SBA Lender Risk Rating System, 9257-9262 [2010-4266]
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Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices
• Size—The unit must fit within the
space allocated in the hull and ice
wedge;
• Power—Minimum 686-kW rated
(920 hp);
• Capability—360-degree thrust
(azimuthing steering control);
• Certification for use in ice—No hull
protrusion(s), tunnel with propeller, or
any feature that subjects the thruster to
ice damage along the hull form, per
American Bureau of Shipping Rules for
Building and Classing Vessels, Polar
Class PC–5.
Failure to meet any of these four
technical requirements would have
severe negative consequences for the
capabilities of the vessel. It is not
feasible to modify the shape of the hull
forward to accommodate a thruster of a
different configuration, since the hull
shape has been optimized for ice
breaking through extensive testing over
the past four years. Any changes at this
point would significantly affect vessel
capabilities. Reduction of the minimum
power, or elimination of the 360-degree
thrust requirement, would also result in
a vessel that could not successfully
support open water science equipment
deployments in the Arctic. Vessels
working in the Arctic are subject to
demanding and often dangerous
conditions due to low temperatures,
high winds, and rough seas as well as
ice. Accepting a design that is
susceptible to ice damage could render
the bow thruster inoperable under these
severe conditions, thereby jeopardizing
the safety of the vessel and personnel
aboard. Such compromises also produce
a ship that would not be allowed to
operate independently in the Arctic
under emerging international
agreements which require minimum
standards for equipment survivability
for vessels operating in polar waters
(Arctic and Antarctic). Independent
operation is critical to cost-effective
science support. Requiring the ARRV to
be escorted by another, more ice-capable
vessel could add over $6M in outside
charter cost for NSF and the other
funding agencies for every 100 days in
the ice. Frequent damage as a result of
using a non-compliant design would
add significant annual program cost for
maintenance and repair (in excess of
$100K per incident depending on the
extent of damage) once the vessel goes
into operation. This financial loss is in
addition to the lost science
opportunities caused by delay in sailing.
As noted in UAF’s request for this
waiver, UAF performed market research
in April and early May of 2009 that
initially found that bow thrusters are
generally available in manufacturers’
commercial product lines. UAF then
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conducted additional market research
by reviewing industry publications and
the Internet, and by attending an
industry suppliers’ conference, in order
to assess whether there exists a
domestic capability to provide a bow
thruster that meets the necessary
requirements for safe and successful
operation in Arctic waters.
After identifying 15 potential
domestic suppliers, UAF compared the
existing product lines for compliance
with the bow thruster technical
specifications and requirements as
identified above.
Beginning with an assessment of
power requirements, the bow thrusters
offered by 12 domestic firms either did
not meet the 686-kW rated minimum or
the companies simply served as
distributors of others’ product lines.
Two of the remaining three domestic
suppliers did not provide bow thrusters
that meet the required ice certification
standards, because their products rely
upon tunnels with propellers or units
that extended from the hull; these
features make this type of bow thruster
susceptible to ice damage which, as
explained above, could render them
inoperable under the severe conditions
inherent in Arctic operations. The final,
most capable domestic manufacturer of
bow thrusters did comply with the
stated size, power and (potentially)
capability requirements. However, this
bow thruster relies upon controllable
vanes that are fitted to the thruster
discharge nozzles to achieve the 360degree thrust capability. The
controllable vanes make the bow
thrusters susceptible to ice damage
which, as explained above, could render
them inoperable under the severe
conditions inherent in Arctic
operations.
In the absence of a domestic supplier
that could provide a requirementscompliant bow thruster, UAF requested
that NSF issue a Section 1605 waiver
determination with respect to the
purchase of foreign-supplied,
requirements-compliant bow thruster,
so that the vessel will contain a bow
thruster that meets the specific design
and technical requirements which, as
explained above, are necessary for this
vessel to be able to perform its Arctic
mission safely and successfully.
Furthermore, UAF’s market research
indicated that bow thrusters compliant
with the ARRV’s technical
specifications and requirements are
commercially available from foreign
vendors within their standard product
lines.
NSF’s Division of Acquisition and
Cooperative Support (DACS) and other
NSF program staff reviewed the UAF
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9257
waiver request submittal, found that it
was complete, and determined that
sufficient technical information was
provided in order for NSF to evaluate
the waiver request and to conclude that
a waiver is needed and should be
granted.
III. Waiver
On January 28, 2010, based on the
finding that no domestically produced
bow thruster met all of the ARRV’s
technical specifications and
requirements and pursuant to section
1605(b), the Director of the National
Science Foundation granted a limited
project waiver of the Recovery Act’s Buy
American requirements with respect to
the procurement of a 360-degree
azimuthing, 686-kW, ice classed bow
thruster.
Dated: February 24, 2010.
Lawrence Rudolph,
General Counsel.
[FR Doc. 2010–4170 Filed 2–26–10; 8:45 am]
BILLING CODE 7555–01–P
SMALL BUSINESS ADMINISTRATION
SBA Lender Risk Rating System
Small Business Administration.
Notice of revised Risk Rating
System; request for comments.
AGENCY:
ACTION:
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: https://
www.regulations.gov. Follow the
instructions for submitting comments.
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Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices
• 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
https://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 https://
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
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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.
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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.
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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-theshelf 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 stepwise 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;
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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.
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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.
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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
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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 betterthan-acceptable credit quality and/or
credit trends as measured by credit
scores and portfolio performance.
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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-thanacceptable 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
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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 12month period. Gross dollars purchased
in the last 12 months are added to the
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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 pastdue 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
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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 12months, 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 dollarweighted 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
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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.
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16:46 Feb 26, 2010
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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
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Fmt 4703
Sfmt 4703
9261
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 onsite reviews of large SBA Lenders,
performs safety and soundness
examinations of SBA Small Business
Lending Companies (SBLCs) and NonFederally Regulated Lenders, and uses
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Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices
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
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61566; File No. SR–FINRA–
2009–065]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1 Thereto, To Require
the Reporting of Transactions in
Asset-Backed Securities to TRACE
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February 22, 2010.
U.S.C. 78s(b)(1).
VerDate Nov<24>2008
16:46 Feb 26, 2010
II. Description of the Proposal
FINRA utilizes TRACE to collect from
its members and publicly disseminate
information on secondary over-thecounter transactions in corporate debt
securities and, pursuant to a recent rule
change to the Rule 6700 Series,7 Agency
Debt Securities and certain primary
market transactions. In this proposal,
FINRA has proposed to expand TRACE
to include the reporting (but not public
dissemination) of Asset-Backed
Securities. Specifically, the proposed
rule change would:
(1) In Rule 6710, amend the defined
terms (a) ‘‘TRACE–Eligible Security’’ to
include Asset-Backed Securities; (b)
‘‘Reportable TRACE Transaction’’ to
include specific requirements regarding
certain Asset-Backed Securities; (c)
‘‘Agency Debt Security’’ to incorporate
new defined terms; (d) ‘‘TRACE System
Hours’’ to transfer the defined term from
Rule 6730(a) to Rule 6710(bb); and (e)
‘‘Asset-Backed Security’’ to clarify that
the definition included a residual
tranche of an Asset-Backed Security; 8
(2) To Rule 6710, add the defined
terms, ‘‘Sponsor,’’ ‘‘Issuing Entity,’’
‘‘TBA,’’ ‘‘Agency Pass-Through
Mortgage-Backed Security,’’ ‘‘Factor,’’
‘‘Specified Pool Transaction,’’
2 17
I. Introduction
On October 1, 2009, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’)1 and Rule 19b–4
1 15
thereunder,2 a proposed rule change to
designate asset-backed securities,
mortgage-backed securities, and other
similar securities (collectively, ‘‘AssetBacked Securities’’) as eligible for the
Trade Reporting and Compliance Engine
(‘‘TRACE’’), and to establish reporting,
fee, and other requirements relating to
such securities. The proposed rule
change was published for comment in
the Federal Register on October 28,
2009.3 The Commission received four
comments in response to the proposal.4
On December 22, 2009, FINRA
responded to the comments 5 and on
January 19, 2010, FINRA filed
Amendment No. 1 to the proposal.6 The
Commission is publishing this notice
and order to solicit comments on
Amendment No. 1 and to approve the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
Jkt 220001
CFR 240.19b–4.
Securities Exchange Act Release No. 60860
(October 21, 2009), 74 FR 55600 (‘‘Notice’’).
4 See infra note 13.
5 See letter from Sharon Zackula, Associate Vice
President and Associate General Counsel, FINRA, to
Elizabeth M. Murphy, Secretary, Commission, dated
December 22, 2009 (‘‘FINRA Letter’’).
6 See infra Section III.
7 See Securities Exchange Act Release No. 60726
(September 28, 2009), 74 FR 50991 (October 2,
2009) (approving SR–FINRA–2009–010).
8 See Amendment No. 1, infra Section III.
3 See
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‘‘Stipulation Transaction,’’ ‘‘Dollar Roll,’’
and ‘‘Remaining Principal Balance’’;
(3) Amend the definitions of ‘‘List or
Fixed Offering Price Transaction’’ and
‘‘Takedown Transaction’’ in Rule
6710(q) and Rule 6710(r), respectively,
to exclude from those defined terms
transactions in any type of Asset-Backed
Security;
(4) In Rule 6710(y), amend the
defined term ‘‘Stipulation Transaction’’
to delete the condition relating to the
settlement of transactions not in
conformity with certain uniform
practices established as ‘‘good delivery’’;
(5) In Rule 6710(w), amend the
defined term ‘‘Factor’’; 9
(6) In Rule 6730, require the reporting
of Asset-Backed Securities transactions;
(7) In Rule 6730(a)(6)(A), and for a
six-month pilot period, establish the
reporting period for Asset-Backed
Securities transactions to no later than
T + 1 during TRACE System Hours;10
(8) In Rule 6730(d)(1), amend the
requirement that a member input a
commission stated in points per bond,
and instead require reporting of the total
dollar amount of a commission;
(9) In Rule 6730(d)(2), modify the
manner that a member reports the
Factor to require a member to report the
Factor only if the Factor used is not the
current most publicly available Factor
for the Asset-Backed Security;
(10) In Rule 6730(d)(4)(B), add
subparagraphs (i) and (ii) and, in
subparagraph (ii), require members to
report, for all transactions in AssetBacked Securities, the actual date of
settlement and indicate if the
transaction will or will not settle
‘‘regular way’’;11
(11) In Rule 6750, provide that
information on a transaction in a
TRACE–Eligible Security that is an
Asset-Backed Security will not be
disseminated;
(12) In Rule 6760, require a member
that is a Sponsor or an Issuing Entity of
an Asset-Backed Security to provide the
required notice to FINRA, and modify
the notification requirements to accept a
mortgage pool number in certain
circumstances;
(13) In Rule 7730, establish reporting
fees for transactions in Asset-Backed
Securities that are TRACE–Eligible
Securities at the same rates in effect for
transactions in corporate debt
securities;12 and
(14) In Rule 6700 Series, incorporate
certain technical, administrative, and
clarifying changes.
9 See
id.
id.
11 See id.
12 See id.
10 See
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Agencies
[Federal Register Volume 75, Number 39 (Monday, March 1, 2010)]
[Notices]
[Pages 9257-9262]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-4266]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
SBA Lender Risk Rating System
AGENCY: Small Business Administration.
ACTION: Notice of revised Risk Rating System; request for comments.
-----------------------------------------------------------------------
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: https://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 https://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 https://
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