Credit Administration Review Component

4. Credit Administration Review Component

a. Introduction

Credit Administration evaluates a Lender’s SBA program from the perspective of the lending operation. This component of the review assesses how loans are originated, closed, serviced, and problem loans managed either through workouts and restructuring and/or liquidation.

b. Review Criteria

In accordance with 13 CFR §120.410, each Lender’s credit administration practices must demonstrate the Lender’s continuing ability to evaluate, process, close, disburse, service and liquidate small business loans. The SBA’s small business lending criteria is further outlined in 13 CFR §§120.101, 120.102, 120.120, 120.150, 120.151, 120.160, 120.191, 120.201, 120.211-120.214, 120.313, 120.524, 120.540 and other related SBA Loan Program Requirements and SOP provisions, as amended by SBA from time to time. The criteria upon which the assessment of the Lender’s credit administration practices is performed is listed below. The criteria are not all inclusive and during the course of the review, additional criteria may be identified as well as certain criteria may be determined not to apply. The credit administration criteria include:

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  Creditworthiness;
  
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  Collateral;
  
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  Closing and Disbursement;
  
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  Regular Servicing and Assessment of Continued Creditworthiness;
  
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  Collection Practices and Intensive Servicing and Liquidation;
  
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  Active Purchases Management;
  
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  Other Portfolio Management Items (i.e., Consistency with SBA Policy, Risk Rating Systems, etc.), and
  
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  Other Risk Characteristics (i.e., Effectiveness of Internal Controls, Use of Loan Agents, Loan Sales/Participations, etc.).
  

c. Review Objectives

The objective of the review of a Lender’s credit administration practices is to assess the Lender’s ability to evaluate, process, close, disburse, service and liquidate its SBA portfolio. This assessment includes an analysis of Lender’s credit policies, procedures, practices and internal controls, as well as an analysis of a sample of performing loans and intensive servicing of non-performing assets, in accordance with paragraph 12 of Chapter 2. This also includes analysis of acquired collateral to identify systemic features of the loan portfolio that pose an unnecessary risk of loss to the Agency, and to assess effectiveness of the management and staff in managing these risks related to the Lender’s SBA program. The review procedures are designed to determine if loan origination, loan monitoring and collection activities (i) are in accordance with Lender’s policy and SBA policy, and (ii) demonstrate prudent small business lending practices and adequate internal controls.

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  Lender’s organizational structure within which it performs credit administration and portfolio management functions including origination, servicing and liquidations of the SBA loan portfolio;
  
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  Lender’s ability to (i) exercise approval authority, including exception approval authority, (ii) document approvals, and (iii) review for the proper level of approval authority;
  
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  Lender’s ability to determine the creditworthiness of each applicant, in accordance with SBA policy, through consideration of (i) repayment ability, (ii) capitalization sufficiency, (iii) sufficiency of working capital, (iv) management ability of principals, (v) credit history of applicant and/or principals, (vi) sufficiency of collateral assessment, and (vii) requirement of all necessary collateral;
  
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  Lender’s ability to use its commercial policies for credit determinations, to the extent possible, to determine that the SBA guaranteed loan is approved in a manner consistent with lender’s requirements for non-guaranteed commercial loans of similar size and type, e.g. for SBAExpress loans;
  
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  Use of any credit scoring appropriate to the SBA program in a manner that is consistent with its use in Lender’s non-guaranteed commercial lending program;
  
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  Lender’s maintenance of effective systems for on-going monitoring of performing loans to assess continued creditworthiness;
  
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  Lender’s maintenance of effective tickler systems for Uniform Commercial Code (UCC) continuations, annual review of borrower financial statements or other prescribed routines for review of the account relationship, and insurance renewals;
  
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  Whether Lender’s servicing actions result in an apparent increase in risk, including but not limited to actions that result in a substitution of, lowering of lien priority or release of collateral, are taken appropriately;
  
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  Lender’s SBA program management requirements to report delinquent SBA loans to senior management and the BOD;
  
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  Lender’s documentation of policies and procedures based upon a prudent lending standard for the following:
  
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  Servicing resources to properly perform workout and liquidation activities throughout geographic area served by the lender;
  
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  Legal resources to properly perform intensive servicing, workout and/or liquidation activities throughout geographic area served by the lender;
  
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  Periodic review by management of SBA loans in workout and liquidation status;
  
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  Reasonableness of workout actions taken by lender that resulted in an apparent increase in risk;
  
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  Basis for and documentation required to transfer a loan into liquidation status, other than when required pursuant to an SBA “adverse event” (as defined in SOP 50 51 2);
  
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  Adherence to SBA requirements for mandatory transfer to liquidation status;
  
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  Degree to which liquidation practices for SBA loans conform to practices accorded lender’s non-guaranteed commercial loans;
  
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  Response to notices of bankruptcy and other legal actions that might hamper workout or liquidation activities;
  
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  Actions to be taken to remedy deficiencies, inadequacies, or to seek rectification of legal and regulatory violations by the borrower;
  
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  Documentation related to efforts to be made to resolve liquidation cases prior to commencing efforts to take possession of the collateral or seek performance by the guarantors;
  
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  Documentation of efforts to be made to control collateral in a timely manner;
  
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  Prudence of the process to be employed to determine net realizable value of collateral;
  
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  Prudence of delegated authority to release or abandon collateral;
  
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  Prudence of delegated authority to compromise with, or agree to release of guarantors;
  
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  Documentation of procedures to be employed to dispose of acquired collateral; and
  
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  Consistency of lender’s policy and procedure for disposal of collateral on non-SBA guaranteed commercial loans with actions taken on SBA-guaranteed loans;
  
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  Lender’s SBA program management requirements to report loans that are in “workout” or “liquidation” status to senior management and the BOD;
  
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  Determination whether: Any aspect of Lender’s credit administration policy is in direct conflict with SBA policy, and if so, how does lender propose resolution;
  
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  Lender’s delegations of authority are adequate to ensure appropriate credit administration of the SBA portfolio;
  
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  Lender’s risk rating system is adequate;
  
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  Lender’s use of loan agents and what risk factors are apparent; and
  
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  Overall effectiveness of Lender’s internal controls.
  

d. Review Procedures

The following procedures are provided as guidance in conducting the credit administration component of the review. The procedures are not an exhaustive list. They will be expanded, contracted and adapted, as warranted, within SBA’s sole discretion based on (i) the circumstances of the individual Lender, particularly if there are program and operational changes, (ii) changes in economic conditions, or (iii) Agency policy changes.

Describe Lender’s application of credit scoring on individual SBA loan decisions and practices for overriding credit score determinations.

Describe the circumstances under which the credit score model is used on SBA loan decisions as compared to non-SBA loan decisions.

Describe any exceptions to the credit scoring policy or ability to override credit score policy, and/or practice. Review a sample of loans to determine whether Lender is adhering to all loan policies and all SBA loan policy requirements, and identify and provide examples of any Material Deficiencies or patterns of deficiency.

Determine whether Lender’s SBA policy for continued monitoring of the SBA portfolio is, at a minimum, consistent with its policy for non-guaranteed commercial loans, and is in accordance with all loan authorization requirements. Determine whether Lender’s policy for SBA loan servicing is consistent with 13 CFR §120.513 and SOP 50 50 4, Loan Servicing.

Determine whether Lender’s SBA servicing policy demonstrates the continuing ability to service SBA loans in accordance with 13 CFR §120.410.

Determine whether adequate controls exist to ensure required insurance coverage is in place, including any applicable assignments and/or acknowledgments are obtained, and all required insurance policies are renewed as necessary.

Determine whether “umbrella” insurance is in place to protect lender and SBA in the event insurance policies are not properly renewed. Determine that any such insurance is proportionately applied to Lender’s and SBA’s exposure. Identify examples of application of any umbrella insurance.

Determine whether adequate controls exist to ensure required lien positions are obtained and renewed, as necessary.

Describe and determine procedures for processing borrower servicing requests.

Review sample of loans to determine whether Lender is adhering to loan policies and all SBA requirements , including those contained in 13 CFR §120.513 and SOP 50 50(4), regarding regular servicing and portfolio management, and identify and provide examples of any Material Deficiencies or patterns of deficiencies.

Determine whether Lender’s policy for collections and deferrals of the SBA loan portfolio is complete in procedure and followed.

Determine whether Lender’s policies and procedures establish a basis upon which a loan will be subjected to intensive servicing or liquidation action, including workouts, site visits, liquidation plans, inventory of, control, possession and/or protection of collateral; and access to counsel, and is consistent with 13 CFR §120.540 and SOP 50 51 2.

Review sample of loans to determine whether Lender is adhering to its loan policy and all SBA requirements, as set forth in 13 CFR §120.540 and SOP 50 51 2, regarding management of collections, intensive servicing and liquidation of accounts, and identify and provide examples of any Material Deficiencies or patterns of deficiencies.

Consistency/Conflict with SBA Policy

Determine how these rating systems affect Lender’s SBA portfolio management. Identify who is responsible for maintaining accurate risk ratings. Review management reports containing risk ratings or classifications of all SBA loans.

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  Does the Lender routinely or on an ad hoc basis use loan agents in originating its SBA loans?
  
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  Determine whether Lender’s policies and procedures establish a basis for routine or ad hoc use of loan agents (packagers, referral agents, brokers, etc.) in originating SBA loans.
  
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  Determine whether loan agent-originated loans are fully meeting SBA standards, including those on creditworthiness.
  
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  For Lenders with active loan agent relationships, obtain list of loans referred by loan agents, and analyze a sample of loans referred by loan agents to determine whether performance trends and/or credit quality is comparable to book of business originated directly by Lender.
  
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  Determine whether SBA Form 159, “Fee Disclosure Form and Compensation Agreement” has been completed, as applicable, for each loan in which a loan agent has participated.
  
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  Determine whether additional file review is appropriate to fully assess loan agent activity. If so, review a small selection of loan files for loans originated by loan agents to determine whether each decision was reached in accordance with Lender’s and SBA’s policies and to better evaluate Lender’s use of loan agents.
  

Loan Sales, Participations, Pledges and/or Securitizations

Evaluate Lender practices to determine that Lender has followed applicable polices and procedures for any such sales, participations, pledges or securitizations.

Conclude on the effectiveness of Lender’s credit administration policies and practices. In making these conclusions, the reviewer should identify mitigating circumstances such as lending that, while being more risky, may further SBA’s mission in a positive manner. However, additional risk in the SBA loan portfolio must be accompanied by more rigorous credit administration practices in servicing and oversight. The conclusions shall be presented to management at the exit conference along with an assessment of the seriousness of the preliminary Findings relative to the lender’s SBA activities.