Transparency Gaps, Redundancy Should Be Considered with SBA's Lender Oversight Proposal, NAFCU Suggests
ARLINGTON, Va. -- NAFCU said while it supports the Small Business Administration's efforts to improve oversight of the agency's guaranteed loan portfolio, it is concerned about the lack of transparency regarding key aspects of the SBA Lender Risk Rating System.
At issue is SBA's proposal to incorporate its lender oversight program into federal regulation in order to provide for more coordinated and effective oversight of financial institutions that originate and manage SBA-guaranteed loans. Specifically, the proposed rule would codify in the agency's regulations SBA's process of risk-based oversight including accounting and reporting requirements, off-site reviews and monitoring, on-site reviews and examinations, and capital adequacy requirements.
In a Jan. 29 letter to SBA, Dan Berger, senior vice president of government affairs at NAFCU, wrote the agency's proposal had added a group of regulations that are applicable to "SBA supervised lenders"--a new category consisting of small business lending companies and non-federally regulated lenders. SBA-supervised lender regulations would cover internal controls, record retention, accounting and reporting, and capital adequacy for SBLCs and NFRLs, which NAFCU "strongly supports," Berger wrote.
However, federally insured depository institutions are already subject to "strictly enforced" regulatory requirements but unregulated entities are "similarly engaged in the provision of commercial credit and yet are not subject to the same level of vigorous supervisory oversight."
NAFCU supported the capital requirements of SBA's proposal for 7(a) program participation, which entail "sufficient permanent" capital to support SBA lending activities. For federal credit union SBA lenders, that means "adequately capitalized" under NCUA's regulations, Berger noted.
SBA is also proposing to incorporate a Lender Risk Rating System for 7(a) lenders and certified development companies' loan operations and portfolios into the agency's regulations. Risk ratings would be considered in determining continued participation in SBA's programs, frequency of on-site reviews, and enforcement action. NAFCU believes certain areas need tweaking before SBA implements the risk rating system, however.
"As we have expressed to the agency on previous occasions, NAFCU is concerned that peer group analysis based wholly on portfolio size may not allow for a fair comparison in certain circumstances," Berger said.
It may be inequitable to compare lenders with Preferred Lender status to lenders in the regular program, he said. In addition, lenders that concentrate in certain industries or geographical areas should be compared against others with a comparable concentration.
NAFCU also took issue with how SBA's proposed rating system works. The SBA Risk Rating System assigns each lender with a composite rating of 1 to 5 (best to worst) based on the lender's portfolio performance. The composite score is derived from either three or four common rating components. Berger said "greater transparency" is needed, especially since some credit unions are still concerned about the agency's Small Business Predictive Score, a proprietary portfolio management credit score based upon a borrower's business credit report and principal's consumer credit report.
"NAFCU continues to believe that additional information is necessary about how the SBPS works in credit evaluation," Berger said. "Because the SBPS has considerable impact on the overall composite rating score, NAFCU feels that greater assurance of its integrity is prudent before the SBA Lender Risk Rating System is codified into SBA's regulation."
Whereas the new rating system has been in effect since June 15, 2007, the agency acknowledged it has not been available throughout an entire economic cycle, Berger pointed out. NAFCU is urging SBA to postpone incorporating the risk rating system into regulation until adequate historical performance information has been established to verify effectiveness of the overall ratings methodology.