Office of Credit Risk Management
SMART - SBA’s New Risk Based Review Protocol
Build Northeast Conference
Monday September 8, 2014
SMART – SBA’s new 504 oversight protocol
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S
Solvency and Financial Condition
M
Management and Board Governance
A
Asset Quality and Servicing
R
Regulatory Compliance
T
Technical Issues and Mission
.
“S” - Solvency and Financial Condition
The first SMART component is Solvency and Financial
Condition. The objective of the Solvency and Financial
Condition component is to assess the CDC’s financial
ability to operate.
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“S” - Solvency and Financial Condition
The quantitative factors measured for the Solvency and Financial
Condition component are:
(a)
5 Year Cumulative Net Yield
(b)
12 Month Default Rate
(c)
5 Year Default Rate
The qualitative factors reviewed for the Solvency and Financial
Condition component include:
(a)
Reserves for Future Operations
(b)
Liquidity Risk and Management
(c)
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Debt to Net Asset Ratio
“M” – Management and Board Governance
The second SMART component is Management and Board
Governance. The objective of the Management and Board
Governance component is to assess the CDC’s
organizational structure, policies, and internal controls.
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“M” – Management and Board Governance
The quantitative factors measured for the Management and
Board Governance component are:
(a)
(b)
(c)
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Lender Purchase Rating (formerly known as Lender
Risk Rating---See Notice of Revised Risk Rating
System, 79 FR 24053, April 29, 2014)
High Risk Origination Rate
Loans in Purchase Status over 3 Years Rate
“M” – Management and Board Governance
The qualitative factors reviewed for the Management and
Board Governance component include:
(a) Board-Approved Internal Controls Policies, including
Independent Loan Review and Loan Classification
System
(b)
Business Strategy and Planning
(c)
Audit and Review Programs
(d)
IT Operations
(e)
Management of Risk Concentrations
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“A” - Asset Quality and Servicing
The objective of the Asset Quality and Servicing
component is to assess the quality of the CDC’s 504 loan
origination, underwriting, closing, servicing, and liquidation
practices.
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“A” - Asset Quality and Servicing
The quantitative factors measured for the Asset Quality and
Servicing component are:
(a)
Stressed Rate
(b)
Recovery Rate (over last 5 years)
(c)
Early Problem Loan Rate
The qualitative factors reviewed for the Asset Quality and
Servicing component include:
(a)
Credit Administration
(b)
Servicing and Liquidation Management
(c)
Potential fraud, negligence or misrepresentation issues on
individual 504 loans
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“R” - Regulatory Compliance
The fourth SMART component is Regulatory Compliance.
The objective of the Regulatory Compliance component is
to assess the CDC’s compliance with SBA Loan Program
Requirements.
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“R” - Regulatory Compliance
The quantitative factor measured for the Regulatory
Compliance component is:
(a) Minimum Level of 504 Activity
The qualitative factors reviewed for the Regulatory
Compliance component include:
(a) Timely and complete submission of CDC Annual
Report (and PCLP Loan Loss Reserve Report, if
required)
(b)
Liability Insurance Minimums
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“T” - Technical Issues and Mission
The fifth SMART component is Technical Issues and
Mission. The objective of Technical Issues and Mission
component is to review risk areas that do not fall into any
of the other SMART components but may pose risk to SBA
or present program integrity concerns.
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“T” - Technical Issues and Mission
The quantitative factors measured for the Technical Issues
and Mission component are:
(a)
Average Small Business Portfolio Score (weighted)
(b)
Top Industry Concentration Rate
The qualitative factors reviewed for the Technical Issues
and Mission component include:
(a)
CDC support of “other economic development”
(b)
Job Creation and Retention Documentation
(c)
Professional Services Contracts
(d)
Franchise Concentration
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SMART Review Protocol
SBA’s new SMART protocol features the following
levels/types of review:
(a)
(b)
(c)
(d)
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CDC Profile Assessment
SMART Analytical Review
SMART Targeted Review
SMART Full Review
CDC Profile Assessment
The CDC Profile Assessment (CPA) is the initial level of
SMART review. It is a virtual review that serves as a
diagnostic exercise. For the CPA, OCRM currently uses
SBA, Wells Fargo CSA, and Dun & Bradstreet data. The
CPA measures the quantitative factors for each SMART
component and scores the quantitative factor measurement
using risk tolerance benchmarks established by SBA.
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CDC Profile Assessment
The current quantitative factor scores are: “Preferred”=1
point; “Acceptable”=3 points; and “Less Than Acceptable”=5
points.
OCRM may use the CPA to determine the next level of
SMART review, if any. OCRM may also use the CPA in
connection with CDC delegated authority renewals and
extensions. The benchmarks, will be adjusted periodically
to move with the 504 portfolio and reflect economic
conditions.
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CDC Profile Assessment
U.S. Small Business Administration
CDC Profile Assessment
Office of Credit Risk Management
Day Report Generated:
#N/A
Friday, September 05, 2014
Third Quarter of Fiscal Year 2014
Source Data Updated Quarterly
504 SMART RATES
Solvency
Management
Asset Quality
Regulatory Compliance
Technical Issues
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5 Year Cumulative Net Yield
12 Month Default Rate
5 Year Default Rate
Lender Purchase Rating (formerly LRR)
High Risk Origination Rate*
Loans in Purchase Status over 3 Years Rate
Stressed Rate
Recovery Rate (Over last 5 years)
Early Problem Loan Rate
Preferred (+1) Acceptable (+3)
Lender Rate
Number
of Points
> -1 %
≥ -3% and ≤ -1%
< -3%
#N/A
#N/A
0%
> 0% and ≤ 5%
> 5%
#N/A
#N/A
0%
> 0% and ≤ 5%
> 5%
#N/A
#N/A
1,2
3
4,5
#N/A
#N/A
0%
> 0% and ≤ 13%
> 13%
#N/A
#N/A
<= 0%
> 0% and <= 27%
> 27%
#N/A
#N/A
< 3%
>= 3% and ≤ 10%
> 10%
#N/A
#N/A
> 33%
≤ 33% and > 6%
≤ 6%
#N/A
#N/A
<= 0%
> 0% and ≤ 4%
> 4%
#N/A
#N/A
<4
#N/A
#N/A
Minimum Level of 504 Activity
Average SBPS (weighted)
Top Industry Concentration Rate
Less Than
Acceptable (+5)
>= 4
> 197
>= 188 and <= 197
< 188
#N/A
#N/A
< 13%
>= 13% and ≤ 28%
> 28%
#N/A
#N/A
Total Points
#N/A
SMART Analytical Review
The SMART Analytical Review (SAR) is the next level of
SMART review. A SAR begins with a CPA, and SBA uses
the CPA template to analyze and document each SMART
review component, including both quantitative and
qualitative factors. OCRM may select a CDC for a SAR
based on the CDC’s CPA, as well as other risk criteria, such
as previous RBR assessments. OCRM may also conduct
SARs in connection with CDC delegated authority
renewals and extensions.
SARs are generally a virtual review unless a CDC does not
have virtual review capability.
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SMART Targeted Review
A SMART Targeted Review (STR) is generally narrow in
scope.
In a STR, SBA will review one or more SMART components
or other areas of concern (including program integrity
concerns) identified by SBA as requiring a focused scope of
review.
For example, SBA may perform a STR in connection with a
finding identified during a SAR or a SMART Full Review.
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SMART Full Review
SBA performs a comprehensive analysis of all SMART
review components in a SMART Full Review (SFR). SFRs
are generally conducted on-site at the CDC, but may
include a virtual review portion. SBA intends to select
CDCs for SFRs based on indications of higher risk
(including portfolio size) as identified through CPAs, SARs
or other SBA monitoring tools, and/or based on program
integrity considerations.
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SMART Full Review
SBA performs a comprehensive analysis of all SMART
review components in a SMART Full Review (SFR).
SFRs are generally conducted on-site at the CDC, but may
include a virtual review portion.
SBA intends to select CDCs for SFRs based on indications
of higher risk (including portfolio size) as identified through
CPAs, SARs or other SBA monitoring tools, and/or based
on program integrity considerations.
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Frequently Identified Deficiencies in Reviews
 Board-approved Internal Control Policy (13 CFR 120.826(b))
 No Independent Loan Review
 Loan Classification not compliant with FFIR
 Audit engagement letter must include the required verbiage
providing the SBA access to, and copies of any work papers,
policies and procedures relating to the services performed (13 CFR
120.826(d)(2)).
 Directors and Officers Liability insurance policies inadequate – many
exclude SBA-related claims, 504 loan making, and CDC staff (SOP
50 10 5(F) Subpart A Chapter 3(V)(A)(g)(iv)).
 Determination of need for life insurance needs to be addressed in
CDC’s credit memorandum.
 Need to obtain COC or equivalent prior to funding.
 Improvement needed in documentation of use of proceeds for
construction.
 Need to obtain list of equipment at closing if equipment included as
collateral.
 At default, site visit should be conducted and inventory of equipment
taken if possible.
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Independent Loan Review
OCRM looking for this through ALP renewals, Full
SMART Reviews, and SMART Analytical Reviews.
Key OCRM Requirements:
1) Board-approved written internal control policy
2) Defined elements
3) Loan Classification System consistent with FFIR
system (aka Risk Rating)
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Key Elements of Independent Loan Review
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
To protect review function’s independence, board or board committee should
approve review plan.

Plan should identify individual(s) who will conduct review – must be
independent of process under review.

Scope of sample selection – explain how sample size is set and how loans are
actually selected for review.

Define frequency of review (at least annually).

Specific review criteria.

Review findings should be compiled in report format and presented to the
board.
.
Scope of Loan Review
Loan reviews should analyze a number of important
credit factors, including:
 Credit quality;
 Sufficiency of credit and collateral documentation;
 Proper lien perfection;
 Proper loan approval;
 Adherence to loan covenants;
 Compliance with internal policies, procedures, and
applicable laws and regulations; and
 The accuracy and timeliness of credit grades
assigned by loan officers.
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