[Federal Register: October 31, 2007 (Volume 72, Number 210)] [Proposed Rules] [Page 61751-61785] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr31oc07-35] [[Page 61751]] ----------------------------------------------------------------------- Part III Small Business Administration ----------------------------------------------------------------------- 13 CFR Part 120 Lender Oversight Program; Proposed Rule [[Page 61752]] ----------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 13 CFR Part 120 RIN 3245-AE14 Lender Oversight Program AGENCY: Small Business Administration (SBA). ACTION: Notice of Proposed Rulemaking. ----------------------------------------------------------------------- SUMMARY: SBA is proposing a rule to incorporate SBA's risk-based lender oversight program into SBA regulations. Specifically, the proposed rule would establish the role and responsibilities of SBA's Office of Credit Risk Management within a new subpart of the business loan regulations. It would codify in SBA regulations SBA's process of risk-based oversight including: (i) Accounting and reporting requirements; (ii) off-site reviews/monitoring; (iii) on-site reviews and examinations; and iv) capital adequacy requirements. The proposed rule would also list the types of, grounds for, and procedures governing SBA enforcement actions within consolidated enforcement regulations for all 7(a) Lenders, Certified Development Companies, Microloan Intermediaries, and Non-Lending Technical Assistance Providers. This rule is necessary to provide coordinated and effective oversight of financial institutions that originate and manage SBA guaranteed loans. DATES: Comments must be received on or before December 31, 2007. ADDRESSES: You may submit comments, identified by [RIN number 3245- AE14] by any of the following methods: Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. 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 Linda RU.S.C.he, Supervisory Financial Analyst, 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 sole discretion, of whether the information is CBI and, therefore, will not be published or not. FOR FURTHER INFORMATION CONTACT: Linda RU.S.C.he, Supervisory Financial Analyst, at (816) 426.4860, or Bryan Hooper, Director, Office of Credit Risk Management, (202) 205.3049. SUPPLEMENTARY INFORMATION: I. Background A. Statutory Section 7(a) of the Small Business Act (the Act), 15 U.S.C. 636, authorizes SBA to guarantee loans made by Lenders (7a Lenders) to eligible small businesses. Under Section 504 of the Small Business Investment Act, 15 U.S.C. 697a, SBA guarantees Certified Development Company (CDC) debentures. Section 7(m) of the Act authorizes SBA to make direct loans to Microloan Intermediaries, who use proceeds to make loans to very small businesses, and also authorizes SBA to make technical assistance grants to non-lending technical assistance providers (NTAPs). 15 U.S.C. 636(m). With this authority to offer government guarantees and related grants, Congress has also provided SBA with authority to support appropriate Lender, CDC, Microloan Intermediary, and NTAP supervision. 15 U.S.C. 650; 15 U.S.C. 634 note, citing Public Law 104-208, Division D, Title I, Sec. 103(h); 15 U.S.C. 634(b)(14); 15 U.S.C. 634(b)(7); 15 U.S.C. 636(a)(31); 15 U.S.C. 687(f); 15 U.S.C. 696(3)(A); 15 U.S.C. 697(a)(2); 15 U.S.C. 697e(c)(8); and 15 U.S.C. 634(b)(6). The provisions cited include both direct and indirect authority to supervise, regulate, and examine Small Business Lending Companies (SBLCs) and Non-Federally Regulated Lenders (NFRLs). 15 U.S.C. 650; 15 U.S.C. 634(b)(14); 15 U.S.C. 636(a)(31); and 15 U.S.C. 634(b)(6) and (7). The cites also include both direct and indirect provisions that, together, authorize SBA oversight of and reviews of the SBA operations of other 7(a) Lenders (including national banks and other federally regulated financial institutions), CDCs, Microloan Intermediaries, and NTAPs. 15 U.S.C. 634 note, citing Public Law 104-208, Division D, Title I, Sec. 103(h); 15 U.S.C. 634(b)(14); 15 U.S.C. 634(b)(6) and (7); 15 U.S.C. 636(a)(31); 15 U.S.C. Sec. 687(f); 15 U.S.C. 696(3)(A); 15 U.S.C. 697(a)(2); and 15 U.S.C. 697e(c)(8). B. History Currently, there are over 5,000 7(a) Lenders and CDC s (together, SBA Lenders) authorized to make SBA-guaranteed loans and issue SBA- guaranteed debentures. These SBA Lenders hold approximately $60 billion of 7(a) and 504 loans outstanding (in gross dollars). SBA has delegated increasingly more authority to its SBA Lenders such that the number of loans originated under delegated authority has grown from approximately 20% of SBA's loan volume in 1992 to over 75% of SBA's loan volume as of 2006. As SBA continues to place more responsibility and independence on its SBA Lenders, SBA must have the necessary controls to ensure that SBA Lenders' SBA operations are well-managed and avoid unnecessary losses. A comprehensive oversight process provides this control for the Agency. Prior to 1999, SBA's risk management, lender monitoring, and lender oversight activities were conducted by SBA's Office of Financial Assistance (OFA) and SBA's District Offices, which were also responsible for developing and promoting the Agency's business loan programs. With the increase in lending authority given to SBA Lenders and lending volume, SBA needed a separate division to perform risk management and lender oversight. Therefore, in 1999 SBA established the Office of Lender Oversight (OLO) for the primary purpose of ensuring the ``consistent and appropriate supervision of SBA's lending partners.'' At the time it was initially established, OLO's major responsibilities were defined as: ``evaluating existing oversight regulations, policies and procedures and promulgating new ones where appropriate; monitoring changes in the accounting, banking and financial industries, and recommending appropriate modification of SBA oversight policy; coordinating all headquarters and field office activities with respect to Lender reviews; [and] evaluating new programs and changes to existing programs to assess their risk potential * * *'' The head of the office, the Associate Administrator for OLO, was to serve as a member of SBA's Risk Management Committee and a key member of the group developing and implementing the Agency's lender monitoring and oversight system. Subsequent to its establishment, OLO assumed responsibility for conducting ``safety and soundness'' examinations of the SBLCs and compliance reviews for Preferred Lenders Program (PLP) Lenders. OLO then began developing a risk-based review process for all SBA [[Page 61753]] Lenders. OLO, in 2003, developed and implemented a Loan and Lender Monitoring System (L/LMS). In late 2004, Congress provided SBA specific supervision and enforcement authorities over SBLCs and NFRLs (together, SBA Supervised Lenders). In April 2005, SBA published Delegations of Authority that delineated the responsibilities of OLO and a new Lender Oversight Committee (LOC) consistent with new authorities. 70 FR 21262 (April 25, 2005). On May 5, 2007, SBA published a final rule governing 7(a) Lender review/examination fees. 72 FR 25189. On May 16, 2007 OLO published a final rule on SBA's Lender Risk Rating System. 72 FR 27611. Also, in May 2007, SBA reorganized and renamed the office to the Office of Credit Risk Management (OCRM). Most recently, SBA has reviewed the Agency's current oversight regulations and is now proposing this rule to incorporate OCRM's new authorities and SBA's risk-based lender oversight program into SBA's regulations. A discussion of the proposed rule, consisting of an overview and key provisions, follows. II. Proposal A. Overview The proposed rule would incorporate SBA's risk management/lender oversight program into SBA's business loan program regulations by: (i) Adding risk management definitions to Part 120 (13 CFR 120.10); (ii) incorporating risk management/lender oversight metrics and tools into program participation criteria and requirements (13 CFR 120.410, 120.424, 120.433, 120.434, 120.451, 120.710, 120.812, 120.820, 120.826, 120.830, 120.839, and 120.841); (iii) updating provisions to include key OCRM Delegations of Authority (13 CFR 120.451, 120.461, 120.702, 120.710, and 120.845); and (iv) consolidating loan program oversight and enforcement regulations into subpart I, designated Risk-Based Lender Oversight. (See below chart on Regulations Relocated). Subpart I would cover the role and responsibilities of OCRM, the Risk Rating System, off-site reviews/monitoring, on-site reviews and examinations, and enforcement actions against SBA Lenders, Microloan Intermediaries, and NTAPs. Chart of Regulations Relocated ------------------------------------------------------------------------ Regulation subject Proposed regulatory Current regulatory citation matter citation ------------------------------------------------------------------------ Sec. 120.414.............. SBA access to 7(a) Sec. 120.1010. Lender files. Sec. 120.415.............. 7(a) program-- Sec. 120.1400 Suspension or (grounds). revocation of Sec. 120.1500 eligibility to (types of participate. enforcement actions). Sec. 120.1600 (enforcement procedures). Sec. 120.442.............. Suspension or Sec. 120.1400 revocation of CLP (grounds). status. Sec. 120.1500 (types of enforcement actions). Sec. 120.1600 (enforcement procedures). Sec. 120.454.............. PLP performance Sec. 120.1000(a) review. (Risk-Based Lender Oversight). Sec. 120.1025 (off- site reviews/ monitoring). Sec. 120.1050 (on- site reviews and examinations). Sec. 120.455.............. Suspensions or Sec. 120.1400 revocations of PLP (grounds). status. Sec. 120.1500 (types of enforcement actions). Sec. 120.1600 (enforcement procedures). Sec. 120.470(b)(3)........ Minimum SBLC capital Sec. 120.471 requirement. (minimum capital requirement). Sec. 120.472 (higher individual minimum capital requirement). Sec. 120.473 (procedures for higher individual minimum capital requirement). Sec. 120.470(b)(4)........ SBLC capital Sec. 120.462(d). impairment. Sec. 120.470(b)(5)........ SBLC issuance of Sec. 120.471(d). securities. Sec. 120.470(b)(6)........ SBLC voluntary Sec. 120.471(c). capital reduction. Sec. 120.470(b)(7)........ SBLC reserve for Sec. 120.463(e). losses. Sec. 120.470(b)(8)........ SBLC internal Sec. 120.460(b). controls. Sec. 120.470(b)(9)........ SBLC dual control... Sec. 120.470(d). Sec. 120.470(b)(10)....... SBLC fidelity Sec. 120.470(e). insurance. Sec. 120.470(b)(11)....... SBLC common control. Sec. 120.470(f). Sec. 120.470(b)(12)....... SBLC management..... Sec. 120.470(g). Sec. 120.470(b)(13)....... SBLC borrowed funds. Sec. 120.470(h). Sec. 120.471.............. SBLC recordkeeping Sec. 120.461. and retention requirements. Sec. 120.473.............. SBLC change of Sec. 120.475. control. Sec. 120.474.............. SBLC prohibited Sec. 120.476. financing. Sec. 120.475.............. SBLC Audits......... Sec. 120.490. Sec. 120.476.............. SBLC suspension and Sec. 120.1400 revocation. (grounds). Sec. 120.1500 (types of enforcement actions). Sec. 120.1600 (enforcement procedures). Sec. 120.716.............. Microloan Sec. 120.1425 Intermediary and (grounds). NTAP suspension and Sec. 120.1540 revocation. (types of enforcement actions). Sec. 120.1600 (enforcement procedures). Sec. 120.853.............. CDC reviews......... Sec. 120.1000, Sec. 120.1050. Sec. 120.854.............. CDC grounds for Sec. 120.1400 taking enforcement (grounds). action. Sec. 120.855.............. CDC types of Sec. 120.1500 enforcement actions. (types of enforcement actions). Sec. 120.856.............. CDC enforcement Sec. 120.1600 procedures. (enforcement procedures). ------------------------------------------------------------------------ Chart: This chart is intended to serve as a reference tool for locating regulatory provisions repositioned under the proposed rule. In some instances, the relocation involves simply moving text from one regulatory section to another. In other instances, SBA is proposing substantive changes with the move. [[Page 61754]] B. Key Provisions The following is a discussion of key provisions of the proposed rule. They are as follows: (i) SBA Supervised Lender regulation; (ii) capital regulation; (iii) incorporation of a risk rating system; (iv) the addition of the CDC Single Audit Act provision; (v) the codification of the risk-based on-site review and examination program; and (vi) the coordination and development of enforcement policies and procedures. These key provisions are highlighted because they generally cover more than one regulation within the proposed rule. In addition, their discussion will provide a useful background for regulation review. 1. SBA Supervised Lender Regulation Public Law 108-447, Division K, Title I (December 2004) effectively created a new category of SBA Lender--an SBA Supervised Lender. SBA Supervised Lenders consist of SBLCs and NFRLs. P.L 108-447 generally treated these 7(a) Lenders the same for purposes of regulation, supervision, and enforcement. Accordingly, SBA has drafted a group of regulations applicable to SBA Supervised Lenders in general (Sec. Sec. 120.460-120.465). The SBA Supervised Lender regulations would cover for example; internal controls, record retention, accounting and reporting, and capital adequacy. Many of these new regulations governing SBA Supervised Lenders, especially those related to capital, are similar to that of either the Federal Deposit Insurance Corporation; the Federal Reserve Board; the Office of the Comptroller of the Currency; the Office of Thrift Supervision; the National Credit Union Administration; or the Farm Credit Administration (each a Federal Financial Institution Regulator). 2. Capital Regulation Essential to the success of a government guaranteed loan program is the financial strength of its lenders. Capital is a common metric for measuring financial strength. The proposed rule would incorporate capital more fully into the 7(a) program. Specifically, the proposed rule would explicitly make having sufficient permanent capital a requirement for 7(a) program participation (Sec. 120.410(a)). For 7(a) Lenders with a Federal Financial Institution Regulator, meeting capital requirements for an adequately capitalized financial institution would be considered sufficient permanent capital to support SBA lending activities. For SBA Supervised Lenders, adequate capital would mean meeting its minimum capital requirement (For an SBLC--this would mean meeting SBA's Sec. 120.471 minimum or Sec. 120.472 higher individual minimum capital requirement, as applicable. For an NFRL--this would mean meeting the minimum capital requirement set by its state of incorporation regulator). While the proposed rule does not revise the minimum capital requirement for all SBLCs, SBA is considering updating this requirement. SBA seeks comments as to the appropriate minimum capital requirement for SBLCs. In addition to an SBLC minimum capital requirement, the proposed regulations would allow SBA to set a higher individual minimum capital requirement for an SBLC, where appropriate. (Sec. 120.472). SBA would set such a higher minimum capital requirement after consideration of certain risk-related factors described in proposed Sec. 120.472 and pursuant to procedures contained in proposed Sec. 120.473. The proposed rule would also require SBA Supervised Lenders to maintain a minimum capital adequacy plan (Sec. 120.462(b)), and to quarterly certify as to compliance with minimum capital requirements. (Sec. 120.462(c)). Capital impairment would be redefined under the proposed rule for SBA Supervised Lenders, as failing to meet its applicable minimum capital requirement. (Sec. 120.462(d)). Under the proposed rule, if an SBA Supervised Lender fails to meet its minimum capital requirement (i.e., is capitally impaired), it must file with SBA a capital restoration plan (Sec. 120.462(e)) and then timely implement the approved plan. SBA could take enforcement action under the proposed enforcement regulations (Sec. Sec. 120.1400-1600) against an SBA Supervised Lender that fails to submit a capital restoration plan that is acceptable to SBA or fails to implement, in any material respect, its capital restoration plan in a timely manner. The proposed capital regulations contain provisions similar to those maintained by some Federal Financial Institution Regulators. 3. Incorporation of a Risk Rating System With the assistance of private industry leaders in predictive modeling and risk rating systems, SBA has developed an SBA Lender Risk Rating System. The proposed SBA Lender Risk Rating System was published for comment in the Federal Register at 71 FR 25624 (May 1, 2006). On May 16, 2007 OLO published the final rule on SBA's Lender Risk Rating System. 72 FR 27611. The SBA Lender Risk Rating System is an internal tool for assessing the risk of each SBA Lender's SBA loan operations on a uniform basis within its program and for identifying those institutions whose SBA loan operations and portfolio require additional SBA monitoring or other action. Under the SBA Lender Risk Rating System, SBA assigns each SBA Lender a composite rating of one to five based on certain portfolio performance factors which may be overridden in some cases due to SBA Lender specific factors that may be indicative of a higher or lower level of risk. SBA would generally consider an SBA assigned Risk Rating (Risk Rating) of either one, two, or three on a scale of one to five to be an ``Acceptable Risk Rating''. A ``Less Than Acceptable Risk Rating'' would be an SBA assigned Risk Rating of four or five. (Sec. 120.10 and Sec. 120.1015). SBA may revise the scale for SBA Risk Ratings and related definitions as the program develops. Any such changes would be published in the Federal Register for notice and comment. SBA plans to develop a risk rating system for Microloan Intermediaries and NTAPs and will provide notice before implementation of this system. SBA has incorporated the SBA Lender Risk Rating System into its on- site risk-based reviews and examinations as set forth in SOP 51-00 governing on-site SBA Lender reviews and examinations. The proposed rule would incorporate the SBA Lender Risk Rating System and its definitions into SBA's loan program regulations. Risk Ratings would be considered in determining whether an SBA Lender (and, in the future, a Microloan Intermediary, or NTAP) has satisfactory SBA performance for purposes of continued participation in the 7(a), 504, Microloan, or NTAP programs (including the delegated authority programs) under proposed amendments to: Sec. Sec. 120.410 (requirements for 7(a) Lenders); 120.424 (securitization requirements); 120.433 (sales and sales of participating interests); 120.434 (pledges of SBA loans); 120.451 (PLP Program); 120.812 (Extensions of CDC probationary periods and permanent CDC status); 120.820 (requirements for CDC certifications and operation); 120.839 (outside area of operation loan approval); and 120.841 (ALP status). SBA would also consider a Risk Rating before approving a Microloan Intermediary's reduction in its loan loss reserve fund (LLRF) under proposed amendments to Sec. 120.710. Under proposed Sec. 120.1051, SBA would consider an SBA Lender's, Intermediary's, or NTAP's Risk Rating in determining frequency of on-site reviews/ examinations. [[Page 61755]] Under proposed rule Sec. 120.1400(c)(9), a repeated Less Than Acceptable Risk Rating (particularly in conjunction with other grounds) may evidence increased financial risk to SBA to warrant consideration of taking formal enforcement action. A repeated Less Than Acceptable Risk Rating may also be evidence of an SBA Lender not performing underwriting, closing, disbursing, servicing, liquidation, or litigation in a commercially reasonable and prudent manner under proposed Sec. 120.1400(c)(4). SBA expects to consider additional factors (e.g., on-site review/examination assessment, corrective actions implemented, and contribution toward SBA mission) before taking formal enforcement action on these Risk Rating grounds. Finally, a repeated Less Than Acceptable Risk Rating could be support for SBA not renewing program or delegated authorities. The incorporation of the Risk Rating System into the regulations is consistent with SBA's movement away from considering only the lagging indicators of our portfolio benchmark performance measures and towards integration of more current and sophisticated performance measurement systems developed by private sector leaders. 4. Single Audit Act Provisions The proposed rule incorporates Single Audit Act requirements into SBA's 504 program regulations. The Single Audit Act (31 U.S.C. 7501- 7507) requires Non-Federal entities, such as non-profit CDCs, that expend a total of $500,000 or more of federal awards (e.g. loan guarantees) in any fiscal year (including amounts outstanding), to have a single audit performed for such fiscal year. The audit must be conducted by an independent auditor in accordance with generally accepted government auditing standards. The Single Audit Act may also require, under certain circumstances, the Non-Federal entity to monitor the subrecipients' use of federal awards through site visits, limited scope audits, and other means. By including reference to the Single Audit Act in SBA regulations, SBA would not intend to extend coverage of the Single Audit Act to those CDCs for which the Single Audit Act does not apply. Therefore, for example, if a CDC does not meet the $500,000 federal award minimum, then the Single Audit Act compliance requirement would not apply. However, SBA estimates that virtually all active CDCs are covered by the Single Audit Act. SBA also would intend to consider CDC compliance with the Single Audit Act, including any future amendments to it, as a requirement for participation in the 504 program and, accordingly would monitor CDC compliance with Single Audit Act requirements. 5. Review and Examination Program SBA has developed a coordinated risk-based SBA Lender review and examination program. SBA regulations need to reflect the updated coordinated risk-based review/examination approach. The proposed rule would remove current regulatory provisions governing on-site reviews and examinations within SBA's loan program regulations (Sec. Sec. 120.414, 120.454, 120.470, 120.853) and consolidate them within subpart I on Risk-Based Lender Oversight. Under the proposed regulations, SBA Lenders could now look in one location for consistent regulatory guidance on on-site reviews and examinations. In addition, the proposed rule would extend such guidance beyond regulatory authorization for reviews and examinations. Specifically, the proposed rule would include provisions for off-site reviews and monitoring, on-site review and examination evaluative components, the frequency of on-site reviews and examinations, review and examination reports, and expected responses, including, as applicable, corrective actions and capital restoration plans. As to the proposed regulation's on-site reviews, if an SBA Lender is to be examined by a Federal Financial Institution Regulator in the same general timeframe, SBA would try to mutually coordinate the timing of the SBA operation review and the supervisor's examination to minimize any burden. Finally, the proposed rule also would include Microloan Intermediaries and NTAPs in the review regulations, and would harmonize the review process between for-profit 7(a) Lenders and non- profit CDCs, since SBA's partial guaranty of credit risk on individual loans for each program is similar. 6. Enforcement Policies and Procedures SBA has consolidated within subpart I, the Agency's enforcement regulations for SBA Lenders, Microloan Intermediaries, and NTAPs. The consolidation would facilitate coordinated enforcement policies. It would allow all SBA Lenders, Microloan Intermediaries, and NTAPs to look in one place for such regulatory guidance. Finally, consolidation within subpart I should provide for greater consistency in taking formal enforcement actions. SBA has modeled its proposed enforcement provisions after SBA's CDC enforcement regulations. Like the current CDC enforcement regulations, subpart I's enforcement provisions would consist primarily of three main enforcement regulations. The first, proposed Sec. 120.1400, would cover grounds for enforcement actions. The second, proposed Sec. 120.1500, would list types of formal enforcement actions. The third, proposed Sec. 120.1600, would set forth the procedures governing each type of formal enforcement action. Within each of these proposed regulations, the subsections are generally broken down into provisions that apply to all SBA Lenders; additional provisions that apply only to 7(a) Lenders; additional provisions that apply only to SBA Supervised Lenders; additional provisions that apply only to SBLCs; and additional provisions that apply only to CDCs. Enforcement grounds and formal enforcement actions for Microloan Intermediaries and NTAPs would be contained in separate regulations within the enforcement series, as there was less overlap with these participants. III. Section-by-Section Analysis Section 120.10--Definitions. SBA proposes to add ten new definitions to this section primarily for purposes of risk management/ lender oversight and enforcement. The new definitions would help to clarify categories of SBA Lenders and related parties referenced in the proposed regulations. Definitions would be added for 7(a) Lender, SBA Lender, Small Business Lending Company (SBLC), Non-Federally Regulated Lender (NFRL), SBA Supervised Lender, Other Regulated SBLC, Federal Financial Institutions Regulator, and Management Official. SBA would also add Risk Rating definitions that would describe an SBA Risk Rating and the key rating categories of Acceptable and Less Than Acceptable. Section 120.410--Requirements for all participating Lenders. Under the proposed rule, the requirement in section 120.410(a) that a 7(a) Lender have the continuing ability to evaluate, process, close, disburse, service, liquidate, (and litigate) loans would be more specifically defined to include (but not be limited to) (i) holding sufficient permanent capital (For Lenders with Federal Financial Institution Regulators, that would entail being ``adequately capitalized.'' For SBLCs, that would entail meeting its SBA minimum capital requirement. For NFRLs, that would entail meeting the minimum capital requirement of its state of incorporation) and (ii) having satisfactory SBA performance. SBA is more specifically defining the [[Page 61756]] continuing ability provision to include adequate capital and satisfactory SBA performance because sufficient capital and satisfactory performance sustain a 7(a) Lender's ability to evaluate, process, close, disburse, service, liquidate, and litigate loans. In determining satisfactory SBA performance, SBA would consider a Lender's Risk Rating, among other factors. The other factors SBA anticipates considering may include on-site review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, other performance related measurements and information, and contribution toward SBA mission. Subsection (a) would also be revised to specify the requirement that a 7(a) Lender have the ability to litigate loans. This is consistent with SBA's policy on 7(a) Lender litigation of SBA Loans. In addition, the OCRM proposed rule would further define SBA's requirements to participate in the 7(a) program by adding the following 7(a) Lender requirements: (i) Good standing (as generally defined under Sec. 120.420(f) and with a Lender's state banking regulator and/or Federal Financial Institution Regulator, as applicable); (ii) safe and sound condition; and (iii) use of commercially reasonable lending policies, procedures, and standards employed by prudent lenders. For SBA Supervised Lenders, safe and sound condition would be determined by SBA. For other 7(a) Lenders, SBA would look to a 7(a) Lender's Federal Financial Institution Regulator or state banking regulator, as applicable, to ensure safe and sound condition. Finally, subsection (d) would be clarified to provide that a 7(a) Lender must be supervised and examined by either a Federal Financial Institution Regulator, a state banking regulator (satisfactory to SBA) or SBA. SBA is clarifying this provision to make clear that a 7(a) Lender participating in SBA's program must be supervised and examined by a banking regulator, satisfactory to SBA. The clarifications and revisions proposed for Sec. 120.410 are intended to minimize losses in the 7(a) program. Sections 120.420(f)--Participating lender financings, definition of ``Good Standing''; 120.425(c)(2)--Reinstatement of securitizer PLP status; and 120.426--Actions SBA would take if SBA securitizer transfers tranche prior to holding period. SBA proposes to change the determining authority in these provisions from the Securitization Committee to the more recently established Lender Oversight Committee (LOC). Proposed changes to Sec. 120.420(f) would also specify the LOC's discretion in reviewing an SBA Lender's good-standing in certain circumstances involving investigations, indictments, convictions, and judgments, to be consistent with the LOC's discretion set forth in 120.420(f)(4). Finally, SBA proposes to add the words ``In general'' to its ``good-standing'' definition to underscore the discretionary nature of the ``good-standing'' determination. Sections 120.424--What are the basic conditions a Lender must meet to securitize; 120.433--What are SBA's other requirements for sales and sales of participating interests; and 120.434--What are SBA's requirements for loan pledges? SBA is revising the requirements in these sections to more explicitly reference the ``good standing'' definition in Sec. 120.420(f). SBA is also proposing to add the requirement that 7(a) Lenders have satisfactory SBA performance as determined by SBA and that Risk Ratings would be considered among other factors in determining satisfactory SBA performance. SBA expects to consider among the other factors, on-site review/examination assessments, historical performance measures like default rate, purchase rate and loss rate, other performance-related measures and information, and contribution toward SBA mission. This change would incorporate SBA's Risk Rating System within SBA's securitization and other conveyance regulations. Section 120.435--Which loan pledges do not require notice to or consent by SBA? SBA proposes to update the cross-reference to ``Sec. 120.434(e)'' within this section consistent with proposed revisions to Sec. 120.434. Section 120.451--How does a Lender become a PLP Lender? SBA is proposing to amend Sec. 120.451 to add satisfactory SBA performance to those items SBA would consider in approving PLP status. Subsection (e) on PLP recertification would also be amended to include SBA performance (including contribution to SBA mission), a Lender's Risk Rating, examination and review results, and other risk-related factors in the recertification decision. Section 120.451 would also be amended to provide that the recertification decision would be made by the appropriate Office of Capital Access official in accordance with Delegations of Authority. Also, SBA proposes to delete current subsections (c) and (f) to conform to existing Agency policy as published in Notice 5000-989 dated May 2, 2006 governing PLP territories. Finally, these additions incorporate lender oversight and related performance metrics and OCRM's Delegations of Authority into PLP program participation determinations. Section 120.460--What are SBA's additional requirements for SBA Supervised Lenders? SBA is proposing a new Sec. 120.460 entitled ``What are SBA's additional requirements for SBA Supervised Lenders?'' In addition to complying with SBA's requirements for 7(a) Lenders, an SBA Supervised Lender would be required to meet additional requirements set forth in Sec. 120.460 and the sections that follow. Under Sec. 120.460, SBA would require an SBA Supervised Lender to adopt an internal control policy that would provide adequate direction for establishing effective control over and accountability for operations, programs, and resources. An SBA Supervised Lender that is required to maintain an adequate internal control program may be more likely to self-identify and self-correct operational deficiencies. Proposed Sec. 120.460 is similar to a Federal Financial Institution Regulator internal control provision in Title 12 of the Code of Federal Regulations. Section 120.461--What are SBA's additional requirements for filing SBA Supervised Lender reports with SBA and for record retention? This proposed regulation would require that SBA Supervised Lender specific reports be filed with the appropriate Office of Capital Access official in accordance with Delegations of Authority. This is consistent with current Delegations of Authority. This section would also extend the recordkeeping requirements for SBLCs to NFRLs. Record retention is required for SBA to be able to perform safety and soundness examinations or Lender reviews and to monitor that SBLC licensing requirements are maintained. Finally, this proposed section would newly specify certain time periods for retrieving certain documents (i.e., 1 day for documents that must be immediately retrievable and 15 days for originals of documents that are stored electronically). Consequently, an SBA Supervised Lender must be able to produce needed records when required, and within a reasonable period of time, as defined here. Section 120.462--What are SBA's additional requirements on capital maintenance for SBA Supervised Lenders? A financial institution is expected to maintain capital commensurate with its existing and potential risk exposure and the ability of management to identify, measure, monitor, and control exposures. Given this, many SBA Supervised Lenders do, [[Page 61757]] and should be expected to, maintain capital levels above specified minimums. Therefore, SBA is proposing a new Sec. 120.462 which would guide SBA Supervised Lenders to maintain their own capital adequacy goals and plans, typically at a level above SBA's minimum. The provision would also provide guidance as to factors an SBA Supervised Lender should consider in determining the total amount of capital needed to assure the SBA Supervised Lender's continued financial viability and to provide for any necessary growth. Given the importance of maintaining adequate capital, the proposed rule would further require that all SBA Supervised Lenders, within 45 days of the end of each fiscal quarter, furnish SBA with a calculation of its compliance with its minimum regulatory capital requirement. Under proposed Sec. 120.462(c), SBA would require the SBA Supervised Lender's chief financial officer to certify the calculation as correct. Section 120.462 would extend to NFRLs SBA's requirement to timely notify SBA in writing of capital impairment. Under proposed Sec. 120.462(d), SBA would redefine capital impairment as any failure by an SBA Supervised Lender to meet its minimum capital requirements. SBA is proposing this revision to provide SBA early notice of a Supervised Lender's deteriorating capital position below required minimums. Unless otherwise waived by SBA in writing, an SBA Supervised Lender would be prohibited from presenting any loans to SBA for guarantee until the capital impairment is cured. Finally, the proposed rule would require an SBA Supervised Lender that fails to meet its minimum capital requirement to submit a capital restoration plan. Proposed subsection (e) would detail the plan content, how SBA would respond, amendments to the capital plan, and consequences of failure to: (i) Submit an acceptable plan within the required timeframe or (ii) implement in any material respect an approved capital restoration plan within the plan timeframe. Section 120.463--Regulatory accounting. To facilitate accurate and reliable financial reporting, the proposed rule contains a new Sec. 120.463 on regulatory accounting. The proposed regulation would require that an SBA Supervised Lender's (i) books and records be kept on an accrual basis in accordance with Generally Accepted Accounting Principles (GAAP) as supplemented by Regulatory Accounting Principles (RAP) and (ii) financial statements be audited annually in accordance with generally accepted auditing standards by an independent certified public accountant experienced in auditing financial institutions. Proposed subsection (d) would require an SBA Supervised Lender that discharges its auditor to notify SBA within ten days of discharge and provide SBA with the name, address, and telephone number of the discharged auditor. If the discharge involved a dispute over the financial statements, the SBA Supervised Lender would also have to provide additional information, including but not limited to, a detailed reason for the discharge and the effect of each party's position on the financial statements. Proposed subsection (e) would extend the SBLC requirement for maintenance of an allowance for losses on loans to NFRLs. Under proposed Sec. 120.463(e), an SBA Supervised Lender would be required to maintain documentation of its loan loss allowance calculations and analysis in sufficient detail to permit the SBA to review assumptions used and their application. SBA would also require, under subsection (e) that the unguaranteed portions of loans identified as uncollectible be charged off promptly. If the portion determined to be uncollectible by the SBA Supervised Lender would differ from that determined by its auditors or the SBA, the SBA Supervised Lender would be required to charge-off such amount as the SBA may direct. Each SBA Supervised Lender would also be required to classify loans as nonaccrual or formally restructured in accordance with stated guidelines. Under the proposed subsection, if one loan to a given borrower would be classified as nonaccrual or formally restructured, all loans to that borrower would be required to be so classified unless the SBA Supervised Lender could document that the loans have independent sources of repayment. Finally, Sec. 120.463, subsection (f), would require that SBA Supervised Lenders account for loan sales transactions and the valuation of loan servicing rights in accordance with GAAP. At the end of each quarter, assumptions used in the valuation would be reviewed by the SBA Supervised Lender for reasonableness in the existing environment. In evaluating the assumptions, the SBA Supervised Lender would be required to give particular attention to interest rate and repayment rate assumptions. Assumptions considered no longer reasonable would be required to be modified and reflected in the valuation and would have to be documented and supported by a market analysis. Under subsection (f), SBA could require an SBA Supervised Lender to use industry averages for the valuation of servicing rights, in lieu of any other assumptions found unacceptable by SBA. Section 120.464--Reports to SBA. Proposed Sec. 120.464 would extend to NFRLs, SBA's current SBLC reporting requirements covering audited financial statements, administrative and legal proceedings, reports to stockholders, summaries of changes (in organization and financing), stock pledges, and other reports, as listed in current Sec. 120.472. Proposed Sec. 120.464 would also clarify current reporting requirements by, for example, detailing required statements to accompany the Annual Report (audited financial statements); inserting filing time requirements where presently not stated (Stockholder Report and Report of Changes); detailing the form and format of financial reporting (e.g. for Annual Reports, Quarterly Condition Reports, and Reporting of Changes--to be in accord with GAAP, include footnotes, and utilize accrual accounting), and specifying that any legal or administrative proceedings must be included in other required reporting (e.g., Annual Report, Quarterly Condition Report, any Capital plan report, etc.) until such matter is resolved. Proposed Sec. 120.464 would also introduce two additional SBA Supervised Lender reports: (i) The Quarterly Condition Report and (ii) the Reports of Changes in Financial Condition. SBA Supervised Lenders would report quarterly financial status in Quarterly Condition Reports. The Quarterly Condition Report under proposed Sec. 120.464 would contain quarterly financial statements that could be internally prepared and which would likely include the required certification of compliance with capital requirements under proposed Sec. 120.462(c). Reports of Changes in Financial Condition would report material changes in an SBA Supervised Lender's financial condition (such as unanticipated reductions in asset values due to unanticipated events such as natural disasters or uninsured hazard loss). Generally, SBA would require the SBA Supervised Lender to file the Report of Changes in Financial Condition within 10 days of becoming aware of such a material financial change, except in cases of capital impairment which would be 30 days from the month-end in which the impairment occurred, in accordance with proposed Sec. 120.462(d), as clearly specified in the Regulation language. These two financial reports would result in timelier financial reporting. [[Page 61758]] Subsection (c) would require that SBA Supervised Lenders certify each report of financial condition (e.g., the Quarterly Condition Report, the Changes in Financial Condition Report and the Annual Report) as having been prepared in accordance with applicable regulations and instructions and to be a true, accurate, and complete representation of the SBA Supervised Lender's financial condition and performance. Accurate financial reporting is essential to an institution's safety and soundness. Reliable financial reports are necessary for an SBA Supervised Lender to raise capital. They provide data to stockholders and potential investors on the company's financial position and results of operations. Such information is critical to effective market discipline. Accurate financial information also enables management to effectively manage the institution's risks and make sound business decisions. Further, the compilation and submission of accurate financial information on a regular basis in a consistent format allows SBA to perform more timely and effective risk-based supervision to support examination functions, off-site monitoring, assessments of an institution's capital adequacy and financial strength, and comparisons between SBA Supervised Lenders. Finally, proposed Sec. 120.464 would provide for a waiver provision for any reporting requirement for good cause. Good cause may include, but is not limited to, where an SBA Supervised Lender has a relatively small SBA loan portfolio, consistently-acceptable Risk Ratings, portfolio performance that exceeds SBA's portfolio or peer group averages, etc. This waiver would be determined by SBA, in its sole discretion. In making this determination based on portfolio size, SBA expects to consider the value of the report to SBA given the size of SBA Supervised Lender's SBA loan portfolio and relative to other SBA Supervised Lender's portfolios individually and in the aggregate and other risk related factors. Authority for such actions will be in accordance with SBA's Delegations of Authority. Section 120.465--Civil penalty for late submission of required reports. Congress recognized the importance of reporting to effective oversight and legislated civil monetary penalties of up to $5,000 per day for SBA Supervised Lenders that fail to meet reporting requirements (15 U.S.C. 650(j)). Proposed Sec. 120.465 would codify in SBA regulations the statutory civil monetary penalties. The proposed regulation would provide that penalties would automatically accrue from the report due date until the SBA Supervised Lender submits a complete report. If a submitted report is not complete, it would be deemed not filed for purposes of civil monetary penalty assessment. Under the proposed rule, if SBA discovers after the due date (e.g., during an examination) that the report was submitted only in part or was not filed, penalties would be assessed dating back to the original due date. Finally, proposed Sec. 120.465 would provide procedures for requesting: (i) Due date extension and waiver of automatic penalty up to a new due date, (ii) reduction or exemption from the automatic penalty, and (iii) reconsideration of SBA decisions on extensions and reductions/exemptions and would include factors that would be considered in the SBA approval (e.g. determination of reasonable cause such as natural disaster or other conditions beyond the control of management, that failure was not due to willful neglect, demonstration of modified internal procedures to comply with reporting in the future, etc.). SBA seeks comments on the factors SBA would consider as discussed in the proposed rule. Section 120.470--What is an SBLC? As part of the rewrite of the SBLC regulations, SBA is proposing to amend the title and certain content of current Sec. 120.470. Under the proposed rule, the subject matter in several provisions of Sec. 120.470 would be moved elsewhere in Part 120 (See Chart of Regulations Relocated in the Proposal section of the preamble) and some remaining provisions would be updated, reorganized, or expanded. Updates would include, for example: The addition of limited liability companies and limited partnerships as allowable business structures; an increase to $2 million for required Fidelity Bond insurance; incorporation of new definitions of 7(a) Lender and Intermediary into subsection (a)(2) on lending requirements; a statement on SBA's policy on capitalization with borrowed funds. The Fidelity Bond increase would update the insurance requirements consistent with the current maximum loan amount that SBA can guarantee. SBA would expand guidance, in particular, on SBA's policy against capitalization with borrowed funds. Borrowed funds may result in a weaker capital position of the SBLC due to the potential for required repayment. SBA would also expand guidance in the proposed subsection on common control--providing terms and definitions, requirements for divestitures, and a clearer statement on common control and presumptions. Section 120.471, 120.472, 120.473, and 120.474--SBLC minimum capital requirements. SBA sets SBLC capital standards pursuant to 15 U.S.C. 650(a)(2) and 15 U.S.C. 634(b)(7) in conjunction with 15 U.S.C. 636. Proposed Sec. Sec. 120.471 through 120.474 would govern SBLC minimum capital standards. Proposed Sec. 120.471 would state SBA's baseline minimum capital standard for SBLCs. Under proposed Sec. 120.471, the baseline would remain at the current level stated in Sec. 120.470(b)(3). However, SBA is considering revising the baseline minimum capital standard and seeks comments on the appropriate minimum capital level. Proposed Sec. 120.471 would provide more detailed guidance on those items that SBA would include in calculating an SBLC's capital under the capital requirement. The capital calculation would generally consist of the following items: (i) Common stock; (ii) preferred stock that is non-cumulative as to dividends and does not have a maturity; (iii) additional paid-in-capital for stock in excess of the par value; (iv) retained earnings; and (v) for limited liability companies and limited partnerships, those capital contributions that are not subject to repayment at any specific time, are not subject to withdrawal and have no cumulative priority return. The inclusion of retained earnings and limitations on preferred stock in the proposed rule is consistent with Federal Financial Institution Regulator policies. In some cases, SBA may determine that the baseline minimum capital formula may not be sufficient to support the risk associated with a particular SBLC's portfolio. Consequently, proposed Sec. 120.472 would provide that SBA may require a higher individual minimum capital requirement for an SBLC. Proposed Sec. 120.472 would provide examples of risk-related factors that SBA might consider in making that determination. An SBLC individual minimum capital requirement would be established pursuant to procedures set forth in proposed Sec. 120.473 or through written agreement or a cease and desist proceeding as stated in proposed Sec. 120.474. The proposed individual minimum capital requirement procedures are similar to those provided by some Federal Financial Institution Regulators. Finally, the SBLC capital regulations would include a change in policy for approving issuances of securities (currently in Sec. 120.470(b)(5) and proposed in Sec. 120.471(d)). The proposed provisions would delete the last part of [[Page 61759]] current Sec. 120.470(b)(5). This deletion would have the effect of making it a requirement for an SBLC to obtain prior written approval for issuances of common stock, including issuances for cash or direct obligations of or obligations fully guaranteed as to principal and interest by the United States government. This is consistent in general with SBA's policy of prior approval for other types of financings (e.g. warehouse lines, participations, and securitizations). For further information on proposed rule capital provisions see the Capital Regulation provision in the Proposal section of the preamble. Section 120.475--Change of ownership or control. SBA proposes to relocate current Sec. 120.473 governing change of ownership and control for SBLCs to Sec. 120.475. In addition, the proposed rule would shift approval authority from the D/FA to the appropriate Office of Capital Access official in accordance with Delegations of Authority to reflect changes in internal agency procedure. Further, if a transfer of ownership or control is subject to approval of any State or Federal chartering, licensing, or other regulatory authority, copies of any documents filed with such authority would also have to be transmitted to the appropriate Office of Capital Access official in accordance with Delegations of Authority. Section 120.630--Qualifications to be a Pool Assembler. SBA proposes to add an additional requirement applicable only to SBA Lenders. Specifically, SBA would require SBA Lenders seeking to become a Pool Assembler to have satisfactory SBA performance, as determined by SBA. SBA would consider an SBA Lender's Risk Rating, among other factors, in determining satisfactory SBA performance. The other factors that SBA anticipates considering may include on-site review/examination assessments, historical performance measures (e.g., default rate, purchase rate, and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information. SBA considers these factors as relevant to the expected performance of a Pool Assembler. SBA is revising this regulation to incorporate SBA loan program performance for SBA Lenders/ pool assemblers into pool assembler eligibility criteria. Section 120.702--Limitations on where an Intermediary may operate? Current Sec. 120.702 provides that Microloan Intermediaries may operate in only one state unless SBA determines that it would be in the best interests of the small business community for it to operate across state lines. The proposed rule would shift approval authority for expansions from the D/FA to the appropriate Office of Capital Access official in accordance with Delegations of Authority to reflect changes in internal agency procedure. Section 120.710(c) and (d)--Microloan Intermediary Loan Loss Reserve Fund (LLRF) approval authority. SBA proposes amending Sec. 120.710(c) and (d) to shift approval authority for a reduction in the LLFR calculation from the D/FA to the appropriate Office of Capital Access official in accordance with Delegations of Authority. This revision would reflect changes in internal agency procedure. Sections 120.710(e)(1), 120.812, 120.820, 120.839, and 120.841-- Microloan Intermediary LLRF reduction and selected CDC authority criteria. SBA proposes amending Sec. Sec. 120.710(e)(1) (Microloan Intermediary reduction of LLRF); 120.812 (Extension of CDC probationary periods and permanent CDC status); 120.820 (Requirements for CDC certification and operation); 120.839 (Outside area of operation loan approval); and 120.841 (ALP status), to incorporate that SBA would consider an Intermediary's or SBA Lender's performance (which will include its Risk Rating, among other factors) in making determinations under these regulations. SBA expects to consider in determining satisfactory SBA performance on-site review assessments; historical performance measures; loan volume to the extent that it impacts performance measures; other performance related measurements and information, and contribution toward SBA mission. Proposed Sec. 120.841(c) (ALP status) would also add the requirement that an ALP CDC must have a risk-based review assessment of ``acceptable'' or ``acceptable with corrective actions required'' to be considered for ALP status. Section 120.826--Basic requirements for operating a CDC. The proposed rule adds to Sec. 120.826 internal control requirements similar to those proposed for SBA Supervised Lenders. Under the proposed rule, a CDC would be required to adopt an internal control policy to include maintenance of a loan review program, in conjunction with its SBA-guaranteed debenture financings. In addition, a CDC would have to have its financial statements annually audited by an independent certified public accountant since this would establish consistency in application of GAAP (a requirement) for CDC audits. Proposed Sec. 120.826 would also incorporate the Single Audit Act requirements into SBA's 504 program regulations. Section 120.830--Reports a CDC must submit. SBA is proposing an amended Sec. 120.830 to clarify the current annual report requirement by detailing the statements that must be included. Section 120.845(b)--PCLP status. Section 120.845(b) would be revised to provide that final determinations under this section would be made by the appropriate Office of Capital Access official in accordance with Delegations of Authority. This proposed revision would reflect changes in internal agency procedure. Section 120.853--Oversight and evaluation of CDCs. Section 120.853 currently covers both SBA reviews and Inspector General audits of CDCs. The proposed rule would move the CDC review portion of the regulation to subpart I--Lender Oversight (proposed Sec. Sec. 120.1000 and 120.1050--On-site Reviews and Examinations). The proposed rule would retitle Sec. 120.853 ``Inspector General Audits of CDCs'' consistent with the revised subject matter. Section 120.956--Suspension or revocation of brokers and dealers. The proposed rule would revise Sec. 120.956 to provide that the appropriate Office of Capital Access official in accordance with Delegations of Authority (rather than the D/FA) would be responsible for suspensions and revocations of broker/dealer participation in the Secondary Market. This is consistent with SBA's Delegations of Authority for oversight and enforcement responsibilities. In addition, the proposed rule deletes the last sentence on suspension of appeal rights. Subpart I--Risk-Based Lender Oversight. SBA is significantly enhancing subpart I in Part 120 introduced on May 4, 2007 with SBA's published final rule on its Lender oversight fees. 72 FR 25194. The enhancements would consolidate SBA's supervision and enforcement authorities for SBA Lenders, Microloan Intermediaries and NTAPs. This consolidation would facilitate more coordinated and effective lender oversight. Section 120.1000--Risk management/Lender oversight. SBA is proposing a new Sec. 120.1000 entitled ``Risk management/Lender oversight'' that would describe lender oversight functions and the financial institutions supervised under the subpart. Section 120.1005--Bureau of PCLP Oversight. In Public Law 108-232 (May 28, 2004), the ``Premier Certified Lenders Program Improvement Act of 2004'', Congress established two [[Page 61760]] alternative loss reserve pilot programs for certain Premier Certified Lenders (PCLP CDCs) loan loss reserve funds (LLRF). The public law also established the Bureau of PCLP Oversight in SBA to carry out such functions as the Administrator designates towards implementing the pilot programs. On May 26, 2006, SBA published a proposed rule governing the LLRF pilot programs. See, 71 FR 30323. Under the published proposed regulations, the Bureau of PCLP Oversight (Bureau) would approve the independent auditor that a pilot participant would engage to calculate its required LLRF. The Bureau would also review and make a determination as to a pilot participant's process for analyzing the risk of loss associated with the pilot participant's outstanding PCLP debentures (and the underlying loans) and the sufficiency of the LLRF. SBA anticipates publishing a final PCLP rule in the future. Proposed Sec. 120.1005 as contained in today's proposed lender oversight rule would include the Bureau of PCLP Oversight within subpart I, SBA's consolidated lender oversight regulations. Proposed Sec. 120.1005 would provide that the Bureau monitor the capitalization of PCLP CDC pilot participants' LLRFs, and perform other related functions. SBA may expand Bureau functions in the future consistent with SBA's statutory authority. Section 120.1010--SBA access to SBA Lender, Microloan Intermediary, and NTAP files. Proposed Sec. 120.1010 governs SBA access to SBA Lender, Microloan Intermediary, and NTAP files. SBA is relocating its current file access regulation from Sec. 120.414 and expanding this codification of authority to explicitly include CDCs, Microloan Intermediaries, and NTAPs. This provision is intended to facilitate lender oversight. Section 120.1015--Risk Rating System. SBA is proposing a new Sec. 120.1015 entitled ``Risk Rating System.'' Under proposed Sec. 120.1015, SBA could assign a Risk Rating to all SBA Lenders, Microloan Intermediaries, and NTAPs on a periodic basis (currently quarterly for SBA Lenders). This SBA Risk Rating process is detailed separately in final Federal Register notice at 72 FR 27320 (May 16, 2007). Risk Ratings range from one to five, with one indicating the least risk and five the most risk to SBA. OCRM would, from time to time, define the numeric definitions of acceptable and unacceptable levels of risk. For additional discussion of the Risk Rating System within this proposed rule, see the Proposal section of the preamble. Section 120.1025--Off-site reviews/monitoring. SBA is proposing a new Sec. 120.1025 entitled ``Off-site reviews/monitoring''. Under proposed Sec. 120.1025, SBA may conduct off-site reviews/monitoring of all SBA Lenders, Microloan Intermediaries, and NTAPs, including SBA Lender self-assessments and other targeted off-site reviews as defined by SBA. Currently, SBA conducts off-site SBA Lender reviews on at least a quarterly basis using SBA's Loan and Lender Monitoring System (L/ LMS). The L/LMS off-site review is SBA's primary method of monitoring all of SBA's 5000-plus SBA Lenders. For lower volume SBA Lenders, it may be the sole method of SBA review. L/LMS off-site reviews/monitoring are also used in conjunction with SBA Lender onsite review