Small Business Administration: New Service for Lender Oversight Reflects Some Best Practices, but Strategy for Use Lags Behind

SBA clarified responsibilities for continuous improvement in the loan monitoring service, frequent and routine portfolio reviews, and mandated the involvement of senior SBA managers who are not part of the Offices of Lender Oversight or Capital Access. See April 25, 2005, Federal Register, Vol. 70, No. 78, 21262. In addition, SBA issued an internal directive ("606") that also specifies the responsibilities and composition of two committees (the Portfolio Analysis and the Lender Oversight Committees) responsible for reviewing lender performance. A "Program Management Plan" developed by SBA's loan monitoring service contractor, Dun & Bradstreet, specifies a strategy for continuous improvement. For example, the contractor provides a monthly report to SBA on its service and it is to include recommendations for improvements.

On December 11, 2008 SBA issued an interim final rule that includes SBA's enforcement regulations. Specifically, the rule lists the types of, grounds for, and procedures governing SBA enforcement actions against 7(a) Lenders, Certified Development Companies, Microloan Intermediaries, and Non-Lending Technical Assistance Providers within consolidated enforcement regulations. The rule went into effect on January 12, 2009.

Information shown in response to the first, second, and fourth recommendations indicates that SBA has provided sufficient resources to developing appropriate guidance, requirements for senior officials to be involved in oversight of lender performance, creating a risk rating system, and identifying and applying the benefits of the loan monitoring service to other processes at SBA.

SBA's Portfolio Analysis Committee, which meets monthly, includes senior officials from offices other than Lender Oversight and Capital Access, such as the Offices of the Chief Operating Officer, and Chief Financial Officer. In reviewing and discussing data provided by the Dun & Bradstreet service, it identified special risks associated with the LowDoc (i.e., limited documentation required of lenders) loan product. Subsequently, SBA terminated the product. SBA officials provided other examples of the agency's use of the service, such as discussing and assessing the relationship of data to the 7(a) and 504 loan credit subsidy calculations and initiating a special review of loan charge-off activity at the SBA liquidation facility in Herndon.

SBA developed a contingency plan in May 2016 that details steps the agency will take to continue to manage the risk of the 7(a) and 504 portfolio, including individual lenders, if the Dun & Bradstreet contract were discontinued. The plan describes a negotiated phase out that will allow SBA staff to continue to use and access all data, models, and software provided by Dun & Bradstreet for a period of time. In addition, the plan states that SBA would use the GSA schedule to procure similar or reduced-scope loan credit scoring from a commercial-off-the-shelf provider to serve as a surrogate for the Small Business Predictive Score on a quarterly basis until new vendor services are procured. According to the plan, SBA has identified several nationally-recognized vendors that offer replacement systems. During the months it may take to put another contract in place, the plan states that the agency will also independently conduct portfolio analysis using performance metrics of individual lenders that it receives each month from its own data mart.