Typically all SBA prime-based variable rate loans are originated at 100 to 275 basis points over the prime rate published in the Wall Street Journal ("Prime"). The maximum rate that can be charged on most SBA fixed rate loans is 275 basis points above the current prime rate. When the guaranteed portion of a loan is sold in the secondary market, the lender retains a servicing fee typically greater than or equal to 100 basis points, making the maximum rate that can be offered for sale on a variable rate loan Prime + 1.75%. The initial purchaser can securitize the guaranteed portion of a loan into an individual guaranteed interest certificate ("SBA loan certificate") through the fiscal and transfer agent ("FTA") at this rate, less the FTA's fee and the SBA's program fee. The purchaser also may "strip" a portion of the interest rate from the guaranteed loan portion, creating what is called an originator fee or interest-only strip, and securitize the guaranteed loan portion at a lower interest rate.

Each originator fee is evidenced by an Confirmation of Originator Fee ("COOF"), which constitutes the rights of the registered holder to receive a designated portion of each interest payment received on a specific SBA loan certificate. Subsequent purchasers of SBA loan certificates may also strip originator fees from certificates registered in their name by presenting the SBA loan certificate and a Notice of Originator Fee to the FTA. However, the FTA recognizes only one originator fee holder per SBA loan certificate. For SBA loan certificates, an originator fee represents the difference between the borrower's interest rate and the interest rate payable on the SBA loan certificate, less the lender's servicing fee, the FTA's fees and the SBA's program fee.

Initially, the originator fee concept was developed from the SBA's pooling program, which was enacted in 1984. Many purchasers of the guaranteed portions of SBA loans and/or certificates are also SBA pool assemblers, who create pools from SBA loan certificates with similar characteristics. SBA's guidelines for creating pool securities require that the rate of interest on the pool equal the net interest rates of the SBA loan certificates comprising the pool. To enable pool assemblers to combine similar SBA loan certificates with different net interest rates in the same pool, the pool assembler may retain a varying portion of each of the underlying loan certificates' net interest rate, thus creating originator fees. These originator fees provide a means of establishing a single net interest rate for the pool. For pooling purposes, an originator fee(s) represents the difference between the interest rate payable on the pool and the interest rate on the SBA loan certificate(s) at the time of pool formation (if it is greater than the pool rate), less the FTA's fee for servicing the originator fee.

The interest rate of the originator fee can range from a few basis points to over 300 basis points. This range is determined by the interest rate paid by the borrower and the spread over or under prime for the respective pool rate, reduced by the servicing fee retained by the lender, fees for the FTA and SBA's program fee. For example, a pool assembler is the registered holder of six SBA loan certificates and plans to package the certificates into a pool with an interest rate of Prime. Five certificates have an interest rate of Prime; one certificate has an interest rate of Prime + .875%, hence one originator fee has to be created. The pool assembler will "strip" 7/8 of 1% (less the FTA's fee) from this certificate so that the underlying loans all have the same net interest rate, which equals the pool rate of Prime.

The initial issuance of an COOF to a holder is determined by the registered holder of the SBA loan certificate or by the pool assembler creating an originator fee, said holder being themselves or another holder its designates. COOFs are freely transferable and must be presented to the FTA for transfer.

On the fifteenth of each month, or the next business day thereafter if the fifteenth is not a business day, the FTA mails to the registered holder of a COOF one check and statement. The statement delineates payment information for each originator fee owned, assuming that the FTA received a payment on the guaranteed loan portion to which the originator fee belongs. For payments not received by the FTA before the thirteenth of the month ("late payments"), the registered holder of a COOF is mailed its check and statement within two business days of the FTA's receipt of immediately available funds for said late payment.

Timely payment of the interest is not guaranteed on COOFs; however, delinquencies do not generally continue for more than 60 days without causing the SBA to repurchase the guaranteed portion of the loan. Inasmuch as COOFs constitute a portion of the interest payments on SBA guaranteed loan portions, SBA guarantees payment on originator fees. That is, the SBA guarantees ultimate payment of interest to the registered holder of a COOF, and the full faith and credit of the United States Government supports such guarantee. However, the ultimate payment of interest in the case of prepayment or default is limited to a specified time period, as stipulated in SBA Form 1086.

For more information about COOFs, please call our customer service department at (877) 245-6159.