Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices 9257 

• Size—The unit must fit within the 

space allocated in the hull and ice 

wedge; 

• Power—Minimum 686-kW rated 

(920 hp); 

• Capability—360-degree thrust 

(azimuthing steering control); 

• Certification for use in ice—No hull 

protrusion(s), tunnel with propeller, or 

any feature that subjects the thruster to 

ice damage along the hull form, per 

American Bureau of Shipping Rules for 

Building and Classing Vessels, Polar 

Class PC–5. 

Failure to meet any of these four 

technical requirements would have 

severe negative consequences for the 

capabilities of the vessel. It is not 

feasible to modify the shape of the hull 

forward to accommodate a thruster of a 

different configuration, since the hull 

shape has been optimized for ice 

breaking through extensive testing over 

the past four years. Any changes at this 

point would significantly affect vessel 

capabilities. Reduction of the minimum 

power, or elimination of the 360-degree 

thrust requirement, would also result in 

a vessel that could not successfully 

support open water science equipment 

deployments in the Arctic. Vessels 

working in the Arctic are subject to 

demanding and often dangerous 

conditions due to low temperatures, 

high winds, and rough seas as well as 

ice. Accepting a design that is 

susceptible to ice damage could render 

the bow thruster inoperable under these 

severe conditions, thereby jeopardizing 

the safety of the vessel and personnel 

aboard. Such compromises also produce 

a ship that would not be allowed to 

operate independently in the Arctic 

under emerging international 

agreements which require minimum 

standards for equipment survivability 

for vessels operating in polar waters 

(Arctic and Antarctic). Independent 

operation is critical to cost-effective 

science support. Requiring the ARRV to 

be escorted by another, more ice-capable 

vessel could add over $6M in outside 

charter cost for NSF and the other 

funding agencies for every 100 days in 

the ice. Frequent damage as a result of 

using a non-compliant design would 

add significant annual program cost for 

maintenance and repair (in excess of 

$100K per incident depending on the 

extent of damage) once the vessel goes 

into operation. This financial loss is in 

addition to the lost science 

opportunities caused by delay in sailing. 

As noted in UAF’s request for this 

waiver, UAF performed market research 

in April and early May of 2009 that 

initially found that bow thrusters are 

generally available in manufacturers’ 

commercial product lines. UAF then 

conducted additional market research 

by reviewing industry publications and 

the Internet, and by attending an 

industry suppliers’ conference, in order 

to assess whether there exists a 

domestic capability to provide a bow 

thruster that meets the necessary 

requirements for safe and successful 

operation in Arctic waters. 

After identifying 15 potential 

domestic suppliers, UAF compared the 

existing product lines for compliance 

with the bow thruster technical 

specifications and requirements as 

identified above. 

Beginning with an assessment of 

power requirements, the bow thrusters 

offered by 12 domestic firms either did 

not meet the 686-kW rated minimum or 

the companies simply served as 

distributors of others’ product lines. 

Two of the remaining three domestic 

suppliers did not provide bow thrusters 

that meet the required ice certification 

standards, because their products rely 

upon tunnels with propellers or units 

that extended from the hull; these 

features make this type of bow thruster 

susceptible to ice damage which, as 

explained above, could render them 

inoperable under the severe conditions 

inherent in Arctic operations. The final, 

most capable domestic manufacturer of 

bow thrusters did comply with the 

stated size, power and (potentially) 

capability requirements. However, this 

bow thruster relies upon controllable 

vanes that are fitted to the thruster 

discharge nozzles to achieve the 360- 

degree thrust capability. The 

controllable vanes make the bow 

thrusters susceptible to ice damage 

which, as explained above, could render 

them inoperable under the severe 

conditions inherent in Arctic 

operations. 

In the absence of a domestic supplier 

that could provide a requirementscompliant bow thruster, UAF requested 

that NSF issue a Section 1605 waiver 

determination with respect to the 

purchase of foreign-supplied, 

requirements-compliant bow thruster, 

so that the vessel will contain a bow 

thruster that meets the specific design 

and technical requirements which, as 

explained above, are necessary for this 

vessel to be able to perform its Arctic 

mission safely and successfully. 

Furthermore, UAF’s market research 

indicated that bow thrusters compliant 

with the ARRV’s technical 

specifications and requirements are 

commercially available from foreign 

vendors within their standard product 

lines. 

NSF’s Division of Acquisition and 

Cooperative Support (DACS) and other 

NSF program staff reviewed the UAF 

waiver request submittal, found that it 

was complete, and determined that 

sufficient technical information was 

provided in order for NSF to evaluate 

the waiver request and to conclude that 

a waiver is needed and should be 

granted. 

III. Waiver 

On January 28, 2010, based on the 

finding that no domestically produced 

bow thruster met all of the ARRV’s 

technical specifications and 

requirements and pursuant to section 

1605(b), the Director of the National 

Science Foundation granted a limited 

project waiver of the Recovery Act’s Buy 

American requirements with respect to 

the procurement of a 360-degree 

azimuthing, 686-kW, ice classed bow 

thruster. 

Dated: February 24, 2010. 

Lawrence Rudolph, 

General Counsel. 

[FR Doc. 2010–4170 Filed 2–26–10; 8:45 am] 

BILLING CODE 7555–01–P 

SMALL BUSINESS ADMINISTRATION 

SBA Lender Risk Rating System 

AGENCY: Small Business Administration. 

ACTION: Notice of revised Risk Rating 

System; request for comments. 

SUMMARY: This notice implements 

changes to the Small Business 

Administration’s (SBA’s) Risk Rating 

System (Risk Rating System). The Risk 

Rating System is an internal tool to 

assist SBA in assessing the risk of each 

active 7(a) Lender’s and Certified 

Development Company’s (CDC’s) SBA 

loan operations and loan portfolio. 

Consistent with industry best practices, 

SBA recently redeveloped the model 

used to calculate the composite risk 

ratings to ensure that the Risk Rating 

System remains current and predictive 

as technologies and available data 

evolve. SBA is publishing this notice 

with a request for comments to provide 

the public with an opportunity to 

comment and to allow for any necessary 

adjustments as the industry moves 

through the economic cycle. 

DATES: This notice is effective March 1, 

2010. 

Comment Date: Comments must be 

received on or before April 30, 2010. 

ADDRESSES: You may submit comments, 

identified by RIN number [INSERT RIN 

NUMBER], by any of the following 

methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

mstockstill on DSKH9S0YB1PROD with NOTICES

9258 Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices 

• Mail: Bryan Hooper, Director for 

Office of Credit Risk Management, U.S. 

Small Business Administration, 409 3rd 

Street, SW., 8th floor, Washington, DC 

20416. 

• Hand Delivery/Courier: Bryan 

Hooper, Director for Office of Credit 

Risk Management, U.S. Small Business 

Administration, 409 3rd Street, SW., 8th 

Floor, Washington, DC 20416. 

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 

Bryan Hooper, Director for Office of 

Credit Risk Management, Office of 

Credit Risk Management. 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: 

Bryan Hooper, Director, Office of Credit 

Risk Management, U.S. Small Business 

Administration, 409 Third Street, SW., 

8th Floor Washington, DC 20416, (202) 

205–3049. 

SUPPLEMENTARY INFORMATION: 

I. Background Information 

A. Introduction to the Risk Rating 

System 

In 2005, the Small Business 

Administration (SBA) developed an 

SBA internal Lender Risk Rating System 

(Risk Rating System). The Risk Rating 

System is an internal tool that primarily 

uses data in SBA’s Loan and Lender 

Monitoring System (L/LMS) to assist 

SBA in assessing the risk of an SBA 

Lender’s SBA loan performance 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) 

and 504 loan portfolios and to assist 

SBA in managing the related risk. In 

addition, SBA uses risk ratings and the 

underlying components to make more 

effective use of its on-site and off-site 

Lender review and assessment 

resources. 

Under SBA’s Risk Rating System, SBA 

assigns all SBA Lenders a composite 

risk rating of 1 to 5, based on empirical 

data. The rating reflects SBA’s 

assessment of the potential risk to the 

government of that SBA Lender’s SBA 

portfolio performance. The composite 

rating is calculated using several 

component factors. The component 

factors 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. 

On May 1, 2006, SBA published a 

notice and request for comment in the 

Federal Register seeking comments on 

the proposed Risk Rating System (72 FR 

25624). A final notice was published in 

the Federal Register on May 16, 2007 

(72 FR 27611). 

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. This 

redevelopment is consistent with such 

practices and is necessary to ensure that 

SBA’s risk ratings provide an accurate 

assessment of Lenders’ SBA portfolio 

performance. SBA’s portfolio has 

changed substantially over the past five 

years; the portfolio has grown 

dramatically, and the composition of 

loan products (delivery methods) has 

greatly shifted. In addition, over the past 

five years the economy, and in 

particular the small business lending 

environment, has changed. Given these 

circumstances and that SBA now has 

five years’ experience with this 

modeling and the type of SBA data 

available, SBA determined to test for 

additional or different components to 

increase the model’s predictiveness. 

SBA reviewed 86 possible variables; 

of which 26 were tested in detail. These 

variable factors were derived from 

SBA’s experience working with the 

model over the past five years and 

feedback from Lenders, including 

comments received in response to the 

Proposed Risk Rating System Notice. 71 

FR 25624 (May 1, 2006). The factors 

were run through the model in various 

combinations and the most predictive 

combinations of factors were chosen for 

each loan program (7(a) and 504). In so 

doing, SBA selected additional 

components that proved to enhance the 

predictive value of the model over the 

earlier model factors. 

II. The Redeveloped Risk Rating Model 

The redeveloped model used to 

calculate the composite risk ratings is an 

updated version of the previous model. 

It remains a custom credit score model, 

at the Lender-level, based on the same 

outcome as the previous system—the 

likelihood of a Lender’s purchases over 

the next 12 months. It models the 

relative risk levels of Lenders. The 

model continues to use loan-level SBA 

performance data (as provided by the 

Lenders and SBA centers), and it 

continues to use external risk 

assessment data in the form of off-theshelf Small Business Predictive Score 

(SBPS) credit scores, derived from third 

party business and consumer credit 

bureau data. 

The SBA will continue to report the 

risk ratings by SBA peer groups based 

on SBA loan portfolio size, as 

determined by outstanding SBA 

guaranteed dollars. Peer group sizes will 

remain the same as under the former 

Lender Risk Rating Notice, and they will 

continue to reflect SBA’s relative level 

of risk from Lenders in each peer group. 

The existing peer groups will continue 

to significantly reduce the possibility of 

the same event (for example, a loan 

purchase) having a different impact on 

Lenders in the same peer group. 

Splitting SBA Lenders into peer groups 

based on portfolio size also helps SBA 

to better monitor those SBA Lenders in 

the largest peer groups that represent 

the overwhelming majority of 

guaranteed dollars at risk, and allows 

SBA to make the best use of its oversight 

resources. The most notable changes 

that will result from the redevelopment 

are: 

1. Updated components in the linear 

regression formulas for both 7(a) 

Lenders and CDCs in the 504 program, 

chosen in conjunction with a full stepwise regression analysis. 

2. Modeling of the overall portfolios, 

with the age and/or size of a Lender’s 

portfolio represented by a component 

(consisting of three segments for 7(a) 

Lenders). These segments replace the 

need for a separate linear regression 

model for each Peer Group in 7(a). 

3. Both components and weightings of 

the components are the same across the 

7(a) portfolio. The components and 

weightings of the rating formula are also 

the same across all CDCs. 

The rating components in the new 

risk rating model include: 

1. Several previously used rating 

components; 

2. Additional performance-related 

components; 

3. Components to account for 

differences in performance between 

delivery methods; 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices 9259 

4. Assessment of the age of a loan 

portfolio; 

5. Other measures of loan credit 

quality; 

6. Measures of net flow (dollars in and 

dollars out); and 

7. An additional commercial off the 

shelf risk score. 

SBA had received a number of 

comments when it initially proposed 

the Risk Rating System in May 2006 

regarding the need to include losses and 

recoveries in the risk rating models. Due 

to the substantial time lag for losses to 

occur, adding a loss factor did not 

directly improve the predictive power of 

the Lender risk ratings. However, a 

similar factor, net flow, did add to the 

predictive values of the risk rating 

model for 7(a) Lenders and was 

therefore included as a new 7(a) rating 

component. Net flow incorporates a 

measure of losses and recoveries, as it 

is calculated by summing all fees and 

recoveries coming in, less purchases 

going out. 

These new components provide SBA 

and its Lenders with a more diverse set 

of factors that add predictive value to 

the risk ratings calculated by the risk 

rating model. A description of all of the 

rating components used in the 

redeveloped risk rating model may be 

found in the overview section below. 

III. Other Changes to the Risk Rating 

System 

In addition to employing new rating 

components, the redeveloped risk rating 

model also relies on a newer version of 

the SBPS scoring tool. As of June 30, 

2009, SBA switched from SBPS version 

5 to an improved SBPS version 6 

recently produced by Dun & Bradstreet 

(D&B) and FICO. Version 6 has been 

validated numerous times for more than 

a year by D&B/FICO and an SBA 

subcontractor, TrueNorth, and it has 

been found to be predictive on both the 

7(a) and 504 loan portfolios. In addition, 

since the commercial release of SBPS 

version 6 in December 2006, the SBPS 

has also been validated on multiple 

independent account portfolios of 

industry leading financial institutions. 

This notice provides program 

participants and other parties with an 

explanation of the components and a 

description of other modeling 

enhancements. In addition, SBA is 

soliciting comments on the components 

and enhancements. These changes have 

been made to the model and included 

in the risk rating update for the quarter 

ending September 30, 2009, and will be 

made available to Lenders through 

SBA’s Lender Portal upon publication of 

this notice. 

IV. Text of the 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 potential risk to 

the government of that SBA Lender’s 

SBA portfolio performance. 

For 7(a) Lenders, SBA will base the 

composite rating on eleven components. 

The components for 7(a) Lenders are as 

follows: 

1. Past 12 Months Actual Purchase 

Rate; 

2. Six (6) Month Liquidation Rate; 

3. Gross Delinquency Rate; 

4. Gross Past-Due Rate; 

5. Six (6) Month Net Flow Indicator; 

6. Average Small Business Predictive 

Scores (SBPS); 

7. Projected Purchase Rate (PPR); 

8. Dollar Weighted Average Financial 

Stress Score (FSS); 

9. PLP Percent; 

10. SBA Express Percent; and 

11. Portfolio Size/Age. 

The statistical analysis performed 

showed that incorporating the Portfolio 

Size/Age component improved the 

predictive power of the 7(a) Lender risk 

rating. This component is further broken 

down into three segments: 

(1) Lenders with 7(a) portfolios equal 

to or less than $4 million SBA 

guaranteed outstanding; 

(2) Lenders with 7(a) portfolios over 

$4 million SBA guaranteed outstanding, 

and whose average loan age is over 30 

months; and 

(3) Lenders with 7(a) portfolios over 

$4 million SBA guaranteed outstanding, 

and whose average loan age is equal to 

or under 30 months. 

For CDCs, SBA will base the Lender 

rating on six common components. The 

components for CDCs follow: 

1. Past 12 Months Actual Purchase 

Rate; 

2. Six (6) Month Delinquency Rate; 

3. Gross Delinquency Rate; 

4. Gross Past-Due Rate; 

5. Average Small Business Predictive 

Score (SBPS); and 

6. Low Month on Book Indicator. 

In general, these 7(a) and CDC 

components reflect both historical SBA 

Lender performance and projected 

future performance. The components 

were selected through statistical 

analysis using step-wise regression 

analysis. The selected components were 

then used in an overall regression model 

to create the Lender risk rating. No 

single component normally decides an 

SBA Lender’s risk rating. SBA updates 

the Lender risk ratings on a quarterly 

basis, using refreshed Lender data. Each 

of the risk rating factors is described in 

more detail in the Rating Components 

section below. 

SBA generally does not intend to use 

the risk ratings as the sole basis for 

taking enforcement actions against SBA 

Lenders. The primary purpose 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. 

All SBA Lenders have on-line access 

to their Lender risk rating and rating 

component values along with peer 

group and portfolio component averages 

through SBA’s Lender Portal. 

Information on the Lender Portal can be 

found at 72 FR 27611, 27619 (May 16, 

2007). 

B. Lender Risk Rating 

The SBA Lender risk rating (LRR) is 

a measure of predicted performance 

over the next 12 months. SBA uses its 

risk rating model to calculate and assign 

a composite rating of 1 to 5 to each SBA 

Lender. SBA may make adjustments to 

the composite rating based on results of 

reviews, third party information on a 

SBA Lender’s operations, portfolio 

trends and other information that could 

impact a SBA Lender’s risk profile. (See 

Overriding Factors section for further 

detail.) In general, a rating of 1 indicates 

strong portfolio performance, least risk, 

and that the least degree of SBA 

oversight is likely needed (relative to 

other SBA Lenders), while a 5 rating 

indicates weak portfolio performance, 

highest risk, and that the highest degree 

of SBA oversight is likely needed. SBA 

provides the following general 

descriptions for the Lender risk ratings: 

LRR 1—The SBA operations of an 

SBA Lender rated 1 are generally 

considered strong in every respect, 

typically score well above average in all 

or nearly all of the rating components 

described in this Notice, are more likely 

to have well below average historical 

purchase rate, and have loans that 

demonstrate highly acceptable credit 

quality and/or credit trends as measured 

by credit scores and portfolio 

performance. 

LRR 2—The SBA operations of an 

SBA Lender rated 2 are generally 

considered good, typically are above 

average in all or nearly all of the rating 

components described in this Notice, 

are more likely to have below average 

previous (12 months) purchase rates, 

and have loans that demonstrate betterthan-acceptable credit quality and/or 

credit trends as measured by credit 

scores and portfolio performance. 

mstockstill on DSKH9S0YB1PROD with NOTICES

9260 Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices 

LRR 3—The SBA operations of an 

SBA Lender rated 3 are generally 

considered about average in all or nearly 

all of the rating components described 

in this Notice, are likely to have average 

previous (12 months) purchase rates, 

and have loans that demonstrate 

acceptable credit quality and/or credit 

trends as measured by credit scores and 

portfolio performance. 

LRR 4—The SBA operations of an 

SBA Lender rated 4 are generally 

considered below average in all or 

nearly all of the rating components 

described in this Notice, are likely to 

have below average component factors 

and above average previous (12 months) 

purchase rates, and have loans that 

demonstrate somewhat less-thanacceptable credit quality and/or credit 

trends as measured by credit scores and 

portfolio performance. 

LRR 5—The SBA operations of an 

SBA Lender rated 5 are generally 

considered well below average in all or 

nearly all of the rating components 

described in this Notice, are most likely 

to have well above average previous (12 

months) purchase rates, and have loans 

that demonstrate less-than-acceptable 

credit quality and/or credit trends as 

measured by credit scores and portfolio 

performance. 

The descriptions for each rating value 

are not meant as definitions of the 

ratings and do not limit or dictate SBA’s 

dealings with any SBA Lender. 

C. Rating Components 

1. 7(a) Lenders 

SBA’s quantitative composite risk 

ratings for 7(a) Lenders rely on eleven 

components, selected because of their 

power to predict loan purchases over 

the next 12 months. For the 7(a) 

program, the eleventh component is 

broken down into three different 

segments based on age and size of a 7(a) 

Lender’s portfolio. Each of the eleven 

rating components is defined below. 

(i) Past 12–Months Actual Purchase 

Rate. The Past 12–Month Actual 

Purchase Rate is a historical measure of 

SBA loan guarantee purchases from the 

7(a) Lender in the 12 months preceding 

the rating date. Thus, this component 

provides a measure of 7(a) Lender 

performance and risk reflective of actual 

SBA guarantee purchases. SBA 

calculates this rate by dividing the sum 

of total gross dollars of the 7(a) Lender’s 

loans purchased during the past 12 

months (numerator), by the sum of total 

gross dollars of the 7(a) Lender’s SBA 

loans outstanding at the end of the 12- 

month period. Gross dollars purchased 

in the last 12 months are added to the 

denominator, as they are not included 

in the outstanding figure. 

(ii) 6 Month Liquidation Rate. The Six 

(6) Month Liquidation Rate is the 

liquidation rate (loans in liquidation but 

not yet purchased by SBA) calculated 

over the past six (6) months. This 

component provides a measure of 7(a) 

Lender performance and risk as 

indicated by dollars in liquidation over 

the past six (6) months, as placed in that 

status by SBA at the request of the 

Lender. SBA calculates this ratio by 

dividing the sum of the total gross 

dollars of the 7(a) Lender’s SBA loans in 

liquidation status in each of the six (6) 

months prior to the rating date 

(numerator), by the sum of total gross 

dollars of the (7a) Lender’s SBA loans 

outstanding in each of the six (6) 

months prior to the rating date 

(denominator). 

(iii) Gross Delinquency Rate. The 

Gross Delinquency Rate is the 

delinquency rate (loans 60 days past 

due or more, but not in liquidation) as 

of the rating date. This component 

provides a measure of 7(a) Lender 

performance and risk as indicated by 

SBA loan dollars in delinquency status 

as reported by the Lender. SBA 

calculates this ratio by dividing the sum 

of the total gross dollars of the 7(a) 

Lender’s SBA loans in delinquency 

status as of the rating date (numerator), 

by the sum of total gross dollars of the 

7(a) Lender’s SBA loans outstanding as 

of the rating date (denominator). 

(iv) Gross Past-Due Rate. The Gross 

Past-Due Rate is the past-due rate (30 to 

59 days past-due) as of the rating date. 

This component provides a measure of 

7(a) Lender performance and risk as 

indicated by SBA loan dollars in pastdue status as reported by the Lender. 

SBA calculates this rate by dividing the 

sum of the total gross dollars of the 7(a) 

Lender’s SBA loans in past-due status as 

of this date (numerator), by the sum of 

the total gross dollars of the 7(a) 

Lender’s SBA loans outstanding as of 

this date (denominator). 

(v) 6 Month Net Flow Indicator. The 

Six (6) Month Net Flow Indicator 

measures net flows, or dollars-in and 

dollars-out, over the last six (6) months 

preceding the rating date. Dollars-in 

includes guarantee fee payments and 

recoveries by SBA from a 7(a) Lender; 

dollars-out reflects guarantee purchases 

made by SBA. The net flow indicator is 

calculated by summing up all guarantee 

fees and recoveries submitted by the 

7(a) Lender to SBA over the six (6) 

months prior to the rating date. From 

the six (6) month total, all of the 

purchases paid out by SBA to the 7(a) 

Lender over the same six (6) months are 

subtracted. If the net flow of dollars is 

positive, the component value is a 1; if 

the net flow of dollars is negative, the 

component value is 0. 

(vi) Average Small Business Predictive 

Score (SBPS). The SBPS is a portfolio 

management (not origination) credit 

score based upon a borrower’s business 

credit report and principal’s consumer 

credit report. SBPS is a proprietary 

calculation provided by Dun & 

Bradstreet, under contract with SBA, 

and is compatible with FICO’s ‘‘Liquid 

Credit’’ origination score. This 

component provides an indication of 

the relative credit quality of the loans in 

a 7(a) Lender’s SBA portfolio. The score 

is calculated from the average SBPS 

score of the loans in a 7(a) Lender’s 

portfolio, weighted by each loan’s 

guaranteed dollars outstanding. 

(vii) Projected Purchase Rate (PPR). 

The PPR is a predictive measure of the 

relative future riskiness of the 7(a) 

Lender’s SBA loans over the next 12- 

months, calculated as of the rating date. 

This is a credit quality, leading 

indicator, predictive factor. The PPR is 

derived from the annual and quarterly 

statistical validations of SBPS credit 

scores on the entire SBA 7(a) portfolio. 

As part of this validation process, Dun 

& Bradstreet and FICO compare the 

SBPS credit scores, by delivery method, 

of all outstanding 7(a) loans at the 

beginning of the validation period to the 

actual purchases observed over the next 

12-months. From this comparison, a 

projected purchase rate is developed for 

each 7(a) loan based on the loan’s 

delivery method and current SBPS 

credit score. A 7(a) Lender’s PPR is then 

determined by calculating the dollarweighted average PPR of the 7(a) loans 

in the Lender’s portfolio. SBA calculates 

this rate by dividing the sum of the 

PPRs for each loan (multiplied by the 

guaranteed dollars outstanding for each 

loan) by the total guaranteed dollars 

outstanding for all the Lender’s loans. 

(viii) Dollar Weighted Average 

Financial Stress Score (FSS). The FSS 

predicts the likelihood that a small 

business borrower will experience one 

or more of the following conditions over 

the next 12 months, based on the 

information in D&B’s files: obtaining 

legal relief from creditors; ceasing 

business operations without paying all 

creditors in full; voluntarily 

withdrawing from business operation, 

leaving unpaid obligations; going into 

receivership or reorganization; or 

making an arrangement for the benefit of 

creditors. FSS uses statistical 

probabilities to classify businesses into 

a score range, where the lowest score 

has the highest likelihood of business 

failure. The score includes D&B data 

related to payment trends, business 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices 9261 

financial statements, industry position, 

business size and age, and public 

filings. 

(ix) PLP Percent. The PLP Percent is 

the percent of the 7(a) Lender’s PLP loan 

dollars outstanding (disbursed but not 

purchased or paid-in-full), compared to 

the 7(a) Lender’s total outstanding SBA 

portfolio as of the rating date. This 

variable is reflective of the fact that 

there is a strong correlation among 

various SBA delivery methods and loan 

risk, with PLP loans generally providing 

the least risk. This component is 

calculated by taking the sum of the 7(a) 

Lender’s total PLP loan gross dollars 

outstanding (numerator), and dividing it 

by the sum of the total gross dollars 

outstanding for the 7(a) Lender 

(denominator). 

(x) SBA Express Percent. The SBA 

Express Percent is the percent of the 7(a) 

Lender’s SBA Express loan dollars 

outstanding (disbursed but not 

purchased or paid-in-full), compared to 

the 7(a) Lender’s total outstanding SBA 

portfolio as of the rating date. This 

variable is reflective of the fact that 

there is a strong correlation among 

various SBA delivery methods and loan 

risk, with SBA Express loans being 

among those delivery methods with 

generally greater risk. This component 

is calculated by taking the sum of the 

7(a) Lender’s total SBA Express loan 

gross dollars outstanding (numerator), 

and dividing it by the sum of the total 

gross dollars outstanding for the 7(a) 

Lender (denominator). 

(xi) Portfolio Size/Age Segment 

Component. During the redevelopment 

process, it was found that 7(a) Lender 

performance differed depending on the 

size and age of the Lender’s SBA 

portfolio. To account for these 

differences, 7(a) Lenders were analyzed 

and divided into three different 

segments based on the differences seen 

in the performance outcome variable. 

The first segment of 7(a) Lenders 

consists of Lenders with SBA portfolios 

less than or equal to $4 million in 

outstanding SBA guarantees regardless 

of portfolio age. This segment generally 

presents the least portfolio risk. The 

second segment of 7(a) Lenders consists 

of Lenders with an outstanding SBA 

guaranteed portfolio of more than $4 

million and an average loan age (‘‘month 

on book’’) of greater than 30 months. 

The third segment of 7(a) Lenders 

consists of Lenders with an outstanding 

SBA guaranteed portfolio of more than 

$4 million and an average loan age 

(‘‘month on book’’) of less than or equal 

to 30 months. This segment generally 

presents the greatest portfolio risk. 

Factor weight is dependent on which 

segment is applicable. 

2. Certified Development Companies 

(CDCs) 

SBA’s quantitative composite risk 

ratings for CDCs rely on six 

components, selected because of their 

power to predict loan purchases over 

the next 12 months. Each of the six 

rating components is defined below. 

(i) Past 12–Months Actual Purchase 

Rate. The Past 12 Months Actual 

Purchase Rate is a historical measure of 

SBA loan guarantee purchases from the 

CDC in the 12 months preceding the 

rating date. Thus, this component 

provides a measure of the CDC’s 

performance and risk reflective of actual 

SBA guarantee purchases. SBA 

calculates this rate by dividing the sum 

of total gross dollars of the CDC’s loans 

purchased during the past 12 months 

(numerator), by the sum of total gross 

dollars of the CDC’s SBA loans 

outstanding at the end of the 12-month 

period. Gross dollars purchased in the 

last 12 months are added to the 

denominator, as they are not included 

in the outstanding figure. 

(ii) 6 Month Delinquency Rate. The 

Six (6) Month Delinquency Rate is the 

delinquency rate calculated over the 

past six (6) months. It is calculated by 

dividing the sum of the total gross 

dollars of the CDC’s loans in 

delinquency status in each of the six (6) 

months prior to the rating date 

(numerator) by the sum of total gross 

dollars of the CDC’s SBA loans 

outstanding in each of the six (6) 

months prior to the rating date. 

(iii) Gross Delinquency Rate. The 

Gross Delinquency Rate is the 

delinquency rate (loans 60 days past 

due or more, but not in liquidation) as 

of the rating date. This component 

provides a measure of CDC performance 

and risk as indicated by SBA loan 

dollars in delinquency status as 

reported by the CDC. SBA calculates 

this rate by dividing the sum of the total 

gross dollars of the CDC’s SBA loans in 

delinquency status as of the rating date 

(numerator) by the sum of total gross 

SBA dollars of the CDC’s SBA loans 

outstanding as of the rating date 

(denominator). 

(iv) Gross Past-Due Rate. The Gross 

Past-Due Rate is the past-due rate (30 to 

59 days past-due) as of the rating date. 

This component provides a measure of 

CDC’s performance and risk as indicated 

by SBA loan dollars in past-due status 

as reported by the CDC. SBA calculates 

this rate by dividing the sum of the total 

gross dollars of the CDC’s SBA loans in 

delinquency status as of this date 

(numerator), by the sum of the total 

gross dollars of its SBA loans 

outstanding as of this date 

(denominator). 

(v) Average Small Business Predictive 

Score (SBPS). The SBPS is a portfolio 

management (not origination) credit 

score based upon a borrower’s business 

credit report and principal’s consumer 

credit report. SBPS is a proprietary 

calculation provided by Dun & 

Bradstreet, under contract with SBA, 

and is compatible with FICO’s ‘‘Liquid 

Credit’’ origination score. This 

component provides an indication of 

the relative credit quality of the loans in 

a CDC’s SBA portfolio. The score is 

calculated from the average SBPS score 

of the loans in a CDC’s portfolio, 

weighted by each loan’s guaranteed 

dollars outstanding. 

(vi) Low Month on Book Indicator. 

The Low Month on Book Indicator 

component is triggered for a CDC if that 

CDC has a month-on-book age (average 

age) of 30 months or less. CDCs with a 

portfolio with less than 30 months on 

book or exactly 30 months on book 

generally have portfolios that are 

growing rapidly. The modeling process 

showed that there is a marked difference 

in these CDCs’ performance compared 

to those CDCs with more established 

portfolios. If a CDC has a portfolio with 

an average age of more than 30 months 

on book, this component has a zero 

weight in its rating. 

3. Overriding Factors 

In addition to the common 

components referenced above, the 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’ on-site risk based 

reviews/assessments and off-site 

evaluations. SBA routinely conducts onsite reviews of large SBA Lenders, 

performs safety and soundness 

examinations of SBA Small Business 

Lending Companies (SBLCs) and NonFederally Regulated Lenders, and uses 

mstockstill on DSKH9S0YB1PROD with NOTICES

9262 Federal Register / Vol. 75, No. 39 / Monday, March 1, 2010 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 60860 

(October 21, 2009), 74 FR 55600 (‘‘Notice’’). 

4See infra note 13. 

5See letter from Sharon Zackula, Associate Vice 

President and Associate General Counsel, FINRA, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

December 22, 2009 (‘‘FINRA Letter’’). 

6See infra Section III. 

7See Securities Exchange Act Release No. 60726 

(September 28, 2009), 74 FR 50991 (October 2, 

2009) (approving SR–FINRA–2009–010). 

8See Amendment No. 1, infra Section III. 

9See id. 

10See id. 

11See id. 

12See id. 

certain off-site 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 federal financial 

regulators; 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 significantly 

worse than average; and inadequate, 

incomplete, or untimely reporting to 

SBA or inaccurate submission of 

required fees to SBA. 

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 first redevelopment of SBA’s 

risk rating model. In addition to the 

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 

possibly improve the predictability of 

its risk scoring. 

Authority: 15 U.S.C. 634(b)(7), and 15 

U.S.C. 687(f). 

Karen G. Mills, 

Administrator. 

[FR Doc. 2010–4266 Filed 2–26–10; 8:45 am] 

BILLING CODE 8025–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–61566; File No. SR–FINRA– 

2009–065] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 1 and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment No. 1 Thereto, To Require 

the Reporting of Transactions in 

Asset-Backed Securities to TRACE 

February 22, 2010. 

I. Introduction 

On October 1, 2009, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (the ‘‘Act’’)1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

designate asset-backed securities, 

mortgage-backed securities, and other 

similar securities (collectively, ‘‘AssetBacked Securities’’) as eligible for the 

Trade Reporting and Compliance Engine 

(‘‘TRACE’’), and to establish reporting, 

fee, and other requirements relating to 

such securities. The proposed rule 

change was published for comment in 

the Federal Register on October 28, 

2009.3 The Commission received four 

comments in response to the proposal.4

On December 22, 2009, FINRA 

responded to the comments 5 and on 

January 19, 2010, FINRA filed 

Amendment No. 1 to the proposal.6 The 

Commission is publishing this notice 

and order to solicit comments on 

Amendment No. 1 and to approve the 

proposed rule change, as modified by 

Amendment No. 1, on an accelerated 

basis. 

II. Description of the Proposal 

FINRA utilizes TRACE to collect from 

its members and publicly disseminate 

information on secondary over-thecounter transactions in corporate debt 

securities and, pursuant to a recent rule 

change to the Rule 6700 Series,7 Agency 

Debt Securities and certain primary 

market transactions. In this proposal, 

FINRA has proposed to expand TRACE 

to include the reporting (but not public 

dissemination) of Asset-Backed 

Securities. Specifically, the proposed 

rule change would: 

(1) In Rule 6710, amend the defined 

terms (a) ‘‘TRACE–Eligible Security’’ to 

include Asset-Backed Securities; (b) 

‘‘Reportable TRACE Transaction’’ to 

include specific requirements regarding 

certain Asset-Backed Securities; (c) 

‘‘Agency Debt Security’’ to incorporate 

new defined terms; (d) ‘‘TRACE System 

Hours’’ to transfer the defined term from 

Rule 6730(a) to Rule 6710(bb); and (e) 

‘‘Asset-Backed Security’’ to clarify that 

the definition included a residual 

tranche of an Asset-Backed Security; 8

(2) To Rule 6710, add the defined 

terms, ‘‘Sponsor,’’ ‘‘Issuing Entity,’’ 

‘‘TBA,’’ ‘‘Agency Pass-Through 

Mortgage-Backed Security,’’ ‘‘Factor,’’ 

‘‘Specified Pool Transaction,’’ 

‘‘Stipulation Transaction,’’ ‘‘Dollar Roll,’’ 

and ‘‘Remaining Principal Balance’’; 

(3) Amend the definitions of ‘‘List or 

Fixed Offering Price Transaction’’ and 

‘‘Takedown Transaction’’ in Rule 

6710(q) and Rule 6710(r), respectively, 

to exclude from those defined terms 

transactions in any type of Asset-Backed 

Security; 

(4) In Rule 6710(y), amend the 

defined term ‘‘Stipulation Transaction’’ 

to delete the condition relating to the 

settlement of transactions not in 

conformity with certain uniform 

practices established as ‘‘good delivery’’; 

(5) In Rule 6710(w), amend the 

defined term ‘‘Factor’’; 9

(6) In Rule 6730, require the reporting 

of Asset-Backed Securities transactions; 

(7) In Rule 6730(a)(6)(A), and for a 

six-month pilot period, establish the 

reporting period for Asset-Backed 

Securities transactions to no later than 

T + 1 during TRACE System Hours;10

(8) In Rule 6730(d)(1), amend the 

requirement that a member input a 

commission stated in points per bond, 

and instead require reporting of the total 

dollar amount of a commission; 

(9) In Rule 6730(d)(2), modify the 

manner that a member reports the 

Factor to require a member to report the 

Factor only if the Factor used is not the 

current most publicly available Factor 

for the Asset-Backed Security; 

(10) In Rule 6730(d)(4)(B), add 

subparagraphs (i) and (ii) and, in 

subparagraph (ii), require members to 

report, for all transactions in AssetBacked Securities, the actual date of 

settlement and indicate if the 

transaction will or will not settle 

‘‘regular way’’;11

(11) In Rule 6750, provide that 

information on a transaction in a 

TRACE–Eligible Security that is an 

Asset-Backed Security will not be 

disseminated; 

(12) In Rule 6760, require a member 

that is a Sponsor or an Issuing Entity of 

an Asset-Backed Security to provide the 

required notice to FINRA, and modify 

the notification requirements to accept a 

mortgage pool number in certain 

circumstances; 

(13) In Rule 7730, establish reporting 

fees for transactions in Asset-Backed 

Securities that are TRACE–Eligible 

Securities at the same rates in effect for 

transactions in corporate debt 

securities;12 and 

(14) In Rule 6700 Series, incorporate 

certain technical, administrative, and 

clarifying changes. 

mstockstill on DSKH9S0YB1PROD with NOTICES