Chapter 5 Certified Development Company (CDC) Risk-based Reviews

Chapter 5

Certified Development Company (CDC) Risk-based Reviews

1. Introduction

This chapter addresses the on-site risk-based review process for all 504 loan program CDCs. The risk-based review process focuses on performance and operational factors that allow SBA to assess the quality of a CDC’s lending operations. SBA determines the nature and scope of the review for each CDC individually depending upon the SBA lending activity and actual or expected performance of an individual CDC. Subsequent sections of this chapter describe the review objectives and criteria for each of the review components that will be used in reviews of CDCs. The review components for CDCs are (i) portfolio performance, (ii) SBA management and operations, (iii) credit administration, and (iv) compliance.

2. Portfolio Performance Review Component

a. Introduction

The analysis of portfolio performance focuses on an evaluation of a CDC’s SBA loan portfolio to assess historical, current and projected performance and to identify the risk characteristics of the portfolio. This analysis considers a CDC’s performance compared to the portfolio, to SBA defined peers and to itself over time (trends). While the criteria and procedures identified are not an exhaustive list and may be modified during review planning or on-site activities, they provide reasonably complete list of the processes used evaluate this component. The procedures are not mandated rules to be rigidly followed by the reviewers. The lending business is a dynamic one, requiring reviewers to use their judgment to tailor review practices to individual situations. Reviewers can add, delete and/or modify procedures as appropriate, with approval of the AA/OLO or designee when a CDC’s particular circumstances and risk characteristics warrant. (Electronic mail is an acceptable means of obtaining the written approval of the AA/OLO or designee.) Any criteria added, deleted or modified for a particular review should be so identified in the Report, along with the reason for the change.

b. Review Criteria

The review criteria used for portfolio performance are described below, and are in accordance with 13 CFR §120.825-826 and §120.853. 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.

• 
  Summary of Key Statistics;
  
• 
  Loan Production Activity;
  
• 
  Comparative Performance Analysis;
  
• 
  Credit Quality; and
  
• 
  Any other Risk Characteristic(s) identified in the Plan.
  

c. Review Objectives

The objective of the Portfolio Performance component is to assess the performance of a CDC’s loan portfolio and the demographics of the 504 portfolio, and to determine whether the CDC is failing to meet any portfolio performance requirements set forth in statute, SBA Loan Program Requirement or Notice.

d. Review Procedures

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

Analyze the CDC’s portfolio composition, portfolio performance rates, and delivery method (e.g. ALP, PCLP) performance characteristics.

Identify any significant variations, fluctuations or performance trends in the individual delegated loan program(s) for further assessment.

Analyze CDC’s loans with repurchased debentures to establish a basic picture of those projects which have repurchased debentures but are still within the purview of the CDC’s control.

Identify any significant characteristics of the loans with repurchased debentures, or trends of increasing numbers, for further assessment.
Loan Production Activity
Analyze the annual production (numbers and dollars), delivery method break-down, average loan size, and discuss any trends or significant period-to-period fluctuations.
Comparative Performance Analysis

• 
  Compare the CDC’s SBA loan portfolio performance to overall SBA portfolio and peer group, and past trends of CDC itself, at least over two prior years.
  
• 
  Identify and analyze outstanding portfolio performance (in numbers and dollars) by loan payment status (e.g. current, delinquent, catch-up) and delivery method, and in comparison to SBA’s portfolio, program and peer group performance rates, as available.
  
• 
  Identify and analyze any deviation of performance in the CDC’s portfolio or in any particular program as compared to the available standards (SBA portfolio and peer).
  

Repurchased Debentures

• 
  Identify and analyze industry concentration(s) within the CDC’s portfolio, and risk implications; i.e. significant percentage of dollars in one or more industries.
  
• 
  Compile a table of industry concentrations for loan portfolio (numbers and dollars).
  
• 
  Compare to SBA portfolio and peer averages, if available.
  
• 
  Analyze concentrations of 20% or more identifying the risk implications of such concentrations.
  

Early Defaults

Compile a table of any other concentrations (i.e. new versus existing business, loans generated by loan agents, etc.), as available, and compare to any available applicable standards.

• 
  Compare CDC’s SBPS data to SBA’s portfolio average, and discuss risk implications; i.e. significant deviation from the SBA portfolio average, positive or negative trends, quarter-to-quarter and/or year-to-year fluctuations, etc.
  
• 
  Analyze stratification of CDC’s portfolio by credit score ranges and discuss proportions of predicted at-risk loans, both low and high, and risk implications; i.e. percentage of portfolio at high risk, trend over time, etc.
  
• 
  Analyze Projected Purchase Rate (PPR), and compare to SBA portfolio and peer averages.
  

Other Risk Characteristics

Conclude on the portfolio performance of the CDC.