Lesson 13 of 25
SBA backed ABS are securities whose underlying assets are loans from the Small Business Administration of the U.S. government.
The SBA is a US Government agency that guarantees the loans made by approved SBA lenders to qualified borrowers. Since, the SBA loans are backed by the U.S. government, it lowers credit risk.
The pooled loans must have similar terms and features, such as capped or uncapped. The different maturities used for pooling loans together are 7, 10, 15, 20 and 25 years.
SBA loans are commonly floating rate. The reference rate is the prime rate. The payments are made monthly and include both interest and principal repayments.
The prepayments are largely driven by the borrowing purpose. Shorter maturity loans tend to have higher prepayment speed. Studies suggest that the loans with maturities of less than 10 years made for the purpose of working capital needs have the fastest prepayment speed. On the other hand, loans for real estate purposes have the slowest prepayment rates. Loans with capped interest rates prepay slower than uncapped loans.