SBA 504 Lending Regulatory Considerations Randy Christiansen National

SBA 504 Lending Regulatory Considerations Randy Christiansen National Bank Examiner OCC Large Bank Division 1

Overview of Risk Issues n n n 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 2

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

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

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

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

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

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

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

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

Interest Rate Risk Issues Rate Risk Management n Negotiable rate structures n Secondary market 11

Reputation Risks n n n CDC and SBA Secondary Market Borrower 12

Community Reinvestment Act (CRA) n n 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 13

Resources n SBA 504 Loan Program: Small Businesses’ Window to Wall Street www. occ. treas. gov/cdd/Insights_2 -06. pdf n State listing of CDCs n SBA information on the 504 product n SBA regulations n Lending limits www. nadco. org/search_advanced. asp? mode=org www. sba. gov/services/financialassistance/sbaloantopics/cdc 504/index. html www. sba. gov/tools/resourcelibrary/lawsandregulations/index. html www. occ. treas. gov/fr/cfrparts/12 CFR 32. htm n Real estate lending and appraisals www. occ. treas. gov/fr/cfrparts/12 CFR 34. htm (see subpart C) n Supervisory Loan-to-Value limits www. occ. treas. gov/fr/cfrparts/12 CFR 34. htm (see Appendix A to Subpart D) n Proposed CRE Risk Management Guidance www. occ. treas. gov/ftp/bulletin/2006 -2. doc n Community Reinvestment Act www. occ. treas. gov/fr/cfrparts/12 CFR 25. htm 14