Using judgment in evaluating the results of the review/examination and assessing the acceptability of risk an individual lender represents to SBA, the Examiner-in-Charge (EIC) for a review/examination recommends an assessment category; individual review/examination components are not rated. Rather, the EIC, in recommending an assessment, evaluates each individual review/examination component, any actual or anticipated financial risk to SBA, management’s planned or proposed actions to address identified issues, and any relevant external factors and/or subsequent events (e.g., policies, procedures and/or internal controls partially implemented).
Determining the appropriate assessment category to recommend requires a thorough understanding of an SBA Lender’s operation, knowledge of prudent lending practices, application of SBA requirements and judgment. The basis for the recommended assessment category must be clearly identified and substantiated in the written Report. The SBA Lender assessment will fall into one of three categories: (i) Acceptable, (ii) Acceptable with Corrective Actions Required, or (iii) Less than Acceptable with Corrective Actions Required. SBA Lenders within the assessment category of “Acceptable” are managing a satisfactory SBA loan program utilizing prudent lending practices and representing limited financial risk to SBA. SBA Lenders in the “Acceptable with Corrective Actions Required” category may have Findings but it is reasonably expected that the SBA Lender can address the Findings during the normal course of operations. Lastly, SBA Lenders in the assessment category of “Less than Acceptable with Corrective Actions Required” are operating an SBA lending program with serious deficiencies and/or represent significant financial risk to SBA. More detailed descriptions, including factors considered for each SBA Lender assessment category are presented below. While not all characteristics listed must be present for a particular assessment to be assigned, the descriptions provide the overall characteristics of each category that must largely represent the SBA Lender’s operation.
a. Acceptable Category
SBA Lenders in this category are considered to be managing an SBA loan program that generally meets or exceeds SBA’s expectations and requirements. Weaknesses, if present, are modest and can be easily addressed; no significant patterns or practice of deficiencies are noted; and
SBA Lender represents limited financial risk to SBA. The following characteristics are reflective of SBA Lenders in the Acceptable assessment category:
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SBA lending operations, credit administration, and portfolio management practices demonstrate minimal or no problems;
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SBA portfolio performance indicators are comparable to or better than the SBA portfolio and peer group performance, defined by SBA;
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SBA lending program demonstrates the ability to withstand adverse business conditions, if experienced;
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Policy, procedure and internal controls are complete, well documented, and implemented;
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SBA Lender is able to manage SBA program expansion and/or delegated authority;
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SBA Lender utilizes risk management processes that are satisfactory relative to its size, the territory it serves, and the complexity of its operations;
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SBA Lender has an effective risk rating system for SBA loan assets;
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SBA Lender has a program of regular internal loan review that includes SBA loan assets;
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Reports and payments to SBA are accurate, complete and made on a timely basis;
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Knowledge of and compliance with SBA eligibility requirements is strong;
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No violations of law or SBA Loan Program Requirement are identified;
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SBA Lender is not operating with any supervisory restrictions or agreements that involve its lending practices with its Federal Financial Institution Regulator, if applicable;
For SBLCs and NFRLs (as applicable), the following additional characteristics are reflective of SBA Supervised Lenders in the Acceptable assessment category:
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SBA Supervised Lender has sufficient quality and/or quantity of capital to meet business operations and regulatory requirements;
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There is a low level of criticized and/or classified assets;
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There is an adequate allowance for loan losses, and good portfolio management practices;
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SBA Supervised Lender monitors external events that could impact its condition or performance;
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SBA Supervised Lender exhibits the ability to react to changing circumstances and addresses risk that may arise from changes in business conditions;
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SBA Supervised Lender has sufficient income to meet goals, augment capital after any necessary provisions to the loan loss allowance, and support any anticipated growth;
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SBA Supervised Lender has sufficient liquid funds available to meet obligations with management of cash flows; and/or
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The stability of the principal source(s) of liquid funds is sufficient.
SBA Lenders in this category are generally reviewed on-site on a 24-month cycle depending upon available resources. The written Report may contain recommendations. However, generally no follow-up or Corrective Actions to address Findings are required. Regular off-site monitoring of all SBA Lenders in this group occurs between on-site reviews, and if performance trends decline, may cause a change in the cycle of reviews.
b. Acceptable with Corrective Actions Required Category
SBA Lenders in this category are considered to be managing an SBA loan program that generally meets SBA’s expectations and requirements, but have one or more weaknesses in its operation or a limited number of significant patterns or practice of deficiencies that, if not corrected, could negatively impact the SBA Lender’s SBA lending and expose SBA to an unacceptable level of financial risk
The following characteristics are reflective of lenders in the Acceptable with Corrective Actions Required Category:
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SBA lending operations, credit administration, and portfolio management practices demonstrate correctable problems and SBA Lender demonstrates the ability and willingness to correct the problems;
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SBA portfolio performance indicators are below SBA portfolio and peer group performance, as defined by SBA;
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SBA lending program demonstrates some vulnerability to the onset of adverse business conditions, if experienced;
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Policy, procedure and/or internal controls are incomplete, not well documented, and/or not effectively implemented;
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SBA Lender utilizes risk management processes that have some deficiencies relative to its size, the territory it serves, and the complexity of its operations;
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SBA Lender does not have a comprehensive and/or fully implemented risk rating system for SBA loan assets;
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SBA Lender does not have a fully implemented program of regular internal loan review that is applied to SBA loan assets;
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Reports and payments to SBA are not always accurate, complete and/or made on a timely basis;
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Knowledge of and compliance with SBA eligibility requirements demonstrates some weakness;
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Violations of law or SBA Loan Program Requirement are identified;
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SBA Lender is operating with no supervisory restrictions, but with one or more agreements that involve their lending practices with its Federal Financial Institution or State Regulator.
For SBLCs and NFRLs (as applicable), the following additional characteristics are reflective of SBA Supervised Lenders in the Acceptable with Corrective Actions Required assessment category:
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SBA Supervised Lender has marginally sufficient quality and/or quantity of capital to meet business operations and regulatory requirements;
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There is a high level of criticized and/or classified assets;
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There are unresolved questions regarding the adequacy of allowance for loan losses and good portfolio management practices;
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SBA Supervised Lender does not consistently monitor external events that could impact its condition or performance;
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SBA Supervised Lender exhibits lack of ability to react to changing circumstances and/or lack of ability to address risk that may arise from changes in business conditions;
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SBA Supervised Lender has insufficient income to meet goals, augment capital after any necessary provisions to the loan loss allowance, and support any anticipated growth;
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SBA Supervised Lender has less than sufficient liquid funds available to meet obligations with management of cash flows; and/or
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The stability of the principal source(s) of liquid funds is questionable.
SBA Lenders in this category are generally reviewed on an 18-24 month cycle depending upon available resources. Findings will require action on the part of the SBA Lender to address weaknesses including a response to SBA on planned actions in the form of a Corrective Action work plan and regular progress reports. Regular off-site monitoring of all SBA Lenders in this group occurs between on-site reviews, and if performance trends decline, may cause a change the cycle of reviews.
c. Less than Acceptable with Corrective Actions Required Category
SBA Lenders in this category have a SBA loan program that is considered unacceptable to SBA in one or more aspects. This assessment is a judgment that an SBA Lender’s SBA loan program has weaknesses of such magnitude, or multiple and/or significant patterns of deficiencies noted, that its operation is negatively impacted. SBA Lender’s SBA lending operations expose SBA to an unacceptable level of financial risk.
For SBLCs and NFRLs with a Less than Acceptable with Corrective Actions Required assessment are considered to be operating in an unsafe and unsound manner. The following characteristics are reflective of lenders in the Less than Acceptable with Corrective Actions Required assessment category:
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SBA lending operations, credit administration, and portfolio management practices demonstrate significant weaknesses, and SBA Lender demonstrates lack of ability and/or willingness to correct;
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SBA portfolio performance indicators are significantly below SBA portfolio and/or peer group performance, as defined by SBA;
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SBA lending program demonstrates significant vulnerability to the onset of adverse business conditions, if experienced;
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Multiple instances and/or a pattern where SBA Lender’s policies, procedures and/or internal controls are incomplete, not well-documented, and/or not effectively implemented;
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SBA Lender demonstrates insufficient risk management processes relative to its size, the territory it serves, and the complexity of its operations;
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SBA Lender does not have a comprehensive risk rating system for SBA loan assets;
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SBA Lender does not have a program of regular internal loan review that is applied to SBA loan assets;
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Reports and payments to SBA are seldom accurate, complete and/or timely;
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Knowledge of and compliance with SBA eligibility requirements demonstrates critical weakness;
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Multiple violations of law or SBA Loan Program Requirement are identified;
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SBA Lender is operating under supervisory restrictions and/or agreements that involve their lending practices with its Federal Financial Institution or State Regulator, if applicable;
For SBLCs and NFRLs (as applicable), the following additional characteristics are reflective of lenders in the Less than Acceptable with Corrective Actions Required assessment category:
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SBA Supervised Lender has serious deficiency in quality and/or quantity of capital to meet business operations and regulatory requirements, and it may fail without an external injection of capital;
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There is a very high level of criticized and/or classified assets of such nature that they pose a threat to the lender’s viability;
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There is inadequate allowance for loan losses, and/or lack of good portfolio management practices;
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SBA Supervised Lender does not monitor and/or react to external events that could impact its condition or performance;
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SBA Supervised Lender has inconsistent earnings or has experienced losses which are eroding the capital base and calling into question continued solvency;
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SBA Supervised Lender has serious threat to its liquidity with the potential for critical shortage of liquid funds to meet all obligations; and/or
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The stability of the principal source(s) of liquid funds is not sufficient.
SBA Lenders in this group are generally reviewed on a 12 month cycle, depending upon available resources. Immediate Corrective Action by the SBA Lender will be required to address identified deficiencies. SBA will consider appropriate enforcement actions to address the situation including suspension and/or removal from the SBA loan program. Communication with the SBA Lender is frequent with the SBA Lender receiving close monitoring by SBA until the situation is resolved to SBA’s satisfaction.
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