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SBA 504 Lending Regulatory Considerations

Gain insights into credit, liquidity, interest rate, and reputation risks in SBA 504 lending. Understand underwriting nuances, appraisal regulations, and deal with credit concentrations and limits effectively.

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SBA 504 Lending Regulatory Considerations

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  1. SBA 504 LendingRegulatory Considerations Randy Christiansen National Bank Examiner OCC Large Bank Division

  2. Overview of Risk Issues • Credit risk - Underwriting risks - Concentrations - legal lending limits - Appraisal regulations and supervisory loan-to-value limits - Regulatory guidance on commercial real estate lending • Liquidity risk • Interest rate risk • Reputation risks • CRA benefits

  3. Credit Risk Issues Underwriting Risks – Summary • Favorable risk structure • Above average obligor risk • Below average collateral and structural risk • Relatively low credit loss type of lending

  4. Credit Risk Issues (continued) Underwriting Risks – Obligor Risk • Above average risk of repayment • Primary underwriting focus – repayment ability • Principal or guarantor due diligence critical

  5. Credit Risk Issues (continued) Underwriting Risks – Structure and Collateral • Favorable structure and collateral protection • CAUTION: Collateral based lending • Losses can and do occur

  6. Credit Risk Issues (continued) Credit Concentrations and Lending Limits • Second lien loan • Secondary market • Quality underwriting and due diligence is key

  7. Credit Risk Issues (continued) Appraisal Regulation Requirements • Appraisal regulations apply • Business loan exemption may apply • Appraisal independence standards • Qualified appraisers and quality appraisals • Poor appraisals or environmental studies

  8. Credit Risk Issues(continued) Supervisory Loan-to-Value (SLTV) Exceptions • Temporary high LTV transaction • High LTV status can be extended for construction loans • SLTV monitoring and reporting

  9. Credit Risk Issues (continued) Commercial Real Estate Risk Management Guidance • Owner occupied exemption • Development or construction phase • Majority of cash flow test

  10. Liquidity Risk Issues Take-Outs and Secondary Market • Second lien take-out • Active secondary market • Repurchases

  11. Interest Rate Risk Issues Rate Risk Management • Negotiable rate structures • Secondary market

  12. Reputation Risks • CDC and SBA • Secondary Market • Borrower

  13. Community Reinvestment Act (CRA) • Small business development • Job creation, community and economic development • Consideration given in CRA examinations • CRA consideration a function of bank and loan size - Loans of $1 million or less may qualify as small business loans - Loans greater than $1 million may qualify as community development loans

  14. Resources • SBA 504 Loan Program: Small Businesses’ Window to Wall Street www.occ.treas.gov/cdd/Insights_2-06.pdf • State listing of CDCswww.nadco.org/search_advanced.asp?mode=org • SBA information on the 504 productwww.sba.gov/services/financialassistance/sbaloantopics/cdc504/index.html • SBA regulationswww.sba.gov/tools/resourcelibrary/lawsandregulations/index.html • Lending limits www.occ.treas.gov/fr/cfrparts/12CFR32.htm • Real estate lending and appraisals www.occ.treas.gov/fr/cfrparts/12CFR34.htm (see subpart C) • Supervisory Loan-to-Value limits www.occ.treas.gov/fr/cfrparts/12CFR34.htm (see Appendix A to Subpart D) • Proposed CRE Risk Management Guidance www.occ.treas.gov/ftp/bulletin/2006-2.doc • Community Reinvestment Act www.occ.treas.gov/fr/cfrparts/12CFR25.htm

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