Regulating Secondary Loan Markets: Evidence from Small Business Lending

Abstract

We investigate how secondary market regulation shifts loan terms and borrower composition in the primary market. Utilizing data on government-guaranteed Small Business Administration (SBA) 7(a) loans and their secondary market, we study the 2017 tightening of the Minimum Maturity Ratio (MMR) which restricts differences in loan maturities within a pool. To assess the causal effect of the reform, accounting for the possibility of selection into securitization, we utilize differential propensities of lenders to securitize loans as a shifter of treatment. Results demonstrate that maturity decreases by about 18 months due to the MMR reform. The reform also lowers the probability that a loan is securitized, increases interest rates, and decreases chargeoff rates. The reform shifted the types of businesses that received loans, away from physical-capital-intensive sectors. Finally, the MMR reform decreased lenders' propensity to serve counties with high Black or minority demographic shares. Our results suggest that secondary loan market reforms have significant real impacts on primary markets.

Keywords: Small Business, Securitization, Lending, SBA, Minimum Maturity Ratio, Maturity JEL Classification: G20, G21, G23