SBA Management and Operations Review Component

3. SBA Management and Operations Review Component

a. Introduction

The management and operations review component provides an overall assessment of a CDC’s SBA lending operations. It assesses the adequacy of the CDC’s SBA lending operation management, including defined lending and decision making authorities; lending policies and procedures; management oversight and internal controls; ability to plan operationally and respond to changing circumstances; managerial expertise, leadership and administrative ability; and overall compliance with laws and SBA Loan Program Requirements for the 504 loan program.

b. Review Criteria

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  CDC Organization;
  
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  Regulatory Organizational Requirements;
  
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  Delegations of Authority;
  
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  Operating Plan and Performance;
  
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  Internal Controls and Oversight;
  
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  External Oversight; and
  
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  Any other Risk Characteristic(s) identified in the Plan.
  

c. Review Objectives

The objective of the Management and Operations component is to assess the completeness and effectiveness of the CDC’s management of its SBA loan program, as evidenced by, for example, the adequacy of its lending policies, procedures, operations and internal controls.

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  Determine completeness of CDC’s organizational guidance, including policies, procedures and other operational direction applicable to the CDC’s SBA loan program;
  
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  Assess implementation of policies and procedures;
  
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  Identify demonstrated competence, leadership, and administrative ability by CDC’s SBA program management;
  
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  Identification and dissemination of delegated (i.e., PCLP) lending and exception approval authority delegations throughout the SBA department;
  
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  Determine sufficiency of knowledgeable SBA loan personnel;
  
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  Determine if training is adequate to maintain well-informed SBA loan personnel;
  
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  Evaluate CDC’s ability to respond to changes in SBA programs and requirements;
  
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  Assess management’s performance in maintaining up-to-date and reliable operating policy, procedure, SBA budgets and performance reports;
  
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  Assessment of management’s ability to respond to and effectively implement changes in SBA programs and requirements;
  
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  Assess adequacy of internal controls internal loan review and SBA compliance review activities;
  
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  Determine adequacy and effectiveness of independent oversight (i.e., independent audit, depending upon size of portfolio) of the SBA operation; and
  
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  Determine whether CDC meets all organization requirements of 13 CFR §120.820-120.830.
  

A CDC’s portfolio performance, credit administration practices for both performing and problem loans, and compliance is largely affected by the result of decisions made by management. Findings and conclusions in these other components, made during the course of the review in these areas, will strongly influence evaluation of management. However, an “acceptable” assessment in one does not necessitate an acceptable assessment for SBA Management and Operations. Judgment in evaluating this component is essential. For example, in positive economic conditions, a CDC’s portfolio performance can be strong even though policies, procedures and controls may be inadequate.

d. Review Procedures

This assessment is conducted through review and analysis of (i) the CDC’s governance documents, (ii) structure of 504 program governance, (iii) operational and management policies and procedures, (iv) underwriting and loan monitoring policies and procedures, and (v) exception to policy processes. This assessment is then tested through observations and interviews with CDC’s management.

How does BOD/senior management maintain its awareness of and direction over SBA operations through its chain of command?

Identify what meetings, reports and other methods of communication are conducted to accomplish direction of SBA operations, and obtain documentation or records of these meetings, reports, and methods.

Are there any policy or procedural weaknesses which must be corrected by CDC in the direction of the SBA 504 loan program?

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  Identify that CDC membership meets the requirements of 13 CFR §120.822:
  

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  Having at least 25 members (13 CFR §120.822(a));
  
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  The membership must meet annually (13 CFR §120.822(a));
  
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  No person or entity owns or controls more than 10% of the voting membership (13 CFR §120.822(a));
  
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  No employee or staff of the CDC can qualify as a member of the CDC for the purpose of meeting the membership requirements (13 CFR §120.822(a));
  
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  Must be represented by all of the four required groups in areas of (i) Government, (ii) Financial Institutions, (iii) Community Organizations, and (iv) Businesses (13 CFR §120.822(b));
  
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  Members must be responsible for actively supporting economic development in the Area of Operations and must be from one of the four groups specified in 13 CFR §120.822(b); and
  
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  CDC operating as a Multi-State must meet the membership requirements for each State (13 CFR §120.822(c)).
  
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  Identify any insufficiencies with regard to13 CFR §120.822 organizational requirements.
  
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  Identify that the BOD meets the CFR requirements of:
  
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    Be composed of at least three of the four membership groups with no single group controlling (13 CFR §120.823);
    
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    Have no CDC staff as a voting member of the BOD except for the CDC manager (13 CFR §120.823);
    
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    Have at least one member, other than CDC manager, with commercial lending experience (13 CFR §120.823(a));
    
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    Meeting quarterly (13 CFR §120.823);
    
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    Conduct all decisioning with a quorum of at least five voting directors (13 CFR §120.823);
    
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    Conduct all votes on loan approvals or servicing actions with at least one director with commercial loan experience, other than CDC manager, present and voting (13 CFR §120.823); and
    
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    If BOD has an established Loan Committee, that Loan Committee meets all criteria of 13 CFR §120.823(a) and (b).
    
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  Identify that the professional management and staff meet the CFR requirements of:
  
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    Full time professional management including at least an Executive Director (or equivalent) who manages daily operations (13 CFR §120.824); and
    
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    Employment of full-time professional staff qualified by training to market the 504 program, package and process loan applications, close loans, service and if authorized by SBA, liquidate the loan portfolio and sustain a sufficient level of service and activity in the Area of Operations (13 CFR §120.824).
    
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  Determine that the Operating CDC has:
  
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    At least one salaried professional staff member available full time (13 CFR §120.824(a));
    
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    Obtained SBA pre-approval for any contracts to manage, market, package, process, close, service or liquidate SBA loans (13 CFR §120.824(b));
    
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    Separately listed telephone number (13 CFR §120.826 and SOP 50 10 43, Subpart H, Chapter 4, paragraph c.(1));
    
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    Maintenance of financial records and minutes of all meetings (13 CFR §120.826 and SOP 50 10 4e, Subpart H, Chapter 4, paragraph 5.c.(1));
    
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    Availability of documents pertaining to the 504 loan portfolio available at the CDC’s principal office (13 CFR §120.826 and SOP 50 10 4e, Subpart H, Chapter 4, paragraph c.(2));
    
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    Any changes in address, telephone, offices, directors, professional staff, by-laws or articles of incorporation must be reported to SBA field office within 30 days (13 CFR §120.826 and SOP 50 10 4e, Subpart H, Chapter 4, paragraph 5.d.(1)); and
    
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    Resumes, “Statement of Personal History” SBA Form 1081 and fingerprint cards Form FD 258 must be filed on all new associates and staff (13 CFR §120.826 and SOP 50 10 4e, Subpart H, Chapter 2, paragraph 1.d.(2)).
    
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  Determine that the CDC has the financial ability to operate and sustain its operations continuously, with reliable sources of funds (13 CFR §120.825).
  
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  Determine that CDC meets the following requirements of:
  
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    Receive SBA approval of at least four 504 loans in two consecutive fiscal years (13 CFR §120.828(a)); and
    
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    The CDC’s portfolio maintains a minimum average of one job opportunity per an amount of 504 loan funding that will be specified by SBA from time to time in a Federal Register Notice (13 CFR §120.829(a)). (“Job Opportunity” is defined in 13 CFR §120.802 as “a full time (or equivalent) permanent job created within two years of receipt of 504 funds, or retained in the community because of a 504 loan.”)
    
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  Identify that CDC meets reporting requirements to SBA of:
  
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    Annual report submitted within 180 days after CDC’s fiscal year end (13 CFR §120.830(a));
    
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    Reporting of any involvement in any legal proceedings (13 CFR §120.830(c));
    
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    Reporting of any organizational status changes (13 CFR §120.830(d));
    
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    Reporting of any changes in any condition that affects CDC’s eligibility to continue to participate in the 504 program (13 CFR §120.830(c)), and
    
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    Quarterly service reports on each loan 60 days or more past due (13 CFR 120.830(f)).
    

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  Identify any other deficiencies with regard to or failure to meet regulatory requirements.
  
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  For Non-Profit CDCs: Determine if CDC meets the requirements of the Single Audit Act Amendments of 1996 (31 USC 7501-7507) and revised OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations.
  
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  Determine whether any long-range planning demonstrates a significant change to the CDC’s approach to its SBA program. Describe the proposed change(s) and management’s intent. Is it prudent?
  
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  Determine if management is knowledgeable of SBA lending requirements.
  

Delegations of Authority

Determine that CDC management communicated its delegations to the SBA portfolio staff to meet the goals and objectives of senior direction?

Assess what internal controls exist to ensure that exceptions to delegations are properly handled?
Operating Plan and Performance

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  Describe CDC’s business plan for SBA lending, including SBA loan program goals.
  
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  Determine if SBA business plan is realistic in terms of CDC’s capacity, expertise and lending infrastructure.
  
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  Describe and analyze materials and methods employed to periodically compile and communicate the SBA financial results, production data, portfolio performance, repurchase and liquidation information to senior CDC management. Obtain reports (or copies) of reporting which demonstrates this reporting.
  
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  Determine whether reporting is sufficient to manage SBA lending operations.
  
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  Determine what the CDC does to train and maintain proficiency in lending for its SBA personnel.
  

Internal Controls and Oversight

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  Determine the nature and frequency of the internal activities that provide oversight data and information to the SBA management.
  
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  Identify the types of independent review being used to oversee the SBA lending program (i.e. internal and external audits). (This is not reporting, but review independent of the loan program management).
  
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  Review any internal audit reports or compliance examinations of SBA lending operation and review Findings and recommendations for deficiencies.
  
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  Determine what action(s) has been taken by CDC to address any identified deficiencies.
  

External Oversight

Conclude on adequacy of SBA program management.