Feb. 2022 Issue:
A Word from Arne
Both the SBA and the USDA loan programs continue to be well funded by Congress. The successful Paycheck Protection Program (PPP) is winding down, and the forgiveness process is now in full swing. Unfortunately, there were many instances of fraud, waste and abuse involved in the PPP program, which are robbing American small businesses of funding that can be vital to their future. This is a good time to visit some common-sense steps to follow if you suspect that bad actors are at work.
Report suspected wrongdoing. It's in everyone’s best interest.
Anyone can contribute to helping the SBA’s Office of Inspector General (OIG) detect and prevent misconduct in SBA programs. Because lenders are often on the front lines of detecting and reporting possible acts of crime and rules violations, OIG provides them helpful tools for communicating their concerns to investigators. See more.
- Online Complaint Submission System — Using this SBA OIG Complaint Submission Form, lenders (and other interested parties) can enter information about their allegations or concerns electronically. The form also allows you to attach related documents. Before beginning the process, make sure to have all of the details at hand, including the SBA program involved, loan number and amount, information about the alleged person/business/department, supporting documents, etc. Read more.
The system will provide a confirmation number indicating that OIG received your information, and this should be referenced in any further communications. It’s also important to include this number when reporting fraud, waste or abuse to the SBA Office of Credit Risk Management (See SBA SOP 50 10 6 page 21 for requirements) at OCRM@sba.gov or CRMFraudNotification@sba.gov.
- New! ‘Urgent’ Email for Bankers’ Use Only — Now lenders can provide additional allegation information and follow up on urgent matters or matters of heightened concern by communicating directly to OIG staff using an email address — OIGbankhotline@sba.gov — established specifically for SBA’s banking industry partners. The correspondence should include the OIG confirmation number, basic information about the allegation (i.e., borrower’s name, loan number, significance of the matter such as fraud ring, high-dollar fraud, threats, etc.).
New process for PPP partial approval forgiveness decisions
The SBA has implemented a new process for PPP loan forgiveness decisions submitted by Lenders to SBA. Read more in the Procedural Notice.
Turning 40 and loving it!
On March 1st, Holtmeyer & Monson will celebrate 40 years in business, serving small business lenders and borrowers. Much has changed in our industry since then — but not our founding tenet. We continue to provide the highest level of service possible to our clients. My sincere thanks to all whom we have had the privilege to partner with throughout our history, and a special thank-you to the dedicated H&M staff who nurture the great (not just good) relationships we enjoy. You’re world class in every way.
Have a question or problem we can help you with? Just give us a call. As the outsourced SBA lender service provider for community banks across the nation, we’ve assisted in solving practically any quandary you can imagine. That experience has helped us become a Preferred Service Provider of the ICBA. If you’ll be attending ICBA LIVE, make sure to stop by our booth. We look forward to seeing you in person!
Featured Article
Rising Tide
Bonds to own for a rate hike environment
by Jim Reber, President and CEO, ICBA Securities
Community bankers are nothing if not predictable, and I mean that as a compliment. They are bright, enterprising, have a nose for the risk/reward dynamic and a sense of duty and loyalty to their customers and staff. They’re also deathly afraid of rising interest rates.
The last is understandable, speaking as one who has (a) worked for a bank when overnight rates were double-digit; (b) personally borrowed money for a home at 12%; and (c) worked in financial services during the near-death of the thrift industry. We know how low rates can go. What we don’t know is how high they can go, nor for how long.
But what’s a bit curious about this widespread fear is that by a number of measures, community banks in 2022 stand to profit from higher interest rates. This comes from banking regulators, interest rate risk modelers, and even bankers themselves. I suppose the notion of a bond portfolio losing four, five or six percent of its value drives some of this thought process. So, as we haven’t had to endure a rate hike scenario since 2018, we’ll use the rest of this column to remind ourselves which bonds stand a good chance of performing well if higher rates do indeed prevail in the near future.
Old school
Certainly, the bonds that fit the most traditional definition of a floater are those which have very short reset periods, are indexed to money market equivalents, and have large or no caps, both periodic and lifetime. The model for such a security is a Small Business Administration (SBA) 7(a) pool. These securities float based on the prime rate, which is 100% correlated to fed funds. Most SBAs reset monthly or quarterly and have no caps—so wherever prime goes, so goes your yield.
The rub on SBAs, at least from a risk standpoint, is that many of them come with large premium prices of 108, 109 or even higher. This exposes the investor to unwelcome prepayments. Still, the many benefits (have we mentioned 0% risk weighting?) make them attractive to short investors. It’s not uncommon for them to yield around prime minus 2.75%, which will beat fed funds by about 25 basis points (0.25%). They are true money market alternatives.
Mortgage floaters
These days there are few true mortgage-backed securities (MBS) floaters. The ones that do exist usually have an extended period of time with a fixed rate, before they convert to adjustable. This “extended period” can be three, five, seven years or more so they’re really not floaters, yet. However, the fact that one day they will adjust can help their market value stay relatively stable.
Something new about these is that the Secured Overnight Financing Rate (SOFR) index is becoming more visible. SOFR is the U.S. alternative to London Interbank Offered Rate (LIBOR), and it has generally tracked fed funds, so far. And, since these will have prices closer to par, the investor doesn’t have to take a gigantic bite of prepay risk. Starting yields are wholly dependent on the fixed rate period and other variables, but they deserve a look.
Clip coupons
Even if you don’t own a floater, an easy-to-execute trade that will help limit your price volatility is “up-in-coupon” securities. It doesn’t matter if they’re MBS, agencies, or munis: The bigger the stated interest rate, the greater the cash flow and the lower the duration.
The best example of this strategy is a tax-free municipal bond that has a big stated interest rate, or “coupon.” It’s common to see a newly hatched security with a 4% rate, that comes to market at an original issue price of 120 or more. This is a quality to be embraced. For one thing, the fact that the yield is tax-free makes the security less volatile that a taxable bond. If (and when, it appears) interest rates rise, the large interest payments will further help keep the value of the bond from falling off the table.
Do-it-yourself
There’s another way to inject floating rate securities into your bond portfolio, and that’s to build them yourself. It’s a simple task to buy and own a collection of long-duration municipal bonds—that’s how they typically come to market. A recent innovation is the ability to execute an interest rate swap to instantly, or at some designated point in the future, turn the munis into floaters.
Interest rate product providers are equipped to price out transactions whereby a community bank can convert a bond, a collection of bonds, or a subsector of your balance sheet into short-duration assets that will see their yields improve every time the Fed has a “policy adjustment.” Maybe the best news is that these transactions can now be executed in sizes that fit your community bank’s needs.
How many rate hikes might we see this year? That’s the subject of myriad conversations around the board room, water cooler, and ALCOs. I’m pleased to report investments that are built for rising rates can take on a variety of appearances, and are fully accessible to your community bank.
Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.
For more information on Vining Sparks, visit www.viningsparks.com.
Regulatory Corner
Month-end Status Reporting on All Loans
A reminder that SBA lenders must provide a monthly report using the Guaranty Loan Status & Lender Remittance Form (SBA Form 1502). This form reflects the loan status for all SBA loans, regardless of whether the borrower has made a payment. The month-end report covers the reporting period from the first calendar day of the prior month through the last calendar day of the prior month. Please note that the report should be filed after the end of the current month and no later than the scheduled reporting date published by the SBA Fiscal Transfer Agent.
Feb. 2022 Issue:
Penny’s
Hot Topic
The SBA’s Fiscal Transfer Agent has changed. Trust accounts used for processing loan payments must now be titled as follows: “(Lender Name), FBO Guidehouse LLP as FTA, in trust for the individual security beneficiaries.”