CUNA Comment Letter
Proposed Rule on the Use of the London Interbank Offered Rate (LIBOR) and Secondary Market Pool Interest Rate Changes
December 15, 2008
Mr. Gary Hedgespeth
Director Office of Financial Assistance
U.S. Small Business Administration
409 3rd Street, SW Eighth Floor
Washington, DC 20416
|RE:||RIN Number 3245-AF83 Proposed Rule on the Use of the London Interbank Offered Rate (LIBOR) and Secondary Market Pool Interest Rate Changes|
Dear Mr. Hedgespeth:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the interim final rule that will allow loans to be priced based on the London Interbank Offered Rate (LIBOR) and will allow secondary market loan pools to be priced based on the weighted average coupon rate. CUNA represents approximately 90 percent of our nations 8,200 state and federal credit unions, which serve nearly 92 million members.
Summary of CUNAs Comments
- CUNA generally supports the interim final rule that will provide SBA lenders the option to price loans at the thirty day LIBOR plus 300 basis points as a means to alleviate the problems caused be the narrowing of the spread between LIBOR and the prime rate.
- CUNA supports the changes to improve the liquidity of the SBA loan pools that are sold into the secondary market by allowing weighted average coupon pools. CUNA also supports other efforts to achieve this goal, such as the new Term Asset-Backed Securities Loan Facility (TALF) that was recently established by the Federal Reserve Board and the Department of the Treasury, which will make loans to investors who purchase asset-backed securities, including those comprised of loans guaranteed by the SBA.
For many Small Business Administration (SBA) lenders, the cost of funds is based at least in part on the LIBOR, while the interest rate for Section 7(a) SBA loans is typically based on the prime rate. Recently, the spread between the LIBOR and the prime rate has narrowed significantly, which has made it increasingly difficult for credit unions and others to continue providing SBA loans. The result has been a reduction in the amount of such loans that are made and this has reduced the capital that is now available to small businesses.
For these reasons, CUNA supports the interim final rule that will provide SBA lenders with the option to price loans at the thirty day LIBOR plus 300 basis points. We believe this will alleviate the problems associated with the narrowing of the spread between the LIBOR and the prime rate, which will allow credit unions and other lenders to resume providing the capital and financing to small businesses that is urgently needed during these difficult economic times. We are hopeful that small business will then be able to continue to grow their business and provide much needed new jobs.
Our only concern with this proposal would be that small businesses may not be comfortable with having loans that are based on the LIBOR as they may not be familiar with LIBOR and may be concerned that these rates will fluctuate more than the prime rate. However, we believe these concerns will be alleviated to some extent both because using the LIBOR will now be an option in addition to using the prime rate and the use of the prime rate should become more prevalent as the spread widens between the LIBOR and the prime rate.
For similar reasons, the narrowing of the spread between LIBOR and the prime rate has also impacted the SBA secondary market because the reduced profits has limited the number of investors who are now willing to buy SBA loans in the secondary market. Until now, the interest rate on a loan pool is the lowest net rate of all the loans in the pool. The interim final rule will allow weighted average coupon pools, which is intended to improve liquidity in the secondary market.
CUNA supports these efforts to encourage investors to purchase SBA loans as a means to improve liquidity in the secondary market, as well as other initiatives that will achieve these same goals. This includes the Term Asset-Backed Securities Loan Facility (TALF) that was recently established by the Federal Reserve Board and the Department of the Treasury. Under the TALF, loans will be made to investors who purchase asset-backed securities, and this will include small business loans guaranteed by the SBA. We appreciate the efforts of the SBA to include these types of securities within the TALF program and would also welcome the opportunity to work with the SBA on other initiative that will help facilitate the ability of credit unions and others to make SBA loans during these difficult times.
Thank you for the opportunity to comment on the interim final rule on the use of the LIBOR and the secondary market pool interest rate changes. If you or agency staff have questions about our comments, please contact Senior Vice President and Deputy General Counsel Mary Dunn or me at (202) 638-5777,
Senior Assistant General Counsel