Small Business Lending Company and Non-Federally Regulated Lender Examinations

Small Business Lending Company and Non-Federally Regulated Lender Examinations

1. Introduction

The majority of the lenders that participate in SBA’s 7(a) program are banks which take deposits from customers, extend loans to the general public and are regulated by a Federal Financial Institution Regulator.

2. Lenders Who Will Receive Examinations

“SBA Supervised Lender” is a term that SBA applies collectively to both SBLCs and NFRLs. The provisions of this chapter apply to examinations of SBA Supervised Lenders. However, depending upon the level of lending activity and the extent and nature of regulation by other Federal or State financial regulatory agencies, SBA will not conduct an examination on every SBA Supervised Lender. For NFRLs, the AA/OLO or designee will determine, in their sole discretion, whether to conduct a risk-based review (in accordance with Chapter 3 of this SOP) or an examination (in accordance with this chapter). Factors upon which this determination will be made include the level of 7(a) lending activity of the NFRL, the NFRL’s risk characteristics, and availability of resources.

The examination outlined in this chapter is applicable to SBLCs licensed by SBA (except for those SBLCs that are subject to regulation by another Federal or State financial regulatory agency as determined by SBA pursuant to regulation), and to those NFRLs which have been determined to be a candidate for the more extensive examination process. This determination will be accomplished through OLO’s off-site monitoring, and will be based upon each individual NFRL’s level of risk to the Agency (e.g. outstanding SBA exposure and performance rates relative to program or peer standards). SBLC-licensing standards which are not applicable to NFRLs (e.g. minimum capital requirements) will be excluded from the examination process for NFRLs.
SBLCs operate differently from banks in that SBLCs are non-depository lending institutions whose operations are limited to originating and servicing SBA 7(a) loans. In addition to comparing SBLC performance to its 7(a) peer group, SBA performs a comparative analysis of an SBLC’s performance to the overall SBLC peer group. For this reason, SBA compiles portfolio performance statistics for the SBLC lenders on a quarterly basis and uses these statistics in assessing an SBLC’s performance.

3. Examination Components

Examinations of SBA Supervised Lenders cover six major components – capital, asset quality, management, earnings, liquidity and SBA compliance. Some of the evaluation criteria are reiterated under one or more of the other components to reinforce the interrelationship between components. The procedures are not mandated rules to be rigidly followed by the reviewers. The lending business is a dynamic one, requiring examiners to use their judgment to tailor review practices to individual situations. Examiners can add, delete and/or modify procedures as appropriate, with the written approval of the AA/OLO or designee when an SBA Supervised Lender’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 procedure that is added, deleted or modified should be so identified in the Report, along with the reason for the change. The listing of evaluation criteria for each component is in no particular order of importance.

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:

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

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:

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  The level and severity of criticized and classified loans, and delinquency, workout, and non-accruals trends;
  
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  Adequacy of loan portfolio management, including strategic planning, policy and procedure, internal loan review, stress testing, and compliance;
  
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  The adequacy of the loss allowance and capital in relation to classified and criticized loans;
  
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  Concentrations in industries or geographic regions that are suffering some economic distress; and
  
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  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.
  

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 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:

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  Effectiveness of policies, standards, and procedures;
  
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  Adequacy of internal controls, including internal loan review;
  
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  Ability to plan strategically and operationally, and to respond to changing circumstances;
  
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  The overall condition of the company, to the extent it can be attributed to policy or ineffective response to poor performance;
  
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  Pending litigation;
  
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  Compliance with law and regulations; and
  
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  Demonstrated competence, leadership, and administrative ability.
  

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:

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

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:

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  The existence of a parent company committed to providing the necessary liquidity to its subsidiary;
  
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  The availability and cost of funding which is usually dictated by the overall condition of the company;
  
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  Any loans available for pooling and available for sale;
  
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  Loan demand;
  
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  The stability of the principal source of funding; and
  
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  Any near term capital expenditures, cash dividend, or unexpected liquidity demands.
  

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:

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  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);
  
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  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 §120.472 and SOP 50 50(4); and
  
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  Accurate and timely payment of guaranty fees, prepayment fees and other fees, payments or recoveries due to SBA in accordance with 13 CFR §§1202110, 120.223, SOP 50 10(4), 50 50(4) and 50 51(2).
  

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