ARLINGTON, Va. – While a proposed lender risk rating system from the Small Business Administration would be a helpful peer comparison tool, NAFCU is concerned it may be applied unfairly in some circumstances.
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. The risk rating system would also be used to assess the aggregate strength of SBA's 7(a) and 504 portfolios.
"NAFCU believes that an SBA lender risk rating system should be objective, consistent, and fair," said Carrie Hunt, NAFCU senior counsel and director of regulatory affairs. "A uniform risk assessment of 7(a) and 504 lenders will help the SBA to protect the safety and soundness of its loan guaranty program, thereby ensuring increased capital to our nation's small businesses."
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With peer comparisons, NAFCU said for example, it may be inequitable to compare lenders with Preferred Lender status to lenders in the regular program. The same comparison would apply to lenders that concentrate in certain industries or geographical areas, rural lenders and so forth. Peer comparisons might also be skewed by "significant" variances in size and complexity. Some institutions could have more complex operations, more personnel, or greater resources for portfolio management than their peers, the trade group expressed. In addition, the size of the peer group itself may have a "substantial impact" on the fairness of the peer comparison.
"As noted in the proposal, depending on the size of a peer group, a single factor could carry a disproportionate weight among the three or four component factors. NAFCU believes that final peer groups should be organized proportionately, to alleviate this potentially negative effect," wrote Fred Becker, NAFCU president/CEO in the June 15 letter to SBA.
Under its proposal, 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 for strongest to five for weakest, SBA said. NAFCU said while it believes the scoring model is appropriately defined and will be effective in helping the agency identify those lenders whose loan operations and portfolio are presenting a higher risk it suggests that portfolio management data from more than one credit reporting agency be used to determine SBA's Small Business Predictive Score. At minimum, NAFCU requests that the final rule provide additional information about how the SBPS is derived by Dunn & Bradstreet.
"NAFCU member credit unions have expressed concern about the reliability of the SBPS," Becker said. "For example, Dunn & Bradstreet's information may not be current, resulting in an inaccurate SBPS. Because the SBPS has considerable impact on the overall composite rating score, assurance of its integrity is prudent." SBA has also proposed the risk rating system consider additional overriding factors, which could conclude that a lender's composite rating is not fully reflective of its actual risk. NAFCU recommended that early loan default trends and inaccurate reporting to SBA be given "significant weight." Overall loan delinquency, charge-off rates and overall loan portfolio performance, not just SBA loans, "may be appropriate in certain circumstances."
Lenders had until June 15 to comment on the SBA proposal and view their preliminary risk ratings, but during a June 19 NAFCU press call, Hunt said the agency recently extended the deadline to July 15. [email protected]
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