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Office of Credit Risk Management
Lender Risk Rating System
&
Lender Portal
America East Lenders Conference
Buffalo, NY
August, 2011
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 2007.
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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
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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.
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.]
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• Results from validating the SBPS using all 7(a) loans with actual purchase
performance results one year after the scoring of the portfolio:
NOTE:
• Outstanding Loans as of 12-31-2008 were Scored as of 12-31-2008.
• Purchases include any loan purchased from 01-01-2009 through 12-31-2009.
• Score of 999 means “Not Scored” – but these loans are still validated.
Small Business Portfolio Solution (SBPS) Loan Scores
Does SBPS work for 7(a) Loans?
SBPS V6
# of Scored Loans
12/08 # Purchased
Loan Purchase
Rate
000-099 2,956 1,390 47.02%
100-109 5,415 2,077 38.36%
110-119 10,734 3,632 33.84%
120-129 13,746 4,009 29.16%
130-139 17,154 3,908 22.78%
140-149 19,709 3,253 16.51%
150-159 25,119 2,771 11.03%
160-169 30,833 2,346 7.61%
170-179 37,411 1,883 5.03%
180-189 41,932 1,727 4.12%
190-199 35,635 905 2.54%
200-209 31,447 587 1.87%
210-219 25,628 351 1.37%
220-229 12,636 119 0.94%
230-300 2,808 15 0.53%
999 6,223 623 10.01%
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• Results from validating the SBPS using all 504 loans with actual purchase
performance results one year after the scoring of the portfolio :
NOTE:
• Outstanding Loans as of 12-31-2008 were Scored as of 12-31-2008.
• Purchases include any loan purchased from 01-01-2009 through 12-31-2009.
• Score of 999 means “Not Scored” – but these loans are still validated.
Small Business Portfolio Solution (SBPS) Loan Scores
Does SBPS work for 504 Loans?
SBPS V6
# of Scored Loans
12/08 # Purchased Loan Purchase Rate
000-099 84 35 41.67%
100-109 211 80 37.91%
110-119 403 119 29.53%
120-129 627 132 21.05%
130-139 941 164 17.43%
140-149 1,267 161 12.71%
150-159 2,019 170 8.42%
160-169 2,945 192 6.52%
170-179 4,343 156 3.59%
180-189 6,095 189 3.10%
190-199 7,302 122 1.67%
200-209 8,103 108 1.33%
210-219 8,460 64 0.76%
220-229 6,094 32 0.53%
230-300 2,234 11 0.49%
999 502 17 3.39%
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.
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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
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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
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.)
(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$ Active1 -2.50% 0.47% $2,389,398,601
2 -2.08% 1.80% $6,980,826,660
3 -2.99% 4.81% $13,061,515,952
4 -7.23% 10.59% $14,074,470,351
5 -10.30% 21.18% $85,167,377
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• 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.)
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.)
Off-Site Lender Risk Rating (LRR)Is the LRR effective for 504 Lenders?
Risk Rating Yield Lst 12 Pur% $ Active1 -2.32% 0.67% $1,005,001,992
2 -3.41% 2.79% $6,607,869,202
3 -7.12% 5.84% $14,770,105,002
4 -11.04% 9.78% $592,760,311
5 -15.65% 14.05% $352,867,974
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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
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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
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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.
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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:
https://pdp.dnb.com/pdpsba/pdplogin.asp
• 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.)
Login Page
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Off-Site Lender Portal (Portal)
Basic View of the Portal – 1st of 2
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Off-Site Lender Portal (Portal)
Basic View of the Portal – 2nd of 2
Data Definitions
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Changes to the Lender PortalSeptember 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, 2010. 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
2005.
• 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).
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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.
• .
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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.
Off-Site Lender Portal (Portal)
Loan Level Data
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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.
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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.
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OCRM Information
• Review L/LMS information accessible on OCRM‟s web page at:
http://www.sba.gov/aboutsba/sbaprograms/olo/index.html
• Send your specific questions to OCRM‟s mailbox at:
• Obtain information on applying for Lender Portal access at:
https://pdp.dnb.com/pdpsba/pdplogin.asp
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Resources for Additional Information
OCRM Financial Analyst Regional Assignments:
Region I – Cailyn Snyder (202) 205-7373 [email protected]
Region II – Larry Handzlik (202) 205-7080 [email protected]
Region III - Evelyn “Chris” Cephas (202) 205-6769 [email protected]
Region IV – Marilys Diaz (202) 205-6755 [email protected]
Region V – Andrea Peoples (202) 205-6549 [email protected]
Region VI – Obi Ogbu (202) 205-7544 [email protected]
Region VII – Arvel Howerton (202) 205-6935 [email protected]
Region VIII – Kenya Ingram (202) 205-3049 [email protected]
Region IX – Mike Collins (202) 205-7282 [email protected]
Region X – Gina Silva (202) 205-7384 [email protected]
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Resources for Additional Information
You can always contact the OCRM team managers anytime
• Linda Rusche, Lender Oversight Team Leader (816) 426-4861;
• Felicia Smith, Lender Transaction Team Leader (202) 205-7522;