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SBA 504 Lending Regulatory Considerations

SBA 504 Lending Regulatory Considerations. Randy Christiansen National Bank Examiner OCC Large Bank Division. Overview of Risk Issues. Credit risk - Underwriting risks - Concentrations - legal lending limits - Appraisal regulations and supervisory loan-to-value limits

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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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