[Federal Register Volume 75, Number 39 (Monday, March 1, 2010)]
[Notices]
[Pages 9257-9262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4266]


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SMALL BUSINESS ADMINISTRATION


SBA Lender Risk Rating System

AGENCY: Small Business Administration.

ACTION: Notice of revised Risk Rating System; request for comments.

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SUMMARY: This notice implements changes to the Small Business 
Administration's (SBA's) Risk Rating System (Risk Rating System). The 
Risk Rating System is an internal tool to assist SBA in assessing the 
risk of each active 7(a) Lender's and Certified Development Company's 
(CDC's) SBA loan operations and loan portfolio. Consistent with 
industry best practices, SBA recently redeveloped the model used to 
calculate the composite risk ratings to ensure that the Risk Rating 
System remains current and predictive as technologies and available 
data evolve. SBA is publishing this notice with a request for comments 
to provide the public with an opportunity to comment and to allow for 
any necessary adjustments as the industry moves through the economic 
cycle.

DATES: This notice is effective March 1, 2010.
    Comment Date: Comments must be received on or before April 30, 
2010.

ADDRESSES: You may submit comments, identified by RIN number [INSERT 
RIN NUMBER], by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

[[Page 9258]]

     Mail: Bryan Hooper, Director for Office of Credit Risk 
Management, U.S. Small Business Administration, 409 3rd Street, SW., 
8th floor, Washington, DC 20416.
     Hand Delivery/Courier: Bryan Hooper, Director for Office 
of Credit Risk Management, U.S. Small Business Administration, 409 3rd 
Street, SW., 8th Floor, Washington, DC 20416.
    All comments will be posted on http://www.Regulations.gov. If you 
wish to include within your comment, confidential business information 
(CBI) as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you 
must submit the comment by either Mail or Hand Delivery and you must 
address the comment to the attention of Bryan Hooper, Director for 
Office of Credit Risk Management, Office of Credit Risk Management. In 
the submission, you must highlight the information that you consider is 
CBI and explain why you believe this information should be held 
confidential. SBA will make a final determination, in its discretion, 
of whether the information is CBI and, therefore, will be published or 
not.

FOR FURTHER INFORMATION CONTACT: Bryan Hooper, Director, Office of 
Credit Risk Management, U.S. Small Business Administration, 409 Third 
Street, SW., 8th Floor Washington, DC 20416, (202) 205-3049.

SUPPLEMENTARY INFORMATION:

I. Background Information

A. Introduction to the Risk Rating System

    In 2005, the Small Business Administration (SBA) developed an SBA 
internal Lender Risk Rating System (Risk Rating System). The Risk 
Rating System is an internal tool that primarily uses data in SBA's 
Loan and Lender Monitoring System (L/LMS) to assist SBA in assessing 
the risk of an SBA Lender's SBA loan performance on a uniform basis and 
identifying those SBA Lenders whose portfolio performance, or other 
Lender-specific risk-related factors, may demonstrate the need for 
additional SBA monitoring or other action. The Risk Rating System also 
serves as a vehicle to measure the aggregate strength of SBA's overall 
7(a) and 504 loan portfolios and to assist SBA in managing the related 
risk. In addition, SBA uses risk ratings and the underlying components 
to make more effective use of its on-site and off-site Lender review 
and assessment resources.
    Under SBA's Risk Rating System, SBA assigns all SBA Lenders a 
composite risk rating of 1 to 5, based on empirical data. The rating 
reflects SBA's assessment of the potential risk to the government of 
that SBA Lender's SBA portfolio performance. The composite rating is 
calculated using several component factors. The component factors were 
developed using step-wise regression analysis to determine the 
components that provided a linear regression formula that was most 
predictive of actual purchases over a one year period.
    On May 1, 2006, SBA published a notice and request for comment in 
the Federal Register seeking comments on the proposed Risk Rating 
System (72 FR 25624). A final notice was published in the Federal 
Register on May 16, 2007 (72 FR 27611).

B. Redevelopment

    Typically, under industry best practices, custom credit scoring 
models are redeveloped approximately every three to five years to 
reflect changing conditions, portfolio shifts, and to incorporate 
additional data that may have become available. This redevelopment is 
consistent with such practices and is necessary to ensure that SBA's 
risk ratings provide an accurate assessment of Lenders' SBA portfolio 
performance. SBA's portfolio has changed substantially over the past 
five years; the portfolio has grown dramatically, and the composition 
of loan products (delivery methods) has greatly shifted. In addition, 
over the past five years the economy, and in particular the small 
business lending environment, has changed. Given these circumstances 
and that SBA now has five years' experience with this modeling and the 
type of SBA data available, SBA determined to test for additional or 
different components to increase the model's predictiveness.
    SBA reviewed 86 possible variables; of which 26 were tested in 
detail. These variable factors were derived from SBA's experience 
working with the model over the past five years and feedback from 
Lenders, including comments received in response to the Proposed Risk 
Rating System Notice. 71 FR 25624 (May 1, 2006). The factors were run 
through the model in various combinations and the most predictive 
combinations of factors were chosen for each loan program (7(a) and 
504). In so doing, SBA selected additional components that proved to 
enhance the predictive value of the model over the earlier model 
factors.

II. The Redeveloped Risk Rating Model

    The redeveloped model used to calculate the composite risk ratings 
is an updated version of the previous model. It remains a custom credit 
score model, at the Lender-level, based on the same outcome as the 
previous system--the likelihood of a Lender's purchases over the next 
12 months. It models the relative risk levels of Lenders. The model 
continues to use loan-level SBA performance data (as provided by the 
Lenders and SBA centers), and it continues to use external risk 
assessment data in the form of off-the-shelf Small Business Predictive 
Score (SBPS) credit scores, derived from third party business and 
consumer credit bureau data.
    The SBA will continue to report the risk ratings by SBA peer groups 
based on SBA loan portfolio size, as determined by outstanding SBA 
guaranteed dollars. Peer group sizes will remain the same as under the 
former Lender Risk Rating Notice, and they will continue to reflect 
SBA's relative level of risk from Lenders in each peer group. The 
existing peer groups will continue to significantly reduce the 
possibility of the same event (for example, a loan purchase) having a 
different impact on Lenders in the same peer group. Splitting SBA 
Lenders into peer groups based on portfolio size also helps SBA to 
better monitor those SBA Lenders in the largest peer groups that 
represent the overwhelming majority of guaranteed dollars at risk, and 
allows SBA to make the best use of its oversight resources. The most 
notable changes that will result from the redevelopment are:
    1. Updated components in the linear regression formulas for both 
7(a) Lenders and CDCs in the 504 program, chosen in conjunction with a 
full step-wise regression analysis.
    2. Modeling of the overall portfolios, with the age and/or size of 
a Lender's portfolio represented by a component (consisting of three 
segments for 7(a) Lenders). These segments replace the need for a 
separate linear regression model for each Peer Group in 7(a).
    3. Both components and weightings of the components are the same 
across the 7(a) portfolio. The components and weightings of the rating 
formula are also the same across all CDCs.
    The rating components in the new risk rating model include:
    1. Several previously used rating components;
    2. Additional performance-related components;
    3. Components to account for differences in performance between 
delivery methods;

[[Page 9259]]

    4. Assessment of the age of a loan portfolio;
    5. Other measures of loan credit quality;
    6. Measures of net flow (dollars in and dollars out); and
    7. An additional commercial off the shelf risk score.
    SBA had received a number of comments when it initially proposed 
the Risk Rating System in May 2006 regarding the need to include losses 
and recoveries in the risk rating models. Due to the substantial time 
lag for losses to occur, adding a loss factor did not directly improve 
the predictive power of the Lender risk ratings. However, a similar 
factor, net flow, did add to the predictive values of the risk rating 
model for 7(a) Lenders and was therefore included as a new 7(a) rating 
component. Net flow incorporates a measure of losses and recoveries, as 
it is calculated by summing all fees and recoveries coming in, less 
purchases going out.
    These new components provide SBA and its Lenders with a more 
diverse set of factors that add predictive value to the risk ratings 
calculated by the risk rating model. A description of all of the rating 
components used in the redeveloped risk rating model may be found in 
the overview section below.

III. Other Changes to the Risk Rating System

    In addition to employing new rating components, the redeveloped 
risk rating model also relies on a newer version of the SBPS scoring 
tool. As of June 30, 2009, SBA switched from SBPS version 5 to an 
improved SBPS version 6 recently produced by Dun & Bradstreet (D&B) and 
FICO. Version 6 has been validated numerous times for more than a year 
by D&B/FICO and an SBA subcontractor, TrueNorth, and it has been found 
to be predictive on both the 7(a) and 504 loan portfolios. In addition, 
since the commercial release of SBPS version 6 in December 2006, the 
SBPS has also been validated on multiple independent account portfolios 
of industry leading financial institutions.
    This notice provides program participants and other parties with an 
explanation of the components and a description of other modeling 
enhancements. In addition, SBA is soliciting comments on the components 
and enhancements. These changes have been made to the model and 
included in the risk rating update for the quarter ending September 30, 
2009, and will be made available to Lenders through SBA's Lender Portal 
upon publication of this notice.

IV. Text of the SBA Lender Risk Rating System

A. Overview

    Under SBA's Risk Rating System, SBA assigns all SBA Lenders a 
composite risk rating. The composite rating reflects SBA's assessment 
of the potential risk to the government of that SBA Lender's SBA 
portfolio performance.
    For 7(a) Lenders, SBA will base the composite rating on eleven 
components. The components for 7(a) Lenders are as follows:
    1. Past 12 Months Actual Purchase Rate;
    2. Six (6) Month Liquidation Rate;
    3. Gross Delinquency Rate;
    4. Gross Past-Due Rate;
    5. Six (6) Month Net Flow Indicator;
    6. Average Small Business Predictive Scores (SBPS);
    7. Projected Purchase Rate (PPR);
    8. Dollar Weighted Average Financial Stress Score (FSS);
    9. PLP Percent;
    10. SBA Express Percent; and
    11. Portfolio Size/Age.
    The statistical analysis performed showed that incorporating the 
Portfolio Size/Age component improved the predictive power of the 7(a) 
Lender risk rating. This component is further broken down into three 
segments:
    (1) Lenders with 7(a) portfolios equal to or less than $4 million 
SBA guaranteed outstanding;
    (2) Lenders with 7(a) portfolios over $4 million SBA guaranteed 
outstanding, and whose average loan age is over 30 months; and
    (3) Lenders with 7(a) portfolios over $4 million SBA guaranteed 
outstanding, and whose average loan age is equal to or under 30 months.
    For CDCs, SBA will base the Lender rating on six common components. 
The components for CDCs follow:
    1. Past 12 Months Actual Purchase Rate;
    2. Six (6) Month Delinquency Rate;
    3. Gross Delinquency Rate;
    4. Gross Past-Due Rate;
    5. Average Small Business Predictive Score (SBPS); and
    6. Low Month on Book Indicator.
    In general, these 7(a) and CDC components reflect both historical 
SBA Lender performance and projected future performance. The components 
were selected through statistical analysis using step-wise regression 
analysis. The selected components were then used in an overall 
regression model to create the Lender risk rating. No single component 
normally decides an SBA Lender's risk rating. SBA updates the Lender 
risk ratings on a quarterly basis, using refreshed Lender data. Each of 
the risk rating factors is described in more detail in the Rating 
Components section below.
    SBA generally does not intend to use the risk ratings as the sole 
basis for taking enforcement actions against SBA Lenders. The primary 
purpose is to focus SBA's oversight resources on those SBA Lenders 
whose portfolio performance or other Lender-specific risk-related 
factors demonstrate a need for further review and evaluation by SBA.
    All SBA Lenders have on-line access to their Lender risk rating and 
rating component values along with peer group and portfolio component 
averages through SBA's Lender Portal. Information on the Lender Portal 
can be found at 72 FR 27611, 27619 (May 16, 2007).

B. Lender Risk Rating

    The SBA Lender risk rating (LRR) is a measure of predicted 
performance over the next 12 months. SBA uses its risk rating model to 
calculate and assign a composite rating of 1 to 5 to each SBA Lender. 
SBA may make adjustments to the composite rating based on results of 
reviews, third party information on a SBA Lender's operations, 
portfolio trends and other information that could impact a SBA Lender's 
risk profile. (See Overriding Factors section for further detail.) In 
general, a rating of 1 indicates strong portfolio performance, least 
risk, and that the least degree of SBA oversight is likely needed 
(relative to other SBA Lenders), while a 5 rating indicates weak 
portfolio performance, highest risk, and that the highest degree of SBA 
oversight is likely needed. SBA provides the following general 
descriptions for the Lender risk ratings:
    LRR 1--The SBA operations of an SBA Lender rated 1 are generally 
considered strong in every respect, typically score well above average 
in all or nearly all of the rating components described in this Notice, 
are more likely to have well below average historical purchase rate, 
and have loans that demonstrate highly acceptable credit quality and/or 
credit trends as measured by credit scores and portfolio performance.
    LRR 2--The SBA operations of an SBA Lender rated 2 are generally 
considered good, typically are above average in all or nearly all of 
the rating components described in this Notice, are more likely to have 
below average previous (12 months) purchase rates, and have loans that 
demonstrate better-than-acceptable credit quality and/or credit trends 
as measured by credit scores and portfolio performance.

[[Page 9260]]

    LRR 3--The SBA operations of an SBA Lender rated 3 are generally 
considered about average in all or nearly all of the rating components 
described in this Notice, are likely to have average previous (12 
months) purchase rates, and have loans that demonstrate acceptable 
credit quality and/or credit trends as measured by credit scores and 
portfolio performance.
    LRR 4--The SBA operations of an SBA Lender rated 4 are generally 
considered below average in all or nearly all of the rating components 
described in this Notice, are likely to have below average component 
factors and above average previous (12 months) purchase rates, and have 
loans that demonstrate somewhat less-than-acceptable credit quality 
and/or credit trends as measured by credit scores and portfolio 
performance.
    LRR 5--The SBA operations of an SBA Lender rated 5 are generally 
considered well below average in all or nearly all of the rating 
components described in this Notice, are most likely to have well above 
average previous (12 months) purchase rates, and have loans that 
demonstrate less-than-acceptable credit quality and/or credit trends as 
measured by credit scores and portfolio performance.
    The descriptions for each rating value are not meant as definitions 
of the ratings and do not limit or dictate SBA's dealings with any SBA 
Lender.

C. Rating Components

1. 7(a) Lenders
    SBA's quantitative composite risk ratings for 7(a) Lenders rely on 
eleven components, selected because of their power to predict loan 
purchases over the next 12 months. For the 7(a) program, the eleventh 
component is broken down into three different segments based on age and 
size of a 7(a) Lender's portfolio. Each of the eleven rating components 
is defined below.
    (i) Past 12-Months Actual Purchase Rate. The Past 12-Month Actual 
Purchase Rate is a historical measure of SBA loan guarantee purchases 
from the 7(a) Lender in the 12 months preceding the rating date. Thus, 
this component provides a measure of 7(a) Lender performance and risk 
reflective of actual SBA guarantee purchases. SBA calculates this rate 
by dividing the sum of total gross dollars of the 7(a) Lender's loans 
purchased during the past 12 months (numerator), by the sum of total 
gross dollars of the 7(a) Lender's SBA loans outstanding at the end of 
the 12-month period. Gross dollars purchased in the last 12 months are 
added to the denominator, as they are not included in the outstanding 
figure.
    (ii) 6 Month Liquidation Rate. The Six (6) Month Liquidation Rate 
is the liquidation rate (loans in liquidation but not yet purchased by 
SBA) calculated over the past six (6) months. This component provides a 
measure of 7(a) Lender performance and risk as indicated by dollars in 
liquidation over the past six (6) months, as placed in that status by 
SBA at the request of the Lender. SBA calculates this ratio by dividing 
the sum of the total gross dollars of the 7(a) Lender's SBA loans in 
liquidation status in each of the six (6) months prior to the rating 
date (numerator), by the sum of total gross dollars of the (7a) 
Lender's SBA loans outstanding in each of the six (6) months prior to 
the rating date (denominator).
    (iii) Gross Delinquency Rate. The Gross Delinquency Rate is the 
delinquency rate (loans 60 days past due or more, but not in 
liquidation) as of the rating date. This component provides a measure 
of 7(a) Lender performance and risk as indicated by SBA loan dollars in 
delinquency status as reported by the Lender. SBA calculates this ratio 
by dividing the sum of the total gross dollars of the 7(a) Lender's SBA 
loans in delinquency status as of the rating date (numerator), by the 
sum of total gross dollars of the 7(a) Lender's SBA loans outstanding 
as of the rating date (denominator).
    (iv) Gross Past-Due Rate. The Gross Past-Due Rate is the past-due 
rate (30 to 59 days past-due) as of the rating date. This component 
provides a measure of 7(a) Lender performance and risk as indicated by 
SBA loan dollars in past-due status as reported by the Lender. SBA 
calculates this rate by dividing the sum of the total gross dollars of 
the 7(a) Lender's SBA loans in past-due status as of this date 
(numerator), by the sum of the total gross dollars of the 7(a) Lender's 
SBA loans outstanding as of this date (denominator).
    (v) 6 Month Net Flow Indicator. The Six (6) Month Net Flow 
Indicator measures net flows, or dollars-in and dollars-out, over the 
last six (6) months preceding the rating date. Dollars-in includes 
guarantee fee payments and recoveries by SBA from a 7(a) Lender; 
dollars-out reflects guarantee purchases made by SBA. The net flow 
indicator is calculated by summing up all guarantee fees and recoveries 
submitted by the 7(a) Lender to SBA over the six (6) months prior to 
the rating date. From the six (6) month total, all of the purchases 
paid out by SBA to the 7(a) Lender over the same six (6) months are 
subtracted. If the net flow of dollars is positive, the component value 
is a 1; if the net flow of dollars is negative, the component value is 
0.
    (vi) Average Small Business Predictive Score (SBPS). The SBPS is a 
portfolio management (not origination) credit score based upon a 
borrower's business credit report and principal's consumer credit 
report. SBPS is a proprietary calculation provided by Dun & Bradstreet, 
under contract with SBA, and is compatible with FICO's ``Liquid 
Credit'' origination score. This component provides an indication of 
the relative credit quality of the loans in a 7(a) Lender's SBA 
portfolio. The score is calculated from the average SBPS score of the 
loans in a 7(a) Lender's portfolio, weighted by each loan's guaranteed 
dollars outstanding.
    (vii) Projected Purchase Rate (PPR). The PPR is a predictive 
measure of the relative future riskiness of the 7(a) Lender's SBA loans 
over the next 12-months, calculated as of the rating date. This is a 
credit quality, leading indicator, predictive factor. The PPR is 
derived from the annual and quarterly statistical validations of SBPS 
credit scores on the entire SBA 7(a) portfolio. As part of this 
validation process, Dun & Bradstreet and FICO compare the SBPS credit 
scores, by delivery method, of all outstanding 7(a) loans at the 
beginning of the validation period to the actual purchases observed 
over the next 12-months. From this comparison, a projected purchase 
rate is developed for each 7(a) loan based on the loan's delivery 
method and current SBPS credit score. A 7(a) Lender's PPR is then 
determined by calculating the dollar-weighted average PPR of the 7(a) 
loans in the Lender's portfolio. SBA calculates this rate by dividing 
the sum of the PPRs for each loan (multiplied by the guaranteed dollars 
outstanding for each loan) by the total guaranteed dollars outstanding 
for all the Lender's loans.
    (viii) Dollar Weighted Average Financial Stress Score (FSS). The 
FSS predicts the likelihood that a small business borrower will 
experience one or more of the following conditions over the next 12 
months, based on the information in D&B's files: obtaining legal relief 
from creditors; ceasing business operations without paying all 
creditors in full; voluntarily withdrawing from business operation, 
leaving unpaid obligations; going into receivership or reorganization; 
or making an arrangement for the benefit of creditors. FSS uses 
statistical probabilities to classify businesses into a score range, 
where the lowest score has the highest likelihood of business failure. 
The score includes D&B data related to payment trends, business

[[Page 9261]]

financial statements, industry position, business size and age, and 
public filings.
    (ix) PLP Percent. The PLP Percent is the percent of the 7(a) 
Lender's PLP loan dollars outstanding (disbursed but not purchased or 
paid-in-full), compared to the 7(a) Lender's total outstanding SBA 
portfolio as of the rating date. This variable is reflective of the 
fact that there is a strong correlation among various SBA delivery 
methods and loan risk, with PLP loans generally providing the least 
risk. This component is calculated by taking the sum of the 7(a) 
Lender's total PLP loan gross dollars outstanding (numerator), and 
dividing it by the sum of the total gross dollars outstanding for the 
7(a) Lender (denominator).
    (x) SBA Express Percent. The SBA Express Percent is the percent of 
the 7(a) Lender's SBA Express loan dollars outstanding (disbursed but 
not purchased or paid-in-full), compared to the 7(a) Lender's total 
outstanding SBA portfolio as of the rating date. This variable is 
reflective of the fact that there is a strong correlation among various 
SBA delivery methods and loan risk, with SBA Express loans being among 
those delivery methods with generally greater risk. This component is 
calculated by taking the sum of the 7(a) Lender's total SBA Express 
loan gross dollars outstanding (numerator), and dividing it by the sum 
of the total gross dollars outstanding for the 7(a) Lender 
(denominator).
    (xi) Portfolio Size/Age Segment Component. During the redevelopment 
process, it was found that 7(a) Lender performance differed depending 
on the size and age of the Lender's SBA portfolio. To account for these 
differences, 7(a) Lenders were analyzed and divided into three 
different segments based on the differences seen in the performance 
outcome variable. The first segment of 7(a) Lenders consists of Lenders 
with SBA portfolios less than or equal to $4 million in outstanding SBA 
guarantees regardless of portfolio age. This segment generally presents 
the least portfolio risk. The second segment of 7(a) Lenders consists 
of Lenders with an outstanding SBA guaranteed portfolio of more than $4 
million and an average loan age (``month on book'') of greater than 30 
months. The third segment of 7(a) Lenders consists of Lenders with an 
outstanding SBA guaranteed portfolio of more than $4 million and an 
average loan age (``month on book'') of less than or equal to 30 
months. This segment generally presents the greatest portfolio risk. 
Factor weight is dependent on which segment is applicable.
2. Certified Development Companies (CDCs)
    SBA's quantitative composite risk ratings for CDCs rely on six 
components, selected because of their power to predict loan purchases 
over the next 12 months. Each of the six rating components is defined 
below.
    (i) Past 12-Months Actual Purchase Rate. The Past 12 Months Actual 
Purchase Rate is a historical measure of SBA loan guarantee purchases 
from the CDC in the 12 months preceding the rating date. Thus, this 
component provides a measure of the CDC's performance and risk 
reflective of actual SBA guarantee purchases. SBA calculates this rate 
by dividing the sum of total gross dollars of the CDC's loans purchased 
during the past 12 months (numerator), by the sum of total gross 
dollars of the CDC's SBA loans outstanding at the end of the 12-month 
period. Gross dollars purchased in the last 12 months are added to the 
denominator, as they are not included in the outstanding figure.
    (ii) 6 Month Delinquency Rate. The Six (6) Month Delinquency Rate 
is the delinquency rate calculated over the past six (6) months. It is 
calculated by dividing the sum of the total gross dollars of the CDC's 
loans in delinquency status in each of the six (6) months prior to the 
rating date (numerator) by the sum of total gross dollars of the CDC's 
SBA loans outstanding in each of the six (6) months prior to the rating 
date.
    (iii) Gross Delinquency Rate. The Gross Delinquency Rate is the 
delinquency rate (loans 60 days past due or more, but not in 
liquidation) as of the rating date. This component provides a measure 
of CDC performance and risk as indicated by SBA loan dollars in 
delinquency status as reported by the CDC. SBA calculates this rate by 
dividing the sum of the total gross dollars of the CDC's SBA loans in 
delinquency status as of the rating date (numerator) by the sum of 
total gross SBA dollars of the CDC's SBA loans outstanding as of the 
rating date (denominator).
    (iv) Gross Past-Due Rate. The Gross Past-Due Rate is the past-due 
rate (30 to 59 days past-due) as of the rating date. This component 
provides a measure of CDC's performance and risk as indicated by SBA 
loan dollars in past-due status as reported by the CDC. SBA calculates 
this rate by dividing the sum of the total gross dollars of the CDC's 
SBA loans in delinquency status as of this date (numerator), by the sum 
of the total gross dollars of its SBA loans outstanding as of this date 
(denominator).
    (v) Average Small Business Predictive Score (SBPS). The SBPS is a 
portfolio management (not origination) credit score based upon a 
borrower's business credit report and principal's consumer credit 
report. SBPS is a proprietary calculation provided by Dun & Bradstreet, 
under contract with SBA, and is compatible with FICO's ``Liquid 
Credit'' origination score. This component provides an indication of 
the relative credit quality of the loans in a CDC's SBA portfolio. The 
score is calculated from the average SBPS score of the loans in a CDC's 
portfolio, weighted by each loan's guaranteed dollars outstanding.
    (vi) Low Month on Book Indicator. The Low Month on Book Indicator 
component is triggered for a CDC if that CDC has a month-on-book age 
(average age) of 30 months or less. CDCs with a portfolio with less 
than 30 months on book or exactly 30 months on book generally have 
portfolios that are growing rapidly. The modeling process showed that 
there is a marked difference in these CDCs' performance compared to 
those CDCs with more established portfolios. If a CDC has a portfolio 
with an average age of more than 30 months on book, this component has 
a zero weight in its rating.
3. Overriding Factors
    In addition to the common components referenced above, the Risk 
Rating System allows for consideration of additional factors. The 
occurrence of these factors may lead SBA to conclude that an individual 
SBA Lender's composite rating, as calculated by the risk rating model, 
is not fully reflective of its true risk. Therefore, the Risk Rating 
System provides for the consideration of overriding factors, which may 
only apply to a particular SBA Lender or group of SBA Lenders, and 
permit SBA to adjust an SBA Lender's calculated composite rating. The 
allowance of overriding factors in helping determine an SBA Lender's 
risk rating enables SBA to use key risk factors that are not 
necessarily applicable to all SBA Lenders, but indicate a greater or 
lower level of risk from a particular SBA Lender than that which the 
calculated rating provides.
    Overriding factors may result from SBA Lenders' on-site risk based 
reviews/assessments and off-site evaluations. SBA routinely conducts 
on-site reviews of large SBA Lenders, performs safety and soundness 
examinations of SBA Small Business Lending Companies (SBLCs) and Non-
Federally Regulated Lenders, and uses

[[Page 9262]]

certain off-site evaluation measures for other SBA Lenders.
    Examples of other overriding factors that may be considered 
include, but are not limited to: enforcement or other actions of 
regulators or other authorities, including, but not limited to, Cease & 
Desist orders by federal financial regulators; 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; net 
yield rate significantly worse than average; and inadequate, 
incomplete, or untimely reporting to SBA or inaccurate submission of 
required fees to SBA.
    In conclusion, industry best practices and changes in the SBA 
portfolio, programs, and available data necessitate that SBA's risk 
rating model be periodically redeveloped. This notice marks the first 
redevelopment of SBA's risk rating model. In addition to the 
redevelopment, SBA has and will continue to perform annual validation 
testing on the calculated composite risk ratings, and will further 
refine the model as necessary to maintain or possibly improve the 
predictability of its risk scoring.

    Authority:  15 U.S.C. 634(b)(7), and 15 U.S.C. 687(f).

Karen G. Mills,
Administrator.
[FR Doc. 2010-4266 Filed 2-26-10; 8:45 am]
BILLING CODE 8025-01-P