Good afternoon!! I am pleased to have been given this opportunity to share with you all, the process in which OCRM (the Office of Credit risk Management) performs its lender oversight and some helpful tips on .   My name is Anne Goldberg. I am an Financial Analyst with the Office of Credit Risk Management which is located in Washington, DC. I assist in the office’s various lender oversight functions; overseeing SBA lenders in Georgia, Florida, North and South Carolina. OCRM deals with Risk. Our Mission is to maximize efficiency of the Agency’s lending programs by effectively managing program credit risk, monitoring lender performance and enforcing lender program requirements. Topics to cover are: The tools in which we m– risk Review Life Cycle The various review assessments Common findings and their associated corrective action Attributes of a successful SBA Lender And ways to improve the SBA Review Experience Before I begin, I want to know how many have experienced an OCRM Review within the last 2 years? I would like to have this as an interactive time, so please ask questions as we move along. Office of Credit Risk Management Anne Goldberg, Financial Analyst anne.goldberg@sba.gov WPASGL Quality Circle March 14-16, 2018

PARRiS Lender Profile Assessment Scorecard Pictured here is the PARRiS Lender Portfolio Assessment or LPA .  The PARRiS tool is populated using data in “hidden” source spreadsheets. These source spreadsheets are compiled by SAS software using SBA and Dun & Bradstreet data, Lender/Loan Monitoring System (L/LMS System), lender reported data, SBA Approvals, 1502 Reporting, credit scores, SBA Cash transactions along with other internal and external data sources.   This Report is the property of the U.S. Small Business Administration, Office of Credit Risk Management, and is furnished for the confidential use of the examined entity. Under no circumstances shall any recipient of this report or its parent company, or any of their directors, officers, employees, attorneys or auditors disclose or make public this report or any portion thereof. Unauthorized disclosure of any of the contents of this report is subject to the penalties in 18 USC 641. The Office of Credit Risk Management must be notified immediately if the examined entity receives a subpoena or other legal process calling for the production of this report.

PARRiS Scores and Risk Relationship Less than 30 ____________________________________________________ Lower Risk The LPA and the lender’s score is updated on a quarterly basis. The PARRiS score has an overall score range between 15-75. Risk is broken down into 3 levels.   Scores less than 30 indicate a -- lower risk to SBA  Scores between 30-43 indicate a -- moderate level of risk  And a PARRiS score between 44-75 indicate a --higher level of risk A higher PARRiS risk score may trigger a review. The majority of our lenders fall within the moderate risk range and to a lesser degree, higher risk range. 30-43 ____________________________________________________ Moderate Risk 44 and Greater ____________________________________________________ Higher Risk

Risk Based Review Life Cycle 2) Conduct Review 3) Review Report Issued 4) Lender Response to Findings 5) SBA Assessment of Lender Response 6) Resolution Letter 1) Lender Selected for Review Life cycle of a Risk Based Review. First- OCRM selects the lender for review Second - the review is conducted Third - a review report is issued Fourth- lender provides its corrective action response to any review findings Fifth - SBA assesses the lender’s response Sixth - SBA sends the lender a resolution letter indicating that the lender’s response was satisfactory or whether further monitoring is required on some metric.   However, if there is no Resolution or if the lender is uncooperative, the lender may be placed under Increased Supervision. Which may result in one or multiple Increased Supervision actions detailed in OCRM’s SOP 50 53 entitled Lender Supervision and Enforcement Some examples of Increased Supervision action are: downgrade in the lender’s Risk Rating Shortened renewal or non-renewal of its delegated authority and/or Meeting with SBA senior management Life Cycle

Types of Review Assessments Acceptable Acceptable with Corrective Actions Marginally Acceptable with Corrective Actions Less Than Acceptable with Corrective Actions As I mentioned, at the conclusion of a Review, a report is generated and issued to the lender. The report will have 1 of 4 assessments;   Acceptable Acceptable with corrective actions Marginally acceptable with corrective actions, or Less than acceptable with corrective actions Most lenders receive one of the Acceptable assessments. The Marginally acceptable assessment is given when there is a heightened awareness of risk. (Policy Notice 1332) The Less than acceptable assessment is given when there is a higher level/frequency and severity of policy non-compliance. An assessment, other than Acceptable, will require some sort of corrective action.

Common Findings - Eligibility Size Determination Finding: The Lender used incorrect NAICS code for size standards in E-Tran and Form 1920; however, the Lender used correct NAICS code in the credit memorandum. 13 CFR 121.107 details how the SBA determines a concern’s “primary industry” and 13 CFR Part 121 defines the Small Business Size Regulations. SOP 50 10 5(J) Subpart B states when sending data to SBA, use the same NAICS Code that was used to determine size for the Small Business Applicant. EPC/OC Conditions Finding: All EPC/OC conditions were not met; evidence of disbursement of working capital to the Operating Company was missing in the loan files. SOP 50 10 5(J) requires that all EPC/OC conditions must be met including evidence of disbursements of working capital to the Operating Company. Debt Refinancing Conditions Finding: The credit memo failed to include written analysis and supporting documentation justifying debt refinancing. SOP 50 10 5(J), Subpart B, Chapter 2 states that when refinancing debt, the lender’s loan file must include a written analysis and supporting documentation of the refinancing issues including why was the debt incurred.

Common Findings - Eligibility Form 1919 Finding: Lender did not accurately review the required SBA Form 1919 for completion. An incomplete Form 1919 may result in approval of an ineligible loan which subsequently the SBA may repair or deny liability on its guaranty. Credit Elsewhere Test Finding: Credit Elsewhere Test documentation was inadequate. 13 CFR 120.101, which requires the lender to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal sources without SBA assistance and must include substantiation in its file to support the certification. SOP 50 10 5 (J), Subpart B, Chapter 2 requires that a lender must certify that credit is not available elsewhere on reasonable terms.

Common Findings - Underwriting Collateral Analysis Finding: the Lender’s underwriting was deficient as the analysis of collateral adequacy, including liquidation value, was not documented. SOP 50 10(J), Subpart B, Chapter 4 states that the lender’s credit memorandum and analysis must demonstrate the Small Business Applicant’s ability to repay the loan from the cash flow of the business by documenting collateral adequacy assessment (using market or net book value). Evidence/Source of Equity Injection Finding: Lender failed to verify equity injections prior to disbursement through supporting documents. If the Lender’s policies and procedures for its similarly-sized, non-SBA guaranteed commercial loans ($350.0M and less) require verification of equity, it must do so for SBA loans in accordance with SOP 50 10 5 (J), Chapter 4. Credit Memo vs. Loan Authorization Finding: Loan authorization not in agreement with the credit memo (credit memo indicated refinancing of Same Institution Debt, whereas Loan Authorization indicated refinancing of external debt; correct usage was for external debt) The Lender must ensure it follows all SBA Loan Program Requirements at origination and during servicing in accordance with SOP 50 10 5(J).

Common Findings - Underwriting Adequate Projections Finding: there was no evidence of an analysis of projections or discussion of capital adequacy located in file. In order to demonstrate reasonable assurance of repayment, on loans larger than $350.0M, SOP 50 10 5 (J), Subpart B, Chapter. 4 states that the lender’s credit memorandum must document, among other things, an analysis of financial ratios, industry standards, and borrower projections.

Common Findings – Loan Closing Practices Secure Collateral Finding: Lender was deficient in obtaining all required collateral positions. SOP 50 10 5(J), Subpart B, Chapter 7 states that for the PLP Program, the Lender must obtain all required collateral positions and must meet all other required conditions before loan disbursement. Flood/Hazard Insurance Finding: Appropriate Insurance Not Obtained / Documented) The Lender is not in compliance with 13 CFR 120.170 which states under the Flood Disaster Protection Act of 1973, a loan recipient must obtain flood insurance if any building (including mobile homes), machinery, or equipment acquired, installed, improved, constructed, or renovated with the proceeds of SBA financial assistance is located in a special flood hazard area. Life Insurance Finding: required life insurance was not adequately obtained as the loan file was not documented with the insured amount of the three life insurance policies assigned to the Lender. SOP 50 10 5 (J) Subpart B, Chapter 5 states if the loan is not fully secured, life insurance is required for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation, consistent with the size and term of the loan.

Common Findings – Loan Closing Practices Standby Agreement Finding: In 1 of 2 loan files reviewed with a standby agreement, a copy of the Note was not attached to the Standby Agreement. SOP 50 10 5 (J), Subpart B, Chapter 5 states that a copy of the Note must be attached to the standby agreement.

Common Findings – Servicing Practices Site Visits Finding: Site visit not conducted when loan became 60 days past due. SOP 50 10 5 (J), Subpart B, Chapter 5 states that a site visit must be conducted when a loan becomes 60 days past due. Release of Lien Finding: Lenders released collateral, on an under-collateralized loan, and did not require the borrower to provide available collateral injection. Premature requests for the release of liens on real and/or personal property collateral, without prudently analyzing the implications on the quality and security of the SBA loan could result in a repair or denial of guaranty. SOP 50 57 2, Chapter 8 requires that that the Recoverable Value of any remaining collateral must be sufficient to adequately secure the SBA loan after the proposed release. Timely Wrap Up Reports Finding: the Lender failed to submit a Wrap-up Report in a timely manner. SOP 50 57 2, Chapter 26, Paragraph B states that a Wrap-up Report must be prepared and submitted in electronic format to the appropriate SBA Loan Center for review and approval within 30 calendar days after Prudent Liquidation is complete or upon receipt of a request from SBA, whichever occurs first.

Common Findings – Servicing Practices Continued Creditworthiness Finding: Lender’s monitoring of continued creditworthiness was not evident in the loan file. SOP 50 57 2, Chapter 3, Paragraph E states the borrower’s creditworthiness, i.e., financial and operational condition, should be monitored through the use of tools such as periodic submission of financial statements.

Attributes of a Successful SBA Lender Dedicated and trained staff Formal, complete procedures Committed management Technology SBA partner relationships  

Attributes of a Successful SBA Lender Industry partners: WPASGL, NAGGL Do what you know: approve and disburse loans in familiar industries Periodic internal check up and audits Servicing acquired loans to be sure these loans are converted after acquisition/merger and 1502 reported

Successful Review Experience Data uploaded by deadline Transparent approach Walk through staff availability Exceptions quick turnaround time Complete loan documentation