To: All Affiliated Credit Union CEOs
From: Matt Beard - Regulatory Specialist
Date: June 1, 2006
RE: Small Business Administration (SBA) Lender Risk Rating System
Note: This new Comment Call format is designed to highlight the key issues associated with the proposed changes, with the option of going to the full description from CUNA. If the topic discussed is of interest, you may click on the link that will take you to the full explanation and questions associated with the changes. If you receive this information via fax or mail, and you do not have Internet access, please contact Angie Hall at 800-262-6285 to receive CUNA’s full proposal.
The Small Business Administration (SBA) has issued a proposal to institute a lender risk rating system. The rating system would be used to assess an SBA Lender’s 7(a) portfolio performance and a Certified Development Company’s (CDC’s) 504 loan portfolio performance.
The proposed risk rating system utilizes predictive modeling and behavioral scoring systems developed by private sector industry leaders in credit risk analysis. Under the lender rating system, each lender’s loan performance is compared to that of its peers. SBA would assign each lender a composite rating to reflect SBA’s assessment of the potential risk to the government of that lender’s SBA portfolio performance. This proposal indicates that lenders would be given a rating from 1 to 5, with a 1 rating posing the least risk to SBA, requiring the lowest level of agency management oversight (relative to other Lenders in their peer Group). At the other end of the spectrum, a composite rating of 5 would indicate weak portfolio performance, highest risk, and therefore, the highest degree of SBA management oversight.
In addition to the loan performance factors, the proposed rating system allows for SBA to adjust a lender’s overall composite rating based on overriding factors, which may only apply to a particular lender or group of lenders. SBA has and will continue to perform annual validation testing on the risk rating system, and will further refine the system as necessary to improve the predictability of its risk scoring. SBA is soliciting comments on all aspects of the proposed risk rating system, including the methodology.
The proposed rating system is not intended to be a lender grading system. Rather, it is intended to be an internal tool used by the SBA to assess the risk of each lender’s loan operations/portfolio and identify those lenders whose portfolio demonstrates the need for enhanced SBA monitoring or other action . In addition, the lending rating system would serve as a vehicle to measure the aggregate strength of SBA’s overall 7(a) and 504 loan portfolios and to assist the agency in managing the related risk. SBA plans to use the Lender rating system to make more effective use of its on-site and off-site lender review and assessments resources.
Once the risk rating system is finalized, lenders will have access to their own quarterly performance data, including their most current composite risk rating, though the online Lender Information Portal developed for SBA’s Loan and Lender Monitoring System (L/LMS). Lenders will also be able to access data on peer group and portfolio averages through the Lender Portal. The web page for the Lender Portal is https://pdp.dnb.com/pdpsba/pdplogin.asp.
Comments are due to SBA by June 15, 2006. Please send comments to MCUL by June 12, 2006.
- If you would like a copy of the proposal, you may access it on the Internet at: http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6-6506.pdf.
- If you would like a copy of the CUNA analysis, (you will need your CUNA user ID and password) you may access it at: http://www.cuna.org/reg_advocacy/reg_call/rcc_051006.html
- SBA states that the descriptions for each composite rating are not meant as definitions of the ratings, but are given to provide, in general, the characteristics a lender receiving a particular rating may exhibit. Do you agree with the implementation of a rating system whereby each lender is assigned a composite score? Please explain why or why not.
- Would you change any/all of the composite rating description(s)? If yes, what modification(s) do you suggest?
- SBA’s risk rating system emphasizes purchase metrics. SBA believes purchase metrics would be a good measure of SBA lending risk because purchases are a strong indicator of the cost to SBA, and predictive of final charge offs and loan recoveries. In addition, loan purchases are resource intensive and an administrative expense to SBA that reduces SBA’s ability to provide assistance to small businesses. Finally, SBA is a ‘‘gap’’ lender, and purchases are a prime indicator of the failure of the financing to assist in the growth and development of small businesses. Do you feel that the components/factors that go into the composite rating are appropriate? Please explain why or why not. If not, what other/additional factors do you think would be more appropriate?
- Do you feel that the allowance of overriding factors in helping determine a lender’s risk rating would be sufficiently flexible? Please explain.
- Would having access to your credit union’s ratings, your credit union’s performance indicators, and peer and portfolio averages through the Lender Portal be helpful? Please explain.
- Do you have any concerns relating to the utilization of the Lender Portal – the process for making corrections to the data or the confidentiality agreement? Please explain.
Potential Impact to Credit Unions. ( Note: Below are issues the MCUL identified as potentially impacting credit union policies, procedures, or operations. Keep in mind that as each credit union is unique, this list may not be exhaustive.)
- As currently proposed, based on the risk criteria, credit unions would be assigned a value that would help determine the amount of SBA oversight to which they would be subject.
If you have any further questions, or to submit a response, please contact:
Matt Beard, Michigan Credit Union League
112 East Allegan St., Suite 800
Lansing , MI 48933
E-mail: firstname.lastname@example.org Fax: (517) 482-3762 We a ppreciate Your Response.