Credit Administration Review Component

4. Credit Administration Review Component

a. Introduction

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

b. Review Criteria

In accordance with 13 CFR §120.826 and 848, each CDC must be able to demonstrate that it can package and process, close and service, and if authorized by SBA, liquidate and litigate 504 loans. The SBA’s small business lending criteria is further outlined in 13 CFR §120.101, 120.102, 120.120, 120.150-120.195, 120.800, 120.860, 120.861, and other related SBA Loan Program Requirements and SOP provision, as amended by SBA from time to time. The criteria upon which the assessment of the CDC’s credit administration practices for performing loans are 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;
  
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  Regular Servicing;
  
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  Collection Practices;
  
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  Intensive Servicing and Liquidation;
  
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  Loans with Repurchased Debentures;
  
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  Other Portfolio Management Items; and
  
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  Other Risk Characteristics as identified in the Plan.
  

c. Review Objectives

The objective of the review of CDC’s credit administration practices is to assess CDC’s ability to package and process, close and service, and if authorized by SBA, liquidate and litigate 504 loans. This assessment includes an analysis of CDC’s credit policies and procedures, as well as 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 recovered 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 CDC’s SBA program. The review procedures utilize the CDC’s loan policies and procedures and individual file review to determine if loan originations, loan monitoring and collection activities are (i) in accordance with CDC’s discretionary policy and SBA policy, and (ii) demonstrate prudent CDC practice.

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  CDC’s organizational structure within which CDC performs marketing, packaging and processing, closing and servicing, and if authorized by SBA, liquidating and litigating 504 loans;
  
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  CDC’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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  CDC’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) adequacy of collateral, as assessed in accordance with SOP, and (vii) closing of the loan and debenture in accordance with SOP requirements, and as applicable, through use of qualified closing personnel, as required by SOP;
  
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  CDC’s ability take appropriate servicing actions, including but not limited to actions that result in an exchange or reduction of lien priority, or release of collateral;
  
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  CDC’s ability to maintain an 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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  CDC’s ability to report loans that are not performing “as agreed” to SBA and, as applicable, to senior management of the CDC;
  
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  CDC’s effectiveness of the implementation of policy and procedure related to SBA requirements regarding the adequacy and effectiveness of the following workout and liquidation activities, when liquidation authority is approved by SBA:
  
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  Servicing resources to properly perform workout and liquidation activities throughout geographic area served by the CDC;
  
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  Legal resources to properly perform workout and liquidation activities throughout geographic area served by the CDC;
  
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  Reasonableness of workout actions taken by CDC 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”;
  
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  Adherence to SBA requirements related to mandatory transfer to liquidation status;
  
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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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  Reasonableness of the process to be employed to determine net realizable value of collateral;
  
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  Reasonableness of delegated authority to release or abandon collateral;
  
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  Reasonableness of delegated authority to compromise with, or agree to release of guarantors; and
  
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  Documentation of procedures to be employed to dispose of acquired collateral;
  
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  CDC’s requirements to report loans that are in “workout” or “liquidation” status to senior management and the BOD; Determine whether:
  

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  Any aspect of CDC’s credit administration policy is in direct conflict with SBA policy, and if so; how does CDC propose resolution;
  
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  CDC’s delegations of authority are adequate to ensure appropriate credit administration of the SBA portfolio;
  
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  The CDC’s risk rating system is adequate;
  
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  CDC uses of loan agents and what risk factors arise from this; and
  
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  Overall effectiveness of CDC’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 and contracted and adapted, as warranted, within 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.

Determine whether CDC’s SBA credit policy demonstrates the ability to evaluate and process SBA loans in accordance with 13 CFR § 120.150-120.195, 120.801, 120.826, 120.841, and 120.848, and SOP 50-10(4), Subpart H, Chapter 18.

Review sample of loans to determine if CDC is adhering to SBA’s policy and requirements regarding collateral, and identify and provide examples of any Material Deficiencies or patterns of deficiencies.

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  Describe CDC practices for evaluating continued creditworthiness, (e.g., annual financial statement analysis, credit modeling for portfolio management purposes, etc.).
  
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  Determine whether policy for continued monitoring of the SBA portfolio is, at minimum, in accordance with any loan authorization requirements.
  
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  Determine whether CDC’s policy for loan servicing is consistent with 13 CFR § 120.826, 120.848 and 120.970 and SOP 50 50(4), Chapter 11.
  
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  Determine whether adequate controls exist to ensure required insurance coverage in place, including any applicable assignments and/or acknowledgements are obtained, and all required insurance policies are renewed as necessary.
  
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  Determine whether adequate controls exist to ensure required lien positions are obtained and renewed, as necessary.
  
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  Describe and determine procedures for processing borrower servicing requests.
  
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  Review sample of loans to determine if CDC is adhering to loan policies and SBA requirements, including those contained in 13 CFR §120.826 120.848 and 120.970 and SOP 50-50(4), Chapter 11, regarding regular servicing and portfolio management, and identify and provide examples of any Material Deficiencies or patterns of deficiencies.
  

Intensive Servicing/Liquidation

Review a selection of loans with repurchased debentures to determine that CDC has well-defined action plan events for pursuit of payments, with timelines and responsibilities for various categories of intensive attention.

Consistency/Conflict with SBA Policy

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  Evaluate policies for internal grading and/or risk rating SBA loans, and practices for rating loans at regular intervals through life of loan (at least annually).
  
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  Determine how these rating systems affect CDC’s SBA portfolio management.
  
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  Identify the person responsible for maintaining accurate risk ratings?
  
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  Review management reports containing grades or risk ratings of all SBA loans.
  

Effectiveness of Internal Controls

Describe any serious gaps in internal controls which indicate a weakness.

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  Does the CDC routinely or on an ad hoc basis use loan agents in originating its SBA loans?
  
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  Determine whether CDC’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 regarding creditworthiness.
  
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  For CDCs with active loan agent relationships, obtain list of loans referred by loan agents, and analyze loans referred by loan agents to determine whether performance trends and/or credit quality is comparable to book of business originated directly by CDC.
  
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  Determine that SBA form 159, “Fee Disclosure Form and Compensation Agreement” has been completed, as applicable, for each loan in which a loan agent has had participation.
  
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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 if each decision was reached in accordance with SBA’s policies and to better evaluate CDC’s use of loan agents.
  

Conclusion

Conclude on the adequacy of credit administration of the SBA portfolio.