[Federal Register Volume 86, Number 29 (Tuesday, February 16, 2021)]
[Notices]
[Pages 9562-9567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03053]


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SMALL BUSINESS ADMINISTRATION

[Docket No: SBA-2020-0011]


SBA Lender Risk Rating System

AGENCY: Small Business Administration.

ACTION: Notice of revised Risk Rating System and Lender Portal 
definition of Confidential Information; request for comments.

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SUMMARY: This notice implements changes to the Small Business 
Administration's (SBA's) Risk Rating System. The Risk Rating System is 
an internal tool to assist SBA in assessing the risk of the SBA loan 
operations and loan portfolio of each active 7(a) Lender and Certified 
Development Company (CDC). Consistent with industry best practices, SBA 
recently redeveloped the model used to calculate the composite Risk 
Ratings of lenders and the risk associated with each SBA loan to ensure 
that the Risk Rating System remains current and predictive as 
technologies, the economy, and available data evolve. In conjunction 
with the redevelopment of the Lender Risk Rating, SBA is updating the 
Lender Portal and its definition for Confidential Information. SBA is 
publishing this notice with a request for comments to provide the 
public with an opportunity to comment.

DATES: This notice is effective February 16, 2021.
    Comment Date: Comments must be received on or before April 19, 
2021.

ADDRESSES: You may submit comments, identified by Docket number SBA-
2020-0011 by using any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Identify comments by ``Docket Number SBA-2020-0011, SBA Lender Risk 
Rating System,'' and follow the instructions for submitting comments.
    <bullet> Email: Eddie Ledford, Deputy Director, Office of Credit 
Risk Management, U.S. Small Business Administration, at 
<a href="/cdn-cgi/l/email-protection#ddb8b9aabcafb9f3b1b8b9bbb2afb99daebfbcf3bab2ab"><span class="__cf_email__" data-cfemail="d3b6b7a4b2a1b7fdbfb6b7b5bca1b793a0b1b2fdb4bca5">[email protected]</span></a>.
    All comments will be posted on http://www.Regulations.gov. If you 
wish to include within your comment confidential business information 
(CBI) as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you 
must submit the comment by either Mail or Hand Delivery and you must 
address the comment to the attention of Eddie Ledford, Deputy Director, 
Office of Credit Risk Management, U.S. Small Business Administration. 
In the submission, you must highlight the information that you consider 
is CBI and explain why you believe this information should be held 
confidential. SBA will make a final determination, in its discretion, 
of whether the information is CBI and, therefore, will be published or 
not.

FOR FURTHER INFORMATION CONTACT: Eddie Ledford, Deputy Director, Office 
of Credit Risk Management, U.S. Small Business Administration, 409 
Third Street SW, 8th Floor, Washington, DC 20416, (202) 205-6402.

SUPPLEMENTARY INFORMATION:

I. Background Information

(A) Introduction to the Risk Rating System

    The Risk Rating System is an internal tool that uses data in SBA's 
Loan and Lender Monitoring System (L/LMS), borrower data provided by 
Dun & Bradstreet (D&B), and certain macroeconomic factors to assist SBA 
in assessing the risk of the SBA loan performance of each 7(a) Lender 
and CDC (each, an SBA Lender) on a uniform basis and identifying those 
SBA Lenders whose portfolio performance, or other lender-specific risk-
related factors, may demonstrate the need for additional SBA monitoring 
or other action. The Risk Rating System also serves as a vehicle to 
measure the aggregate strength of SBA's overall 7(a) loan and 504 loan 
portfolios and to assist SBA in managing the related risk. SBA uses the 
Risk Rating System to make more effective use of its lender review and 
assessment resources. The Risk Rating System is available to SBA 
Lenders through SBA's Lender Portal

[[Page 9563]]

and provides SBA Lenders feedback and timely insight into the expected 
performance of their SBA portfolio.
    Under SBA's Risk Rating System, SBA calculates a Forecasted 
Purchase Rate (FPR) for each SBA Lender. The FPR projects the percent 
of an SBA Lender's SBA loan portfolio that will be purchased by SBA 
over the next 12 months. An SBA Lender's FPR can be used to predict the 
dollar amount of an SBA Lender's purchases. The FPR is calculated using 
several component variables or factors. The component variables were 
developed using step-wise regression analysis to determine the 
components that provided a linear regression formula that was most 
predictive of actual purchases over a one-year period. The FPR is also 
used to assign each SBA Lender a composite Risk Rating (Lender Risk 
Rating or Lender Purchase Rating) of 1 to 5 based on geometric 
sequencing. The rating reflects SBA's measurement of the SBA Lender's 
potential portfolio risk. In general, a rating of 1 indicates least 
risk and that the least degree of SBA oversight is likely needed, while 
a 5 rating indicates highest risk and that the highest degree of SBA 
oversight is likely needed.
    SBA first introduced the Risk Rating System as a proposal for 
comment in the Federal Register on May 1, 2006 (72 FR 25624). SBA 
published the final notice in the Federal Register on May 16, 2007 (72 
FR 27611). On March 1, 2010, SBA published a notice describing 
revisions to the Risk Rating System (75 FR 9257), with a correction 
notice published on March 18, 2010 (75 FR 13145). In 2014, SBA revised 
the system again and published a notice and request for comments on 
April 29, 2014 (79 FR 24053).

(B) Redevelopment

    Typically, under industry best practices, custom credit scoring 
models are redeveloped approximately every three to five years to 
reflect changing conditions, portfolio shifts, and to incorporate 
additional data that may have become available. Accordingly, SBA 
redeveloped the Risk Rating System in 2010 and 2014 and completed the 
latest redevelopment in 2019. This most recent redevelopment, like the 
earlier ones, is consistent with best practices. Given the 
unprecedented economic impact caused by the pandemic in 2020, SBA will 
initiate the next redevelopment in late 2021 to ensure that SBA's Risk 
Rating System provides an accurate and up to date measurement of 
lenders' SBA portfolio performance.
    The goals of this redevelopment were to: (i) Maintain or improve 
the accuracy of the current Lender Risk Rating (LRR) and FPR; (ii) 
maintain or increase transparency to the lender without sacrificing 
predictive power; (iii) incorporate the latest SBA performance data; 
and (iv) evaluate other variables that can provide additional insight 
into lender risk. During this redevelopment, SBA reviewed over 200 
potential variables from SBA's L/LMS archive along with nearly 400 
potential variables from D&B sources. SBA selected these potential 
variables for review based on its experience working with such models 
over the past several years. The D&B variables included attributes from 
its detailed trade repository providing the highest level of trade data 
resolution. The variables were then run through rigorous statistical 
techniques and the most predictive combinations of variables were 
chosen as components in the redeveloped Risk Rating model.

II. The Redeveloped Risk Rating Model

    SBA followed common industry best practices and internal control 
standards when redeveloping and validating the Risk Rating model. The 
redeveloped model was independently validated by personnel other than 
the staff responsible for the redevelopment. The redeveloped model used 
to calculate the composite Risk Ratings is an updated version of the 
previous models. Like the previous models, it is a custom credit 
scoring model that predicts the likelihood of an SBA Lender's loan 
purchases over the next 12 months. Like the 2014 model, the redeveloped 
model uses a segmentation approach to loan scoring. The model groups 
the loans into loan segments \1\ and then applies a formula to the loan 
predictive of purchase for that applicable segment. (See Section IV 
below for more information on the segments and their formulas). The new 
model thus predicts the probability of default for each loan in an SBA 
Lender's portfolio (Projected Purchase Rate or PPR) and then multiplies 
this probability by the outstanding loan amount at the time the ratings 
are formulated. The individual loan-level PPRs are then aggregated to 
obtain the SBA Lender's overall FPR, which is then used to calculate 
the SBA Lender's composite Risk Rating [1-5].
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    \1\ For example, 7(a) fixed term loans in current payment status 
or 504 fixed term loans in non-current payment status.
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    The most notable changes in the redeveloped Risk Rating System are:
    1. Updated components in the regression formulas. The redeveloped 
model continues to use loan-level data (provided by the SBA Lenders and 
SBA's own data), external risk assessment data (provided by D&B) that 
is derived from third party business and consumer credit bureau data, 
and macroeconomic data. New loan level data components include, for 
example: (i) NAICs sector; (ii) new or existing business indicator; and 
(iii) whether sold on Secondary Market. The new external data 
components include, for example, (i) commercial credit score; (ii) 
number of UCC filings against business; and (iii) PAYDEX previous three 
months.\2\ Only one macroeconomic data component continues to be used--
the State Unemployment Rate. The updated components add predictive 
value to the Risk Rating model.
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    \2\ D&B collects and aggregates all trade data provided to it by 
over 30,000 trade credit sources on a monthly basis for its entire 
global database of commercial entities.
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    2. Slight Revisions in segmentation. The 2014 model used seven 
segments, each with its own rating formula (five for 7(a) Lenders; two 
for CDCs). The 2019 redeveloped model eliminated segmentation of 7(a) 
fixed-term loans based on loan size, collapsing the model's 
segmentation from seven to six (four for 7(a) Lenders and two for 
CDCs). Under the new model, loans are segmented by loan type (revolver-
type or fixed-term) and current payment status. The segments are as 
follows: (i) 7(a) Segment 1--revolver type loans in current payment 
status; (ii) 7(a) Segment 2--revolver-type loans in non-current payment 
status; (iii) 7(a) Segment 3--fixed-term loans in current payment 
status; (iv) 7(a) Segment 4--fixed-term loans in non-current payment 
status; (v) 504 Segment 1--loans in current payment status; and (vi) 
504 Segment 2--loans in non-current payment status. A loan's PPR 
formula is calculated based on a combination of components that is 
uniquely predictive for loans in that segment. See paragraph IV(B) for 
a detailed discussion of the six segments and the update of components 
used in each segment.
    3. Evolution of the Lender Portal.
    Since the 2014 redevelopment, SBA has been significantly expanding 
the content of the Lender Portal. In addition to the LRR/Lender 
Purchase Rating (LPR), the Lender Portal now includes the SBA Lender's 
FPR, the FPR's components or factors, SBA Lender's PARRiS or SMART 
Scores (as applicable) \3\ and the PARRiS/SMART

[[Page 9564]]

Score components. In addition, the Lender Portal now includes much of 
the information that is contained in SBA Lender's Lender Profile 
Assessment (LPA) (e.g., loan vintage analysis, charting of loans by 
delivery method, Cumulative Net Yield chart, loan concentration chart, 
Secondary Market sales chart and other lender information). The Lender 
Portal provides SBA Lenders timely feedback on their expected portfolio 
performance. In conjunction with the redevelopment and expansion of 
Lender Portal content, SBA is updating its definition of Confidential 
Information. See Section IV for more information on the Lender Portal 
and the updated definition of Confidential Information.
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    \3\ PARRiS and SMART refer to SBA's risk measurement 
methodologies and scoring guides used in conjunction with SBA's 
Risk-Based Review protocol. PARRiS is an acronym for the specific 
risk areas or components that SBA reviews for 7(a) lenders. They are 
Performance, Asset Management, Regulatory Compliance, Risk 
Management, and Special Items. SMART is the acronym for the risk 
areas that SBA reviews in the 504 program. They are Solvency and 
Financial Condition, Management and Board Governance, Asset Quality 
and Servicing, Regulatory Compliance, and Technical Issues and 
Mission. For a more detailed discussion on PARRiS and SMART, see 
SOPs 50 53 2 and 50 10, which incorporate SBA Notices on Risk-Based 
Review Protocols.
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    The redeveloped Risk Rating System is one of several tools in SBA's 
oversight framework. SBA uses the Risk Rating, the FPR/LPR, SBA Lender 
Reviews/Examinations, and PARRiS and SMART components and scores in 
conjunction with other risk related information to assess SBA Lender 
risk and performance. For example, SBA may consider rapid growth in 
loan volume that may skew metrics and other factors in considering an 
SBA Lender's overall risk.

III. Request for Comments

    This notice provides program participants and other parties with an 
explanation of the components and a description of other modeling 
enhancements. SBA is soliciting comments on all aspects of this notice, 
including but not limited to the components and enhancements. These 
changes will be effective upon publication of this notice and are 
expected to be incorporated in the Lender Portal update in February 
2021 for the quarter ending December 31, 2020.

IV. SBA Lender Risk Rating System

(A) Overview

    Under SBA's Risk Rating System, SBA assigns all SBA Lenders a 
composite Risk Rating. The composite rating reflects SBA's assessment 
of the SBA Lender's potential risk. It is based on the loan-level 
probability of purchase over the next 12 months, as calculated by SBA.
    The Risk Rating System also assigns each SBA-guaranteed loan a 
Projected Purchase Rate (PPR) using a unique set of components that SBA 
has determined to be predictive for that loan's segment (see Section 
IV.B. on Segmentation for further details below). The individual loan-
level PPR is then multiplied by the total outstanding balance of the 
loan in order to approximate the SBA Lender's exposure for that loan. 
The sum of all those values for Lender's SBA loans is an estimation of 
the total default dollars for the SBA portfolio of the SBA Lender in 
the next 12 months. That number is then divided by the total 
outstanding balances of all loans in the above calculation to obtain 
the SBA Lender's overall Forecasted Purchase Rate (FPR). SBA then 
assigns a composite rating of 1 to 5 based on the SBA Lender's overall 
FPR using geometrically sequenced category thresholds. Geometrically 
sequenced categories contain thresholds that are a multiple of the 
prior category. The category boundaries represent a doubling of the 
prior category (with the exception of the ``zero'' threshold). 
Geometric categorizations aim to delineate a non-linear distribution 
more evenly.
    SBA updates the Lender Risk Ratings and FPRs on a quarterly basis, 
using refreshed SBA Lender data. The primary purpose of the Risk Rating 
and FPR is to focus SBA's oversight resources on those SBA Lenders 
whose portfolio performance or other lender-specific risk-related 
factors demonstrate a need for further review and evaluation by SBA. 
SBA generally does not intend to use the Risk Rating or FPR as the sole 
basis for taking a formal enforcement action against an SBA Lender.
    All SBA Lenders have on-line access to their Risk Ratings, FPR 
(including its components or factors), PARRiS or SMART Score (and its 
components), and other risk related information through the Lender 
Portal. In addition, an SBA Lender can view the loan-level components 
utilized to generate each loan's PPR. For information on gaining access 
to the Lender Portal, see SBA SOP 50 10 and the Lender Portal log-on 
page at https://sbalenderportal.dnb.com.

(B) Segmentation

    SBA's Risk Rating System uses a segmentation approach to calculate 
the PPR of each loan in an SBA Lender's SBA portfolio. The loan 
segments for the 7(a) Program are as follows:
    1. Revolver-type loans in current payment status,
    2. Revolver-type loans in non-current payment status,
    3. Fixed-term loans in current payment status, and
    4. Fixed-term loans in non-current payment status.
    The loan segments for the 504 Loan Program are:
    1. Loans in current payment status, and
    2. Loans in non-current payment status.
    A loan's PPR is calculated based on a combination of components 
that is uniquely predictive for the loans in that segment. Many of the 
segment components are the same as in the prior model, however, some 
are new. The components used in each segment are as follows:

7(a) Segment 1--Revolver-type loans in current payment status:
    (a) Current Small Business Predictive Score (SBPS)
    (b) Months on Book (MOB)
    (c) Loan Term
    (d) Percent of Accounts 30 Days or More Past Due
    (e) Outstanding Loan Balance
    (f) New or Existing Business Indicator
    (g) Total Employees
    (h) NAICS Sector
    (i) 12-Month Originating Lender Purchase Rate
    (j) Overall Interest Rate
    (k) Average State-level Unemployment Rate
7(a) Segment 2--Revolver-type loans in non-current payment status:
    (a) Current SBPS
    (b) MOB
    (c) Loan Term
    (d) Loan Status
    (e) SBA Share of Outstanding Loan Balance
    (f) PAYDEX Previous 3 Months
    (g) Average State-level Unemployment Rate
7(a) Segment 3--Fixed-term loans in current payment status:
    (a) Current SBPS
    (b) MOB
    (c) Loan Term
    (d) Number of Current Accounts
    (e) Sold on Secondary Market Indicator
    (f) Spread Interest Rate
    (g) New or Existing Business Indicator
    (h) 12-Month Originating Lender Purchase Rate
7(a) Segment 4--Fixed-term loans in non-current payment status:
    (a) Current SBPS
    (b) MOB
    (c) Loan Status
    (d) Percent of Accounts 30 Days or More Past Due
    (e) 12-Month Originating Lender

[[Page 9565]]

Purchase Rate
504 Segment 1--Loans in current payment status:
    (a) Current SBPS
    (b) MOB
    (c) Loan Term
    (d) Commercial Credit Score
    (e) NAICS Sector
    (f) Number of UCC Filings
    (g) 12-Month Lender Purchase Rate
    (h) Average State-level Unemployment Rate
504 Segment 2--Loans in non-current payment status:
    (a) Current SBPS
    (b) Loan Status
    (c) Viability Score

The components were selected through statistical analysis using step-
wise logistic regression to identify the combination of variables that 
are the most predictive for each segment of loans. The model is 
``multivariate,'' meaning that an SBA Lender's PPR (and thus its FPR 
and Risk Rating) is based on a combination of all components in the 
model. Each of the components is described in more detail in the Rating 
Components section below.

(C) Rating Components

    SBA derives components from three types of data sources to 
calculate a loan's PPR: SBA loan data, D&B Borrower data,\4\ and 
macroeconomic data. The first category includes detailed loan/borrower 
level information from SBA's database. The second category is 
information on the small business borrower from D&B's trade database. 
The third category includes state level unemployment data. Each of the 
components is defined in detail below. For those components that were 
also in the prior model, their definitions are generally the same.
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    \4\ D&B business bureau data is combined with FICO consumer 
data.
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(1) SBA Loan Data Components
    Loan Status: The Loan Status component captures the payment status 
of loans as of the rating date. Loans are categorized as current, 
delinquent, past due, or deferred. If delinquent, this component 
indicates the delinquency ``bucket'' (e.g., 30 days past due, 60 days 
past due, etc.) at the time of rating. A greater number of days past 
due contributes to a higher purchase risk.
    Loan Term: The Loan Term is the length of the loan repayment period 
at origination. Loan Term is measured in months and purchase risk 
increases as the repayment term increases for 7(a) Revolver loans. For 
7(a) Fixed loans, the purchase risk associated with the loan term is 
arch-shaped: Loans at either end of the spectrum (very short or very 
long term) have the lowest purchase risk. For 504 loans, the purchase 
risk is lower for longer term loans.
    Months on Book (MOB): The MOB is the number of months between the 
rating date and the date of the first loan disbursement, up to a 
maximum of 120 months. For 7(a) loans, the purchase risk associated 
with MOB risk level is arch-shaped: Loans at either end of the spectrum 
(very low or very high MOB) have the lowest purchase risk. For 504 
loans, a higher MOB is associated with a higher purchase risk.
    NAICS Sector: The North American Industry Classification System 
(NAICS) is the standard used by Federal statistical agencies in 
classifying business establishments. For 7(a) Segment 1, revolver-type 
loans in current payment status, industries classified as information, 
transportation, or warehousing are associated with the highest purchase 
risk and those classified as education, finance, insurance, management, 
manufacturing, public administration, and utilities are associated with 
the lowest purchase risk. All other industry classifications are 
associated with a mid-range of purchase risk. For 504 Segment 1, 
current loans, industries classified as food services, administrative, 
educational, manufacturing, real estate, or retail are associated with 
the highest purchase risk and those classified as agriculture, 
forestry, fishing, construction, finance, insurance, information, or 
mining have the lowest purchase risk. All other industry 
classifications are associated with a mid-range of purchase risk.
    New or Existing Business Indicator: This component indicates 
whether a borrower is a new or existing business. Start-ups and 
businesses in existence for 2 years or less are considered new 
businesses and those over 2 years old are considered existing 
businesses. An existing business is associated with a lower purchase 
risk.
    Overall Interest Rate: The Overall Interest Rate is the interest 
rate of a loan at origination. A higher Overall Interest Rate is 
associated with a higher purchase risk.
    Outstanding Loan Balance: The Outstanding Loan Balance is the 
outstanding gross loan balance at the time of the rating date. This 
component is only used for revolver-type accounts that are currently in 
active status. The purchase risk associated with Outstanding Loan 
Balance is arch-shaped: Loans at either end of the spectrum (very low 
or very high Outstanding Loan Balance) have the lowest purchase risk.
    SBA Share of Outstanding Loan Balance: The SBA Share of Outstanding 
Loan Balance is the SBA guaranteed portion of the outstanding amount of 
the loan as of the rating date. Similar to the Outstanding Loan 
Balance, the purchase risk associated with SBA Share of Outstanding 
Loan Balance is arch-shaped: Loans at either end of the spectrum (very 
low or very high SBA Share of Outstanding Loan Balance) have the lowest 
purchase risk.
    Sold on Secondary Market Indicator: This component indicates 
whether the SBA guaranteed portion of a loan was sold on the secondary 
market. This is a static field once a loan is sold on the secondary 
market. Loans sold on the secondary market have a higher purchase risk.
    Spread Interest Rate: The Spread Interest Rate is the difference 
between the interest rate of the loan and the Prime interest rate in 
effect on the date of origination. A higher Spread Interest Rate is 
associated with a higher purchase risk.
    12-Month Lender Purchase Rate: The 12-Month Lender Purchase Rate is 
a calculated field based on a lender's purchase rate over the past 12 
months. A higher value for this attribute is associated with a higher 
purchase risk.
    12-Month Originating Lender Purchase Rate: The 12-Month Originating 
Lender Purchase Rate is a calculated field based on the originating 
lender's purchase rate over the past 12 months. For loans that a lender 
has acquired from another SBA Lender, the originating lender's 12-Month 
Lender Purchase Rate will apply. For loans that have not been acquired 
from another SBA Lender, this component is the same as the 12-Month 
Lender Purchase Rate described above. If the originating lender does 
not have a 12-Month Lender Purchase Rate (for example, the lender is no 
longer participating in SBA's programs or is no longer in business), 
the 12-Month Overall Portfolio Purchase Rate will be used. The 12-Month 
Overall Portfolio Purchase Rate is the purchase rate of SBA's entire 
7(a) or 504 portfolio, based on the last 12 months. A higher value for 
this attribute is associated with a higher purchase risk.
(2) D&B Borrower Data Components
    Commercial Credit Score: The Commercial Credit Score (CCS) is a 
proprietary calculation from D&B that predicts the likelihood of a 
business paying its bills in a severely delinquent manner (91 days or 
more past terms), obtaining legal relief from its creditors, or ceasing 
operations without paying all creditors in full over the next 12 
months. D&B defines severe

[[Page 9566]]

delinquency as a business with at least 10 percent of its payments 91 
days or more past due, based on the information in D&B's commercial 
database. A high CCS value indicates a lower risk of delinquency. The 
CCS is calculated using statistical models derived from D&B's extensive 
database of U.S. businesses including payment, public filing, 
demographic, and financial information when available. A higher CCS is 
associated with a lower purchase risk.
    Number of Current Accounts: The Number of Current Accounts is the 
number of a borrower's trade accounts, as reported to D&B, that have 
been current over the past 24 months. Higher values of this attribute 
are associated with lower purchase risk.
    Number of UCC Filings: Number of UCC Filings is the number of 
Uniform Commercial Code (UCC) filings recorded against the borrower's 
business in the past 10 years, including initial filings, 
continuations, amendments, and terminations. A UCC filing is a legal 
form filed by a creditor to give notice that it has an interest in the 
property of a debtor. A higher value for this attribute is associated 
with a higher purchase risk.
    PAYDEX Previous 3 Months: PAYDEX is a unique, dollar weighted 
indicator of a business's payment performance based on the total number 
of payment experiences in D&B's database over the past 3 months. 
Payment experiences are gathered by D&B from a business's suppliers and 
vendors. Higher PAYDEX scores indicate better payment performance. A 
higher value for this attribute is associated with a lower purchase 
risk.
    Percent of Accounts 30 Days or More Past Due: The Percent of 
Accounts 30 Days or More Past Due is calculated using data from the D&B 
detail trade database for the last 4 months. This percentage results 
from dividing the total number of accounts which have been 30 days or 
more delinquent in the past 4 months by the total number of active 
accounts associated with a borrower. A higher value for this attribute 
is associated with a higher purchase risk.
    SBPS: The SBPS, the Small Business Risk Portfolio Solution 
commercially known as SBRPS, is a portfolio management credit score 
based upon a borrower's business credit report and principal's consumer 
credit report and is updated quarterly. SBPS is a commercial score 
provided by Dun & Bradstreet (D&B), under contract with SBA. SBPS was 
developed by D&B and FICO and is compatible with FICO's ``Liquid 
Credit'' origination score. This component provides an indication of 
the relative creditworthiness of a given borrower with higher values 
indicating lower purchase risk. FICO recently updated SBPS to a new, 
more predictive version which will be used in this redeveloped Risk 
Rating version.
    Total Employees: Total Employees is the number of people the 
borrower employs, as reported to D&B. A higher value for this attribute 
is associated with a lower purchase risk.
    Viability Score: The Viability Score is a proprietary calculation 
from D&B that assesses the probability that the borrower will no longer 
be viable within the next 12 months compared to all the U.S. businesses 
within the D&B database. A business is no longer viable when it goes 
out of business, becomes dormant or inactive, or files for bankruptcy. 
The Viability Score is based on available financial data, trade 
payments, firmographics and other business activity. A higher Viability 
Score is associated with a higher purchase risk.
(3) Macroeconomic Data Component
    Average State-level Unemployment Rate: The Average State-level 
Unemployment Rate is the ratio of unemployed to the civilian labor 
force in the borrower's State, expressed as a percent. The source is 
Bureau of Labor Statistics (BLS), Local Area Unemployment Statistics 
Database. The borrower's state is identified through borrower's address 
fields in the SBA's database. The unemployment rate is extracted 
directly from BLS reporting, which is updated monthly. A higher 
unemployment rate in the borrower's state contributes to a higher 
purchase risk.

(D) Lender Risk Rating

    The SBA Lender Risk Rating (LRR) is a measure of predicted 
performance over the next 12 months. As described above, SBA uses its 
Risk Rating model to calculate a Forecasted Purchase Rate (FPR). The 
FPR predicts the percent of an SBA Lender's SBA loan portfolio that 
will be purchased over the next 12 months. An SBA Lender's FPR can be 
used to project the dollar amount of an SBA Lender's purchases. SBA 
then uses the FPR to assign a composite rating of 1 to 5 to each SBA 
Lender. This composite rating is the LRR. SBA may make adjustments to 
the composite rating based on results of reviews, third party 
information on an SBA Lender's operations, portfolio trends, and other 
information that could impact an SBA Lender's risk profile. (See 
section E ``Overriding Factors'' for further detail.) In general, a 
rating of 1 indicates least risk, and that the least degree of SBA 
oversight is likely needed, while a 5 rating indicates highest risk, 
and that the highest degree of SBA oversight is likely needed. Rating 
categories 2, 3, and 4 provide granularity for increasing levels of 
risk and the corresponding levels of necessary oversight.

(E) Overriding Factors

    As with prior LRR models, the redeveloped Risk Rating System allows 
for consideration of additional factors. The occurrence of these 
factors may lead SBA to conclude that an individual SBA Lender's 
composite rating, as calculated by the Risk Rating model, is not fully 
reflective of its true risk. Therefore, the Risk Rating System provides 
for the consideration of overriding factors, which may only apply to a 
particular SBA Lender or group of SBA Lenders, and permit SBA to adjust 
an SBA Lender's calculated composite rating. The allowance of 
overriding factors in helping determine an SBA Lender's Risk Rating 
enables SBA to use key risk factors that are not necessarily applicable 
to all SBA Lenders but indicate a greater or lower level of risk from a 
particular SBA Lender than that which the calculated rating provides.
    Overriding factors may result from SBA Lenders' risk-based reviews/
examinations and evaluations. SBA routinely conducts reviews of SBA 
Lenders, performs safety and soundness examinations of SBA Small 
Business Lending Companies (SBLCs) and Non-Federally Regulated Lenders 
(NFRLs), and uses certain evaluation measures for other SBA Lenders. 
Examples of other overriding factors that may be considered include, 
but are not limited to: Enforcement or other actions of regulators or 
other authorities, including, but not limited to, Cease & Desist orders 
by, or related agreements with, Federal Financial Institution 
Regulators (FFIRs); capital adequacy levels not in conformity with 
FFIRs; secondary market issues and concerns; receipt of a Going Concern 
opinion issued by an independent auditor; early loan default trends; 
purchase rate or projected purchase rate trends; abnormally high 
default, purchase or liquidation rates; denial of liability 
occurrences; lending concentrations; rapid growth of SBA lending; net 
yield rate (or losses) significantly worse than average; violation of 
SBA Loan Program Requirements; inadequate, incomplete, or untimely 
reporting to SBA; fraud/indictment of lender, officers, or key 
employees; an identified condition that affects capital, solvency or 
prudent commercial lending ability; inaccurate

[[Page 9567]]

submission of required fees or amounts due SBA or the federal 
government; and other risk-related or program integrity concerns. Rapid 
growth, in particular, is a significant factor that can mask poor 
portfolio performance in a calculated Risk Rating. Consequently, SBA 
includes a rapid growth flag in its PARRiS and SMART assessments and in 
this override list.

(F) Confidential Information

    Each SBA Lender must continue to handle its Reports, Risk Ratings 
and related Confidential Information in accordance with the 
confidentiality requirements set forth in 13 CFR 120.1060, 
Confidentiality of Reports, Risk Ratings, and related Confidential 
Information. Under this regulation, Reports, Risk Ratings, and 
Confidential Information are privileged, confidential, and the property 
of SBA. Further, the regulation states that such information may not be 
relied upon for any purpose other than SBA's lender oversight and SBA's 
portfolio management purposes. In addition, the SBA Lender is 
prohibited from disclosing its Report, Risk Rating, and Confidential 
Information, in full or in part, in any manner, without SBA's prior 
written permission, and the SBA Lender must not make any 
representations concerning the information (including Report findings, 
conclusions, and recommendations), the Risk Rating, or the Confidential 
Information.
    13 CFR 120.1060(a) defines ``Report'' to mean ``the review or 
examination report and related documents.'' It also provides that 
Confidential Information ``is defined in the SBA Lender information 
portal and by notice issued from time to time.'' The SBA Lender 
information portal currently defines ``Confidential Information'' to 
mean ``all lender-related information contained in the Portal including 
``Lender Results'', except for the ``Past 12 Month Actual Purchase 
Rate'' and the ``Past 12 Month Actual Charge-Off Rate''. SBA has 
expanded the information available to an SBA Lender in the Lender 
Portal. Therefore, SBA is updating the definition for ``Confidential 
Information'' to mean:

    ``Confidential Information includes all the SBA Lender-related 
information/data contained in the Lender Portal except the dollar 
amounts associated with SBA purchase of and charge off of SBA 
Lender's loans and information already publicly available related to 
the Lender's capital, non-performing assets, and regulatory actions 
(e.g., from a bank's public Call Report). Confidential Information 
also includes any information related to SBA's supervision of the 
SBA Lender (e.g., review or corrective action correspondence) and 
any actions taken by SBA related to enforcement (e.g., informal 
enforcement actions as defined in SOP 50 53 or by regulation, 
notices of proposed enforcement action) unless made public by SBA 
(e.g., in a Cease and Desist Order).''

SBA included the last sentence because it has long treated supervisory 
and enforcement information as confidential information and this 
information is generally related to a review or exam and, therefore, 
covered by the confidentiality provisions in 13 CFR 120.1060 and/or 
FOIA exemption 8. SBA may disclose Reports, Risk Ratings, and 
Confidential Information in its discretion; however, such disclosures 
do not waive SBA Lender's obligation under 13 CFR 120.1060 to maintain 
the confidentiality of the information.

(G) Conclusion

    In conclusion, industry best practices and changes in the SBA 
portfolio, programs, and available data necessitate that SBA's Risk 
Rating model be periodically redeveloped. This notice marks the third 
redevelopment of SBA's Risk Rating model. In addition to this 
redevelopment, SBA has and will continue to perform annual validation 
testing on the calculated composite Risk Ratings and will further 
refine the model as necessary to maintain or improve the predictiveness 
of its risk scoring.

    Authority: 15 U.S.C. 633(b)(3); 15 U.S.C. 634(b)(6) and (7); 15 
U.S.C. 657t; 15 U.S.C. 687(f); and 13 CFR 120.10, 120.1015, 
120.1025, 120.1050, and 120.1060.

Tami Perriello,
Acting Administrator.
[FR Doc. 2021-03053 Filed 2-12-21; 8:45 am]
BILLING CODE 8026-03-P


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