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Office of Credit Risk Management
1. SMART & ALP Renewal Reviews
2. Most Frequent SMART / ALP Review Findings
3. Lender Risk Ratings
4. SMART Benchmarks
i. Methodology
ii. Categories
iii. Metrics being Benchmarked
iv. Qualitative Factors
5. Analysis of CDC Annual Report Information
6. Supervisory & Enforcement Actions
7. Voluntary Decertifications & Inactive CDCs
2 2014 Government Relations Conference
SMART & ALP Renewal Reviews
SMART Reviews:
2013 – Conducted 7 SMART Developmental On-site Reviews and
initiated 20 SMART Remotely Conducted (Virtual) Reviews
2014 – Planned 30 SMART Reviews – to be conducted Remotely and
On-site (when appropriate).
ALP Renewals:
2013 – completed 16 ALP Renewals – some provided full two (2) year
renewal and others limited to 6 to 12 months to allow OCRM to monitor
CDC implementation of corrective actions (primarily related to internal
controls policy and/or independent loan review).
2014 – completed 13 ALP Renewals and 57 additional Renewal Requests
are to be processed in 2014.
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SMART & ALP Renewal Reviews
Most Frequent Findings: Failure to comply with requirement that CDCs operate with a Board-approved internal
controls policy which includes independent loan review and classification policy (loan
ratings). OCRM prepared FAQs on Internal Controls Policy to assist CDCs who are
in need of these policies.
Need for improvement in Intensive Servicing (timely site visits, monitoring of taxes and
bankruptcies, preparation of liquidation plans, and analysis of ability to pursue guarantors).
OCRM organized a webinar with OFPO and NADCO on SOP 50 55 in an effort to
communicate SBA 504 servicing and liquidation requirements to CDC community.
Closing procedures need improvement – failure to verify income via 4506 process, failure
to document use of proceeds, CDCs not being named as lender loss payee in hazard
insurance policies, projects funded prior to completion or issuance of certificate of
occupancy. OCRM will continue to work with the CDC community and NADCO in
an effort to communicate the importance of following SBA program requirements.
We are also following up with the relevant CDCs on issues related to harm that
were identified in the SMART Reviews.
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New Lender Purchase Rating (LPR)
5
Currently known as Lender Risk Rating (LRR)
Multiple approaches were evaluated and the full redeveloped model with
the highest predictive power was selected.
The final model predicts total expected 12 months purchase dollars and
rates and associated LPR* through the following phases:
2014 Government Relations Conference
Multiply loan
probability of
purchase by
outstanding balance
to obtain loan level
predicted purchase
dollar
Phase 1:
Calculate loan
level purchase
probability and
aggregate $
amount
Phase 2:
Project purchase
amount per
lender
Phase 3:
Re-rank lenders 1
to 5 in a more
accurate model
504 New LRR # of
CDCs # of Loans
Total Active
Balance (billions)
Risk Rating
1-2 154 47,011 $21
Risk Rating 3 69 12,092 $5.2
Risk Rating
4-5 30 1,516 $.58
Total 253 60,619 $26.8
504 Active CDCs Lender reported data through 5/31/13
504 Inactive CDCs Lender reported data through 5/31/13
6
504 New LRR # of
CDCs # of Loans
Total Active
Balance (billions)
Risk Rating
1-2 14 170 $.047
Risk Rating 3 3 74 $.023
Risk Rating
4-5 6 79 $.03
Total 23 323 $.10
► Previous model captures 21 Active CDCs risk rated 4-5* vs. 30 in new model
New LPR Results
* 2 Active CDCs were overridden to a 5 LRR.
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Step I. New LPR Model Features
7
Raw score indicating
expected total portfolio
purchases at the lender
level
Probability of Purchase PPR at
loan level, which is then
aggregated to lender level to
produce LPR ( 1 – 5 rating)
Current Model New Model
Outcome
Variables
• 6-month Liquidation rate
• 6-month net cash flow
(Lender: positive or negative)
• FSS Score
• Delinquency Rate (Lender)
• Past Due Rate (Lender)
• Last 12-Month Purchase Rate
(Lender)
• Delivery Method
• SBPS Score
• Average Age (MOB), Total
Dollars (Discretized)
• SBPS
• MOB
• Age of Business
• D&B Detailed Trade Attributes
• % Accounts Past Due
• % Accounts 31+ Past Due
• % Current – Long Term
Trend
• # of Account on Database
for Last 4 Months
• Status
• Housing Price Index Change
Ratio
New LPR Model Features
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Benchmark Methodology
One benchmark scorecard is established for all 504 lenders/CDCs.
This scorecard will be annually updated and will provide a SMART
overall score (12 to 60).
A“20/60/20” rule is used to establish the less than acceptable,
acceptable, and preferred thresholds.
The “Preferred” threshold uses the best 20th percentile of 2005
lender performance data.
2005 was a period of time when the overall economy was stable and the
504 program was essentially subsidy neutral (net cash yields close to
zero) and thus is the preferred state of performance.
The “Less Than Acceptable” threshold is defined with the worst 20th
percentile of current 2013 lender performance data.
This approach enables SBA to encourage lenders to minimize risky
behavior, while still taking into account the residual effects of the
economic recession.
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SMART Benchmark Categories
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SMART
Benchmarks
(12)
• Solvency
• Management and Board Governance
• Asset Quality and Servicing
• Regulatory Compliance
• Technical Issues & Mission
SMART 1.0 Benchmarks
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504 SMART RATES Preferred (+1)
(+ 1)
Acceptable (+3)
(+ 3)
Less Than Acceptable (+5)
Solvency
5 Year Cumulative Net Yield > -1 % ≥ -3% and ≤ -1% < -3%
12 Month Default Rate 0% > 0% and ≤ 5% > 5%
5 Year Default Rate 0% > 0% and ≤ 5% > 5%
Management
Lender Purchase Rating (formerly LRR) 1,2 3 4,5
High Risk Origination Rate* < 0% ≥ 0% and ≤ 13% > 13%
Loans in Purchase Status over 3 Years Rate <= 0% > 0% and <= 27% > 27%
Asset Quality
Stressed Rate < 3% >= 3% and ≤ 10% > 10%
Recovery Rate (Over last 5 years) > 33% ≤ 33% and > 6% ≤ 6%
Early Problem Loan Rate <= 0% > 0% and ≤ 4% > 4%
Regulatory Compliance Minimum Level of 504 Activity >= 4 < 4
Technical Issues Average SBPS (weighted) > 197 >= 188 and <= 197 < 188
Industry Concentration Rate < 13% >= 13% and ≤ 28% > 28%
** 504 SBPS risk categories - high risk (< 160) , medium risk (160 - 199), and low risk ( ≥ 200)
SMART 1.0 Benchmarks - Definitions
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Definitions of Key Metrics
SMART Category Attribute Description Loan Level Attributes Lender Level Equation
Solvency
5 Year Cumulative Net Yield
Numerator - Cumulative net cash flow, including purchase, recovery, origination and servicing fees Denominator - SBA's guarantee share of the gross balance
net_cash, balsba (sum(lst60mn_net_cash_cum)/ 5) / av60mn_balsba
12 Month Default Rate
Numerator - Default Amount over the last 12 months, defined by gross purchase amount Denominator - Active Gross Balance averaged over the last 12 months + the Default Amount over the last 12 months
lst12mnpurch_amtgrs, lst12mnpurch_balgrs
sum(lst12mnpurch_amtgrs) / sum (lst12mnpurch_balgrs)
5 Year Default Rate
Numerator - Default Amount over the last 5 years, defined by gross purchase amount Denominator - Active Gross Balance averaged over last 5 years + Default Amount over last 5 years
lst60mndefault_amtgrs, lst60mndefault_balgrs
(sum(lst60mndefault_amtgrs)/5) / sum (lst60mndefault_balgrs)
SMART Category Attribute Description Loan Level Attributes Lender Level Equation
Management
Lender Purchase Rating (formerly LRR) A Lender Rating based on forecasted purchases for the next 12 months n/a calcrating
High Risk Origination Rate*
Numerator - Gross Approval Amount for young (mob ≤ 36) risky (original SBPS < 140) *** loans that have been disbursed
Denominator - Gross Approval Amount for young loans (mob ≤ 36) that have been disbursed
lst36mn_highriskorig_amtgrs, lst36mndisb_amtgrs
sum(lst36mn_highriskorig_amtgrs) / sum(lst36mndisb_amtgrs)
Loans in Purchase Status over 3 Years Rate
Numerator - Gross Balance of loans in purchase status over 3 years that were purchased due to liquidation
Denominator - Gross Balance of all loans currently in purchase status due to liquidation liqd_for_36_amtgrs, actvpurch_liqd
sum(liqd_for_36_amtgrs) / sum (actvpurch_liqd)
SMART Category Attribute Description Loan Level Attributes Lender Level Equation
Asset Quality
Stressed Rate
Numerator - Stressed (past due (31-59 days past due), deferred, delinquent (60 or more days past due)) balance
Denominator - Active Gross Balance stressed_balgrs, activ_balgrs
sum(stressed_balgrs) / sum(activ_balgrs)
Recovery Rate (Over last 5 years)
Numerator - Cumulative Recovery Amount (funds realized after purchase due to liquidation) of loans charged off within the last 5 years
Denominator - Cumulative Purchase Amount due to liquidation for loans charged off within the last 5 years
purchpringrs, chargeoffpringrs, choff_dt, lndr_dt
(sum(lst60mn_co_purchpringrs) - sum(lst60mn_co_chargeoffpringrs)) /sum(lst60mn_co_purchpringrs)
Early Problem Loan Rate
Numerator - Active Gross Balance for young (mob ≤ 36) loans that have had either a deferred, delinquent (60 or more days past due),
purchased, or charged off status within 18 months of disbursement
Denominator - Gross Approval Amount for young loans (mob ≤ 36) that have been disbursed
lst36mnearlyprob_amtgrs, Lst36mndisb_amtgrs
sum(lst36mnearlyprob) / sum(lst36mndisb_amtgrs)
SMART Category Attribute Description Loan Level Attributes Lender Level Equation
Regulatory Compliance Minimum Level of 504 Activity
The number of 504 debentures disbursed in the last two years dbm twoyear_loan_count
SMART Category Attribute Description Loan Level Attributes Lender Level Equation
Technical Issues
Average SBPS (weighted)
Average Small Business Portfolio Score (SBPS) weighted by active gross balance balscore, balscrden sum(balscore) / sum (balscrden)
Industry Concentration Rate
Numerator - Gross Balance of loans in a given industry subsector (NAICS 3 digit code) Denominator - Gross Balance
naicsubsect_cd, activ_balgrs top_industry_balgrs /sum(balgrs)
SMART 1.0 Qualitative Factors Solvency
• Reserves for future operations
• Liquidity risk and management
Management & Board Governance • Board-approved internal controls policies: Independent loan review & Loan Classification System
• Business Strategy and Planning
• Audit and Review Programs
• IT Operations
• Management of Risk Concentrations
• Professional Service Contractors
Asset Quality & Servicing • Credit Administration
• Servicing and Liquidation Management
• Potential “Harm” Issues
Regulatory Compliance • Timely and complete submission of CDC Annual report (and PCLP reserve report, if required
Technical Issues and Missions • CDC support of “other economic development initiatives”
• Jobs Created/Retained
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Analysis of CDC Annual Report Information
CDCs are required to submit their Annual Report to SBA within 180
days after then end of their fiscal year and CDCs with 504 portfolios
of $20 million or more are required to have their financial audited by
a CPA.
OCRM is conducting a comprehensive review of all CDC Annual
Reports in order to compile key operating CDC information on items
such as profitability, reserves, cash-flow, investment in local
economic development, jobs created/retained, executive
compensation, CDC sponsorship, and business transactions
involving interested parties.
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Supervisory and Enforcement Actions
Supervisory Actions: these are typically confidential in nature and not
released to the public. Examples include Risk Rating downgrades,
shortened or non-renewal of delegated authority, required corrective
actions, and increased reporting.
Enforcement Actions: in the past two years, SBA has taken two
formal enforcement against CDCs. Enforcement actions are made
public by the SBA. The most recent action was issued on 1/31/2014
against SEM Resource Capital and the previous enforcement action
was issued in December of 2012 against EDF Resource Capital.
Details regarding both enforcement actions can be found on the
SBA’s website.
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Voluntary Decertifications and Inactive CDCs
Voluntary Decertifications
Over the past two (2) years, ten CDCs have voluntarily decertified
their CDC status and their portfolios were transferred to other
entities for servicing. SBA’s consent, pursuant to 13 CFR 120.857,
to a CDC’s voluntary withdrawal from the 504 program should not
be construed as an SBA determination that the CDC is in violation
of any SBA Loan Program Requirement.
Inactive CDCs
Currently, there are approximately 30 CDCs nationally that are not
in compliance with either: a) 13 CFR 120.828(a) which states that
“a CDC is required to receive SBA approval of at least four 504
loan approvals during two consecutive fiscal years” and/or b) 13
CFR 120.130 which states that CDCs must submit their Annual
Reports to SBA within 180 days of their fiscal year end.
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