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Feedback Friday — More OCC Won’t Accept Credit Score Comments

March 12, 2015

By Bob Coleman
Editor, Feedback Friday

1) Illinois-based First Capital Bank’s President Jeff Scott says a SBA credit score analysis is prohibited by the OCC

‘Hey guys-I can confirm as well, our primary regulator is the OCC and they absolutely will not allow us to utilize a simple credit score, combined with a minimum amount of analysis/commentary in our loan displays to decision deals. They don’t care if we have minimal risk on our par-side provided by the SBA guarantee. We still have to do a complete analysis and testing of historical and projected business repayment ability, combined with a robust global analysis.

‘The size of the request has no bearing on their attitudes about this requirement. Consequently, we kill just as many trees funding a $100k loan as we do writing a $2.0mm request. They will not allow us the opportunity to leverage this new SBA initiative.

‘Could we have a high ranking official from OCC/FDIC attend our NAGGL conference in October to explain their reasoning to us and perhaps our administrator? Just wondering…’

2) Walter McLaughlin of Banner Bank in Washington also weighs in on the credit score issue.

‘Good read on the regulatory pushback for using the SBA’s credit score in lieu of an analysis of repayment ability section of a credit write-up. We include the score in ours, but still complete the analysis. Our credit people would never agree to approve a loan of $350,000 (or anything close to that) with just a credit score in that section.

‘One quick correction to what you said about equity injections, and it’s just a technicality. SBA requires verification of equity injection for $350,000 and under only if a) there is one, and b) your bank policy requires it for similarly-sized non-SBA loans.

‘Here is the verbiage in the 50 10 5 (G), page 156:

‘If the lender requires an equity injection and, as part of its policies and procedures for its similarly-sized, non-SBA guaranteed commercial loans verifies the equity injection, it must do so for SBA loans;

‘This isn’t to say it’s not always a good idea to document the file as to the equity injection, but technically speaking, the requirements for smaller loans are no longer the same as with the rigid requirements for equity injection verification that exist on loans >$350,000. In theory, if your bank doesn’t require injection verification, you don’t have to document equity injection for 7(a) Small Loans now.’

3) Regarding our coverage of restaurant financing from this week’s National Alliance of Commercial Loan Brokers Conference in Vegas one reader asks if SBA 504 construction loans exempt from Risk Weighting Assessments?

‘First, restaurant finance—I wish I could say restaurants are easy, but the only people who seem to make money on them are the restaurant equipment distributors who buy the stuff back at auction for 5 or 10 cents on the dollar and then promptly sell it to the next restaurant for 80 or 90 cents on the original dollar.

‘Second, I attended a construction lending conference in Phoenix that included an SBA panel. The panelists said that SBA 504 construction loans are exempt from HV-CRE’s 150% risk weighting because, “by definition,” the CDC involvement qualify them for exemption as community development loans.

‘Unfortunately, I can’t find anything on the SBA site or on the OCC-FRB-FDIC sites that confirm 504’s are exempted. Banks over $500MM in assets are living with HV-CRE now, and banks under $500MM will be under it effective January 2016.

‘The 150% RWA adds another 75-100 bps to construction loan pricing by most estimates, so it’s enough to get our attention, especially for its potential impact on SBA 504 lending. So have you heard whether SBA 504’s are subject to HV-CRE?’

Anybody have a thought?

4) Here’s a nice comment about the stats I published Wednesday.

Richard Pallay here from CDC Small Business Finance. I travel around Los Angeles speaking to Entrepreneurs about Access To Capital and I usually like to open with information from your Main Street Wednesday.

This is a note to thank you for stats that encourage Entrepreneurs to “stay the course” they are great for our economy!

5) And I close with a comment by a CDC employee who takes exception to us selling SBA loan data we obtain from SBA.

‘For $1000 you give the world the keys to our kingdom.

‘A private bank would never allow the sale of the information that you are selling. All the details of our borrowers and our loans are now for sale. You hand the banks our portfolio on a plate to consume as they will.

‘Do you understand how destructive this information can be to a CDC? You are supposed to be an advocate of SBA loans and you have just put the CDC’s at enormous risk.’

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