+----------------+-----------------------------------------------------+
| ![](med        | **Public Comment Meeting:**                         |
| ia/image1.png) |                                                     |
|                | **Proposed Regulation**                             |
|                |                                                     |
|                | **Date: [April 8, 2008]{.underline}**               |
|                |                                                     |
|                | **Time: [9:30 am -- 12:30 pm]{.underline}**         |
|                |                                                     |
|                | **Location: [Boston, MA]{.underline}**              |
+----------------+-----------------------------------------------------+

[]{.mark}

US Small Business Adiminstration (SBA) PANELISTS

Bryan Hooper, Director, Office of Credit Risk Management

Diane Wright, Office of General Counsel

Bryan Hooper: Introductions; brief remarks regarding purpose of meeting,
historical perspective of the proposed rule, and logistics of the
meeting.

[]{.mark}

\*\*\*\*\*

COMMENTERS

Mark Cousineau, Connecticut Community Investment Corporation (CTCIC),
Microloan Intermediary, speaking on behalf of his institution and
Microloan Intermediaries.

Mr. Cousineau spoke on behalf of Microloan Intermediaries because no
trade association exists to represent them.

There is no Microloan Program SOP -- They follow an SBA issued guidebook
called "Nuts & Bolts"

SBA does not regulate credit standards that Mircroloan Intermediaries
have to employ - credit risk or collateral -- Why don't you do an
eligibility only review?

Microloan Intermediaries don't fit in risk based parameters and CTCIC
has no suggestions for SBA

Intermediaries borrow money from SBA - the risk lies where Intermediary
fails

It's a given that these are high risk portfolio

Current system seems to work ---- Intermediaries must update the
Microloan Portfolio monthly so SBA knows who is making payments monthly.
SBA rules say Intermediaries must maintain a currency rate of 85% or
more and if any loan is 120 days delinquent SBA rules say write it off.
Intermediaries also have to submit quarterly reports - there are many
safe guards already in place.

\*\*\*\*

Ira Lutsky, New Jersey Business Finance Corp. / National Association of
Development Companies (NADCO), on behalf of his organizations.

NADCO supports oversight of the CDC industry.

The proposed regulations always state the terms for an entity to respond
to the SBA, but it does not set timeframes for SBA to respond to the
entity \[other examples of "sole discretion" language use\], in other
words the SBA is giving itself unilateral authority.

The Single Audit Act does not apply to CDCs across the board

Outside auditors of SBA have transmitted to SBA that there were 4 CDCs
subject to the Single Audit Act (SAA) -- Not All CDCs are subject to SAA

The new regulations put SAA on everybody -- the SAA creates a big cost
that doesn't see that much of a benefit -- The SAA duplicates what the
on-site review does

If you want to charge for D&B and onsite reviews that would be
prohibited under SAA because it says duplication cannot happen

Another added burden/cost burden is cutting the annual report due date
to 90 days after fiscal year end. The SBA will receive constant requests
for extensions. SAA audit moves annual report to being due 9 months
after fiscal year end.

Risk is not mitigated where we can justify cost. Seeing a cost benefit
analysis would be helpful.

The way the Standard Operating Procedures (SOP) is written now there are
enough enforcement actions-- SBA needs to effectively enforce the
regulations already in place instead of adding on.

Wright: How much time is really reasonable for the annual reports?

Lutsky: Explained that his career started out as auditor -- It takes 45
days -- 60 days to close the books; auditors have to come in 4-6 weeks
to draft a report then you get everything back make sure its correct and
filter in everything else that applies. 90 days is not practical and
costly. Take into consideration fewer qualified auditors, the time of
year, the work required --180 days fair and equitable. 180 days will not
put SBA at a great disadvantage -- SBA has online real-time information
on line.

SBA can enforce 180 days better than 90 days - people will just give
extensions and then SBA will have double work because people will have
to review extensions.

Wright: For the 20 million dollar threshold for audited financial
statements-- what dollar threshold would you recommend?

Lutsky: I have to get back to you, but it's going to be more than \$20
million.

\*\*\*\*

James Hanlon, Sovereign Bank, on behalf of his institution.

Small banks nave no resources. They can't hire full time underwriters,
etc.

The complexity of SBA programs keeps him in job.

The costs of the SBA Program out ways the benefits and hurts small
business.

Wright: With regard to the onsite review fee/offsite monitoring fee --
what rules are most costly? Which hardest for small lenders?

Hanlon: I have no good example. The sophistication needed for small
banks to risk rate their loans, allocate sufficient time and resources
to manage existing portfolio is too hard.

Wright: Can the anxiety of smaller banks be addressed by training?

Hanlon: Training is good but once trained they move on and keeping up
with the rules is hard if you are only doing 1 -5 loans a year. Small
banks try to do the right thing but it's hard and expensive to keep up
with the rules.

\*\*\*\*

Richard Brunelle, Northway Bank, on behalf of his institution

Northway Bank was the first bank to experience an onsite oversight
review last year. It took 40 hours to prepare the material for the
subcontractors and the onsite took another 20 hours. The contractors
were not familiar with SBA regulations. It was frustrating to go back
and forth with the auditors who just didn't understand.

Northway Bank is overseen by the Federal Deposit Insurance Corporation
(FDIC) and state banking commission.

FDIC went over SBA loans -- wanted copy of the SBA review and made sure
the bank was following SBA underwriting rules. The bank did not have to
pay for oversight review.

\$22,000 for the onsite review is significant number for them.

Hooper: Your concerns about contractor -- did you talk to SBA examiner
about your concerns?

Brunelle: We did not share concerns with the SBA senior examiner.

Hooper: In the future, please share issues any issues with the onsite
team with SBA representative to get clarification of issues.

\*\*\*\*

Mary Mansfield, Bay Colony Development Corp., on behalf of her
institution.

Issue #1 The estimated cost for an audit submitted with annual report.
The SBA estimates the cost to be \$4,000. Bay Colony Development
Corporation paid \$7,500 for their audited financial statements in FY07.
That number would increase by \$4,000 for new internal controls in
proposed regulations and will go up significantly if SAA is put in
place. Bay Colony Development Corporation's auditor can't give an
estimate until they research if they are qualified to an SAA.

Bay Colony Development Corporation has never received a draft from
auditors with 120 days. 180 days from fiscal year end is more on target
with the real world.

Issue #2 Oversight for Premier Certified Lenders (PCLPs) CDCs --
complete loan application within 3 business days and submit to SBA --
the same rules should to apply to PCLPs -- then SBA can tell if they are
following rules.

Hooper: For Abridged Submission Method (ASM) type audits for PCLPs --
should the audit be done on the origination process or as a follow-up
oversight process?

Mansfield: No, just for origination.

Hooper: Could you clarify more -- Should it apply it to origination or
to oversight process?

Mansfield: Start off for origination then apply it to oversight process.

Lutsky: On the front end make sure the file is complete; on the tail
end, on the random sampling review the file again (environmental and
appraisal); if on the tail end they find out environmental didn't hold
up -- deal with the PCLP.

Wright: Dollar estimates for SAA audit is it currently \$7,500?

Mansfield: Our auditor doesn't have experience in 504 lending and they
have to do research before they can give me an estimate.

Hooper: Have you checked with other auditors to see if they could do an
SAA audit?

Mansfield: No, we work only with a nonprofit auditor and we have not
asked others.

\*\*\*\*

David Etter, UPS Capital Business Credit, on behalf of his institution.

D&B needs review by 3^rd^ party. It's not a complete outfit of a model.

We've seen enough anecdotal evidence of the model not working for loans
over \$300,000.

Hooper: Could you please tell me who said this?

Etter: It was at a NAGGL Conference... I'll find out.

\[Talked about business week article "not so magic numbers"\] -- Credit
scoring is relevant to looking at loans individually, but when the loans
are looked at in aggregate the scores loose relevancy.

ASM-type audit is more effective way to monitor -- what is SBA's
resistance to put in ASM?

UPS Capital Business Credit is an entity of UPS Capital; 60% of assets
managed are related to SBA programs. UPS Capital Business Credit holds a
State of Connecticut uninsured license and cannot accept retail
deposits. The license was granted by The State of Connecticut Banking
Commissioner. We have no FDIC insurance; we are regulated by the State
of Connecticut Department of Banking and not regulated by FDIC.

The Banking commissioner provided detailed information to SBA on how The
State of Connecticut's review is very similar to FDIC insured banks. SBA
should read the Commissioner's letter and read the January 14^th^
Conference of State Banking Supervisors letter.

Under new proposed rulemaking UPS will be considered a Non-Federally
Regulated Lender and this would make them SBA Supervised Lender which
means double oversight, double regulation and a competitive disadvantage
because of the cost of double regulation.

SBA would have regulatory purview over the whole bank not just SBA part
(40% of business is not SBA).

These regulations must be applied fairly.

Re-look at the SBA Supervised Lender definition.

Hooper: Are there examples of conflict in the letter?

Etter: Yes my letter and The State of Connecticut Banking Commissioner
give examples. The letters do not do a side by side comparison, but it
becomes clear there is duplication. SBA regulations will give authority
to both SBA and Connecticut with regard to capital directives and Cease
and Desist (C&D) orders.

Hooper: Are capital regulations the same for Connecticut as FDIC -- are
they linked? Does state say, for example, you must follow FDIC?

Etter: Yes, they are linked see Commissioner Pitkin's letter -- his
letter lays this out; the sharing of exam info with the FDIC and
Connecticut.

Hooper: UPS is solely regulated by state of CT? You mentioned the FDIC?

Etter: FDIC has no purview over UPS Credit as there are no deposits for
them to insure.

\*\*\*\*

Mike Rozman, Edgeware Analytics did not step forward.

\*\*\*\*

Maria Gooch-Smith, SEED Corporation, on behalf of her institution.

Regarding annual reports -- SEED does a SAA audit which costs them
\$8500.

90 days very tight -- in a pinch we can do it in 120 days

Our auditor gives us a good price -- only if you're a small CDC will it
cost you \$4,000

SBA's estimate of \$4,000 is too low

\*\*\*\*

Paul Hart, Housatonic Industrial Dev. Corp, on behalf of his
institution.

Timing of annual report and other additional cost burden on CDCs are
under the proposed regulations

Ira Lutsky and Mary Mansfield pointed out that 90 days cannot be met.

To give an example, I received a draft annual report at 89 days.

My corporation always provides audited financials with annual reports -
add an additional \$3,500 to do SAA audit that is even if our firm can
do SAA audits.

Adjourn a 10:50 AM