Title: Why Do Guaranteed SBA Loans Cost Borrowers So Much
Abstract: The SBA assists small businesses in obtaining access to bank credit by guaranteeing a portion of their loans. Despite the substantial federal guarantee and a history of modest default rates, borrowers are charged rates similar to those on low-grade bonds. We suggest several possible explanations for this phenomenon, including lack of competition between SBA lenders, and a relatively high cost of capital for guaranteed loans. Using comprehensive data obtained from SBA on all disbursed loans from 1988 to 2008, we find some evidence of market power in that large lenders charge borrowers relatively high rates. To evaluate the cost of capital on the guaranteed portion of SBA loans, we develop a Monte Carlo model of the cash flows on fully guaranteed SBA securitized pools, taking into account historical default and prepayment patterns. Comparing our model predictions to market prices provided by large dealer in SBA pools, we find that investors required a spread between 100 and 200 bps over the Treasury curve to hold these securities. *Northwestern University **Northwestern University and NBER We thank Lamont Black, Fritz Burkardt, Renato Gomes, Ravi Jagannathan, Jennifer Main, Damien Moore, Sylvia Merola, Jonathan Parker, Rafael Rogo, Neil Wiggins and especially Wendy Kiska for their comments and help with obtaining and understanding the data used in this project. All errors remain our own.
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
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Cited By Count: 11
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