II. SECURITIZATION

A. SECURITIZATION:

1) enables lenders to routinely sell loans for cash to invest in new loans;

2) has funded residential and commercial mortgages, credit card receivables, auto and home equity loans and other financial assets in liquid, global securities markets;

3) provides diverse investments that match investors' risk/return and maturity needs;

4) gives new categories of borrowers access to institutional and corporate capital.

5) Securitization is a two-step process that transfers loans from loan originators to a loan pool assembler (a conduit or intermediary) and then, as conduit securities, to secondary market investors:

a) Legally, a conduit acquiring loans is a special purpose corporation (SPC), ordinarily created in New York or Delaware, with only limited authority to acquire loans, segregate them, and offer securities.

b) Periodic debt service from the pooled loans passes through the originator as servicer to the SPC, then on to security holders' trustee and security holders.

(www.federalreserve.gov/boarddocs/RptCongress/markets2000.pdf)

1) Small business loans have been slow to securitize.
a) $675 billion are outstanding, not all of which can be securitized.

b) While there has been "notable growth" in small business loan securitization, "the markets still have a long way to go before these securitizations become a significant share of small-business lending."

2) The volume of small business securitizations was more than $2 billion in 1999.

a) The Small Business Administration (SBA) relaxed regulations that prohibited banks from securitizing the non-guaranteed part of 7(a) loans.

b) Banks securitized an increasing volume of conventional loans.

c) For most banks, however, margins are too thin to make small business securitizations profitable, while others bolster their assets by retaining loans.

d) The number of conduits has been reduced by mergers and acquisitions.

3) The current lower volume of securitizations appears to be a cyclical slowdown reflecting rising investor caution with risky, illiquid assets.

4) "Over time, however, the agencies expect the trend toward increasing securitization to continue as banks and other lenders become more familiar with the process and as methods for evaluating the riskiness of small-business loans to be pooled become less costly."

E. SECURITIZATION of RLF BUSINESS DEVELOPMENT LOANS

1) Only about $200 million in RLF loans have been sold; none have been securitized, i.e., sold as rated, structured, asset-backed securities to capital markets investors.

2) A few state RLFs have securitized loans in heavily overcollateralized transactions pledging the agency's full credit, current and future assets to security holders or to a third-party credit enhancer.

3) Community Reinvestment Fund (CRF), a nonprofit corporation founded in 1988, has sold approximately $65 million in securities backed by RLF loans and CRF's credit as supported by foundations and socially-motivated investors. Cargill holds approximately $80 million in RLF loans

4) RLF loans have not yet been offered for sale as rated, structured, asset-backed securities--"Business Development Securities" (BDS)--to banks, mutual and pension funds, insurance companies, corporations, and individuals investing in the ordinary course of business. This essential step in creating a viable secondary market for RLFs and their borrowers is the goal CDA's demonstration project for EDA.