Sba sop 51 00 On-Site Lender Reviews/Examinations Office of Lender Oversight

7. Risk-Based Review Components

On-site risk-based lender reviews for most 7(a) lenders and CDCs assess the SBA Lender’s SBA lending operations in terms of (i) portfolio performance, (ii) SBA management and operations, (iii) credit administration practices and (iv) compliance with laws, rules, the SOPs and SBA Loan Program Requirements. Additional details regarding risk-based review components for 7(a) lenders and CDCs are found in Chapters 3 and 5, respectively, of this SOP.

a. Portfolio Performance

For the portfolio performance component, SBA reviews the size, composition, performance and credit quality of an SBA Lender’s SBA portfolio. Risk, volume and status related data and information, including trends in the SBA Lender’s portfolio performance, and whether requirements contained in SBA Loan Program Requirements or SOPs, are met are evaluated. This data is also considered in terms of industry and geographic concentrations, in comparison to peer groups, and along with explanations and observations related to performance trends. The portfolio performance review is instrumental towards SBA’s determination that the SBA Lender has the continuing ability to make and manage its SBA loan portfolio in accordance with 13 CFR §§120.410(a), 120.451(b) and 120.845.

b. SBA Management and Operations

For this review component, SBA assesses an SBA Lender’s overall management of its SBA loan program. Here, SBA reviews the SBA Lender’s policy and procedural guidance, management and oversight of the SBA loan function. These procedures also assist SBA in determining whether the SBA Lender continues to meet SBA lending standards in 13 CFR §§120.410(a), 120.452, 120.453, 120.500-120.540, 120.848, 120.854 and 120.970. The following criteria are considered:

Demonstrated competence, leadership and administrative ability of SBA Lender management and staff whom have responsibility for the SBA loan portfolio; Adequacy of internal controls including internal loan review;

Ability to plan strategically and operationally, and to respond to changing circumstances; Poor portfolio performance attributable to policy or actions of SBA Lender’s management; and Compliance with laws and SBA Loan Program Requirements.

c. Credit Administration

For the credit administration component, SBA assesses the SBA lending operation policies, processes and controls for origination, servicing and liquidation of SBA loans for prudent lending practices, in accordance with 13 CFR §§120.410(a), 120.452, 120.453, 120.500-120.540, 120.848, 120.854 and 120.970 and SBA’s SOPs 50-10, 50 50 and 50 51. The adequacy of lending policies and procedures governing the full range of SBA lending activities is determined based upon review of the SBA Lender’s SBA policies and procedures, and, when applicable, the SBA Lender’s non-guaranteed commercial lending policies relevant to its SBA operations. Lending practices, reports and activities are identified and assessed for reasonableness and consistency with prudent lending practices. An SBA Lender’s underwriting, and regular servicing of loans is evaluated. Loan servicing and monitoring practices including collection practices, and loan review and risk rating systems are assessed. Workout and liquidation practices are reviewed to determine whether timely actions are taken on a prudent basis.

d. Compliance

Lender’s compliance with SBA-specific requirements, including eligibility and reporting to SBA is also a review component. The compliance review component considers those SBA Loan Program Requirements as generally found in the applicable sections of 13 CFR §120 and SOP 50-10(4), other than those associated with prudent lending practices as evaluated in the credit administration review category. The criteria included in the compliance review component include but are not limited to the following:

Maintenance of PCLP reserve requirements in accordance with 13 CFR §120.847 and Findings from the Bureau of PCLP Oversight; and Compliance with other applicable SBA Loan Program Requirements.

8. Risk-Based Examination Components

SBA Supervised Lenders have a more comprehensive set of examination components that include capital (as applicable by statute), asset quality, management, earnings, liquidity and compliance with SBA requirements. These components are summarized here, and more extensively defined in Chapter 4 of this SOP.

a. Capital

SBA’s required capital structure for SBLCs is specified in 13 CFR §120.470(b). State statutes specify minimum capital requirements for NFRLs. The evaluation of capital focuses on the SBA Supervised Lender’s ability to provide for growth and to absorb loan and operating losses. Criteria to consider when determining an assessment for capital include, but are not limited to: Compliance with the regulatory minimums; The level, composition or quality of capital;

The SBA Supervised Lender’s asset growth rate compared to its capital growth rate; The threat posed by asset quality if allowance for loan losses is inadequate; The impact on capital from earnings, dividends, or other distributions; Any concerns raised by interest rate risk, off-balance-sheet exposure, concentrations of credit, or any near-term commitments of capital; and The adequacy of capital in relation to all pertinent ratios.

b. Asset Quality

Loans are generally the principal risk assets. Accordingly, the analysis of loans will provide an asset quality conclusion that will impact the assessment of the SBA Supervised Lender, under 13 CFR §120.410 for 7(a) lenders and under13 CFR §120.470(b) for SBLCs. Matters to be considered include, but are not limited to: The level and severity of criticized and classified loans, and delinquency, workout, and non-accruals trends; Adequacy of loan portfolio management, including strategic planning, policy and procedure, internal loan review, stress testing, and compliance; The adequacy of the loss allowance and capital in relation to classified and criticized loans;

Concentrations in industries or geographic regions that are suffering some economic distress; and History or track record of i) meeting underwriting standards, ii) quality of credit administration, iii) adequacy of internal loan review, and iv) the timeliness of charge-offs.

c. Management

The assessment of management must consider every operational area in addition to the policies and standards adopted. This category will assess the performance of both the Board of Directors (BOD) and executive management, in accordance with 13 CFR §120.410 for all 7(a) Lenders and also 13 CFR §120.470(b)(12) for SBLCs, based on factors such as: Effectiveness of policies, standards, and procedures; Adequacy of internal controls, including internal loan review; Ability to plan strategically and operationally, and to respond to changing circumstances; The overall condition of the SBA Supervised Lender, to the extent it can be attributed to policy or ineffective response to poor performance; Pending litigation;

Compliance with law and SBA Loan Program Requirements; and

Demonstrated competence, leadership, and administrative ability.

d. Earnings

Earnings are evaluated based on their quantity and quality, and the SBA Supervised Lender’s ability to sustain both. In accordance with 13 CFR §120.410 for all 7(a) lenders and 13 CFR §120.470(b) for SBLCs, the following factors are among those considered in assessing the SBA Supervised Lender’s earnings: The level of earnings compared to the SBA Supervised Lender’s established goal; Dividend expectations;

Composition (quality) of net income; Sustainability of earnings as indicated by interest rate risk and the volume and trend of non-accrual loans; The relationship between the level of earnings and capital growth needs; and Adequacy of the allowance for loan losses.

e. Liquidity

An SBA Supervised Lender’s liquidity is evaluated on its capacity to promptly meet the demand for payment from its obligations and to readily meet the credit needs of borrowers in its territory, in accordance with 13 CFR §120.410 for all 7(a) lenders and also 13 CFR §120.470(b)(12) for SBLCs, The following factors are among those considered when assessing liquidity: The existence of a parent company committed to providing the necessary liquidity to its subsidiary; The availability and cost of funding which is usually dictated by the overall condition of the SBA Supervised Lender; Any loans available for pooling and available for sale; Loan demand; The stability of the principal source of funding; and Any near term capital expenditures, cash dividend, or unexpected liquidity demands.

f. Compliance

The SBA Supervised Lender’s compliance with SBA-specific requirements including eligibility and reporting to SBA, as found in the applicable sections of 13 CFR §120 and SOP 50-10(4), is also an examination component. The criteria included in the compliance review component include, but not limited to, the following: Eligibility of the borrower to qualify for the financial assistance in accordance with 13 CFR §§120.100-120.105, 120.120 and 120.130, and SOP 50 10(4);

Accurate and timely reporting to SBA, to facilitate the accurate assessment of the performance of the SBA Supervised Lender’s SBA loan portfolio in accordance with 13 CFR §120.220-223 and SOP 50 50(4); Accurate and timely payment of guaranty fees, prepayment fees and other fees, payments or recoveries due to SBA in accordance with 13 CFR §§120.220-120.223, SOP 50 10(4), 50 50(4) and 50 51(2); and

Compliance with other applicable SBA Loan Program Requirements.