SBA Lender Risk Rating System, 9562-9567 [2021-03053]
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Federal Register / Vol. 86, No. 29 / Tuesday, February 16, 2021 / Notices
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33 See Notice, supra note 3.
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For the Commission, by the Division of
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J. Matthew DeLesDernier,
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[FR Doc. 2021–02996 Filed 2–12–21; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Docket No: SBA–2020–0011]
SBA Lender Risk Rating System
Small Business Administration.
Notice of revised Risk Rating
System and Lender Portal definition of
Confidential Information; request for
comments.
AGENCY:
ACTION:
This notice implements
changes to the Small Business
Administration’s (SBA’s) Risk Rating
System. The Risk Rating System is an
internal tool to assist SBA in assessing
the risk of the SBA loan operations and
loan portfolio of each active 7(a) Lender
and Certified Development Company
(CDC). Consistent with industry best
practices, SBA recently redeveloped the
model used to calculate the composite
Risk Ratings of lenders and the risk
associated with each SBA loan to ensure
that the Risk Rating System remains
current and predictive as technologies,
the economy, and available data evolve.
In conjunction with the redevelopment
of the Lender Risk Rating, SBA is
updating the Lender Portal and its
definition for Confidential Information.
SBA is publishing this notice with a
request for comments to provide the
public with an opportunity to comment.
DATES: This notice is effective February
16, 2021.
Comment Date: Comments must be
received on or before April 19, 2021.
ADDRESSES: You may submit comments,
identified by Docket number SBA–
2020–0011 by using any of the following
methods:
SUMMARY:
34 17
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CFR 200.30–3(a)(31).
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• Federal eRulemaking Portal: https://
www.regulations.gov. Identify
comments by ‘‘Docket Number SBA–
2020–0011, SBA Lender Risk Rating
System,’’ and follow the instructions for
submitting comments.
• Email: Eddie Ledford, Deputy
Director, Office of Credit Risk
Management, U.S. Small Business
Administration, at edward.ledford@
sba.gov.
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
Eddie Ledford, Deputy Director, Office
of Credit Risk Management, U.S. Small
Business Administration. 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:
Eddie Ledford, Deputy Director, Office
of Credit Risk Management, U.S. Small
Business Administration, 409 Third
Street SW, 8th Floor, Washington, DC
20416, (202) 205–6402.
SUPPLEMENTARY INFORMATION:
I. Background Information
(A) Introduction to the Risk Rating
System
The Risk Rating System is an internal
tool that uses data in SBA’s Loan and
Lender Monitoring System (L/LMS),
borrower data provided by Dun &
Bradstreet (D&B), and certain
macroeconomic factors to assist SBA in
assessing the risk of the SBA loan
performance of each 7(a) Lender and
CDC (each, an SBA Lender) 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)
loan and 504 loan portfolios and to
assist SBA in managing the related risk.
SBA uses the Risk Rating System to
make more effective use of its lender
review and assessment resources. The
Risk Rating System is available to SBA
Lenders through SBA’s Lender Portal
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and provides SBA Lenders feedback and
timely insight into the expected
performance of their SBA portfolio.
Under SBA’s Risk Rating System, SBA
calculates a Forecasted Purchase Rate
(FPR) for each SBA Lender. The FPR
projects the percent of an SBA Lender’s
SBA loan portfolio that will be
purchased by SBA over the next 12
months. An SBA Lender’s FPR can be
used to predict the dollar amount of an
SBA Lender’s purchases. The FPR is
calculated using several component
variables or factors. The component
variables were developed using stepwise regression analysis to determine
the components that provided a linear
regression formula that was most
predictive of actual purchases over a
one-year period. The FPR is also used to
assign each SBA Lender a composite
Risk Rating (Lender Risk Rating or
Lender Purchase Rating) of 1 to 5 based
on geometric sequencing. The rating
reflects SBA’s measurement of the SBA
Lender’s potential portfolio risk. In
general, a rating of 1 indicates least risk
and that the least degree of SBA
oversight is likely needed, while a 5
rating indicates highest risk and that the
highest degree of SBA oversight is likely
needed.
SBA first introduced the Risk Rating
System as a proposal for comment in the
Federal Register on May 1, 2006 (72 FR
25624). SBA published the final notice
in the Federal Register on May 16, 2007
(72 FR 27611). On March 1, 2010, SBA
published a notice describing revisions
to the Risk Rating System (75 FR 9257),
with a correction notice published on
March 18, 2010 (75 FR 13145). In 2014,
SBA revised the system again and
published a notice and request for
comments on April 29, 2014 (79 FR
24053).
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(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. Accordingly,
SBA redeveloped the Risk Rating
System in 2010 and 2014 and completed
the latest redevelopment in 2019. This
most recent redevelopment, like the
earlier ones, is consistent with best
practices. Given the unprecedented
economic impact caused by the
pandemic in 2020, SBA will initiate the
next redevelopment in late 2021 to
ensure that SBA’s Risk Rating System
provides an accurate and up to date
measurement of lenders’ SBA portfolio
performance.
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The goals of this redevelopment were
to: (i) Maintain or improve the accuracy
of the current Lender Risk Rating (LRR)
and FPR; (ii) maintain or increase
transparency to the lender without
sacrificing predictive power; (iii)
incorporate the latest SBA performance
data; and (iv) evaluate other variables
that can provide additional insight into
lender risk. During this redevelopment,
SBA reviewed over 200 potential
variables from SBA’s L/LMS archive
along with nearly 400 potential
variables from D&B sources. SBA
selected these potential variables for
review based on its experience working
with such models over the past several
years. The D&B variables included
attributes from its detailed trade
repository providing the highest level of
trade data resolution. The variables
were then run through rigorous
statistical techniques and the most
predictive combinations of variables
were chosen as components in the
redeveloped Risk Rating model.
II. The Redeveloped Risk Rating Model
SBA followed common industry best
practices and internal control standards
when redeveloping and validating the
Risk Rating model. The redeveloped
model was independently validated by
personnel other than the staff
responsible for the redevelopment. The
redeveloped model used to calculate the
composite Risk Ratings is an updated
version of the previous models. Like the
previous models, it is a custom credit
scoring model that predicts the
likelihood of an SBA Lender’s loan
purchases over the next 12 months. Like
the 2014 model, the redeveloped model
uses a segmentation approach to loan
scoring. The model groups the loans
into loan segments 1 and then applies a
formula to the loan predictive of
purchase for that applicable segment.
(See Section IV below for more
information on the segments and their
formulas). The new model thus predicts
the probability of default for each loan
in an SBA Lender’s portfolio (Projected
Purchase Rate or PPR) and then
multiplies this probability by the
outstanding loan amount at the time the
ratings are formulated. The individual
loan-level PPRs are then aggregated to
obtain the SBA Lender’s overall FPR,
which is then used to calculate the SBA
Lender’s composite Risk Rating [1–5].
The most notable changes in the
redeveloped Risk Rating System are:
1. Updated components in the
regression formulas. The redeveloped
1 For example, 7(a) fixed term loans in current
payment status or 504 fixed term loans in noncurrent payment status.
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model continues to use loan-level data
(provided by the SBA Lenders and
SBA’s own data), external risk
assessment data (provided by D&B) that
is derived from third party business and
consumer credit bureau data, and
macroeconomic data. New loan level
data components include, for example:
(i) NAICs sector; (ii) new or existing
business indicator; and (iii) whether
sold on Secondary Market. The new
external data components include, for
example, (i) commercial credit score; (ii)
number of UCC filings against business;
and (iii) PAYDEX previous three
months.2 Only one macroeconomic data
component continues to be used—the
State Unemployment Rate. The updated
components add predictive value to the
Risk Rating model.
2. Slight Revisions in segmentation.
The 2014 model used seven segments,
each with its own rating formula (five
for 7(a) Lenders; two for CDCs). The
2019 redeveloped model eliminated
segmentation of 7(a) fixed-term loans
based on loan size, collapsing the
model’s segmentation from seven to six
(four for 7(a) Lenders and two for CDCs).
Under the new model, loans are
segmented by loan type (revolver-type
or fixed-term) and current payment
status. The segments are as follows: (i)
7(a) Segment 1—revolver type loans in
current payment status; (ii) 7(a) Segment
2—revolver-type loans in non-current
payment status; (iii) 7(a) Segment 3—
fixed-term loans in current payment
status; (iv) 7(a) Segment 4—fixed-term
loans in non-current payment status; (v)
504 Segment 1—loans in current
payment status; and (vi) 504 Segment
2—loans in non-current payment status.
A loan’s PPR formula is calculated
based on a combination of components
that is uniquely predictive for loans in
that segment. See paragraph IV(B) for a
detailed discussion of the six segments
and the update of components used in
each segment.
3. Evolution of the Lender Portal.
Since the 2014 redevelopment, SBA
has been significantly expanding the
content of the Lender Portal. In addition
to the LRR/Lender Purchase Rating
(LPR), the Lender Portal now includes
the SBA Lender’s FPR, the FPR’s
components or factors, SBA Lender’s
PARRiS or SMART Scores (as
applicable) 3 and the PARRiS/SMART
2 D&B collects and aggregates all trade data
provided to it by over 30,000 trade credit sources
on a monthly basis for its entire global database of
commercial entities.
3 PARRiS and SMART refer to SBA’s risk
measurement methodologies and scoring guides
used in conjunction with SBA’s Risk-Based Review
protocol. PARRiS is an acronym for the specific risk
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Score components. In addition, the
Lender Portal now includes much of the
information that is contained in SBA
Lender’s Lender Profile Assessment
(LPA) (e.g., loan vintage analysis,
charting of loans by delivery method,
Cumulative Net Yield chart, loan
concentration chart, Secondary Market
sales chart and other lender
information). The Lender Portal
provides SBA Lenders timely feedback
on their expected portfolio performance.
In conjunction with the redevelopment
and expansion of Lender Portal content,
SBA is updating its definition of
Confidential Information. See Section IV
for more information on the Lender
Portal and the updated definition of
Confidential Information.
The redeveloped Risk Rating System
is one of several tools in SBA’s oversight
framework. SBA uses the Risk Rating,
the FPR/LPR, SBA Lender Reviews/
Examinations, and PARRiS and SMART
components and scores in conjunction
with other risk related information to
assess SBA Lender risk and
performance. For example, SBA may
consider rapid growth in loan volume
that may skew metrics and other factors
in considering an SBA Lender’s overall
risk.
III. Request for Comments
This notice provides program
participants and other parties with an
explanation of the components and a
description of other modeling
enhancements. SBA is soliciting
comments on all aspects of this notice,
including but not limited to the
components and enhancements. These
changes will be effective upon
publication of this notice and are
expected to be incorporated in the
Lender Portal update in February 2021
for the quarter ending December 31,
2020.
IV. SBA Lender Risk Rating System
(A) Overview
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Under SBA’s Risk Rating System, SBA
assigns all SBA Lenders a composite
Risk Rating. The composite rating
reflects SBA’s assessment of the SBA
Lender’s potential risk. It is based on the
loan-level probability of purchase over
areas or components that SBA reviews for 7(a)
lenders. They are Performance, Asset Management,
Regulatory Compliance, Risk Management, and
Special Items. SMART is the acronym for the risk
areas that SBA reviews in the 504 program. They
are Solvency and Financial Condition, Management
and Board Governance, Asset Quality and
Servicing, Regulatory Compliance, and Technical
Issues and Mission. For a more detailed discussion
on PARRiS and SMART, see SOPs 50 53 2 and 50
10, which incorporate SBA Notices on Risk-Based
Review Protocols.
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the next 12 months, as calculated by
SBA.
The Risk Rating System also assigns
each SBA-guaranteed loan a Projected
Purchase Rate (PPR) using a unique set
of components that SBA has determined
to be predictive for that loan’s segment
(see Section IV.B. on Segmentation for
further details below). The individual
loan-level PPR is then multiplied by the
total outstanding balance of the loan in
order to approximate the SBA Lender’s
exposure for that loan. The sum of all
those values for Lender’s SBA loans is
an estimation of the total default dollars
for the SBA portfolio of the SBA Lender
in the next 12 months. That number is
then divided by the total outstanding
balances of all loans in the above
calculation to obtain the SBA Lender’s
overall Forecasted Purchase Rate (FPR).
SBA then assigns a composite rating of
1 to 5 based on the SBA Lender’s overall
FPR using geometrically sequenced
category thresholds. Geometrically
sequenced categories contain thresholds
that are a multiple of the prior category.
The category boundaries represent a
doubling of the prior category (with the
exception of the ‘‘zero’’ threshold).
Geometric categorizations aim to
delineate a non-linear distribution more
evenly.
SBA updates the Lender Risk Ratings
and FPRs on a quarterly basis, using
refreshed SBA Lender data. The primary
purpose of the Risk Rating and FPR 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. SBA generally does not intend to
use the Risk Rating or FPR as the sole
basis for taking a formal enforcement
action against an SBA Lender.
All SBA Lenders have on-line access
to their Risk Ratings, FPR (including its
components or factors), PARRiS or
SMART Score (and its components),
and other risk related information
through the Lender Portal. In addition,
an SBA Lender can view the loan-level
components utilized to generate each
loan’s PPR. For information on gaining
access to the Lender Portal, see SBA
SOP 50 10 and the Lender Portal log-on
page at https://
sbalenderportal.dnb.com.
(B) Segmentation
SBA’s Risk Rating System uses a
segmentation approach to calculate the
PPR of each loan in an SBA Lender’s
SBA portfolio. The loan segments for
the 7(a) Program are as follows:
1. Revolver-type loans in current
payment status,
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2. Revolver-type loans in non-current
payment status,
3. Fixed-term loans in current
payment status, and
4. Fixed-term loans in non-current
payment status.
The loan segments for the 504 Loan
Program are:
1. Loans in current payment status,
and
2. Loans in non-current payment
status.
A loan’s PPR is calculated based on a
combination of components that is
uniquely predictive for the loans in that
segment. Many of the segment
components are the same as in the prior
model, however, some are new. The
components used in each segment are as
follows:
7(a) Segment 1—Revolver-type loans in
current payment status:
(a) Current Small Business Predictive
Score (SBPS)
(b) Months on Book (MOB)
(c) Loan Term
(d) Percent of Accounts 30 Days or
More Past Due
(e) Outstanding Loan Balance
(f) New or Existing Business Indicator
(g) Total Employees
(h) NAICS Sector
(i) 12-Month Originating Lender
Purchase Rate
(j) Overall Interest Rate
(k) Average State-level
Unemployment Rate
7(a) Segment 2—Revolver-type loans in
non-current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Term
(d) Loan Status
(e) SBA Share of Outstanding Loan
Balance
(f) PAYDEX Previous 3 Months
(g) Average State-level
Unemployment Rate
7(a) Segment 3—Fixed-term loans in
current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Term
(d) Number of Current Accounts
(e) Sold on Secondary Market
Indicator
(f) Spread Interest Rate
(g) New or Existing Business Indicator
(h) 12-Month Originating Lender
Purchase Rate
7(a) Segment 4—Fixed-term loans in
non-current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Status
(d) Percent of Accounts 30 Days or
More Past Due
(e) 12-Month Originating Lender
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Purchase Rate
504 Segment 1—Loans in current
payment status:
(a) Current SBPS
(b) MOB
(c) Loan Term
(d) Commercial Credit Score
(e) NAICS Sector
(f) Number of UCC Filings
(g) 12-Month Lender Purchase Rate
(h) Average State-level
Unemployment Rate
504 Segment 2—Loans in non-current
payment status:
(a) Current SBPS
(b) Loan Status
(c) Viability Score
The components were selected through
statistical analysis using step-wise
logistic regression to identify the
combination of variables that are the
most predictive for each segment of
loans. The model is ‘‘multivariate,’’
meaning that an SBA Lender’s PPR (and
thus its FPR and Risk Rating) is based
on a combination of all components in
the model. Each of the components is
described in more detail in the Rating
Components section below.
(C) Rating Components
SBA derives components from three
types of data sources to calculate a
loan’s PPR: SBA loan data, D&B
Borrower data,4 and macroeconomic
data. The first category includes
detailed loan/borrower level
information from SBA’s database. The
second category is information on the
small business borrower from D&B’s
trade database. The third category
includes state level unemployment data.
Each of the components is defined in
detail below. For those components that
were also in the prior model, their
definitions are generally the same.
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(1) SBA Loan Data Components
Loan Status: The Loan Status
component captures the payment status
of loans as of the rating date. Loans are
categorized as current, delinquent, past
due, or deferred. If delinquent, this
component indicates the delinquency
‘‘bucket’’ (e.g., 30 days past due, 60 days
past due, etc.) at the time of rating. A
greater number of days past due
contributes to a higher purchase risk.
Loan Term: The Loan Term is the
length of the loan repayment period at
origination. Loan Term is measured in
months and purchase risk increases as
the repayment term increases for 7(a)
Revolver loans. For 7(a) Fixed loans, the
purchase risk associated with the loan
term is arch-shaped: Loans at either end
4 D&B business bureau data is combined with
FICO consumer data.
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of the spectrum (very short or very long
term) have the lowest purchase risk. For
504 loans, the purchase risk is lower for
longer term loans.
Months on Book (MOB): The MOB is
the number of months between the
rating date and the date of the first loan
disbursement, up to a maximum of 120
months. For 7(a) loans, the purchase
risk associated with MOB risk level is
arch-shaped: Loans at either end of the
spectrum (very low or very high MOB)
have the lowest purchase risk. For 504
loans, a higher MOB is associated with
a higher purchase risk.
NAICS Sector: The North American
Industry Classification System (NAICS)
is the standard used by Federal
statistical agencies in classifying
business establishments. For 7(a)
Segment 1, revolver-type loans in
current payment status, industries
classified as information, transportation,
or warehousing are associated with the
highest purchase risk and those
classified as education, finance,
insurance, management, manufacturing,
public administration, and utilities are
associated with the lowest purchase
risk. All other industry classifications
are associated with a mid-range of
purchase risk. For 504 Segment 1,
current loans, industries classified as
food services, administrative,
educational, manufacturing, real estate,
or retail are associated with the highest
purchase risk and those classified as
agriculture, forestry, fishing,
construction, finance, insurance,
information, or mining have the lowest
purchase risk. All other industry
classifications are associated with a
mid-range of purchase risk.
New or Existing Business Indicator:
This component indicates whether a
borrower is a new or existing business.
Start-ups and businesses in existence for
2 years or less are considered new
businesses and those over 2 years old
are considered existing businesses. An
existing business is associated with a
lower purchase risk.
Overall Interest Rate: The Overall
Interest Rate is the interest rate of a loan
at origination. A higher Overall Interest
Rate is associated with a higher
purchase risk.
Outstanding Loan Balance: The
Outstanding Loan Balance is the
outstanding gross loan balance at the
time of the rating date. This component
is only used for revolver-type accounts
that are currently in active status. The
purchase risk associated with
Outstanding Loan Balance is archshaped: Loans at either end of the
spectrum (very low or very high
Outstanding Loan Balance) have the
lowest purchase risk.
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SBA Share of Outstanding Loan
Balance: The SBA Share of Outstanding
Loan Balance is the SBA guaranteed
portion of the outstanding amount of the
loan as of the rating date. Similar to the
Outstanding Loan Balance, the purchase
risk associated with SBA Share of
Outstanding Loan Balance is archshaped: Loans at either end of the
spectrum (very low or very high SBA
Share of Outstanding Loan Balance)
have the lowest purchase risk.
Sold on Secondary Market Indicator:
This component indicates whether the
SBA guaranteed portion of a loan was
sold on the secondary market. This is a
static field once a loan is sold on the
secondary market. Loans sold on the
secondary market have a higher
purchase risk.
Spread Interest Rate: The Spread
Interest Rate is the difference between
the interest rate of the loan and the
Prime interest rate in effect on the date
of origination. A higher Spread Interest
Rate is associated with a higher
purchase risk.
12-Month Lender Purchase Rate: The
12-Month Lender Purchase Rate is a
calculated field based on a lender’s
purchase rate over the past 12 months.
A higher value for this attribute is
associated with a higher purchase risk.
12-Month Originating Lender
Purchase Rate: The 12-Month
Originating Lender Purchase Rate is a
calculated field based on the originating
lender’s purchase rate over the past 12
months. For loans that a lender has
acquired from another SBA Lender, the
originating lender’s 12-Month Lender
Purchase Rate will apply. For loans that
have not been acquired from another
SBA Lender, this component is the same
as the 12-Month Lender Purchase Rate
described above. If the originating
lender does not have a 12-Month Lender
Purchase Rate (for example, the lender
is no longer participating in SBA’s
programs or is no longer in business),
the 12-Month Overall Portfolio Purchase
Rate will be used. The 12-Month Overall
Portfolio Purchase Rate is the purchase
rate of SBA’s entire 7(a) or 504 portfolio,
based on the last 12 months. A higher
value for this attribute is associated with
a higher purchase risk.
(2) D&B Borrower Data Components
Commercial Credit Score: The
Commercial Credit Score (CCS) is a
proprietary calculation from D&B that
predicts the likelihood of a business
paying its bills in a severely delinquent
manner (91 days or more past terms),
obtaining legal relief from its creditors,
or ceasing operations without paying all
creditors in full over the next 12
months. D&B defines severe
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delinquency as a business with at least
10 percent of its payments 91 days or
more past due, based on the information
in D&B’s commercial database. A high
CCS value indicates a lower risk of
delinquency. The CCS is calculated
using statistical models derived from
D&B’s extensive database of U.S.
businesses including payment, public
filing, demographic, and financial
information when available. A higher
CCS is associated with a lower purchase
risk.
Number of Current Accounts: The
Number of Current Accounts is the
number of a borrower’s trade accounts,
as reported to D&B, that have been
current over the past 24 months. Higher
values of this attribute are associated
with lower purchase risk.
Number of UCC Filings: Number of
UCC Filings is the number of Uniform
Commercial Code (UCC) filings
recorded against the borrower’s business
in the past 10 years, including initial
filings, continuations, amendments, and
terminations. A UCC filing is a legal
form filed by a creditor to give notice
that it has an interest in the property of
a debtor. A higher value for this
attribute is associated with a higher
purchase risk.
PAYDEX Previous 3 Months: PAYDEX
is a unique, dollar weighted indicator of
a business’s payment performance based
on the total number of payment
experiences in D&B’s database over the
past 3 months. Payment experiences are
gathered by D&B from a business’s
suppliers and vendors. Higher PAYDEX
scores indicate better payment
performance. A higher value for this
attribute is associated with a lower
purchase risk.
Percent of Accounts 30 Days or More
Past Due: The Percent of Accounts 30
Days or More Past Due is calculated
using data from the D&B detail trade
database for the last 4 months. This
percentage results from dividing the
total number of accounts which have
been 30 days or more delinquent in the
past 4 months by the total number of
active accounts associated with a
borrower. A higher value for this
attribute is associated with a higher
purchase risk.
SBPS: The SBPS, the Small Business
Risk Portfolio Solution commercially
known as SBRPS, is a portfolio
management credit score based upon a
borrower’s business credit report and
principal’s consumer credit report and
is updated quarterly. SBPS is a
commercial score provided by Dun &
Bradstreet (D&B), under contract with
SBA. SBPS was developed by D&B and
FICO and is compatible with FICO’s
‘‘Liquid Credit’’ origination score. This
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component provides an indication of
the relative creditworthiness of a given
borrower with higher values indicating
lower purchase risk. FICO recently
updated SBPS to a new, more predictive
version which will be used in this
redeveloped Risk Rating version.
Total Employees: Total Employees is
the number of people the borrower
employs, as reported to D&B. A higher
value for this attribute is associated with
a lower purchase risk.
Viability Score: The Viability Score is
a proprietary calculation from D&B that
assesses the probability that the
borrower will no longer be viable within
the next 12 months compared to all the
U.S. businesses within the D&B
database. A business is no longer viable
when it goes out of business, becomes
dormant or inactive, or files for
bankruptcy. The Viability Score is based
on available financial data, trade
payments, firmographics and other
business activity. A higher Viability
Score is associated with a higher
purchase risk.
(3) Macroeconomic Data Component
Average State-level Unemployment
Rate: The Average State-level
Unemployment Rate is the ratio of
unemployed to the civilian labor force
in the borrower’s State, expressed as a
percent. The source is Bureau of Labor
Statistics (BLS), Local Area
Unemployment Statistics Database. The
borrower’s state is identified through
borrower’s address fields in the SBA’s
database. The unemployment rate is
extracted directly from BLS reporting,
which is updated monthly. A higher
unemployment rate in the borrower’s
state contributes to a higher purchase
risk.
(D) Lender Risk Rating
The SBA Lender Risk Rating (LRR) is
a measure of predicted performance
over the next 12 months. As described
above, SBA uses its Risk Rating model
to calculate a Forecasted Purchase Rate
(FPR). The FPR predicts the percent of
an SBA Lender’s SBA loan portfolio that
will be purchased over the next 12
months. An SBA Lender’s FPR can be
used to project the dollar amount of an
SBA Lender’s purchases. SBA then uses
the FPR to assign a composite rating of
1 to 5 to each SBA Lender. This
composite rating is the LRR. SBA may
make adjustments to the composite
rating based on results of reviews, third
party information on an SBA Lender’s
operations, portfolio trends, and other
information that could impact an SBA
Lender’s risk profile. (See section E
‘‘Overriding Factors’’ for further detail.)
In general, a rating of 1 indicates least
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risk, and that the least degree of SBA
oversight is likely needed, while a 5
rating indicates highest risk, and that
the highest degree of SBA oversight is
likely needed. Rating categories 2, 3,
and 4 provide granularity for increasing
levels of risk and the corresponding
levels of necessary oversight.
(E) Overriding Factors
As with prior LRR models, the
redeveloped 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’ risk-based reviews/
examinations and evaluations. SBA
routinely conducts reviews of SBA
Lenders, performs safety and soundness
examinations of SBA Small Business
Lending Companies (SBLCs) and NonFederally Regulated Lenders (NFRLs),
and uses certain 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, or related agreements
with, Federal Financial Institution
Regulators (FFIRs); capital adequacy
levels not in conformity with FFIRs;
secondary market issues and concerns;
receipt of a Going Concern opinion
issued by an independent auditor; 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 (or losses) significantly worse than
average; violation of SBA Loan Program
Requirements; inadequate, incomplete,
or untimely reporting to SBA; fraud/
indictment of lender, officers, or key
employees; an identified condition that
affects capital, solvency or prudent
commercial lending ability; inaccurate
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submission of required fees or amounts
due SBA or the federal government; and
other risk-related or program integrity
concerns. Rapid growth, in particular, is
a significant factor that can mask poor
portfolio performance in a calculated
Risk Rating. Consequently, SBA
includes a rapid growth flag in its
PARRiS and SMART assessments and in
this override list.
(F) Confidential Information
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Each SBA Lender must continue to
handle its Reports, Risk Ratings and
related Confidential Information in
accordance with the confidentiality
requirements set forth in 13 CFR
120.1060, Confidentiality of Reports,
Risk Ratings, and related Confidential
Information. Under this regulation,
Reports, Risk Ratings, and Confidential
Information are privileged, confidential,
and the property of SBA. Further, the
regulation states that such information
may not be relied upon for any purpose
other than SBA’s lender oversight and
SBA’s portfolio management purposes.
In addition, the SBA Lender is
prohibited from disclosing its Report,
Risk Rating, and Confidential
Information, in full or in part, in any
manner, without SBA’s prior written
permission, and the SBA Lender must
not make any representations
concerning the information (including
Report findings, conclusions, and
recommendations), the Risk Rating, or
the Confidential Information.
13 CFR 120.1060(a) defines ‘‘Report’’
to mean ‘‘the review or examination
report and related documents.’’ It also
provides that Confidential Information
‘‘is defined in the SBA Lender
information portal and by notice issued
from time to time.’’ The SBA Lender
information portal currently defines
‘‘Confidential Information’’ to mean ‘‘all
lender-related information contained in
the Portal including ‘‘Lender Results’’,
except for the ‘‘Past 12 Month Actual
Purchase Rate’’ and the ‘‘Past 12 Month
Actual Charge-Off Rate’’. SBA has
expanded the information available to
an SBA Lender in the Lender Portal.
Therefore, SBA is updating the
definition for ‘‘Confidential
Information’’ to mean:
‘‘Confidential Information includes all the
SBA Lender-related information/data
contained in the Lender Portal except the
dollar amounts associated with SBA
purchase of and charge off of SBA Lender’s
loans and information already publicly
available related to the Lender’s capital, nonperforming assets, and regulatory actions
(e.g., from a bank’s public Call Report).
Confidential Information also includes any
information related to SBA’s supervision of
the SBA Lender (e.g., review or corrective
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action correspondence) and any actions taken
by SBA related to enforcement (e.g., informal
enforcement actions as defined in SOP 50 53
or by regulation, notices of proposed
enforcement action) unless made public by
SBA (e.g., in a Cease and Desist Order).’’
SBA included the last sentence because
it has long treated supervisory and
enforcement information as confidential
information and this information is
generally related to a review or exam
and, therefore, covered by the
confidentiality provisions in 13 CFR
120.1060 and/or FOIA exemption 8.
SBA may disclose Reports, Risk Ratings,
and Confidential Information in its
discretion; however, such disclosures
do not waive SBA Lender’s obligation
under 13 CFR 120.1060 to maintain the
confidentiality of the information.
(G) Conclusion
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 third redevelopment of SBA’s
Risk Rating model. In addition to this
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
improve the predictiveness of its risk
scoring.
Authority: 15 U.S.C. 633(b)(3); 15 U.S.C.
634(b)(6) and (7); 15 U.S.C. 657t; 15 U.S.C.
687(f); and 13 CFR 120.10, 120.1015,
120.1025, 120.1050, and 120.1060.
Tami Perriello,
Acting Administrator.
[FR Doc. 2021–03053 Filed 2–12–21; 8:45 am]
BILLING CODE 8026–03–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #16869 and #16870;
Washington Disaster Number WA–00089]
Administrative Declaration of a
Disaster for the State of Washington
U.S. Small Business
Administration.
ACTION: Notice.
9567
Physical Loan Application Deadline
Date: 04/12/2021.
Economic Injury (EIDL) Loan
Application Deadline Date: 11/09/2021.
Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
ADDRESSES:
A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
FOR FURTHER INFORMATION CONTACT:
Notice is
hereby given that as a result of the
Administrator’s disaster declaration,
applications for disaster loans may be
filed at the address listed above or other
locally announced locations.
The following areas have been
determined to be adversely affected by
the disaster:
SUPPLEMENTARY INFORMATION:
Primary Counties: Whitman.
Contiguous Counties:
Washington: Adams, Asotin,
Columbia, Franklin, Garfield,
Lincoln, Spokane.
Idaho: Benewah, Latah, Nez Perce.
The Interest Rates are:
Percent
For Physical Damage:
Homeowners with Credit Available Elsewhere ......................
Homeowners without Credit
Available Elsewhere ..............
Businesses with Credit Available Elsewhere ......................
Businesses without Credit
Available Elsewhere ..............
Non-Profit Organizations with
Credit Available Elsewhere ...
Non-Profit Organizations without Credit Available Elsewhere .....................................
For Economic Injury:
Businesses & Small Agricultural
Cooperatives without Credit
Available Elsewhere ..............
Non-Profit Organizations without Credit Available Elsewhere .....................................
2.375
1.188
6.000
3.000
2.750
2.750
3.000
2.750
AGENCY:
This is a notice of an
Administrative declaration of a disaster
for the State of Washington dated 02/09/
2021.
Incident: Wildfires and Straight-line
Winds.
Incident Period: 09/01/2020 through
09/19/2020.
DATES: Issued on 02/09/2021.
SUMMARY:
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The number assigned to this disaster
for physical damage is 16869 5 and for
economic injury is 16870 0.
The States which received an EIDL
Declaration # are Washington, Idaho.
(Catalog of Federal Domestic Assistance
Number 59008)
Tami Perriello,
Acting Administrator.
[FR Doc. 2021–03009 Filed 2–12–21; 8:45 am]
BILLING CODE 8026–03–P
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]]>Agencies
[Federal Register Volume 86, Number 29 (Tuesday, February 16, 2021)]
[Notices]
[Pages 9562-9567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03053]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
[Docket No: SBA-2020-0011]
SBA Lender Risk Rating System
AGENCY: Small Business Administration.
ACTION: Notice of revised Risk Rating System and Lender Portal
definition of Confidential Information; request for comments.
-----------------------------------------------------------------------
SUMMARY: This notice implements changes to the Small Business
Administration's (SBA's) Risk Rating System. The Risk Rating System is
an internal tool to assist SBA in assessing the risk of the SBA loan
operations and loan portfolio of each active 7(a) Lender and Certified
Development Company (CDC). Consistent with industry best practices, SBA
recently redeveloped the model used to calculate the composite Risk
Ratings of lenders and the risk associated with each SBA loan to ensure
that the Risk Rating System remains current and predictive as
technologies, the economy, and available data evolve. In conjunction
with the redevelopment of the Lender Risk Rating, SBA is updating the
Lender Portal and its definition for Confidential Information. SBA is
publishing this notice with a request for comments to provide the
public with an opportunity to comment.
DATES: This notice is effective February 16, 2021.
Comment Date: Comments must be received on or before April 19,
2021.
ADDRESSES: You may submit comments, identified by Docket number SBA-
2020-0011 by using any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Identify comments by ``Docket Number SBA-2020-0011, SBA Lender Risk
Rating System,'' and follow the instructions for submitting comments.
Email: Eddie Ledford, Deputy Director, Office of Credit
Risk Management, U.S. Small Business Administration, at
[email protected].
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 Eddie Ledford, Deputy Director,
Office of Credit Risk Management, U.S. Small Business Administration.
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: Eddie Ledford, Deputy Director, Office
of Credit Risk Management, U.S. Small Business Administration, 409
Third Street SW, 8th Floor, Washington, DC 20416, (202) 205-6402.
SUPPLEMENTARY INFORMATION:
I. Background Information
(A) Introduction to the Risk Rating System
The Risk Rating System is an internal tool that uses data in SBA's
Loan and Lender Monitoring System (L/LMS), borrower data provided by
Dun & Bradstreet (D&B), and certain macroeconomic factors to assist SBA
in assessing the risk of the SBA loan performance of each 7(a) Lender
and CDC (each, an SBA Lender) 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) loan and 504 loan
portfolios and to assist SBA in managing the related risk. SBA uses the
Risk Rating System to make more effective use of its lender review and
assessment resources. The Risk Rating System is available to SBA
Lenders through SBA's Lender Portal
[[Page 9563]]
and provides SBA Lenders feedback and timely insight into the expected
performance of their SBA portfolio.
Under SBA's Risk Rating System, SBA calculates a Forecasted
Purchase Rate (FPR) for each SBA Lender. The FPR projects the percent
of an SBA Lender's SBA loan portfolio that will be purchased by SBA
over the next 12 months. An SBA Lender's FPR can be used to predict the
dollar amount of an SBA Lender's purchases. The FPR is calculated using
several component variables or factors. The component variables 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. The FPR is also
used to assign each SBA Lender a composite Risk Rating (Lender Risk
Rating or Lender Purchase Rating) of 1 to 5 based on geometric
sequencing. The rating reflects SBA's measurement of the SBA Lender's
potential portfolio risk. In general, a rating of 1 indicates least
risk and that the least degree of SBA oversight is likely needed, while
a 5 rating indicates highest risk and that the highest degree of SBA
oversight is likely needed.
SBA first introduced the Risk Rating System as a proposal for
comment in the Federal Register on May 1, 2006 (72 FR 25624). SBA
published the final notice in the Federal Register on May 16, 2007 (72
FR 27611). On March 1, 2010, SBA published a notice describing
revisions to the Risk Rating System (75 FR 9257), with a correction
notice published on March 18, 2010 (75 FR 13145). In 2014, SBA revised
the system again and published a notice and request for comments on
April 29, 2014 (79 FR 24053).
(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. Accordingly, SBA
redeveloped the Risk Rating System in 2010 and 2014 and completed the
latest redevelopment in 2019. This most recent redevelopment, like the
earlier ones, is consistent with best practices. Given the
unprecedented economic impact caused by the pandemic in 2020, SBA will
initiate the next redevelopment in late 2021 to ensure that SBA's Risk
Rating System provides an accurate and up to date measurement of
lenders' SBA portfolio performance.
The goals of this redevelopment were to: (i) Maintain or improve
the accuracy of the current Lender Risk Rating (LRR) and FPR; (ii)
maintain or increase transparency to the lender without sacrificing
predictive power; (iii) incorporate the latest SBA performance data;
and (iv) evaluate other variables that can provide additional insight
into lender risk. During this redevelopment, SBA reviewed over 200
potential variables from SBA's L/LMS archive along with nearly 400
potential variables from D&B sources. SBA selected these potential
variables for review based on its experience working with such models
over the past several years. The D&B variables included attributes from
its detailed trade repository providing the highest level of trade data
resolution. The variables were then run through rigorous statistical
techniques and the most predictive combinations of variables were
chosen as components in the redeveloped Risk Rating model.
II. The Redeveloped Risk Rating Model
SBA followed common industry best practices and internal control
standards when redeveloping and validating the Risk Rating model. The
redeveloped model was independently validated by personnel other than
the staff responsible for the redevelopment. The redeveloped model used
to calculate the composite Risk Ratings is an updated version of the
previous models. Like the previous models, it is a custom credit
scoring model that predicts the likelihood of an SBA Lender's loan
purchases over the next 12 months. Like the 2014 model, the redeveloped
model uses a segmentation approach to loan scoring. The model groups
the loans into loan segments \1\ and then applies a formula to the loan
predictive of purchase for that applicable segment. (See Section IV
below for more information on the segments and their formulas). The new
model thus predicts the probability of default for each loan in an SBA
Lender's portfolio (Projected Purchase Rate or PPR) and then multiplies
this probability by the outstanding loan amount at the time the ratings
are formulated. The individual loan-level PPRs are then aggregated to
obtain the SBA Lender's overall FPR, which is then used to calculate
the SBA Lender's composite Risk Rating [1-5].
---------------------------------------------------------------------------
\1\ For example, 7(a) fixed term loans in current payment status
or 504 fixed term loans in non-current payment status.
---------------------------------------------------------------------------
The most notable changes in the redeveloped Risk Rating System are:
1. Updated components in the regression formulas. The redeveloped
model continues to use loan-level data (provided by the SBA Lenders and
SBA's own data), external risk assessment data (provided by D&B) that
is derived from third party business and consumer credit bureau data,
and macroeconomic data. New loan level data components include, for
example: (i) NAICs sector; (ii) new or existing business indicator; and
(iii) whether sold on Secondary Market. The new external data
components include, for example, (i) commercial credit score; (ii)
number of UCC filings against business; and (iii) PAYDEX previous three
months.\2\ Only one macroeconomic data component continues to be used--
the State Unemployment Rate. The updated components add predictive
value to the Risk Rating model.
---------------------------------------------------------------------------
\2\ D&B collects and aggregates all trade data provided to it by
over 30,000 trade credit sources on a monthly basis for its entire
global database of commercial entities.
---------------------------------------------------------------------------
2. Slight Revisions in segmentation. The 2014 model used seven
segments, each with its own rating formula (five for 7(a) Lenders; two
for CDCs). The 2019 redeveloped model eliminated segmentation of 7(a)
fixed-term loans based on loan size, collapsing the model's
segmentation from seven to six (four for 7(a) Lenders and two for
CDCs). Under the new model, loans are segmented by loan type (revolver-
type or fixed-term) and current payment status. The segments are as
follows: (i) 7(a) Segment 1--revolver type loans in current payment
status; (ii) 7(a) Segment 2--revolver-type loans in non-current payment
status; (iii) 7(a) Segment 3--fixed-term loans in current payment
status; (iv) 7(a) Segment 4--fixed-term loans in non-current payment
status; (v) 504 Segment 1--loans in current payment status; and (vi)
504 Segment 2--loans in non-current payment status. A loan's PPR
formula is calculated based on a combination of components that is
uniquely predictive for loans in that segment. See paragraph IV(B) for
a detailed discussion of the six segments and the update of components
used in each segment.
3. Evolution of the Lender Portal.
Since the 2014 redevelopment, SBA has been significantly expanding
the content of the Lender Portal. In addition to the LRR/Lender
Purchase Rating (LPR), the Lender Portal now includes the SBA Lender's
FPR, the FPR's components or factors, SBA Lender's PARRiS or SMART
Scores (as applicable) \3\ and the PARRiS/SMART
[[Page 9564]]
Score components. In addition, the Lender Portal now includes much of
the information that is contained in SBA Lender's Lender Profile
Assessment (LPA) (e.g., loan vintage analysis, charting of loans by
delivery method, Cumulative Net Yield chart, loan concentration chart,
Secondary Market sales chart and other lender information). The Lender
Portal provides SBA Lenders timely feedback on their expected portfolio
performance. In conjunction with the redevelopment and expansion of
Lender Portal content, SBA is updating its definition of Confidential
Information. See Section IV for more information on the Lender Portal
and the updated definition of Confidential Information.
---------------------------------------------------------------------------
\3\ PARRiS and SMART refer to SBA's risk measurement
methodologies and scoring guides used in conjunction with SBA's
Risk-Based Review protocol. PARRiS is an acronym for the specific
risk areas or components that SBA reviews for 7(a) lenders. They are
Performance, Asset Management, Regulatory Compliance, Risk
Management, and Special Items. SMART is the acronym for the risk
areas that SBA reviews in the 504 program. They are Solvency and
Financial Condition, Management and Board Governance, Asset Quality
and Servicing, Regulatory Compliance, and Technical Issues and
Mission. For a more detailed discussion on PARRiS and SMART, see
SOPs 50 53 2 and 50 10, which incorporate SBA Notices on Risk-Based
Review Protocols.
---------------------------------------------------------------------------
The redeveloped Risk Rating System is one of several tools in SBA's
oversight framework. SBA uses the Risk Rating, the FPR/LPR, SBA Lender
Reviews/Examinations, and PARRiS and SMART components and scores in
conjunction with other risk related information to assess SBA Lender
risk and performance. For example, SBA may consider rapid growth in
loan volume that may skew metrics and other factors in considering an
SBA Lender's overall risk.
III. Request for Comments
This notice provides program participants and other parties with an
explanation of the components and a description of other modeling
enhancements. SBA is soliciting comments on all aspects of this notice,
including but not limited to the components and enhancements. These
changes will be effective upon publication of this notice and are
expected to be incorporated in the Lender Portal update in February
2021 for the quarter ending December 31, 2020.
IV. 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 SBA Lender's potential risk. It is based on the loan-level
probability of purchase over the next 12 months, as calculated by SBA.
The Risk Rating System also assigns each SBA-guaranteed loan a
Projected Purchase Rate (PPR) using a unique set of components that SBA
has determined to be predictive for that loan's segment (see Section
IV.B. on Segmentation for further details below). The individual loan-
level PPR is then multiplied by the total outstanding balance of the
loan in order to approximate the SBA Lender's exposure for that loan.
The sum of all those values for Lender's SBA loans is an estimation of
the total default dollars for the SBA portfolio of the SBA Lender in
the next 12 months. That number is then divided by the total
outstanding balances of all loans in the above calculation to obtain
the SBA Lender's overall Forecasted Purchase Rate (FPR). SBA then
assigns a composite rating of 1 to 5 based on the SBA Lender's overall
FPR using geometrically sequenced category thresholds. Geometrically
sequenced categories contain thresholds that are a multiple of the
prior category. The category boundaries represent a doubling of the
prior category (with the exception of the ``zero'' threshold).
Geometric categorizations aim to delineate a non-linear distribution
more evenly.
SBA updates the Lender Risk Ratings and FPRs on a quarterly basis,
using refreshed SBA Lender data. The primary purpose of the Risk Rating
and FPR 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.
SBA generally does not intend to use the Risk Rating or FPR as the sole
basis for taking a formal enforcement action against an SBA Lender.
All SBA Lenders have on-line access to their Risk Ratings, FPR
(including its components or factors), PARRiS or SMART Score (and its
components), and other risk related information through the Lender
Portal. In addition, an SBA Lender can view the loan-level components
utilized to generate each loan's PPR. For information on gaining access
to the Lender Portal, see SBA SOP 50 10 and the Lender Portal log-on
page at https://sbalenderportal.dnb.com.
(B) Segmentation
SBA's Risk Rating System uses a segmentation approach to calculate
the PPR of each loan in an SBA Lender's SBA portfolio. The loan
segments for the 7(a) Program are as follows:
1. Revolver-type loans in current payment status,
2. Revolver-type loans in non-current payment status,
3. Fixed-term loans in current payment status, and
4. Fixed-term loans in non-current payment status.
The loan segments for the 504 Loan Program are:
1. Loans in current payment status, and
2. Loans in non-current payment status.
A loan's PPR is calculated based on a combination of components
that is uniquely predictive for the loans in that segment. Many of the
segment components are the same as in the prior model, however, some
are new. The components used in each segment are as follows:
7(a) Segment 1--Revolver-type loans in current payment status:
(a) Current Small Business Predictive Score (SBPS)
(b) Months on Book (MOB)
(c) Loan Term
(d) Percent of Accounts 30 Days or More Past Due
(e) Outstanding Loan Balance
(f) New or Existing Business Indicator
(g) Total Employees
(h) NAICS Sector
(i) 12-Month Originating Lender Purchase Rate
(j) Overall Interest Rate
(k) Average State-level Unemployment Rate
7(a) Segment 2--Revolver-type loans in non-current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Term
(d) Loan Status
(e) SBA Share of Outstanding Loan Balance
(f) PAYDEX Previous 3 Months
(g) Average State-level Unemployment Rate
7(a) Segment 3--Fixed-term loans in current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Term
(d) Number of Current Accounts
(e) Sold on Secondary Market Indicator
(f) Spread Interest Rate
(g) New or Existing Business Indicator
(h) 12-Month Originating Lender Purchase Rate
7(a) Segment 4--Fixed-term loans in non-current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Status
(d) Percent of Accounts 30 Days or More Past Due
(e) 12-Month Originating Lender
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Purchase Rate
504 Segment 1--Loans in current payment status:
(a) Current SBPS
(b) MOB
(c) Loan Term
(d) Commercial Credit Score
(e) NAICS Sector
(f) Number of UCC Filings
(g) 12-Month Lender Purchase Rate
(h) Average State-level Unemployment Rate
504 Segment 2--Loans in non-current payment status:
(a) Current SBPS
(b) Loan Status
(c) Viability Score
The components were selected through statistical analysis using step-
wise logistic regression to identify the combination of variables that
are the most predictive for each segment of loans. The model is
``multivariate,'' meaning that an SBA Lender's PPR (and thus its FPR
and Risk Rating) is based on a combination of all components in the
model. Each of the components is described in more detail in the Rating
Components section below.
(C) Rating Components
SBA derives components from three types of data sources to
calculate a loan's PPR: SBA loan data, D&B Borrower data,\4\ and
macroeconomic data. The first category includes detailed loan/borrower
level information from SBA's database. The second category is
information on the small business borrower from D&B's trade database.
The third category includes state level unemployment data. Each of the
components is defined in detail below. For those components that were
also in the prior model, their definitions are generally the same.
---------------------------------------------------------------------------
\4\ D&B business bureau data is combined with FICO consumer
data.
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(1) SBA Loan Data Components
Loan Status: The Loan Status component captures the payment status
of loans as of the rating date. Loans are categorized as current,
delinquent, past due, or deferred. If delinquent, this component
indicates the delinquency ``bucket'' (e.g., 30 days past due, 60 days
past due, etc.) at the time of rating. A greater number of days past
due contributes to a higher purchase risk.
Loan Term: The Loan Term is the length of the loan repayment period
at origination. Loan Term is measured in months and purchase risk
increases as the repayment term increases for 7(a) Revolver loans. For
7(a) Fixed loans, the purchase risk associated with the loan term is
arch-shaped: Loans at either end of the spectrum (very short or very
long term) have the lowest purchase risk. For 504 loans, the purchase
risk is lower for longer term loans.
Months on Book (MOB): The MOB is the number of months between the
rating date and the date of the first loan disbursement, up to a
maximum of 120 months. For 7(a) loans, the purchase risk associated
with MOB risk level is arch-shaped: Loans at either end of the spectrum
(very low or very high MOB) have the lowest purchase risk. For 504
loans, a higher MOB is associated with a higher purchase risk.
NAICS Sector: The North American Industry Classification System
(NAICS) is the standard used by Federal statistical agencies in
classifying business establishments. For 7(a) Segment 1, revolver-type
loans in current payment status, industries classified as information,
transportation, or warehousing are associated with the highest purchase
risk and those classified as education, finance, insurance, management,
manufacturing, public administration, and utilities are associated with
the lowest purchase risk. All other industry classifications are
associated with a mid-range of purchase risk. For 504 Segment 1,
current loans, industries classified as food services, administrative,
educational, manufacturing, real estate, or retail are associated with
the highest purchase risk and those classified as agriculture,
forestry, fishing, construction, finance, insurance, information, or
mining have the lowest purchase risk. All other industry
classifications are associated with a mid-range of purchase risk.
New or Existing Business Indicator: This component indicates
whether a borrower is a new or existing business. Start-ups and
businesses in existence for 2 years or less are considered new
businesses and those over 2 years old are considered existing
businesses. An existing business is associated with a lower purchase
risk.
Overall Interest Rate: The Overall Interest Rate is the interest
rate of a loan at origination. A higher Overall Interest Rate is
associated with a higher purchase risk.
Outstanding Loan Balance: The Outstanding Loan Balance is the
outstanding gross loan balance at the time of the rating date. This
component is only used for revolver-type accounts that are currently in
active status. The purchase risk associated with Outstanding Loan
Balance is arch-shaped: Loans at either end of the spectrum (very low
or very high Outstanding Loan Balance) have the lowest purchase risk.
SBA Share of Outstanding Loan Balance: The SBA Share of Outstanding
Loan Balance is the SBA guaranteed portion of the outstanding amount of
the loan as of the rating date. Similar to the Outstanding Loan
Balance, the purchase risk associated with SBA Share of Outstanding
Loan Balance is arch-shaped: Loans at either end of the spectrum (very
low or very high SBA Share of Outstanding Loan Balance) have the lowest
purchase risk.
Sold on Secondary Market Indicator: This component indicates
whether the SBA guaranteed portion of a loan was sold on the secondary
market. This is a static field once a loan is sold on the secondary
market. Loans sold on the secondary market have a higher purchase risk.
Spread Interest Rate: The Spread Interest Rate is the difference
between the interest rate of the loan and the Prime interest rate in
effect on the date of origination. A higher Spread Interest Rate is
associated with a higher purchase risk.
12-Month Lender Purchase Rate: The 12-Month Lender Purchase Rate is
a calculated field based on a lender's purchase rate over the past 12
months. A higher value for this attribute is associated with a higher
purchase risk.
12-Month Originating Lender Purchase Rate: The 12-Month Originating
Lender Purchase Rate is a calculated field based on the originating
lender's purchase rate over the past 12 months. For loans that a lender
has acquired from another SBA Lender, the originating lender's 12-Month
Lender Purchase Rate will apply. For loans that have not been acquired
from another SBA Lender, this component is the same as the 12-Month
Lender Purchase Rate described above. If the originating lender does
not have a 12-Month Lender Purchase Rate (for example, the lender is no
longer participating in SBA's programs or is no longer in business),
the 12-Month Overall Portfolio Purchase Rate will be used. The 12-Month
Overall Portfolio Purchase Rate is the purchase rate of SBA's entire
7(a) or 504 portfolio, based on the last 12 months. A higher value for
this attribute is associated with a higher purchase risk.
(2) D&B Borrower Data Components
Commercial Credit Score: The Commercial Credit Score (CCS) is a
proprietary calculation from D&B that predicts the likelihood of a
business paying its bills in a severely delinquent manner (91 days or
more past terms), obtaining legal relief from its creditors, or ceasing
operations without paying all creditors in full over the next 12
months. D&B defines severe
[[Page 9566]]
delinquency as a business with at least 10 percent of its payments 91
days or more past due, based on the information in D&B's commercial
database. A high CCS value indicates a lower risk of delinquency. The
CCS is calculated using statistical models derived from D&B's extensive
database of U.S. businesses including payment, public filing,
demographic, and financial information when available. A higher CCS is
associated with a lower purchase risk.
Number of Current Accounts: The Number of Current Accounts is the
number of a borrower's trade accounts, as reported to D&B, that have
been current over the past 24 months. Higher values of this attribute
are associated with lower purchase risk.
Number of UCC Filings: Number of UCC Filings is the number of
Uniform Commercial Code (UCC) filings recorded against the borrower's
business in the past 10 years, including initial filings,
continuations, amendments, and terminations. A UCC filing is a legal
form filed by a creditor to give notice that it has an interest in the
property of a debtor. A higher value for this attribute is associated
with a higher purchase risk.
PAYDEX Previous 3 Months: PAYDEX is a unique, dollar weighted
indicator of a business's payment performance based on the total number
of payment experiences in D&B's database over the past 3 months.
Payment experiences are gathered by D&B from a business's suppliers and
vendors. Higher PAYDEX scores indicate better payment performance. A
higher value for this attribute is associated with a lower purchase
risk.
Percent of Accounts 30 Days or More Past Due: The Percent of
Accounts 30 Days or More Past Due is calculated using data from the D&B
detail trade database for the last 4 months. This percentage results
from dividing the total number of accounts which have been 30 days or
more delinquent in the past 4 months by the total number of active
accounts associated with a borrower. A higher value for this attribute
is associated with a higher purchase risk.
SBPS: The SBPS, the Small Business Risk Portfolio Solution
commercially known as SBRPS, is a portfolio management credit score
based upon a borrower's business credit report and principal's consumer
credit report and is updated quarterly. SBPS is a commercial score
provided by Dun & Bradstreet (D&B), under contract with SBA. SBPS was
developed by D&B and FICO and is compatible with FICO's ``Liquid
Credit'' origination score. This component provides an indication of
the relative creditworthiness of a given borrower with higher values
indicating lower purchase risk. FICO recently updated SBPS to a new,
more predictive version which will be used in this redeveloped Risk
Rating version.
Total Employees: Total Employees is the number of people the
borrower employs, as reported to D&B. A higher value for this attribute
is associated with a lower purchase risk.
Viability Score: The Viability Score is a proprietary calculation
from D&B that assesses the probability that the borrower will no longer
be viable within the next 12 months compared to all the U.S. businesses
within the D&B database. A business is no longer viable when it goes
out of business, becomes dormant or inactive, or files for bankruptcy.
The Viability Score is based on available financial data, trade
payments, firmographics and other business activity. A higher Viability
Score is associated with a higher purchase risk.
(3) Macroeconomic Data Component
Average State-level Unemployment Rate: The Average State-level
Unemployment Rate is the ratio of unemployed to the civilian labor
force in the borrower's State, expressed as a percent. The source is
Bureau of Labor Statistics (BLS), Local Area Unemployment Statistics
Database. The borrower's state is identified through borrower's address
fields in the SBA's database. The unemployment rate is extracted
directly from BLS reporting, which is updated monthly. A higher
unemployment rate in the borrower's state contributes to a higher
purchase risk.
(D) Lender Risk Rating
The SBA Lender Risk Rating (LRR) is a measure of predicted
performance over the next 12 months. As described above, SBA uses its
Risk Rating model to calculate a Forecasted Purchase Rate (FPR). The
FPR predicts the percent of an SBA Lender's SBA loan portfolio that
will be purchased over the next 12 months. An SBA Lender's FPR can be
used to project the dollar amount of an SBA Lender's purchases. SBA
then uses the FPR to assign a composite rating of 1 to 5 to each SBA
Lender. This composite rating is the LRR. SBA may make adjustments to
the composite rating based on results of reviews, third party
information on an SBA Lender's operations, portfolio trends, and other
information that could impact an SBA Lender's risk profile. (See
section E ``Overriding Factors'' for further detail.) In general, a
rating of 1 indicates least risk, and that the least degree of SBA
oversight is likely needed, while a 5 rating indicates highest risk,
and that the highest degree of SBA oversight is likely needed. Rating
categories 2, 3, and 4 provide granularity for increasing levels of
risk and the corresponding levels of necessary oversight.
(E) Overriding Factors
As with prior LRR models, the redeveloped 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' risk-based reviews/
examinations and evaluations. SBA routinely conducts reviews of SBA
Lenders, performs safety and soundness examinations of SBA Small
Business Lending Companies (SBLCs) and Non-Federally Regulated Lenders
(NFRLs), and uses certain 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, or related agreements with, Federal Financial Institution
Regulators (FFIRs); capital adequacy levels not in conformity with
FFIRs; secondary market issues and concerns; receipt of a Going Concern
opinion issued by an independent auditor; 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 (or losses) significantly worse than average; violation of
SBA Loan Program Requirements; inadequate, incomplete, or untimely
reporting to SBA; fraud/indictment of lender, officers, or key
employees; an identified condition that affects capital, solvency or
prudent commercial lending ability; inaccurate
[[Page 9567]]
submission of required fees or amounts due SBA or the federal
government; and other risk-related or program integrity concerns. Rapid
growth, in particular, is a significant factor that can mask poor
portfolio performance in a calculated Risk Rating. Consequently, SBA
includes a rapid growth flag in its PARRiS and SMART assessments and in
this override list.
(F) Confidential Information
Each SBA Lender must continue to handle its Reports, Risk Ratings
and related Confidential Information in accordance with the
confidentiality requirements set forth in 13 CFR 120.1060,
Confidentiality of Reports, Risk Ratings, and related Confidential
Information. Under this regulation, Reports, Risk Ratings, and
Confidential Information are privileged, confidential, and the property
of SBA. Further, the regulation states that such information may not be
relied upon for any purpose other than SBA's lender oversight and SBA's
portfolio management purposes. In addition, the SBA Lender is
prohibited from disclosing its Report, Risk Rating, and Confidential
Information, in full or in part, in any manner, without SBA's prior
written permission, and the SBA Lender must not make any
representations concerning the information (including Report findings,
conclusions, and recommendations), the Risk Rating, or the Confidential
Information.
13 CFR 120.1060(a) defines ``Report'' to mean ``the review or
examination report and related documents.'' It also provides that
Confidential Information ``is defined in the SBA Lender information
portal and by notice issued from time to time.'' The SBA Lender
information portal currently defines ``Confidential Information'' to
mean ``all lender-related information contained in the Portal including
``Lender Results'', except for the ``Past 12 Month Actual Purchase
Rate'' and the ``Past 12 Month Actual Charge-Off Rate''. SBA has
expanded the information available to an SBA Lender in the Lender
Portal. Therefore, SBA is updating the definition for ``Confidential
Information'' to mean:
``Confidential Information includes all the SBA Lender-related
information/data contained in the Lender Portal except the dollar
amounts associated with SBA purchase of and charge off of SBA
Lender's loans and information already publicly available related to
the Lender's capital, non-performing assets, and regulatory actions
(e.g., from a bank's public Call Report). Confidential Information
also includes any information related to SBA's supervision of the
SBA Lender (e.g., review or corrective action correspondence) and
any actions taken by SBA related to enforcement (e.g., informal
enforcement actions as defined in SOP 50 53 or by regulation,
notices of proposed enforcement action) unless made public by SBA
(e.g., in a Cease and Desist Order).''
SBA included the last sentence because it has long treated supervisory
and enforcement information as confidential information and this
information is generally related to a review or exam and, therefore,
covered by the confidentiality provisions in 13 CFR 120.1060 and/or
FOIA exemption 8. SBA may disclose Reports, Risk Ratings, and
Confidential Information in its discretion; however, such disclosures
do not waive SBA Lender's obligation under 13 CFR 120.1060 to maintain
the confidentiality of the information.
(G) Conclusion
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 third
redevelopment of SBA's Risk Rating model. In addition to this
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 improve the predictiveness
of its risk scoring.
Authority: 15 U.S.C. 633(b)(3); 15 U.S.C. 634(b)(6) and (7); 15
U.S.C. 657t; 15 U.S.C. 687(f); and 13 CFR 120.10, 120.1015,
120.1025, 120.1050, and 120.1060.
Tami Perriello,
Acting Administrator.
[FR Doc. 2021-03053 Filed 2-12-21; 8:45 am]
BILLING CODE 8026-03-P
