepayment.

This pro rata sharing of guarantees between borrowers, lenders and institutional investors provides financing to small business that is not otherwise available.

Taxpayers win as SBA loan programs operate on what is called a zero subsidy which means the SBA guarantee fee covers the cost of any loan defaults or losses.

Congress did not have to approve appropriations for 7(a) and 504/CDC loan guaranty program credit subsidies for FY2016, FY2017, FY2018, and FY2019 because the President’s budget request indicated that those programs did not require appropriations for credit subsidies in those fiscal years.

This too good to be true story is detailed in the latest Congressional Research Service report prepared for Congress on the SBA 7(a) Loan Guaranty Program.  Let me know if you would like a copy of it.

The only time any one loses is when the government shuts down.



SBA 504 Loan Debenture Rate for January
For 20 year debentures, the debenture rate is only 3.37% but note rate is 3.425% and the effective yield is 4.758%.

For 25 year debentures, the debenture rate is only 3.56% but note rate is 3.60% and the effective yield is 4.88%.


Nothing pro rata about the yield curve.

Last year the Federal Reserve increased interest rates 4 times pushing up the fed funds rate by 1 percent.

One month Treasury bills increased in rate over the last year from 1.32% to about 2.39% currently.  The 30 year Treasury bond yield is close to the same yield as it was a year ago.

Last week’s auction of $19 billion in 30 year Treasury bonds met with decent demand with the yield ending at 3.022% compared to the high yield of 3.035% from the auction in January.  The average yield over the last 12 auctions is 3.134%.

Here is what the 30 year Treasury bond has been doing and this week’s interesting little table:
2009- 3.89
2010- 4.61
2011- 2.89
2012- 2.77
2013- 3.25
2014- 3.97
2015- 2.91
2016- 2.32
2017- 3.16
2018- 3.13

What does all this mean?

I don’t know.

The short end of the curve is driven by the Federal Reserve Open Market Committee.  The long end of the curve is driven by the tyranny of the bond market.  Investors moved into the relative safety of longer term US Treasuries over concerns with the European economy.  On the same day as the 30 year Treasury bond auction, Germany reported another sharp year-over-year decline in industrial production in December while Spain's industrial production also contracted notably.

Industrial production in the United States appears to be robustious as last month the Federal Reserve reported that capacity utilization rose to 78.7% in December, the highest rate in almost four years.   One of the Fed’s favorite leading indicators on inflation is capacity utilization which measures the amount of a plant that is in use at factories, mines and utilities.  Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Keep your eyes and ears open for the Friday’s report on Industrial Production and Capacity Utilization.  At a capacity utilization rate of 78.7%, inflation is the least of the Federal Reserve’s concerns.

At last month’s meeting on monetary policy, the Fed did not change interest rates.  They did however remove language in their statement on the expectation for “further gradual increases” to the fed funds rate.  No more further gradual increases.

The long end of the yield curve as reflected in 30 year Treasury bond appear to be enervating any splenetic presentiment of a bigly recrudescence in interest rates.


A three day weekend approaches and it is NOT a pro rata celebration of Lincoln and Washington’s birthdays.  It is Washington’s Birthday.  It is not President’s Day.

In 1968, Congress passed the Monday Holidays Act, which moved the official observance of Washington's Birthday from February 22 to the third Monday in February. Some reformers wanted to change the name of the holiday as well, to Presidents' Day, in honor of both Lincoln and Washington, but splenetic cerebration over Lincoln’s war of northern aggression caused that proposal to be rejected by Congress, and the holiday remained officially Washington's Birthday.

The Federal Reserve not only dictates interest rates, they promulgate our Federal holidays.

According to the Federal Reserve statistical release K.8, here are our remaining holidays for 2019:

Washington's Birthday February 18
Memorial Day May 27
Independence Day July 4
Labor Day September 2
Columbus Day October 14
Veterans Day November 11
Thanksgiving Day November 28
Christmas Day December 25

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