1 Randy Christiansen National Bank Examiner OCC Large Bank Division SBA 504 Lending Regulatory Considerations

2 Overview of Risk Issues Credit risk - Underwriting risks - Concentrations - legal lending limits - Appraisal regulations and supervisory loan-to-value limits - Regulatory guidance on commercial real estate lending Liquidity risk Interest rate risk Reputation risks CRA benefits

3 Credit Risk Issues Underwriting Risks – Summary Favorable risk structure Above average obligor risk Below average collateral and structural risk Relatively low credit loss type of lending

4 Credit Risk Issues (continued) Underwriting Risks – Obligor Risk Above average risk of repayment Primary underwriting focus – repayment ability Principal or guarantor due diligence critical

5 Underwriting Risks – Structure and Collateral Favorable structure and collateral protection CAUTION: Collateral based lending Losses can and do occur Credit Risk Issues (continued)

6 Credit Concentrations and Lending Limits Second lien loan Secondary market Quality underwriting and due diligence is key Credit Risk Issues (continued)

7 Appraisal Regulation Requirements Appraisal regulations apply Business loan exemption may apply Appraisal independence standards Qualified appraisers and quality appraisals Poor appraisals or environmental studies Credit Risk Issues (continued)

8 Supervisory Loan-to-Value (SLTV) Exceptions Temporary high LTV transaction High LTV status can be extended for construction loans SLTV monitoring and reporting Credit Risk Issues (continued)

9 Commercial Real Estate Risk Management Guidance Owner occupied exemption Development or construction phase Majority of cash flow test Credit Risk Issues (continued)

10 Liquidity Risk Issues Take-Outs and Secondary Market Second lien take-out Active secondary market Repurchases

11 Interest Rate Risk Issues Rate Risk Management Negotiable rate structures Secondary market

12 Reputation Risks CDC and SBA Secondary Market Borrower

13 Community Reinvestment Act (CRA) Small business development Job creation, community and economic development Consideration given in CRA examinations CRA consideration a function of bank and loan size - Loans of $1 million or less may qualify as small business loans - Loans greater than $1 million may qualify as community development loans

14 Resources SBA 504 Loan Program: Small Businesses’ Window to Wall Street State listing of CDCs SBA information on the 504 product SBA regulations Lending limits Real estate lending and appraisals (see subpart C) Supervisory Loan-to-Value limits (see Appendix A to Subpart D) Proposed CRE Risk Management Guidance Community Reinvestment Act