SBA’s CDC Internal Controls Policy
Frequently Asked Questions
SBA regulations require that all Certified Development Companies (CDCs) have a board-approved
internal controls policy (see 13 CFR 120.826(b)). This issue of Regulatory Corner provides
frequently asked questions and SBA’s response to these questions in an effort to provide clarity to the
CDC community regarding SBA’s expectations with respect to this requirement.
4. How do Loan Classifications fit into the internal controls policy and how can I find out what
Loan Classifications are consistent with what are used by Federal Financial Institution
Regulators?
Timely and accurate classification of loans allows the CDC to better manage its 504 loan portfolio.
The SBA requires that the CDC’s internal controls policy must direct the operation of a program to
review and assess the CDC’s 504 loans. This policy must specify the loan, loan-related collateral,
and appraisal review standards, including standards for scope of selection (for review of any such
loan, loan-related collateral or appraisal) and standards for work papers and supporting
documentation.
An example of a loan classification system used by a Federal Financial Institution Regulator would b
the Uniform Classification System (UCS) referenced by the Farm Credit Administration on their
website at:
http://www.fca.gov/examman.nsf/d1df4b2d1f2289dc85256bea004af854/d3766305ca7d9af1852561cd
00527796?OpenDocument
5. What needs to be reviewed during the Independent Loan Review?
The CDC’s internal controls policy should establish specific review guidelines. The guidelines should
specify the review sample size and the methodology for defined scope of review (such as sample
consisting of loans and appraisals to be reviewed for underwriting/closing requirements from
population of loans originated in the last 12 months along with loans to be reviewed for
servicing/liquidation out of population of loans that are currently in intensive servicing or liquidation).
In addition, guidelines should specify the frequency (no less than annually) of review and independent
review of loans, loan-collateral, and appraisals should be
Loan review is a mainstay of internal control of the loan portfolio. Periodic
objective reviews of credit risk levels and risk management processes are
essential to effective portfolio management, which includes review for accuracy and
completeness of eligibility , creditworthiness(collateral) and closing checklists. 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 and procedures, and applicable laws and
regulations; and
The accuracy and timeliness of credit grades assigned by loan officers.
To encourage independence in the review process, the review unit should report to the board of
directors or an audit committee at the board level. Results of the review should be communicated to
both management and the board of directors. However, to protect the review function’s
independence, the board or committee should approve the performance evaluation for the review,
review the unit’s strategic and operating plans, and act on the unit’s findings.
Core analysis phases during the independent Loan Review must include: 1Determine whether
deficiencies noted in last examination and most recent internal/external audit have been addressed
and/or corrected by management
2. Determine if any member of senior management of board of directors/Chairman have ability to
override credit grades and decisions
6. What should the CDC do with results of the review?
The results from the review should be presented to the Board of Directors (or audit committee). The
Board and senior management should then use this information to improve the current and future
loan making and monitoring functions.
The following objectives should generally be addressed in an effective CDC loan review system, and
should serve as potential points for improvement:







To promptly identify loans with well-defined credit weaknesses so that timely action can be taken
to minimize credit loss. This would include a review of the CDC’s loan classifications;
To provide essential information for determining the adequacy of the PCLP reserve (if loans are
PCLP);
To identify relevant trends affecting the collectability of the loan portfolio and isolate potential
problem areas;
To evaluate the activities of lending personnel;
To assess the adequacy of, and adherence to, loan policies and procedures, and to monitor
compliance with relevant laws and regulations;
To provide the board of directors and senior management with an objective assessment of the
overall portfolio quality; and
To provide management with information related to credit quality that can be used for financial and
regulatory reporting purposes.