[Federal Register Volume 75, Number 39 (Monday, March 1, 2010)]
[Notices]
[Pages 9257-9262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4266]
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SMALL BUSINESS ADMINISTRATION
SBA Lender Risk Rating System
AGENCY: Small Business Administration.
ACTION: Notice of revised Risk Rating System; request for comments.
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SUMMARY: This notice implements changes to the Small Business
Administration's (SBA's) Risk Rating System (Risk Rating System). The
Risk Rating System is an internal tool to assist SBA in assessing the
risk of each active 7(a) Lender's and Certified Development Company's
(CDC's) SBA loan operations and loan portfolio. Consistent with
industry best practices, SBA recently redeveloped the model used to
calculate the composite risk ratings to ensure that the Risk Rating
System remains current and predictive as technologies and available
data evolve. SBA is publishing this notice with a request for comments
to provide the public with an opportunity to comment and to allow for
any necessary adjustments as the industry moves through the economic
cycle.
DATES: This notice is effective March 1, 2010.
Comment Date: Comments must be received on or before April 30,
2010.
ADDRESSES: You may submit comments, identified by RIN number [INSERT
RIN NUMBER], by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 9258]]
Mail: Bryan Hooper, Director for Office of Credit Risk
Management, U.S. Small Business Administration, 409 3rd Street, SW.,
8th floor, Washington, DC 20416.
Hand Delivery/Courier: Bryan Hooper, Director for Office
of Credit Risk Management, U.S. Small Business Administration, 409 3rd
Street, SW., 8th Floor, Washington, DC 20416.
All comments will be posted on http://www.Regulations.gov. If you
wish to include within your comment, confidential business information
(CBI) as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you
must submit the comment by either Mail or Hand Delivery and you must
address the comment to the attention of Bryan Hooper, Director for
Office of Credit Risk Management, Office of Credit Risk Management. In
the submission, you must highlight the information that you consider is
CBI and explain why you believe this information should be held
confidential. SBA will make a final determination, in its discretion,
of whether the information is CBI and, therefore, will be published or
not.
FOR FURTHER INFORMATION CONTACT: Bryan Hooper, Director, Office of
Credit Risk Management, U.S. Small Business Administration, 409 Third
Street, SW., 8th Floor Washington, DC 20416, (202) 205-3049.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Introduction to the Risk Rating System
In 2005, the Small Business Administration (SBA) developed an SBA
internal Lender Risk Rating System (Risk Rating System). The Risk
Rating System is an internal tool that primarily uses data in SBA's
Loan and Lender Monitoring System (L/LMS) to assist SBA in assessing
the risk of an SBA Lender's SBA loan performance on a uniform basis and
identifying those SBA Lenders whose portfolio performance, or other
Lender-specific risk-related factors, may demonstrate the need for
additional SBA monitoring or other action. The Risk Rating System also
serves as a vehicle to measure the aggregate strength of SBA's overall
7(a) and 504 loan portfolios and to assist SBA in managing the related
risk. In addition, SBA uses risk ratings and the underlying components
to make more effective use of its on-site and off-site Lender review
and assessment resources.
Under SBA's Risk Rating System, SBA assigns all SBA Lenders a
composite risk rating of 1 to 5, based on empirical data. The rating
reflects SBA's assessment of the potential risk to the government of
that SBA Lender's SBA portfolio performance. The composite rating is
calculated using several component factors. The component factors were
developed using step-wise regression analysis to determine the
components that provided a linear regression formula that was most
predictive of actual purchases over a one year period.
On May 1, 2006, SBA published a notice and request for comment in
the Federal Register seeking comments on the proposed Risk Rating
System (72 FR 25624). A final notice was published in the Federal
Register on May 16, 2007 (72 FR 27611).
B. Redevelopment
Typically, under industry best practices, custom credit scoring
models are redeveloped approximately every three to five years to
reflect changing conditions, portfolio shifts, and to incorporate
additional data that may have become available. This redevelopment is
consistent with such practices and is necessary to ensure that SBA's
risk ratings provide an accurate assessment of Lenders' SBA portfolio
performance. SBA's portfolio has changed substantially over the past
five years; the portfolio has grown dramatically, and the composition
of loan products (delivery methods) has greatly shifted. In addition,
over the past five years the economy, and in particular the small
business lending environment, has changed. Given these circumstances
and that SBA now has five years' experience with this modeling and the
type of SBA data available, SBA determined to test for additional or
different components to increase the model's predictiveness.
SBA reviewed 86 possible variables; of which 26 were tested in
detail. These variable factors were derived from SBA's experience
working with the model over the past five years and feedback from
Lenders, including comments received in response to the Proposed Risk
Rating System Notice. 71 FR 25624 (May 1, 2006). The factors were run
through the model in various combinations and the most predictive
combinations of factors were chosen for each loan program (7(a) and
504). In so doing, SBA selected additional components that proved to
enhance the predictive value of the model over the earlier model
factors.
II. The Redeveloped Risk Rating Model
The redeveloped model used to calculate the composite risk ratings
is an updated version of the previous model. It remains a custom credit
score model, at the Lender-level, based on the same outcome as the
previous system--the likelihood of a Lender's purchases over the next
12 months. It models the relative risk levels of Lenders. The model
continues to use loan-level SBA performance data (as provided by the
Lenders and SBA centers), and it continues to use external risk
assessment data in the form of off-the-shelf Small Business Predictive
Score (SBPS) credit scores, derived from third party business and
consumer credit bureau data.
The SBA will continue to report the risk ratings by SBA peer groups
based on SBA loan portfolio size, as determined by outstanding SBA
guaranteed dollars. Peer group sizes will remain the same as under the
former Lender Risk Rating Notice, and they will continue to reflect
SBA's relative level of risk from Lenders in each peer group. The
existing peer groups will continue to significantly reduce the
possibility of the same event (for example, a loan purchase) having a
different impact on Lenders in the same peer group. Splitting SBA
Lenders into peer groups based on portfolio size also helps SBA to
better monitor those SBA Lenders in the largest peer groups that
represent the overwhelming majority of guaranteed dollars at risk, and
allows SBA to make the best use of its oversight resources. The most
notable changes that will result from the redevelopment are:
1. Updated components in the linear regression formulas for both
7(a) Lenders and CDCs in the 504 program, chosen in conjunction with a
full step-wise regression analysis.
2. Modeling of the overall portfolios, with the age and/or size of
a Lender's portfolio represented by a component (consisting of three
segments for 7(a) Lenders). These segments replace the need for a
separate linear regression model for each Peer Group in 7(a).
3. Both components and weightings of the components are the same
across the 7(a) portfolio. The components and weightings of the rating
formula are also the same across all CDCs.
The rating components in the new risk rating model include:
1. Several previously used rating components;
2. Additional performance-related components;
3. Components to account for differences in performance between
delivery methods;
[[Page 9259]]
4. Assessment of the age of a loan portfolio;
5. Other measures of loan credit quality;
6. Measures of net flow (dollars in and dollars out); and
7. An additional commercial off the shelf risk score.
SBA had received a number of comments when it initially proposed
the Risk Rating System in May 2006 regarding the need to include losses
and recoveries in the risk rating models. Due to the substantial time
lag for losses to occur, adding a loss factor did not directly improve
the predictive power of the Lender risk ratings. However, a similar
factor, net flow, did add to the predictive values of the risk rating
model for 7(a) Lenders and was therefore included as a new 7(a) rating
component. Net flow incorporates a measure of losses and recoveries, as
it is calculated by summing all fees and recoveries coming in, less
purchases going out.
These new components provide SBA and its Lenders with a more
diverse set of factors that add predictive value to the risk ratings
calculated by the risk rating model. A description of all of the rating
components used in the redeveloped risk rating model may be found in
the overview section below.
III. Other Changes to the Risk Rating System
In addition to employing new rating components, the redeveloped
risk rating model also relies on a newer version of the SBPS scoring
tool. As of June 30, 2009, SBA switched from SBPS version 5 to an
improved SBPS version 6 recently produced by Dun & Bradstreet (D&B) and
FICO. Version 6 has been validated numerous times for more than a year
by D&B/FICO and an SBA subcontractor, TrueNorth, and it has been found
to be predictive on both the 7(a) and 504 loan portfolios. In addition,
since the commercial release of SBPS version 6 in December 2006, the
SBPS has also been validated on multiple independent account portfolios
of industry leading financial institutions.
This notice provides program participants and other parties with an
explanation of the components and a description of other modeling
enhancements. In addition, SBA is soliciting comments on the components
and enhancements. These changes have been made to the model and
included in the risk rating update for the quarter ending September 30,
2009, and will be made available to Lenders through SBA's Lender Portal
upon publication of this notice.
IV. Text of the SBA Lender Risk Rating System
A. Overview
Under SBA's Risk Rating System, SBA assigns all SBA Lenders a
composite risk rating. The composite rating reflects SBA's assessment
of the potential risk to the government of that SBA Lender's SBA
portfolio performance.
For 7(a) Lenders, SBA will base the composite rating on eleven
components. The components for 7(a) Lenders are as follows:
1. Past 12 Months Actual Purchase Rate;
2. Six (6) Month Liquidation Rate;
3. Gross Delinquency Rate;
4. Gross Past-Due Rate;
5. Six (6) Month Net Flow Indicator;
6. Average Small Business Predictive Scores (SBPS);
7. Projected Purchase Rate (PPR);
8. Dollar Weighted Average Financial Stress Score (FSS);
9. PLP Percent;
10. SBA Express Percent; and
11. Portfolio Size/Age.
The statistical analysis performed showed that incorporating the
Portfolio Size/Age component improved the predictive power of the 7(a)
Lender risk rating. This component is further broken down into three
segments:
(1) Lenders with 7(a) portfolios equal to or less than $4 million
SBA guaranteed outstanding;
(2) Lenders with 7(a) portfolios over $4 million SBA guaranteed
outstanding, and whose average loan age is over 30 months; and
(3) Lenders with 7(a) portfolios over $4 million SBA guaranteed
outstanding, and whose average loan age is equal to or under 30 months.
For CDCs, SBA will base the Lender rating on six common components.
The components for CDCs follow:
1. Past 12 Months Actual Purchase Rate;
2. Six (6) Month Delinquency Rate;
3. Gross Delinquency Rate;
4. Gross Past-Due Rate;
5. Average Small Business Predictive Score (SBPS); and
6. Low Month on Book Indicator.
In general, these 7(a) and CDC components reflect both historical
SBA Lender performance and projected future performance. The components
were selected through statistical analysis using step-wise regression
analysis. The selected components were then used in an overall
regression model to create the Lender risk rating. No single component
normally decides an SBA Lender's risk rating. SBA updates the Lender
risk ratings on a quarterly basis, using refreshed Lender data. Each of
the risk rating factors is described in more detail in the Rating
Components section below.
SBA generally does not intend to use the risk ratings as the sole
basis for taking enforcement actions against SBA Lenders. The primary
purpose is to focus SBA's oversight resources on those SBA Lenders
whose portfolio performance or other Lender-specific risk-related
factors demonstrate a need for further review and evaluation by SBA.
All SBA Lenders have on-line access to their Lender risk rating and
rating component values along with peer group and portfolio component
averages through SBA's Lender Portal. Information on the Lender Portal
can be found at 72 FR 27611, 27619 (May 16, 2007).
B. Lender Risk Rating
The SBA Lender risk rating (LRR) is a measure of predicted
performance over the next 12 months. SBA uses its risk rating model to
calculate and assign a composite rating of 1 to 5 to each SBA Lender.
SBA may make adjustments to the composite rating based on results of
reviews, third party information on a SBA Lender's operations,
portfolio trends and other information that could impact a SBA Lender's
risk profile. (See Overriding Factors section for further detail.) In
general, a rating of 1 indicates strong portfolio performance, least
risk, and that the least degree of SBA oversight is likely needed
(relative to other SBA Lenders), while a 5 rating indicates weak
portfolio performance, highest risk, and that the highest degree of SBA
oversight is likely needed. SBA provides the following general
descriptions for the Lender risk ratings:
LRR 1--The SBA operations of an SBA Lender rated 1 are generally
considered strong in every respect, typically score well above average
in all or nearly all of the rating components described in this Notice,
are more likely to have well below average historical purchase rate,
and have loans that demonstrate highly acceptable credit quality and/or
credit trends as measured by credit scores and portfolio performance.
LRR 2--The SBA operations of an SBA Lender rated 2 are generally
considered good, typically are above average in all or nearly all of
the rating components described in this Notice, are more likely to have
below average previous (12 months) purchase rates, and have loans that
demonstrate better-than-acceptable credit quality and/or credit trends
as measured by credit scores and portfolio performance.
[[Page 9260]]
LRR 3--The SBA operations of an SBA Lender rated 3 are generally
considered about average in all or nearly all of the rating components
described in this Notice, are likely to have average previous (12
months) purchase rates, and have loans that demonstrate acceptable
credit quality and/or credit trends as measured by credit scores and
portfolio performance.
LRR 4--The SBA operations of an SBA Lender rated 4 are generally
considered below average in all or nearly all of the rating components
described in this Notice, are likely to have below average component
factors and above average previous (12 months) purchase rates, and have
loans that demonstrate somewhat less-than-acceptable credit quality
and/or credit trends as measured by credit scores and portfolio
performance.
LRR 5--The SBA operations of an SBA Lender rated 5 are generally
considered well below average in all or nearly all of the rating
components described in this Notice, are most likely to have well above
average previous (12 months) purchase rates, and have loans that
demonstrate less-than-acceptable credit quality and/or credit trends as
measured by credit scores and portfolio performance.
The descriptions for each rating value are not meant as definitions
of the ratings and do not limit or dictate SBA's dealings with any SBA
Lender.
C. Rating Components
1. 7(a) Lenders
SBA's quantitative composite risk ratings for 7(a) Lenders rely on
eleven components, selected because of their power to predict loan
purchases over the next 12 months. For the 7(a) program, the eleventh
component is broken down into three different segments based on age and
size of a 7(a) Lender's portfolio. Each of the eleven rating components
is defined below.
(i) Past 12-Months Actual Purchase Rate. The Past 12-Month Actual
Purchase Rate is a historical measure of SBA loan guarantee purchases
from the 7(a) Lender in the 12 months preceding the rating date. Thus,
this component provides a measure of 7(a) Lender performance and risk
reflective of actual SBA guarantee purchases. SBA calculates this rate
by dividing the sum of total gross dollars of the 7(a) Lender's loans
purchased during the past 12 months (numerator), by the sum of total
gross dollars of the 7(a) Lender's SBA loans outstanding at the end of
the 12-month period. Gross dollars purchased in the last 12 months are
added to the denominator, as they are not included in the outstanding
figure.
(ii) 6 Month Liquidation Rate. The Six (6) Month Liquidation Rate
is the liquidation rate (loans in liquidation but not yet purchased by
SBA) calculated over the past six (6) months. This component provides a
measure of 7(a) Lender performance and risk as indicated by dollars in
liquidation over the past six (6) months, as placed in that status by
SBA at the request of the Lender. SBA calculates this ratio by dividing
the sum of the total gross dollars of the 7(a) Lender's SBA loans in
liquidation status in each of the six (6) months prior to the rating
date (numerator), by the sum of total gross dollars of the (7a)
Lender's SBA loans outstanding in each of the six (6) months prior to
the rating date (denominator).
(iii) Gross Delinquency Rate. The Gross Delinquency Rate is the
delinquency rate (loans 60 days past due or more, but not in
liquidation) as of the rating date. This component provides a measure
of 7(a) Lender performance and risk as indicated by SBA loan dollars in
delinquency status as reported by the Lender. SBA calculates this ratio
by dividing the sum of the total gross dollars of the 7(a) Lender's SBA
loans in delinquency status as of the rating date (numerator), by the
sum of total gross dollars of the 7(a) Lender's SBA loans outstanding
as of the rating date (denominator).
(iv) Gross Past-Due Rate. The Gross Past-Due Rate is the past-due
rate (30 to 59 days past-due) as of the rating date. This component
provides a measure of 7(a) Lender performance and risk as indicated by
SBA loan dollars in past-due status as reported by the Lender. SBA
calculates this rate by dividing the sum of the total gross dollars of
the 7(a) Lender's SBA loans in past-due status as of this date
(numerator), by the sum of the total gross dollars of the 7(a) Lender's
SBA loans outstanding as of this date (denominator).
(v) 6 Month Net Flow Indicator. The Six (6) Month Net Flow
Indicator measures net flows, or dollars-in and dollars-out, over the
last six (6) months preceding the rating date. Dollars-in includes
guarantee fee payments and recoveries by SBA from a 7(a) Lender;
dollars-out reflects guarantee purchases made by SBA. The net flow
indicator is calculated by summing up all guarantee fees and recoveries
submitted by the 7(a) Lender to SBA over the six (6) months prior to
the rating date. From the six (6) month total, all of the purchases
paid out by SBA to the 7(a) Lender over the same six (6) months are
subtracted. If the net flow of dollars is positive, the component value
is a 1; if the net flow of dollars is negative, the component value is
0.
(vi) Average Small Business Predictive Score (SBPS). The SBPS is a
portfolio management (not origination) credit score based upon a
borrower's business credit report and principal's consumer credit
report. SBPS is a proprietary calculation provided by Dun & Bradstreet,
under contract with SBA, and is compatible with FICO's ``Liquid
Credit'' origination score. This component provides an indication of
the relative credit quality of the loans in a 7(a) Lender's SBA
portfolio. The score is calculated from the average SBPS score of the
loans in a 7(a) Lender's portfolio, weighted by each loan's guaranteed
dollars outstanding.
(vii) Projected Purchase Rate (PPR). The PPR is a predictive
measure of the relative future riskiness of the 7(a) Lender's SBA loans
over the next 12-months, calculated as of the rating date. This is a
credit quality, leading indicator, predictive factor. The PPR is
derived from the annual and quarterly statistical validations of SBPS
credit scores on the entire SBA 7(a) portfolio. As part of this
validation process, Dun & Bradstreet and FICO compare the SBPS credit
scores, by delivery method, of all outstanding 7(a) loans at the
beginning of the validation period to the actual purchases observed
over the next 12-months. From this comparison, a projected purchase
rate is developed for each 7(a) loan based on the loan's delivery
method and current SBPS credit score. A 7(a) Lender's PPR is then
determined by calculating the dollar-weighted average PPR of the 7(a)
loans in the Lender's portfolio. SBA calculates this rate by dividing
the sum of the PPRs for each loan (multiplied by the guaranteed dollars
outstanding for each loan) by the total guaranteed dollars outstanding
for all the Lender's loans.
(viii) Dollar Weighted Average Financial Stress Score (FSS). The
FSS predicts the likelihood that a small business borrower will
experience one or more of the following conditions over the next 12
months, based on the information in D&B's files: obtaining legal relief
from creditors; ceasing business operations without paying all
creditors in full; voluntarily withdrawing from business operation,
leaving unpaid obligations; going into receivership or reorganization;
or making an arrangement for the benefit of creditors. FSS uses
statistical probabilities to classify businesses into a score range,
where the lowest score has the highest likelihood of business failure.
The score includes D&B data related to payment trends, business
[[Page 9261]]
financial statements, industry position, business size and age, and
public filings.
(ix) PLP Percent. The PLP Percent is the percent of the 7(a)
Lender's PLP loan dollars outstanding (disbursed but not purchased or
paid-in-full), compared to the 7(a) Lender's total outstanding SBA
portfolio as of the rating date. This variable is reflective of the
fact that there is a strong correlation among various SBA delivery
methods and loan risk, with PLP loans generally providing the least
risk. This component is calculated by taking the sum of the 7(a)
Lender's total PLP loan gross dollars outstanding (numerator), and
dividing it by the sum of the total gross dollars outstanding for the
7(a) Lender (denominator).
(x) SBA Express Percent. The SBA Express Percent is the percent of
the 7(a) Lender's SBA Express loan dollars outstanding (disbursed but
not purchased or paid-in-full), compared to the 7(a) Lender's total
outstanding SBA portfolio as of the rating date. This variable is
reflective of the fact that there is a strong correlation among various
SBA delivery methods and loan risk, with SBA Express loans being among
those delivery methods with generally greater risk. This component is
calculated by taking the sum of the 7(a) Lender's total SBA Express
loan gross dollars outstanding (numerator), and dividing it by the sum
of the total gross dollars outstanding for the 7(a) Lender
(denominator).
(xi) Portfolio Size/Age Segment Component. During the redevelopment
process, it was found that 7(a) Lender performance differed depending
on the size and age of the Lender's SBA portfolio. To account for these
differences, 7(a) Lenders were analyzed and divided into three
different segments based on the differences seen in the performance
outcome variable. The first segment of 7(a) Lenders consists of Lenders
with SBA portfolios less than or equal to $4 million in outstanding SBA
guarantees regardless of portfolio age. This segment generally presents
the least portfolio risk. The second segment of 7(a) Lenders consists
of Lenders with an outstanding SBA guaranteed portfolio of more than $4
million and an average loan age (``month on book'') of greater than 30
months. The third segment of 7(a) Lenders consists of Lenders with an
outstanding SBA guaranteed portfolio of more than $4 million and an
average loan age (``month on book'') of less than or equal to 30
months. This segment generally presents the greatest portfolio risk.
Factor weight is dependent on which segment is applicable.
2. Certified Development Companies (CDCs)
SBA's quantitative composite risk ratings for CDCs rely on six
components, selected because of their power to predict loan purchases
over the next 12 months. Each of the six rating components is defined
below.
(i) Past 12-Months Actual Purchase Rate. The Past 12 Months Actual
Purchase Rate is a historical measure of SBA loan guarantee purchases
from the CDC in the 12 months preceding the rating date. Thus, this
component provides a measure of the CDC's performance and risk
reflective of actual SBA guarantee purchases. SBA calculates this rate
by dividing the sum of total gross dollars of the CDC's loans purchased
during the past 12 months (numerator), by the sum of total gross
dollars of the CDC's SBA loans outstanding at the end of the 12-month
period. Gross dollars purchased in the last 12 months are added to the
denominator, as they are not included in the outstanding figure.
(ii) 6 Month Delinquency Rate. The Six (6) Month Delinquency Rate
is the delinquency rate calculated over the past six (6) months. It is
calculated by dividing the sum of the total gross dollars of the CDC's
loans in delinquency status in each of the six (6) months prior to the
rating date (numerator) by the sum of total gross dollars of the CDC's
SBA loans outstanding in each of the six (6) months prior to the rating
date.
(iii) Gross Delinquency Rate. The Gross Delinquency Rate is the
delinquency rate (loans 60 days past due or more, but not in
liquidation) as of the rating date. This component provides a measure
of CDC performance and risk as indicated by SBA loan dollars in
delinquency status as reported by the CDC. SBA calculates this rate by
dividing the sum of the total gross dollars of the CDC's SBA loans in
delinquency status as of the rating date (numerator) by the sum of
total gross SBA dollars of the CDC's SBA loans outstanding as of the
rating date (denominator).
(iv) Gross Past-Due Rate. The Gross Past-Due Rate is the past-due
rate (30 to 59 days past-due) as of the rating date. This component
provides a measure of CDC's performance and risk as indicated by SBA
loan dollars in past-due status as reported by the CDC. SBA calculates
this rate by dividing the sum of the total gross dollars of the CDC's
SBA loans in delinquency status as of this date (numerator), by the sum
of the total gross dollars of its SBA loans outstanding as of this date
(denominator).
(v) Average Small Business Predictive Score (SBPS). The SBPS is a
portfolio management (not origination) credit score based upon a
borrower's business credit report and principal's consumer credit
report. SBPS is a proprietary calculation provided by Dun & Bradstreet,
under contract with SBA, and is compatible with FICO's ``Liquid
Credit'' origination score. This component provides an indication of
the relative credit quality of the loans in a CDC's SBA portfolio. The
score is calculated from the average SBPS score of the loans in a CDC's
portfolio, weighted by each loan's guaranteed dollars outstanding.
(vi) Low Month on Book Indicator. The Low Month on Book Indicator
component is triggered for a CDC if that CDC has a month-on-book age
(average age) of 30 months or less. CDCs with a portfolio with less
than 30 months on book or exactly 30 months on book generally have
portfolios that are growing rapidly. The modeling process showed that
there is a marked difference in these CDCs' performance compared to
those CDCs with more established portfolios. If a CDC has a portfolio
with an average age of more than 30 months on book, this component has
a zero weight in its rating.
3. Overriding Factors
In addition to the common components referenced above, the Risk
Rating System allows for consideration of additional factors. The
occurrence of these factors may lead SBA to conclude that an individual
SBA Lender's composite rating, as calculated by the risk rating model,
is not fully reflective of its true risk. Therefore, the Risk Rating
System provides for the consideration of overriding factors, which may
only apply to a particular SBA Lender or group of SBA Lenders, and
permit SBA to adjust an SBA Lender's calculated composite rating. The
allowance of overriding factors in helping determine an SBA Lender's
risk rating enables SBA to use key risk factors that are not
necessarily applicable to all SBA Lenders, but indicate a greater or
lower level of risk from a particular SBA Lender than that which the
calculated rating provides.
Overriding factors may result from SBA Lenders' on-site risk based
reviews/assessments and off-site evaluations. SBA routinely conducts
on-site reviews of large SBA Lenders, performs safety and soundness
examinations of SBA Small Business Lending Companies (SBLCs) and Non-
Federally Regulated Lenders, and uses
[[Page 9262]]
certain off-site evaluation measures for other SBA Lenders.
Examples of other overriding factors that may be considered
include, but are not limited to: enforcement or other actions of
regulators or other authorities, including, but not limited to, Cease &
Desist orders by federal financial regulators; early loan default
trends; purchase rate or projected purchase rate trends; abnormally
high default, purchase or liquidation rates; denial of liability
occurrences; lending concentrations; rapid growth of SBA lending; net
yield rate significantly worse than average; and inadequate,
incomplete, or untimely reporting to SBA or inaccurate submission of
required fees to SBA.
In conclusion, industry best practices and changes in the SBA
portfolio, programs, and available data necessitate that SBA's risk
rating model be periodically redeveloped. This notice marks the first
redevelopment of SBA's risk rating model. In addition to the
redevelopment, SBA has and will continue to perform annual validation
testing on the calculated composite risk ratings, and will further
refine the model as necessary to maintain or possibly improve the
predictability of its risk scoring.
Authority: 15 U.S.C. 634(b)(7), and 15 U.S.C. 687(f).
Karen G. Mills,
Administrator.
[FR Doc. 2010-4266 Filed 2-26-10; 8:45 am]
BILLING CODE 8025-01-P