Secondary Market Program-Proposed Regulatory Changes
| Published date | 23 December 2020 |
| Citation | 85 FR 83837 |
| Record Number | 2020-28195 |
| Section | Proposed rules |
| Court | Small Business Administration |
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
Proposed Rules Federal Register
83837
Vol. 85, No. 247
Wednesday, December 23, 2020
SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245–AH29
Secondary Market Program—Proposed
Regulatory Changes
AGENCY
: U.S. Small Business
Administration.
ACTION
: Advance notice of proposed
rulemaking.
SUMMARY
: The U.S. Small Business
Administration (SBA or Agency) is
considering a change in the structure of
its secondary market 7(a) loan pool
security to better align the collateral and
cash flows to support the long-term
viability of the SBA secondary market
7(a) loan pooling program. Specifically,
SBA seeks public comment on the
alignment of cash flows between the
collateral (the guaranteed portion of 7(a)
loans) and the pool security (Pool
Certificate), the timely payment of
scheduled interest and actual principal,
and the publication of additional loan-
level disclosure. The Agency is also
seeking public comment on registering
such securities in book-entry form.
DATES
: Comments must be received on
or before February 22, 2021.
ADDRESSES
: You may submit comments,
identified by RIN 3245–AH29, by any of
the following methods:
•Federal eRulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting comments.
•Mail/Hand Delivery/Courier: Peter
Meyers, Office of Capital Access, U.S.
Small Business Administration, 409
Third Street SW, 8th Floor, Washington,
DC 20416.
All comments will be posted on
https://www.regulations.gov. If you wish
to submit confidential business
information (CBI) as defined in the User
Notice at https://www.regulations.gov,
you must submit such information
either by mail to Peter Meyers, Office of
Capital Access, U.S. Small Business
Administration, 409 Third Street SW,
8th Floor, Washington, DC 20416, or by
email to Peter.Meyers@sba.gov.
Highlight the information that you
consider to be CBI and explain why you
believe SBA should hold this
information as confidential. SBA will
review your information and determine
whether it will make the information
public.
FOR FURTHER INFORMATION CONTACT
:
Peter Meyers, Office of Capital Access,
U.S. Small Business Administration,
409 Third Street SW, 8th Floor,
Washington, DC 20416; (202) 527–1253
or Peter.Meyers@sba.gov.
SUPPLEMENTARY INFORMATION
:
I. Background
The Secondary Markets Improvement
Act of 1984 (Pub. L. 98–352) authorized
SBA to establish a secondary market to
facilitate the pooling of the guaranteed
portion of 7(a) loans (underlying loans)
into securities (referred to as Pool
Certificates). The SBA secondary market
allows SBA Lenders to expand their
commitment to small businesses by
establishing a process for the sale and
pooling of SBA-guaranteed 7(a) loans
into securities, which enables SBA
Lenders to leverage their capital and
make more 7(a) loans. SBA Lenders may
sell SBA-guaranteed 7(a) loans to SBA-
approved Pool Assemblers, who
aggregate loans into SBA pools (the
underlying loans represent the collateral
for the pool). SBA then issues Pool
Certificates representing ownership of
all or a fractional undivided interest in
a part of those pools. SBA’s guarantee
on Pool Certificates is backed by the full
faith and credit of the United States.
Currently, investors receive a timely
payment guarantee of principal and
interest on Pool Certificates. However,
certain structural limitations of the
current pool security prevent the
instrument from performing like a pure
pass-through security. For example,
mismatches in cashflows between the
underlying loan collateral and the pool
security may result in the accumulation
of amortization excess in SBA’s Master
Reserve Fund (‘‘MRF’’). Historically, the
program costs associated with
amortization excess (and the additional
coupon interest paid while the
amortization excess remains in the
MRF) has been absorbed by SBA.
Other U.S. government-backed
securities issued by government-
sponsored enterprises pass through all
prepayments to the security holder,
which keeps the cash flow from the
underlying loan collateral aligned with
the cash flow paid on the related
securities. Government-sponsored
enterprises also disclose a significant
amount of loan-level information which
provides investors with a better
understanding of underlying loan
collateral performance and may enhance
more accurate security pricing.
II. Current SBA Secondary Market 7(a)
Loan Pool Security
SBA’s current secondary market 7(a)
loan pool security provides for the
timely payment of principal and interest
each month. Full prepayments from the
underlying loans are passed through to
the Pool Certificate holders. Partial
prepayments greater than 20% of the
outstanding principal balance of the
loan at the time of prepayment are also
passed through to the Pool Certificate
holders. However, partial prepayments
that are 20% or less than the
outstanding principal balance of the
loan at the time of prepayment are held
in the MRF for future distribution.
While this current structure may protect
the Pool Certificate holder from some
prepayment risk, it can create
imbalances between the underlying
loans in the pool and the balance
outstanding on the related Pool
Certificates. SBA is seeking to eliminate
this imbalance through the creation of a
new SBA secondary market 7(a) loan
pool security that better aligns payments
in with payments out. SBA anticipates
that the proposed solution will reduce
the risk assumed by SBA for
administering the 7(a) loan pooling
program.
SBA believes that offering a 7(a) loan
pool security that is more similar to
those of other government-backed
enterprises will provide more consistent
long-term stability for pool security
payments, which will attract more
institutional investors. SBA also
believes that these changes will promote
a continued source of liquidity for SBA
Lenders that make 7(a) loans to small
businesses.
III. Proposed New SBA Secondary
Market 7(a) Loan Pool Security
A. Alignment of Cash Flows
SBA is considering the issuance of a
new modified pass-through pool
security that would better align the
actual monthly cash flows of the
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
underlying loans with the pool security.
The underlying loans are structured as
simple interest term loans that are
amortized over their respective loan
maturities. The allocation of principal
and interest on any given installment
payment is dependent on when the
payment is received relative to when it
is due. Accrued interest is paid up to
the date of receipt of payment, with all
remaining amounts applied to principal.
When the underlying loans are paid as
agreed according to their loan terms, the
scheduled principal received from
borrowers aligns with their respective
loan amortization schedules. However,
when borrower payments are late or
missed, the payment of all accrued
interest must be satisfied first before any
remaining amount is applied to the
principal outstanding. This can result in
reduced loan principal paid by the
borrower and, in some instances, no
payment of principal at all. SBA does
not require SBA Lenders, as loan
servicers, to advance principal
payments to make up for these
differences. Under this current
structure, the risk to SBA of supporting
a scheduled principal payment to Pool
Certificate holders is not sustainable
over the long-term.
The current SBA secondary market
7(a) loan pool security is further
complicated by underlying loan
prepayments. Scheduled pool principal
is paid to Pool Certificate holders based
on the outstanding pool principal
balance and the remaining months to
maturity of the pool. This can create a
difference between the remaining pool
principal balance outstanding and the
principal balance outstanding on the
underlying loans. Full prepayments
(which include voluntary prepayments
by borrowers and involuntary
prepayments resulting from SBA’s
payment on its guarantee on defaulted
7(a) loans) require a reconciliation of the
allocated principal paid to the pool
compared with the actual loan principal
received from the underlying loans.
This reconciliation may result in a
reduced amount of prepayment
principal paid to Pool Certificate
holders because portions of prepayment
principal may be needed to cover a
shortfall of principal collected on a
specific loan. Conversely, this
reconciliation may result in an
additional amount of prepayment
principal paid to Pool Certificate
holders due to actual loan principal
previously collected on a specific loan
but not yet distributed.
B. Timely Payment of Scheduled
Interest and Actual Principal
As a solution to the misalignment of
cash flows noted above, SBA is
proposing to restructure its 7(a) loan
pool security to provide for the timely
payment of scheduled interest and
actual principal received. SBA believes
that this form of a modified pass-
through security would remove
differences arising from scheduled
principal paid and actual principal
received and eliminate the
reconciliation and adjustment exercise
occurring on all principal prepayments.
Scheduled interest will be calculated
using a 30/360 accrual method (i.e.,
interest will be calculated on the basis
of a 360-day year consisting of twelve
30-day months). It is a much simpler
form of security and allows investors to
monitor pool prepayment speeds based
on the actual prepayment activity of the
underlying loans. SBA believes that this
will provide greater transparency to
market participants.
This structural change in the pool
security will bring SBA Pool Certificates
more in line with other U.S.
government-backed securities and may
be more marketable to potential
investors. SBA believes that passing all
prepayments through to the Pool
Certificate holder will promote greater
predictability of monthly cash flows.
This will keep the underlying loan
balances in sync with the related Pool
Certificate balances and will no longer
require the MRF to retain amortization
excess or make advances of pool
principal.
Implementing a more standardized set
of pool characteristics, such as requiring
the same underlying loan payment due
date and requiring ACH debits on
underlying loan payments will also
simplify the pooling process and create
a more viable program for the long-term.
C. Loan-Level Disclosure
In addition to the new features
described above, SBA is considering a
robust set of loan-level disclosures to
accompany the launch of a new pass-
through security. This data will provide
investors with greater insight on the
underlying loans and may help inform
more accurate pricing decisions. A new
disclosure portal could be launched to
provide historical and current loan-level
data as well as customizable reports.
D. Book Entry Registration
To further align a new pool security
with other U.S. government-backed
securities, SBA is proposing a book-
entry form of registration. This
electronic record of ownership will
allow the pool security to be traded or
transferred with greater ease than a
physical certificate.
IV. Request for Comment
SBA requests comments from the
public on the questions listed below.
The list of questions is meant to assist
in the formulation of public comments
and is not intended to restrict the issues
that may be addressed. Responders are
invited to comment on any or all
portions of this ANPRM.
A. Questions About the Alignment of
Cash Flows
1. What are the advantages or
disadvantages to SBA revising the
current method of administering loan
prepayments and other unscheduled
principal payments?
2. Are there benefits of knowing that
a pool’s underlying loan collateral
balance will be in sync with that pool’s
outstanding security balance?
3. What impact would this proposed
new security have on the SBA
secondary market 7(a) loan pooling
program?
4. What effect would the alignment of
cash flows have on the pricing of a
security?
B. Questions About the Timely Payment
of Scheduled Interest and Actual
Principal
1. What payment features are most
important when considering a new pool
security? Are there certain payment
features of the current Pool Certificate
that SBA should consider changing?
2. What effect would the timely
payment of scheduled interest and
actual principal have on the pricing of
a pool security?
C. Questions About Loan-Level
Disclosures
1. Will providing loan level
disclosures make the proposed pool
security more attractive to a larger
market?
2. Which loan-level attributes could
SBA provide that would be the most
beneficial?
3. What types of disclosures or reports
would be preferable with a new pool
security?
4. What is the preferred method of
receiving loan-level data and security-
level data? Would using a disclosure
portal to generate reports and download
data files be a helpful resource?
5. What features of a customer-facing
disclosure tool might increase
participation in the SBA secondary
market 7(a) loan pooling program?
6. What effect would the publication
of robust loan-level disclosures have on
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
the pricing of the proposed pool
security?
D. Questions About Book-Entry
Registration
1. Currently, Pool Certificates are
registered in physical certificate form.
Would there be a benefit to the new
pool security being registered in book-
entry form? If so, what would those
benefits be?
2. What additional process or
technology changes would be needed to
support a book-entry security?
3. What effect would book-entry
registration have on the pricing of the
proposed pool security?
E. New SBA Secondary Market 7(a)
Loan Pool Security General Comments
SBA is seeking comments and
recommendations on changes to the
current pool security for the 7(a) loan
program to better align underlying loan
collateral and pool cash flows and to
sustain the long-term viability of the
7(a) loan pooling program. SBA also
requests comments on the proposed
cash flow alignment, the timely
payment of scheduled interest and
actual principal, loan-level disclosures,
and book-entry registration.
We value your comments and ask that
you provide a rationale for any
suggested changes or recommendations.
Jovita Carranza,
Administrator.
[FR Doc. 2020–28195 Filed 12–22–20; 8:45 am]
BILLING CODE P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 71
[Docket No. FAA–2020–1191 Airspace
Docket No. 20–AGL–41]
RIN 2120–AA66
Proposed Revocation of VOR Federal
Airway V–242 Due to the Planned
Decommissioning of the Atikokan,
Ontario, Canada, Nondirectional Radio
Beacon (NDB) Navigation Aid
AGENCY
: Federal Aviation
Administration (FAA), DOT.
ACTION
: Notice of proposed rulemaking
(NPRM).
SUMMARY
: This action proposes to
remove VHF Omnidirectional Range
(VOR) Federal airway V–242 in the
northcentral United States to reflect
changes being made by NAV CANADA
in Canadian airspace. The airway
removal is necessary due to the planned
decommissioning of the Atikokan,
Ontario (ON), Canada, NDB navigation
aid (NAVAID), which provides
navigation guidance for V–242. The
Atikokan NDB is being decommissioned
as part of NAV CANADA’s NAVAID
Modernization Program.
DATES
: Comments must be received on
or before February 8, 2021.
ADDRESSES
: Send comments on this
proposal to the U.S. Department of
Transportation, Docket Operations, 1200
New Jersey Avenue SE, West Building
Ground Floor, Room W12–140,
Washington, DC 20590; telephone: (800)
647–5527, or (202) 366–9826. You must
identify FAA Docket No. FAA–2020–
1191 Airspace Docket No. 20–AGL–41
at the beginning of your comments. You
may also submit comments through the
internet at https://www.regulations.gov.
FAA Order 7400.11E, Airspace
Designations and Reporting Points, and
subsequent amendments can be viewed
online at https://www.faa.gov/air_
traffic/publications/. For further
information, you can contact the Rules
and Regulations Group, Federal
Aviation Administration, 800
Independence Avenue SW, Washington,
DC 20591; telephone: (202) 267–8783.
The Order is also available for
inspection at the National Archives and
Records Administration (NARA). For
information on the availability of FAA
Order 7400.11E at NARA, email:
fedreg.legal@nara.gov or go to https://
www.archives.gov/federal-register/cfr/
ibr-locations.html.
FOR FURTHER INFORMATION CONTACT
:
Colby Abbott, Rules and Regulations
Group, Office of Policy, Federal
Aviation Administration, 800
Independence Avenue SW, Washington,
DC 20591; telephone: (202) 267–8783.
SUPPLEMENTARY INFORMATION
:
Authority for This Rulemaking
The FAA’s authority to issue rules
regarding aviation safety is found in
Title 49 of the United States Code.
Subtitle I, Section 106 describes the
authority of the FAA Administrator.
Subtitle VII, Aviation Programs,
describes in more detail the scope of the
agency’s authority. This rulemaking is
promulgated under the authority
described in Subtitle VII, Part A,
Subpart I, Section 40103. Under that
section, the FAA is charged with
prescribing regulations to assign the use
of the airspace necessary to ensure the
safety of aircraft and the efficient use of
airspace. This regulation is within the
scope of that authority as it would
modify the route structure as necessary
to preserve the safe and efficient flow of
air traffic within the National Airspace
System (NAS).
Comments Invited
Interested parties are invited to
participate in this proposed rulemaking
by submitting such written data, views,
or arguments as they may desire.
Comments that provide the factual basis
supporting the views and suggestions
presented are particularly helpful in
developing reasoned regulatory
decisions on the proposal. Comments
are specifically invited on the overall
regulatory, aeronautical, economic,
environmental, and energy-related
aspects of the proposal.
Communications should identify both
docket numbers (FAA Docket No. FAA–
2020–1191 Airspace Docket No. 20–
AGL–41) and be submitted in triplicate
to the Docket Management Facility (see
ADDRESSES
section for address and
phone number). You may also submit
comments through the internet at
https://www.regulations.gov.
Commenters wishing the FAA to
acknowledge receipt of their comments
on this action must submit with those
comments a self-addressed, stamped
postcard on which the following
statement is made: ‘‘Comments to FAA
Docket No. FAA–2020–1191 Airspace
Docket No. 20–AGL–41.’’ The postcard
will be date/time stamped and returned
to the commenter.
All communications received on or
before the specified comment closing
date will be considered before taking
action on the proposed rule. The
proposal contained in this action may
be changed in light of comments
received. All comments submitted will
be available for examination in the
public docket both before and after the
comment closing date. A report
summarizing each substantive public
contact with FAA personnel concerned
with this rulemaking will be filed in the
docket.
Availability of NPRMs
An electronic copy of this document
may be downloaded through the
internet at https://www.regulations.gov.
Recently published rulemaking
documents can also be accessed through
the FAA’s web page at https://
www.faa.gov/air_traffic/publications/
airspace_amendments/.
You may review the public docket
containing the proposal, any comments
received and any final disposition in
person in the Dockets Office (see
ADDRESSES
section for address and
phone number) between 9:00 a.m. and
5:00 p.m., Monday through Friday,
except federal holidays. An informal
docket may also be examined during
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