WASHINGTON – The Small Business Administration is calling on credit unions and other lenders for their feedback on a proposed lender risk rating system for its 7(a) loan program. The system would be an internal tool to assist the agency in assessing the risk of each active 7(a) lender and certified development company's SBA loan operations and loan portfolio, on a uniform basis and for identifying those institutions whose SBA loan operations and portfolio require additional monitoring or other action. Under the system, SBA would also assign each lender a composite rating based on certain portfolio performance factors, which may be overridden in some cases due to lender specific factors that may be indicative of a higher or lower level of risk, the agency said. SBA lenders would have access to their own ratings through SBA's Lender Portal, SBA said. The risk rating system would also be used to assess the aggregate strength of SBA's 7(a) and 504 portfolios. The agency is accepting comments until June 15. Mary Dunn, CUNA associate general counsel, told CUNA News Now that SBA's proposal may be a step in the right direction but looking at the fine details is necessary. “Having tools, such as the proposal would provide, to assess the risk associated with 7(a) lending is undoubtedly positive from the agency's point of view,” Dunn said, adding “but CUNA will be reviewing the proposal in detail to ensure it would not have a negative, disproportionate impact on credit unions.” The SBA-assigned composite rating for 7(a) loans would be based on four components: a 12-month actual purchase rate, problem loan rate, three-month change in the small business predictive score, which is a small business credit score on 7(a) loans, and projected purchase rate derived from that score. For certified development companies or CDCs, the rating would look at similar components. “In general, these factors reflect both historical lender performance and projected future performance,” the agency said. “The factors are derived through formulas developed using regression analysis validated and tested by industry experts.” SBA said it would perform quarterly calculations on the common factors for each lender, so that their composite risk ratings would be updated on a quarterly basis. Lenders whose overall portfolio performance, using all of the common components, is worse than their peers will receive a worse, or higher score, the agency explained. Those whose overall portfolio performance is better than their peers will receive a better, or lower score. Composite scores range from one or strongest to five or weakest, SBA said.

The agency said it “recognizes that it may be inequitable to compare all lenders in a risk rating system, without separating them into peer groups, because changes in loan performance would have dramatically different impacts on the portfolio performance of lenders of different sizes.” As a result, SBA has established peer groups to minimize the differences that could result from changes in loan performance for portfolios of different sizes.

The proposed risk rating system allows for consideration of additional factors which may lead SBA to conclude that an individual lender's composite rating is not fully reflective of its true risk. One of the most important overriding factors would be a lender's on-site, risk-based reviews or assessments usually performed on SBA's relatively large lenders, or that may, “under extraordinary circumstances,” be performed on other lenders whose performance demonstrates a highly unusual deviation from their peer group. Other overriding factors that may be considered are early loan default trends; purchase rate or projected purchase rate trends; abnormally high default, purchase or liquidation rates; denial of liability occurrences; lending concentrations; rapid growth of SBA lending; inadequate, incomplete, or untimely reporting to SBA or inaccurate submission of required fees to SBA; and enforcement actions of regulators or other authority.