Office of Credit Risk Management Lender Risk Rating System & Lender Portal

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1 Office of Credit Risk Management Lender Risk Rating System & Lender Portal America East Lenders Conference Buffalo, NY August,

2 Off-Site Loan and Lender Monitoring System (L/LMS) (Off-Site Credit Risk Management System) L/LMS is SBA s off-site lender monitoring system it produces: SAS datasets and SAS BI Tool for OCRM analysts on all SBA s 7(a) & 504 loans and lenders. Monthly, Quarterly, and Annual regular reports, plus ad-hoc reports for SBA management. Monitors all lenders, and monitors all portfolios & segments uses loan level data to build up. The SBPS loan credit scores, help monitor the credit quality of all loans: Quarterly scores on every 7(a) & 504 outstanding loan over 350,000 loans. This is used within OCRM in conjunction with monthly SBA loan performance data. Helps bucket risk (i.e. high, med, low), of loans or groups of loans. Many banks use SBPS to monitor their outstanding loans. The LRR helps monitor and bucket risk for all active 7(a) & 504 lenders: Over 4,700 active 7(a) and 504 lenders receive Lender Risk Ratings each quarter. The Portal is the L/LMS interface with SBA lenders: Over 800 lenders and all SBA districts use the Lender Portal lenders see same data as SBA. Lender Portal open to all lenders May 2006; with final rule on Portal & LRR May

3 The D&B SBA Team Global market leader in providing small business credit data Provides SBA program management, solution delivery, and corporate credit risk data Pioneer and leading provider of predictive analytics, scores, and methodologies for over 50 years Delivers to SBA critical insight into small business credit risk based on a proven blended score Small business with 30+ years of expertise in financial services analysis, database development, and custom modeling Develops standard metrics, analytical tools and Lender Risk Rating system for the SBA 3

4 What is the SBPS? Small Business Predictive Score The SBPS predicts the likelihood of loans going into default (for purchase). SBPS uses statistical probabilities to classify small businesses into a score range, where the lowest score has the highest likelihood of severe delinquency, and the SBA uses to predict the likelihood of purchase. SBPS uses Consumer Credit Bureau and Business Credit Bureau data. The Consumer data is similar data to what is used for consumer credit scores(but modeled differently). The Business data is similar to Consumer data, but on the business, not individual; and is third party reported credit history data (vendors, utilities, insurance companies), similar to Consumer Credit Bureau data. 4

5 Small Business Portfolio Solution (SBPS) Loan Scores What are the component factors of SBPS? Third Party Consumer Credit Bureau Components from TransUnion: Fair, Isaac consumer credit bureau score (based upon third party data) Net Fraction revolving burden (revolving debt burden) Number of inquiries last 6 months (excluding the last 7 days) Number of satisfactory trade lines Number of trade lines 30 days or worse delinquent and/or a derogatory public record Months since most recent delinquency Third Party Business Credit Bureau Components from D&B: Time as current owner Current Paydex score (D&B business credit bureau score based upon third party data) Current Paydex minus industry norm Number of experiences in the Paydex calculation Percent Satisfactory payment experiences Derogatory rating Percent slow/negative payment experiences (Note that third party means that ALL data used is independently reported to both credit bureaus by lending institutions, utilities, insurance companies, etc.) NOTE: SBPS was developed by Fair Isaac. It is a commercially available small business credit score built on pooled industry datasets. It is like a consumer FICO score, except that it was developed specifically for small business loans. Also, SBPS uses both Consumer and Business data. Finally, SBPS, is a score of the portfolio (not origination), to be used with loans already disbursed. [SBA annually validates the SBPS scores using all loans, for both the 7(a) and 504 portfolios, to the event of a purchase over the next 12 months.] 5

6 Small Business Portfolio Solution (SBPS) Loan Scores Does SBPS work for 7(a) Loans? Results from validating the SBPS using all 7(a) loans with actual purchase performance results one year after the scoring of the portfolio: # of Scored Loans 12/08 # Purchased NOTE: Outstanding Loans as of were Scored as of Purchases include any loan purchased from through Score of 999 means Not Scored but these loans are still validated. Loan Purchase Rate SBPS V ,956 1, % ,415 2, % ,734 3, % ,746 4, % ,154 3, % ,709 3, % ,119 2, % ,833 2, % ,411 1, % ,932 1, % , % , % , % , % , % 999 6, % 6

7 Small Business Portfolio Solution (SBPS) Loan Scores Does SBPS work for 504 Loans? Results from validating the SBPS using all 504 loans with actual purchase performance results one year after the scoring of the portfolio : SBPS V6 # of Scored Loans 12/08 # Purchased Loan Purchase Rate % % % % % , % , % , % , % , % , % , % , % , % , % % NOTE: Outstanding Loans as of were Scored as of Purchases include any loan purchased from through Score of 999 means Not Scored but these loans are still validated. 7

8 Off-Site Lender Risk Rating (LRR) SBPS is a commercially available pooled industry dataset small business LOAN credit scores, developed by Fair Isaac, that SBA has validated to an event of purchase over the next 12 months. LRR is a custom score developed in the same manner using SBPS loan scores, SBA loan performance data, other scores, and lender SBA portfolio characteristics. Like SBPS it is a linear regression formula developed by stepwise regression analysis. The LRR is modeled on the probability of total purchases (of the guarantee by SBA) over the next 12 months at the LENDER level. The LRR is validated annually using all active 7(a) and 504 lenders. The LRR allows SBA to risk bucket its 4,700 lenders & CDCs. The LRR allows SBA to focus in on risk; and via the Lender Portal, share this risk information with lenders. Hopefully, lenders will be made aware of, and further research their risk levels, and then manage their risk. In this way lenders will all help improve their risk management and portfolio quality, helping the entire 7(a) and 504 portfolios. 8

9 Ratings Effectiveness/Accuracy Have Lender Risk Ratings been verified and validated? Lender Risk Ratings are validated each year - meaning that ratings of each 7(a) and 504 lender from one year ago are and compared to actual results a year later. Model is validated every 3-5 years, in keeping with industry standards 9

10 Off-Site Lender Risk Rating (LRR) Is the LRR effective for 7(a) Lenders? How do you know that your LRR 1-5 Assessment is effective and accurate for 7(a) Lenders? Comparing the point in time rank ordering of performance results by Lender Risk Rating. Validated each year (Though developed to predict purchases over the next 12 months, the Lender Risk Ratings also rank orders the point in time Last 12-Month Purchases and Cumulative Net Yield.) Risk Rating Yield Lst 12 Pur% SBA$ Active % 0.47% $2,389,398, % 1.80% $6,980,826, % 4.81% $13,061,515, % 10.59% $14,074,470, % 21.18% $85,167,377 Last 12-Month Purchase Rate dollar amount of purchases in the past 12 months divided by outstanding dollars. Cumulative Net Yield cumulative dollars received via fees and recoveries and the cumulative dollars spent via purchases, divided by SBA share or guaranteed dollars disbursed a true losses figure for SBA. NOTE: Rating Data is as of 3/31/2011. (SBA Active Balance $ is the SBA share or guaranteed dollars outstanding, which excludes purchases and charge offs.) 10

11 Off-Site Lender Risk Rating (LRR) Is the LRR effective for 504 Lenders? How do you know that your LRR 1-5 assessment is effective and accurate for 504 CDCs? Comparing the point in time rank ordering of performance results by Lender Risk Rating. (Though developed to predict purchases over the next 12 months, the Lender Risk Ratings also rank orders the point in time Last 12-Month Purchases and Cumulative Net Yield.) Risk Rating Yield Lst 12 Pur% $ Active % 0.67% $1,005,001, % 2.79% $6,607,869, % 5.84% $14,770,105, % 9.78% $592,760, % 14.05% $352,867,974 Last 12-Month Purchase Rate dollar amount of purchases in the past 12 months divided by outstanding dollars. Cumulative Net Yield cumulative dollars received via fees and recoveries and the cumulative dollars spent via purchases, divided by SBA share or guaranteed dollars disbursed a true losses figure for SBA. NOTE: Rating Data is as of 3/31/0211. (SBA Active Balance $ is the SBA share or guaranteed dollars outstanding, which excludes purchases and charge offs.) 11

12 7(a) Rating Components What is the Equation used to determine the 7(a) Risk Ratings? The 7(a) Lender Risk Rating = (y axis intercept) + (coef)*6 month liquidation rate + (coef)*6 month net flow indicator + (coef)*average FSS + (coef)*gross delinquency rate + (coef) * gross past due rate + (coef)*last 12 month purchase rate + (coef)*plp percent + (coef)*projected purchase rate + (coef)*sba express percent + (coef)*rating group 2 + (coef)*rating group 3 The actual coefficients are proprietary 12

13 CDC (504) Rating Components What is the Equation used to determine the 504 Risk Ratings? The 504 Lender Risk Rating = (y axis intercept) + (coef)*6 month delinquency rate + (coef)*gross delinquency rate + (coef)*gross past due rate + (coef)*last 12 month purchase rate + (coef)*average SBPS score + (coef)*low month on book indicator Again, the actual coefficients are proprietary 13

14 The Lender Portal (Portal) The Lender Portal is an web-based access for the lender/cdc to see and understand its performance metrics. It is updated quarterly, and the top of the Portal contains the following information including the Lender Risk Rating: Basic Info and Lender Identification. Lender Risk Rating. Lender Risk Rating Components. The Portal also contains other useful data SBA uses that is NOT part of the Lender Risk Rating. These data sections are called: Additional Performance Ratios. SBPS Loan Credit Score Breakdown. Net Flows Information (this is a True Losses figure). The Portal also includes the following internal links: A Portal print friendly version. A Excel database download of all the summary data in the portal. A detailed portal Definitions document in Word with definitions of all fields. An Excel list of all outstanding loans in the portfolio, with SBPS risk bands. 14

15 How do you access the Portal? The Lender Portal is an on-line web-based application. The data in the portal, including the Lender Risk Ratings are updated quarterly. Instructions on how lenders apply for access to the Lender Portal are on the log-in page to the Lender Portal: The instructions for lender applications are detailed for security purposes. (SBA employees have their own procedures to obtain access to the Portal.) Only one person at a lender can have Portal access at one time. Note that once a lender is given access to the Lender Portal, it is up to the Lender to notify SBA when the access person needs to be changed or terminated. Once the lender has access to the Portal, the lender is responsible for the security of that access. Currently there are 800 plus 7(a) lenders and 504 CDCs on the Lender Portal. (SBA District Offices and Centers also use the Lender Portal.) 15

16 Login Page 16

17 Off-Site Lender Portal (Portal) Basic View of the Portal 1 st of 2 17

18 Off-Site Lender Portal (Portal) Basic View of the Portal 2 nd of 2 18

19 Data Definitions 19

20 Changes to the Lender Portal September 2009 Redevelopment of LRR Effective with the September 30, 2009 quarterly update, SBA has implemented a redeveloped Lender Risk Rating. This redevelopment was described in a Federal Register notice on March 1, The notice also provides interested parties with the opportunity to comment on the changes to the Risk Rating system. The redevelopment is in keeping with industry best practices to test and revise models every 3-5 years to keep up with changing program and economic conditions. The original risk rating model was developed in This is an updated version of the same LRR model, using the same outcome to measure risk (the likelihood of a Lender s purchases over the next 12 months) and the same risk rating scale (1-5). 20

21 Recent Additions Net Flow transaction data (directly from the SBA accounting system -OCFO) The Net Flows Information contains the following data: Fees The sum of upfront and annual fees for all of the loans associated with a given lender for the current quarter. Purchases The sum of purchases for all of the loans associated with a given lender for the current quarter. Recoveries The sum of recoveries for all of the loans associated with a given lender for the current quarter. Net Flow (Current) The sum of fees, minus purchases plus recoveries for all of the loans associated with a given lender for the current quarter. Net Flow (Cumulative) Life-to-date net flow. Life-to-date is cumulative since disbursement. Net Yield (Cumulative) Cumulative net flow divided by SBA Share dollars disbursed 6 Month Liquidation Rate The 6 month liquidation rate looks at a longer period of time than the point in time liquidation rate. This rate of time was more predictive than the monthly liquidation rate. In the modeling process we looked at variables for: point in time, 3 month, 6 month and 12 month timeframes FSS (Financial Stress Score). D&B U.S. Financial Stress Score (FSS) predicts the likelihood that a company will: Obtain legal relief from its creditors; Cease business operations without paying all its creditors in full; Voluntarily withdraw from business operation and leave unpaid obligations; Go into receivership or reorganization; Make an arrangement for the benefit of creditors The lower the score the more likely the risk of the event over the next 12 month period NOTE: Voluntary discontinuance involving no loss to creditors is NOT defined as financially stressed. 21

22 June 2009 SBPS version 6 Loan Level Data Effective with the June 30, 2009 lender portal update, SBA added loan level data to lender files. Includes loan level data for all of lender s outstanding loans that have been Disbursed, but not Purchased or Paid-In-Full. Includes loan identifier information. Reminder: SBPS credit scores are based on third party credit data on business and borrower. Excel file in the Lender Portal, accessed through Loan Level Data link. Loans are classified into ranges of credit quality to enable lenders to quickly identify riskiest loans and contact those borrowers proactively. This loan level data is updated quarterly, along with the rest of the Portal. However, loan level data is deleted each quarter, so lenders should save the file in order to perform quarter to quarter comparisons. 22

23 Off-Site Lender Portal (Portal) Loan Level Data 23

24 What makes a rating move from quarter to quarter? Any significant change up or down in one or more of the LRR components may cause the rating value to change. But identifying just one LRR component is generally not a valid explanation for the reason that a lender s rating changed. The LRR is a result of the entire set of components (the formula), not just one metric behavior. It is more accurate to view individual components in the context of peer and portfolio averages; also to view in light of trending over time. Periodic revalidation of the model may also create new banding of the five score bands that may change an individual lender s location to another band. 24

25 Suggestions on how to use the Portal There are a rolling nine quarters of data in the Portal. Lenders can immediately trend their performance and credit quality data for two years. Lenders can continue to track this data for longer periods on their own, if they save this data off of the portal. For each quarter, along with lender data, the Portal provides the lender s Peer Group averages, and the overall Portfolio (7a or 504) averages. Lenders can compare their performance and credit quality to similarly sized SBA portfolios, and to the overall 7(a) or 504 Portfolio. Compare your lender s performance to the previous quarter, and see how it has changed from the previous quarter. How does this differ from the movement of the portfolio averages? From this lenders can get an indication of what is affecting their Lender Risk Rating. Issues and changes are always explained in the Definitions document in the Portal. Every quarter it is important for lenders to check the Definitions document to see if something has been added. 25

26 OCRM Information Review L/LMS information accessible on OCRM s web page at: Send your specific questions to OCRM s mailbox at: [email protected] Obtain information on applying for Lender Portal access at: 26

27 Resources for Additional Information OCRM Financial Analyst Regional Assignments: Region I Cailyn Snyder (202) [email protected] Region II Larry Handzlik (202) [email protected] Region III - Evelyn Chris Cephas (202) [email protected] Region IV Marilys Diaz (202) [email protected] Region V Andrea Peoples (202) [email protected] Region VI Obi Ogbu (202) [email protected] Region VII Arvel Howerton (202) [email protected] Region VIII Kenya Ingram (202) [email protected] Region IX Mike Collins (202) [email protected] Region X Gina Silva (202) [email protected] 27

28 Resources for Additional Information You can always contact the OCRM team managers anytime Linda Rusche, Lender Oversight Team Leader (816) ; Felicia Smith, Lender Transaction Team Leader (202) ; 28