CUNA Comment Letter
SBA Lender Examination and Review Fees Proposal
RIN Number 3245-AF49
October 5, 2006
Mr. Bryan Hooper
Associate Administrator for Lender Oversight
Small Business Administration
409 Third Street, S.W.
Washington, D.C. 20416
Dear Mr. Hooper:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Small Business Administrations (SBAs) proposed rule to implement a December 2004 amendment to the Small Business Act authorizing the agency to assess fees to lenders participating in SBAs 7(a) loan guarantee program. The fees are intended to cover the costs of examinations, reviews, and other lender oversight activities. Currently, SBA does not charge lenders for examinations/reviews conducted by the agency. By way of background, CUNA represents approximately 90 percent of our nations 8,800 state and federal credit unions, which serve nearly 87 million members.
All lenders receive a quarterly off-site review, which is conducted using SBAs Loan and Lender Monitoring System (L/LMS). Under the proposal, lenders would be allocated off-site review/monitoring costs based on that institutions proportionate share of the guaranteed dollars in the entire outstanding SBA portfolio. Further, lenders would pay the actual costs to SBA of any on- site examinations and reviews. The proposed rule also describes the billing and payment processes SBA would utilize to collect these fees.
As discussed below, CUNA does not support imposing such fees on 7(a) lenders.
Summary of CUNAs Comments
- Lenders participating in the SBA program already pay sufficient fees through the guarantee and servicing fees assessed by the agency. This new fee, combined with current SBA fees, would dampen enthusiasm for participation in the SBAs program. Ultimately, the fee could hinder the goal of the 7(a) program to provide loans to small businesses that would otherwise not be able to obtain a loan.
- The proposed risk-based methodology, based on the overall size of the lenders portfolio, seems arbitrary. A methodology based on the actual exam/review costs (time and expense), the actual number of loans in a portfolio, or a combination of those two methods would be equitable.
- NCUA already scrutinizes the guaranteed loan programs when examiners conduct reviews of credit unions member business loan (MBL) programs. SBA should rely on those exams, working cooperatively with the National Credit Union Administration (NCUA).
- If SBA goes forward with these fees, SBA should waive or exempt very small volume lenders, which many credit unions are. Also, the fees should not be retroactively applied to loans already on the lenders books.
- Requiring lenders to remit payment to the SBA within 30 days from the bill date does not provide sufficient time to lenders.
- We agree that lenders should not be charged for other expenses in carrying out lender oversight activities, such as the salaries and travel expenses of SBA employees.
Discussion of CUNAs Comments
SBAs Goal and Cumulative Fees
A growing number of credit unions have become participants in the SBA 7(a) lending program since SBA decided in 2003 to expand its guaranteed loan program to all credit unions, regardless of charter. Credit unions and their members benefit from this participation by enabling credit unions to grant loans that they would not otherwise grant. However, credit unions are still relatively new participants and, therefore, generally have small guaranteed loan portfolios at the present time. Based on the estimates in the proposal, we believe that the majority of credit union participants in the 7(a) program would fall in the fee categories ranging from $327 and less. While this represents a small amount of money by itself, when coupled with the current substantial guarantee fee as well as the annual service fee of up to .545% of the outstanding balance of the guaranteed portion of each loan, the expenses add up.
We do not believe the SBA has justified the need for imposing such cost, which would run counter to the SBAs goal as stated in the proposal of assist[ing] as many of Americas small businesses as are eligible for agency assistance. The continued rise in costs may well price such loans out of the reach of small business recipients for which the program was established. Because it would be difficult for credit unions to pass on continued cost increases, there could be a detrimental effect on the interest of credit unions and other institutions in becoming 7(a) lenders and discourage current participants from increasing their guaranteed loan portfolio.
The methodology proposed is risk-based, depending on the size of the lenders guaranteed portfolio. The size of a loan portfolio does not provide an accurate measure of the level of risk posed by the lender. Larger portfolios may technically have more funds at risk. However, if they are primarily made up of large loans they are also more likely to be secured with a higher quality of tangible collateral and undergo a more thorough review than smaller loans that can be granted based on a lesser set of criteria (stated income, credit scoring models, etc). Moreover, since the SBA examination looks at a percentage of funded loans regardless of size, assessing fees based on portfolio size alone may penalize the smaller lenders that fund fewer loans or loans with a higher-than-average size. An institution with numerous small loans may take more time and manpower on the part of SBA to perform an examination than an institution with fewer loans but of larger size.
Therefore, if SBA proceeds with the new fees, a more equitable methodology would be one based on the actual time and money spent on the individual lenders exam/review by SBA. If the calculation of actual exam/review costs is not feasible, we recommend the charges be based on the number of loans in the lenders portfolio, or on a combination of number of loans and dollar amount.
Redundant Examination Costs
Credit unions and other federally insured depository institutions are already highly regulated and supervised. As part of the supervision process, NCUA examines credit unions for safety and soundness. If the credit union has member business loans (MBLs), including any loans guaranteed by SBA, NCUA examiners review the various aspects of the MBL program, including: the credit unions MBL policies/procedures; staff experience with MBLs; monitoring and servicing of those loans; internal control systems; and financing. Rather than impose a separate exam on 7(a) lenders, in order to reduce duplication of effort, SBA should work cooperatively with NCUA, including relying on exams conducted by NCUA.
In describing the formula to be used to calculate the off-site review fees, the term guaranteed dollars outstanding is defined to include guarantees of both loans held by the lender and loans sold into the secondary market, securitized, or for which a lender has sold a participation interest. It also includes loans that have been purchased by SBA but have not yet been charged off. If SBA determines the new fees are necessary, we urge SBA to include this definition in the proposed new provisions on Lender Oversight Fees (Section 120.1070) or in the definitions section of SBAs rules (Section 120.10) so that it is clear what that term encompasses.
Further, the terms monitoring, review and exam are used interchangeably. It would be beneficial for SBA to also define what is involved in each activity and how they differ in the Lender Oversight Fees section or the definitions section of the agencys rules.
Since many credit unions still have relatively small guaranteed loan portfolios, CUNA supports SBAs plan to provide an exemption for small volume lenders.
The proposal notes that lenders outstanding SBA guarantees and the total guaranteed SBA dollars would be calculated using September 30 portfolio figures. However, it is not evident from the proposal whether SBA plans to make the new fees effective prospectively or retroactively. If SBA decides to implement the proposed fee system, we strongly urge SBA to grandfather existing loans. If the fees were effective for loans already on the books when the rule goes into effect, it would not be fair to those lenders who entered into contacts with their borrowers without having had the opportunity to work new pricing/charges into the pricing charged to the borrower to the extent allowed under the agencys rules.
With regard to billing lenders for examination/review fees, the proposal states that the payment due date will be no less than 30 calendar days from the bill date. Any payment that is not received by the due date specified in the bill would be considered delinquent. SBA may charge interest, penalties and other charges on delinquent payments. We think the 30-day period is not sufficient for many lenders to remit the payment to SBA. There may be delays in sending the bill to the lenders after it is printed. Moreover, lenders require time to properly route the bill through their internal accounting/invoice system so it gets paid accurately. We feel that a minimum of 45 days, preferably 60 days, from the bill date is necessary.
Other Lender Oversight Expenses
Under the proposed rule, SBA has the authority to recover its other expenses in carrying out lender oversight activities (for example, the salaries and travel expenses of SBA employees and equipment expenses that are related to carrying out lender oversight activities). We support SBAs plan at this time not to charge lenders for these costs and encourage the agency to maintain this position.
Thank you for the opportunity to comment. If you have any questions about this letter, please contact me by phone at (202) 508-6743 or by e-mail at firstname.lastname@example.org.
Senior Regulatory Counsel
Credit Union National Association