SBA 7(a) Prepay & Default Model

SBA 7(a) loans require specialized models because the government guarantee makes defaults economically equivalent to prepayments. The prepay model uses an S-curve framework adapted for commercial borrowers, while the default model feeds directly into involuntary CPR rather than credit losses.

Methodology

Prepayment: S-curve based on rate incentive (note rate vs. current market rate for SBA loans). Commercial borrowers have lower refinancing sensitivity than residential: the S-curve is flatter and shifted right. Multipliers for NAICS industry sector, state, loan size, seasoning, and lender quality.

Default (Involuntary Prepayment): Lifecycle (bathtub) CDR curve with peak timing that depends on the loan term. The CDR converts to involuntary CPR because the SBA guarantee pays the investor at par on default.

Total CPR = Voluntary CPR (from S-curve) + Involuntary CPR (from default model) CDR = 0% for the guaranteed portion Loss Severity = 0% for the guaranteed portion

Lender Quality Multiplier: Banks with higher chargeoff rates produce loans with higher involuntary CPR. The SBA Lender Quality Analysis scores originating banks and produces prepay, default, and severity multipliers that are applied loan-by-loan.