Exhibit_2_-_PARRiS_RBR_Pre-Plan.pdf

Exhibit 2

THIS DOCUMENT IS STRICTLY CONFIDENTIAL

This review plan is the property of the U.S. Small Business Administration, Office of Credit Risk Management. Under no circumstances shall any recipient of this plan disclose or make public this document or any portion thereof. Unauthorized disclosure of any of the contents of this document is subject to the penalties in 18 USC 641. The Office of Credit Risk Management must be notified immediately if the examined entity receives a subpoena or other legal process calling for the production of this document.

U.S. Small Business Administration

Office of Credit Risk Management

7(a) Loan Program

PARRiS

Execution Guidance

FY 2013

Lender Name

(FIRS #)

Review Plan Execution Guidance Page 2 of 45 Lender Name (FIRS #)

Most Recent Template: Visit SharePoint

Portfolio Performance

Review Objective and Procedure

The objective of the Portfolio Performance review is to assess the degree of financial risk to the

SBA, largely based upon the lender’s ability to meet quantitative metrics defined by the Office of

Credit Risk Management. The over-arching metric is the calculated risk rating from the Loan and Lender Monitoring System and the Cumulative Net Cash Flow impact resulting from 7(a) lender cash impact to the SBA. This assessment includes an analysis of portfolio characteristics and comparisons of SBA, Lender and industry data, as applicable. A Lender must maintain satisfactory SBA performance as determined by SBA in its discretion.

Lender Risk Rating

1. CRR is a “4” or “5’

2. Calculated Risk Rating (“CRR”) is steadily declining over at least 4 quarters

Discuss with Lender any less than acceptable risk rating and trend over past 8 quarters.

Request Lender to diagnose causative factors for the CRR and/or trend.

Assess any proposed causative factors provided by Lender through application of additional subjective review activities

Use information to inform additional review activities.

Cumulative Cash Flow

3. Net Cash Flow significantly negative

4. Net Cash Flow below “Acceptable” range

Discuss with Lender any excessive cash flow, either quarterly or cumulative.

Request Lender to diagnose causative factors for the CRR and/or trend.

Assess any proposed causative factors provided by Lender through application of

Last 12 Month Charge-Off Rate

5. Rate outside “Acceptable” range

6. Rate steadily or substantially growing adversely (larger)

Request Lender to diagnose causative factors for the excessive charge-off rate.

Assess any proposed causative factors provided by Lender through application of

Review Plan Execution Guidance Page 3 of 45 Lender Name (FIRS #)

Gross Active Balances

7. Marked poor performance in one or more delivery methods

Discuss with Lender poor performance in identified delivery method.

Request Lender to diagnose causative factors for the trend.

Request management to explain any loan policy changes which may be causative upon the poor performing delivery method(s).

Assess any proposed causative factors provided by Lender through application of

Lender SBA Portfolio

8. Large volume of Active Purchases relative to portfolio size

9. Absolute large volume of Active Purchases

Assess lender’s Active Purchases to establish a basic picture of the outstanding loans which have been purchased but are still within the purview of the lender’s control.

Determine whether Lender’s policies and processes to manage Active Purchases are consistent with those for its non-purchased SBA loans up to Final Wrap-up Report submission.

Review a selection of purchased loans to determine whether Lender has well-defined and clear action plan events, with timelines and responsibilities for intensive attention.

Confirm that the unguaranteed portions of purchased loans and/or loans in liquidation status are consistently managed.

Identify whether Lender has forwarded all recoveries on repurchased loans within 15 days of receipt in accordance with SBA Loan Program Requirements.

o Determine based circumstances found in individual loan files as well as from the

“172 Late Payments” report on SharePoint.

Review the list of “Loans Purchased but not Charged Off” from the BI Tool.

o As required, is the Lender submitting the required quarterly reports?

o What percentage was purchased three years or more prior the Review?

o Have the Lender provide an update on those loans. Are bankruptcies, etc.

involved or is the Lender failing to wrap-up loans?

o What percentage was originated after 2009?

o Is there a trend in the emerging portfolio?

Review Plan Execution Guidance Page 4 of 45 Lender Name (FIRS #)

Asset/Liability Management

Review Objective and Procedures

The objective of the Asset/Liability Management review is to assess the quality of key origination, servicing, and workout practices of the lender’s SBA portfolio. This assessment considers both qualitative and quantitative factors to assess the lender’s ability to manage SBA loans through the origination, servicing, and resolution stages of the lending lifecycle. This assessment includes an analysis of credit policies and procedures, as well as analysis of a sample of performing loans and intensive servicing/non-performing assets. It includes analysis of recovered collateral to identify systemic features of the loan portfolio that pose an unnecessary financial risk to the SBA. It also includes an assessment of the effectiveness of the management and staff in managing these risks related to the lender’s SBA program. The review procedures utilize the lender’s loan policies, procedures and individual file reviews to determine if loan originations, loan monitoring and collection activities are in accordance with the lender’s discretionary policy, SBA policy, and prudent lender practice.

Origination Risk

10. Excessive high risk early defaults

Identify and categorize SBA excessive high risk originations by delivery method, industry and geographic concentration.

Discuss with management the perceived reasons behind the high risk originations.

Discuss any changes in loan underwriting policy during the time of the observed early default approvals.

Discuss with management any action taken in response to the early default pattern.

Review a judgmental sample of loans which have early default to assess creditworthiness and adherence to Lender’s and SBA underwriting standards.

Assess Lender’s booking, closing and disbursement actions on early defaulted loans to identify any causative factors for default.

Determine whether Lender performed site visits within 60 days of any unremedied default on early defaulted loans or as soon as possible after default if there are assets of significant value that could be removed or depleted.

Determine whether Lender has sufficiently identified and responded to causative factors of excessive early defaulted loans to ensure correction.

If Lender has not sufficiently identified and responded, discuss with management actions needed to do so.

11. Excessive high risk early problems

Identify and categorize SBA early problem loans by delivery method, industry and geographic concentration.

Discuss with management the perceived reasons behind the excessive early problem loans.

Review Plan Execution Guidance Page 5 of 45 Lender Name (FIRS #)

Discuss any changes in loan underwriting policy during the time of the observed early problem loan approvals.

Discuss with management any action taken in response to the early problem loan pattern(s).

Review a judgmental sample of loans which have early problem payment characteristics to assess creditworthiness and adherence to Lender’s and SBA underwriting standards.

Assess Lender’s booking, closing and disbursement actions on early defaulted loans to identify any causative factors for default.

Determine whether Lender performed site visits within 60 days of any unremedied default on early problem loans or as soon as possible after default if there are assets of significant value that could be removed or depleted.

Determine whether Lender has sufficiently identified and responded to causative factors of excessive early problem loans to ensure correction.

Servicing Risk

12. Significantly high problem loan rates

Identify and categorize SBA problem loans by delivery method, industry and geographic concentration.

Discuss with management the perceived reasons behind the excessive problem loans.

Discuss any changes in loan underwriting policy during the time of the observed problem loan approvals.

Discuss with management any action taken in response to the problem loan pattern(s).

Review a judgmental sample of loans which have problem payment characteristics to assess creditworthiness and adherence to Lender’s and SBA underwriting standards.

Assess Lender’s booking, closing and disbursement actions on early defaulted loans to identify any causative factors for default.

Assess loan file management against Lender’s policies and procedures regarding collection for past due and delinquent loans, procedures for deferring loans, and processes for referring loans from regular collections to intensive servicing and/or liquidation, to determine Lender has ability to service in accordance with its policies and

SBA Loan Program Requirements.

Determine whether Lender’s SBA policy for continued monitoring of the SBA portfolio is, at a minimum, consistent with its policy for non-guaranteed commercial loans, and is in accordance with all loan authorization requirements.

Determine whether adequate controls exist to ensure required lien positions are obtained and renewed, as necessary.

Determine whether the loan officer or anyone else periodically visits the site of the business to discuss operations, and to verify and evaluate the condition of collateral. Are these visits documented?

Review Plan Execution Guidance Page 6 of 45 Lender Name (FIRS #)

Determine whether Lender performed site visits within 60 days of any unremedied default on problem loans or as soon as possible after default if there are assets of significant value that could be removed or depleted.

Determine whether Lender has sufficiently identified and responded to causative factors of excessive problem loans to ensure correction.

13. High projected purchase rate

Discuss with management the perceived reasons behind the excessive projected purchase rate which is derived primarily from a high SBPS.

Identify and categorize high-risk SBPS loans by delivery method, industry and geographic concentration.

Discuss any changes in loan underwriting policy during the time of the observed high-risk loan approvals, if time-specific.

Discuss with management any action taken in response to the high-risk loan approvals pattern(s).

Review a judgmental sample of loans which have high SBPS scores to assess creditworthiness and adherence to Lender’s and SBA underwriting standards.

Assess Lender’s booking, closing and disbursement actions on these loans to identify any causative factors for default or movement toward liquidation.

Assess loan file management against Lender’s policies and procedures regarding collection for past due and delinquent loans, procedures for deferring loans, and processes for referring loans from regular collections to intensive servicing and/or liquidation, to determine Lender has ability to service in accordance with its policies and

SBA Loan Program Requirements.

Determine whether Lender performed site visits within 60 days of any unremedied default on problem loans or as soon as possible after default if there are assets of significant value that could be removed or depleted.

Determine whether Lender has sufficiently identified and responded to causative factors of high-risk loans to ensure correction.

Resolution Risk

14. High number or percentage of liquidations

Discuss with management the perceived reasons behind the high number or percentage of liquidations in the portfolio.

Identify and categorize the liquidation loans by delivery method, industry and geographic concentration.

Discuss any changes in loan underwriting policy during the time of approval for the loans now in liquidation, if time-specific.

Review Plan Execution Guidance Page 7 of 45 Lender Name (FIRS #)

Discuss with management any action taken in response to the high-risk loan approvals pattern(s).

Review a judgmental sample of loans which have high SBPS scores to assess creditworthiness and adherence to Lender’s and SBA underwriting standards.

Assess Lender’s booking, closing and disbursement actions on these loans to identify any causative factors for default or movement toward liquidation.

Assess loan file management against Lender’s policies and procedures regarding collection for past due and delinquent loans, procedures for deferring loans, and processes for referring loans from regular collections to intensive servicing and/or liquidation, to determine Lender has ability to service in accordance with its policies and

SBA Loan Program Requirements.

Determine whether Lender performed site visits within 60 days of any unremedied default on problem loans or as soon as possible after default if there are assets of significant value that could be removed or depleted.

Determine whether Lender’s policies and procedures establish a basis upon which a loan will be subjected to intensive servicing or liquidation action, including workouts, site visits, liquidation plans, inventory of, control, possession and/or protection of collateral;

and access to counsel, and is consistent with SBA Loan Program Requirements.

Determine whether Lender has followed all SOP requirements regarding management of liquidation cases, including preparation of a liquidation plan, timely site visits, use of current appraisals, consideration of environmental issues, and preparation of a wrap-up report at conclusion of liquidation in accordance with SBA Loan Program Requirements.

Determine whether Lender has sufficiently identified and responded to causative factors of high-risk loans to ensure correction.

15. Loans in liquidation over 3 years

Review a small sample of loans that have been in liquidation over 3 years.

Determine whether Lender has followed all SOP requirements regarding timely preparation of a wrap-up report at conclusion of liquidation in accordance with SBA

Loan Program Requirements.

Discuss with management any diagnostic reasons for loans in liquidation beyond 3 years.

Determine whether Lender has sufficient ability to track and conclude liquidation loans when circumstances extend liquidation activity beyond 3 years.

16. Last 12 month repair-denial rate is excessive

Discuss with management the perceived reasons behind the excessive repair/denial rate.

Obtain a list of loans repaired/denied over the past 12 months from LGPC or Lender.

Identify and categorize the loans by delivery method, industry and geographic concentration, and by reason code for repair or denial.

Discuss with management its response to any patterns in the issues of repair/denial.

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Review a judgmental sample of liquidation loans to diagnose any similar patterns of deficiency as the repaired/denied loans.

Discuss with management any patterns of similar deficiencies in loans not yet submitted for purchase.

Obtain from management any action plans to address deficiencies.

Determine whether Lender has sufficiently identified and responded to causative factors of repairs/denials to ensure correction.

Trends & Behavioral Considerations

17. Sizeable increase average loan size

Review Lender’s SBA business plan and its goals and objectives related to SBA loan production.

Compare Lender’s goals and objectives against production results.

Has Lender tailored its SBA policy to address achievement of goals and objectives.

Discuss with management its methods used to communicate SBA production information, portfolio performance and business plan achievements both up and down the management chain.

Determine if management consistently provides training to ensure SBA loan production staff is proficient in increasingly larger loans.

Review a judgmental sample of recently approved large loans to determine if underwriting, closing and disbursing confirm proficiently.

18. Significant number of loans booked over $2MM production and size of loan.

Compare Lender’s goals and objectives against production results.

Has Lender tailored its SBA policy to address achievement of goals and objectives.

Determine if management consistently provides training to ensure SBA loan production staff is proficient in large-sized loans (greater than $2MM balance).

Review a judgmental sample of recently approved loans greater than $2MM in outstanding balances to determine if underwriting, closing and disbursing confirm proficiently.

19. Average SBPS origination score trend is declining

Discuss with lender management its perception of high risk originations

Discuss with management the reasons behind declining SBPS origination scores.

Discuss with management any changes in underwriting policies which may be causative in the declining SBPS score.

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Review a judgmental sample of loans with higher risk SBPS origination score to determine creditworthiness of underwriting decision.

20. Percentage of high risk originations greater than averages.

Discuss with lender management its perception of high risk originations

Discuss with management the perceived causes behind the high risk originations.

Review a judgmental sample of loans with higher risk SBPS origination score to determine overall creditworthiness.

Vintage Analysis

21. Gross balances dramatically increasing

Compare Lender’s goals and objectives against production results.

Has Lender tailored its SBA policy to address achievement of goals and objectives.

Discuss with management its methods used to communicate SBA production information, portfolio performance and business plan achievements both up and down the management chain.

Determine if management consistently provides training to ensure SBA loan production staff is proficient in increasingly larger loans.

Review a judgmental sample of recently approved large loans to determine if underwriting, closing and disbursing confirm proficiently.

22. Gross balances dramatically declining

Compare Lender’s goals and objectives against production results.

Has Lender tailored its SBA policy to address achievement of goals and objectives.

Discuss with management its methods used to communicate SBA production information, portfolio performance and business plan achievements both up and down the management chain.

Discuss with management its ability and commitment to maintain sufficient resources to service the portfolio given the dramatically declining outstanding balances.

Review a judgmental sample of loans in servicing or intensive servicing to determine that capacity to service is still sufficient.

Review Plan Execution Guidance Page 10 of 45 Lender Name (FIRS #)

23. Marked poor performance in one or more vintage years stands out.

Discuss with management its perceived reasons for poor performance in one or more vintage years.

Review Lender’s SBA business plan and its goals and objectives related to SBA loan production for those years (if within the last three years).

Determine if Lender tailored its SBA policy to address poor performance of the vintage year(s) identified.

Discuss with management its ability and commitment to maintain sufficient resources to service the portfolio given the dramatically declining outstanding balances.

Review a judgmental sample of loans in the identified vintage year(s) to determine that capacity to service is still sufficient.

Review Plan Execution Guidance Page 11 of 45 Lender Name (FIRS #)

Regulatory Compliance

Review Objective and Procedures

The objective of the Regulatory Compliance review is to assess the lender’s compliance with

1502 Reporting and SBA Loan Program Requirements. The assessment will focus on the

Lender’s ability to underwrite eligible SBA loans in compliance with CFR and SOP requirements. This assessment also considers the lender’s payment of SBA fees, as well as capitalization requirements of the primary federal regulator. The review procedures may include an assessment of sample loan files reviewed for compliance issues. The procedures also include an analysis and reconciliation of lender reporting documents to program requirements as applicable.

This section will address, in part, the written aspects of Policies/Procedures/Internal Controls.

Does the Lender have sufficient written policy/procedures/internal controls? Are there any conflicts between the Lender’s internal documents and SBA requirements? Implementation/daily practice is tested in Asset and Liability Management.

Capital Adequacy

24. Lender is NOT at least adequately capitalized.

Identify what action(s) have been taken by Lender to address capital deficiencies and the results achieved.

Determine if the risk of Lender failure that may result in SBA portfolio losses through failure to service; or inability to recover from purchase denial is great enough to limit participation in the 7(a) program.

25. Lender has outstanding Order

Discuss issues of public regulatory action with management.

Determine if any modifications to Lender’s operations due to the Order has impacted the

SBA portfolio (loan approval changes, type of loans, underwriting policy changes, etc.).

Request from management its intended actions and milestones to address and resolve the key regulatory concerns.

As available with public information, determine whether the action(s) taken by the

Lender to address deficiencies identified in the Order have resulted in regulatory satisfaction (either short or long-term).

Review loan portfolio to identify any loans sold by Lender on secondary market.

Check internal SBA watch list to ensure FTA has been notified to place the lender on the secondary market sales “hold” for either pre-sale review or Reserve Account maintenance.

If Lender has not properly requested secondary market sales permission, inform Lender of critical actions necessary, and ensure Lender is added to secondary market sales

“hold”.

Review Plan Execution Guidance Page 12 of 45 Lender Name (FIRS #)

SBA Reporting and Fees

26. Lender exceeds acceptable 1502 reporting error rate (presently 90-95%)

Request from Lender the most recent three months of 1502 reports.

Reconcile the most recently aligned monthly 1502 report with SBA internal records of same month (e.g., RiskLender).

Compare the SBA Form 1502 Report submissions for the most recent three months to the loan transcripts for the loans in the review sample to determine timeliness and accuracy of Lender’s reporting, including accuracy of loan: status; outstanding guaranteed loan balance; and paid-to-date information.

Summarize any risk implications of errors in reporting; (e.g., inaccurate reporting to

SBA, etc.)

Review loan transcript for each loan in a judgmentally selected sample to identify any unscheduled “daily remittance transactions” (on sold loans) due, and compare to the appropriate “daily” SBA Form 1502 Report to assess accuracy and timeliness of remittances. (Unscheduled transactions on sold loans include such items as payoffs, late payments, and interest only payments. Reporting and remittance of unscheduled receipts must be made by the second business day following the receipt of good funds. The reviewer must determine if the funds were “good” at the time of receipt, i.e. cash, wired or on deposit with the Lender, in which case they must be remitted by the second business day following receipt.)

Determine whether Lender is providing SBA accurate and timely information on unscheduled transactions.

Determine if lender is reporting its ARC loans on its 1502 report in accordance with

Information Notice 5000-1115.

Review exception reports received by the Lender during the most recent three-month period to determine timeliness of necessary corrective action taken by the Lender.

Determine whether Lender responds to error/exception reporting to successfully resolve any such errors.

Identify any steps Lender management has taken to resolve any patterns or trends, and any additional steps required to meet SBA standards.

27. Non-payment of any guaranty fees.

Review each loan in the review sample for evidence of payment of the guaranty fee, and payment date.

Assess if Lender pays its guaranty fees within the 90 days-of-approval requirement.

28. Non-payment of any review or oversight fees properly.

Discuss with management the existence and billing date of any outstanding review or oversight fee.

Work with lender management to ensure payment of any review or oversight fee.

Review Plan Execution Guidance Page 13 of 45 Lender Name (FIRS #)

29. Recoveries are paid late (15 day limit; 172 report)

Review “172 Late Payments” internal SBA report to identify any late payments.

Discuss with management the internal controls to ensure payment in timely fashion.

Identify any gaps in processes or internal controls.

Review a judgmental sample of Active Purchases still being liquidated to identify whether Lender has forwarded all recoveries on them within 15 days of receipt in accordance with SBA Loan Program Requirements.

Review internal controls and determine if they are sufficient to ensure compliance with

SBA Loan Program Requirements.

Lender Corrective Actions

30. Outstanding or unresolved CA

Review past reports to specifically identify CAs outstanding.

Discuss with management the unresolved issue(s).

Solicit explanation regarding lack of prior response.

Obtain commitment from management for action plan and milestones to resolve outstanding issue(s).

31. Non-responsive to prior requests/requirements for CA

Solicit explanation regarding lack of previous responsiveness.

Obtain commitment from management regarding completion of Corrective Action response.

Review Plan Execution Guidance Page 14 of 45 Lender Name (FIRS #)

Risk Management

The objective of the Risk Management review is to assess the lender’s use of an effective governance model to identify, understand, and mitigate risk exposure to the SBA. This assessment considers the lender’s corporate governance structure, SBA business plan, and internal controls. This assessment is conducted through a review and analysis of the lender’s corporate governance documents; structure of SBA program governance; operational and management policies and procedures; underwriting and loan monitoring policies and procedures;

and exception to policy processes. This assessment is then tested through observations and interviews with the lender’s SBA program management staff.

Policies

Origination

Read Lender’s SBA loan policy to identify that it establishes requirements for creditworthiness that, at a minimum, include reasonable expectation of repayment, sufficient cash flow to fund operations, adequate management ability, adequate capitalization and satisfactory credit history consistent with SBA Loan Program

Requirements.

Identify any separate credit standards between SBA delivery methods (e.g., SBAExpress, Community Express), industry type, business type, or any other portfolio segmentation, and whether these separate standards establish sufficient creditworthiness for these delivery methods consistent with SBA Loan Program Requirements.

Assess whether Lender’s SBA credit policy demonstrates the continuing ability to evaluate and process SBA loans in accordance with SBA Loan Program Requirements.

Determine that the lender maintains prudent credit underwriting practices for its SBA program that meet the following criteria:

o Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made.

o Consider the nature of the markets in which loans will be made.

o Consider the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed.

o Determine whether loan approval documentation contains sufficient analysis of financial trends, industry trends, and risk mitigants.

o Establish a system of independent, ongoing credit review of SBA loans and appropriate communication to management and to the board of directors.

o Take adequate account of concentration of credit risk (geographic and industry).

o Are appropriate to the size of the institution and the nature and scope of its activities.

o Are appropriate to the size of the Lender’s SBA portfolio.

Review any scorecard model (automated underwriting) used and related policies and procedures, the process for developing the scorecard, methodology for validating the scoring model on a periodic basis, and who is responsible for the validation.

Review Plan Execution Guidance Page 15 of 45 Lender Name (FIRS #)

Describe Lender’s application of credit scoring on individual SBA loan decisions and practices for overriding credit score determinations.

Determine if Lender’s SBA loan procedure establishes requirements for collateral that, at a minimum, obtains all available collateral and meets all SBA collateral requirements contained in SBA Loan Program Requirements. If established, is it followed in daily practice?

Review Lender’s commercial loan collateral requirements, by program segments if applicable (i.e., new business, industry type, etc.).

Identify if Lender’s collateral valuation policy for non-guaranteed commercial loans is inconsistent with its SBA collateral valuation policy.

o If so, is Lender’s SBA collateral policy consistent with Lender’s non-guaranteed commercial collateral valuation (loan-to-value) in determining whether the loan is fully secured?

Review sample of loans to determine if Lender is adhering to its loan policy and all SBA requirements regarding collateral, and identify and provide examples of any material deficiencies or patterns of deficiencies.

Determine if the process for appraising collateral is adequate. Also, evaluate the credentials of those who appraise collateral. Do they possess any certifications? Are appraisal reviews completed?

Determine whether Lender’s SBA loan procedure establishes requirements for closing and disbursement which include, at a minimum, all of the following requirements:

o execution of the Loan Authorization;

o obtaining all required executed loan documents;

o meeting all Loan Authorization conditions, to include but not limited to;

i. verification of equity injection;

ii. verification of use of proceeds;

o verification of financial information;

o perfection of lien and guaranty requirements;

o obtaining all required insurance policies, including any applicable assignments and/or acknowledgments;

o and all other SBA-specific closing and disbursement requirements.

i. Determine whether Lender fully completes and follows requirements of

SBA Form 1050, Settlement Sheet, for each disbursement, when applicable.

Review any special Lender standards and practices (i.e. post-closing lien searches in lieu of pre-closing, Ownership and Encumbrance (O&E) Reports versus title insurance, appraisal, environmental or insurance standards, etc.) to determine the effect upon SBA loan closing and/or disbursements.

Servicing

Read Lender’s SBA loan policy to identify that it establishes requirements for evaluating continued creditworthiness (e.g., annual financial statement analysis, credit modeling for portfolio management purposes, etc.)

Determine whether Lender’s SBA policy for servicing is, at minimum, consistent with its policy for non-guaranteed commercial loans.

Assess policy for requirements to ensure required perfected lien positions are in place and maintained.

Review Plan Execution Guidance Page 16 of 45 Lender Name (FIRS #)

Assess policy for requirements to ensure required insurance coverage is in place and maintained, including any applicable assignments and/or acknowledgments are obtained.

Determine whether any “umbrella” insurance is in place to protect Lender and SBA in the event insurance policies are not properly renewed.

Discuss with management its procedures for collection of past due and delinquent loans, deferring loans, and processes for referring loans from regular to intensive servicing and/or liquidation.

Resolutions

Read Lender’s SBA loan policy to identify that it establishes a consistent and prudent basis upon which to take liquidation actions, including workouts, site visits, liquidation plans, inventory of collateral, care and preservation, and access to legal advice when required.

Loan Sample

Review a sample of loans to determine whether Lender is adhering to all loan policies and all SBA loan policy requirements, and identify and provide examples of any material deficiencies or patterns of deficiency.

Concentrations Analysis

32. Any sector high concentration (presently 20%)

Identify and analyze any concentrations of 20% or more (industry, geographic, etc.) or segmentation(s) within the lender’s portfolio, and risk implications; i.e. significant percentage of dollars in one or more segments.

Analyze the portfolio in its entirety and separately by legacy and emerging.

Identify and analyze reasons for concentration.

Determine Lender’s awareness of concentration. How does the Lender maintain awareness?

o Are the concentrations stress tested?

Identify Lender’s strategy to address risk of being overly concentrated.

Does the Lender track and monitor the economic and financial condition of specific geographic locations, industries, and groups of borrowers in which the lender has heavily invested?

Does management closely monitor concentration levels and provide a more in-depth review than the diversified portion of the lender’s assets?

Is management aware how significant economic events might impact its overall SBA portfolio?

Does the Lender use codes to track individual borrowers, related groups of borrowers, industries, and individual foreign countries as related to its SBA program?

Does the Lender use standard industrial classification (SIC) or similar code to track industry concentrations?

Is the Lender’s monitoring program regularly reported to the board of directors?

Are discussions held concerning the risk in new or pending concentrations?

Review Plan Execution Guidance Page 17 of 45 Lender Name (FIRS #)

33. Geographic concentration outside normal lender footprint.

Identify and analyze any geographic concentrations of 20% or more outside of lender’s normal footprint.

Identify and analyze reasons for concentration.

Identify Lender’s strategy to address risk of lending outside of the normal footprint.

Determine how the Lender tracks and monitors the economic and financial condition of geographic locations outside of the normal lending area.

Risk Classification System

34. Risk classification system does not appear to be applied to SBA portfolio loan-by-loan.

Evaluate policies for internal grading, risk rating and/or classification of loans, and practices for rating loans at regular intervals through life of loan (at least annually).

Determine how these rating systems affect Lender’s SBA portfolio management.

Identify who is responsible for maintaining accurate risk ratings.

Review management reports containing risk ratings or classifications of all SBA loans.

Determine whether lender has a uniform risk rating system for SBA-guarantees and non-

SBA guaranteed loans.

Determine whether Lender nets out SBA guaranteed portion of the loans.

Determine whether management classifies SBA loans differently from non-SBA loans.

Determine whether risk rating system is integrated into the Lender’s overall SBA portfolio risk management.

Determine whether all SBA credit exposures related to the SBA program is rated.

Determine whether Lender’s criteria for assigning each rating is clear and precisely defined using objective (e.g. cash flow coverage) and subjective (e.g. quality of management, willingness to repay, etc.) factors.

Determine whether ratings reflect the risks posed by both the borrower’s expected performance and the transaction.

Determine whether risk rating process is independently validated (in addition to regulatory examinations).

Determine whether assumptions implicit in the rating definitions accurately anticipate outcomes. If assumptions are not valid, rating definitions should be modified.

35. No periodic review or audit of the SBA portfolio

Discuss with management how it tracks and maintains awareness of its SBA portfolio through any audit or review independent of SBA management.

Request and review most recent review/audit of the SBA portfolio.

Discuss with management any identified weaknesses and management response or action plan and milestones to correct.

As applicable, select a small judgmental sample of loans to confirm management’s actions in weakness areas.

Review Plan Execution Guidance Page 18 of 45 Lender Name (FIRS #)

Special Items

The objective of the Special Items review is to identify and assess any additional high risk lender behaviors or other areas of interest to the SBA. This assessment is a consolidation point for specific risks/activities/situations that do not fall into one of the other four categories. Special items include, but are not limited to, lender service providers, loan agents, secondary market sales, portfolios by originating bank, delegated authority expiration, loan participations and considerations and pilot programs.

Lender Service Provider (LSP) Agreements

36. Lender has failed to obtain SBA approval of LSP agreements.

Determine whether Lender’s policies and procedures establish a basis for routine or ad hoc use of loan agents (packagers, referral agents, brokers, etc.) in originating

SBA loans.

Question management regarding failure to obtain approval.

Discuss non-compliance with management; determine why approval was not obtained

Determine whether policies and procedures sufficiently address this requirement

Determine whether adequate controls are in place to ensure future compliance

37. Lender cannot identify performance by loan agent origination.

Determine whether lender has policies (such as Code of Conduct) to require business development officers and other lender personnel to disclose the involvement of loan agents in generating or packaging loans.

Determine the internal controls lender has in place to monitor loans generated from loan agents, brokers and packagers.

Determine whether lender conducts an internal review and auditing functions to examine the reasons why a particular lending official may have a significantly higher loan volume than his/her colleagues, particularly if that lending official is known to work with a particular loan agent or agents.

Review operational controls that are in place to monitor loans originated from branch sales offices/business development officers.

Determine if lender has a system of identifying/monitoring potential fraud indicators such as:

a. The loan agent has a record of early defaults;

b. The loan agent controls of all communication between the lender and the borrower;

c. The loan agent threatens to “shop” the loan elsewhere;

d. The loan agent provides a high numbers of “qualified” borrowers in a short period of time;

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e. The loan agent’s apparent ease in resolving seemingly difficult questions or problems with a loan

f. The loan agent steers the lender to specific appraisers or title companies;

g. The borrower replies “no” when asked if a “packager” was paid to prepare the loan application, when it is known a loan agent is involved in the process;

h. Multiple loan applications are submitted simultaneously to different lenders for the same borrowers, as indicated in credit reports; and

i. The loan agent charges excessive fees.

Determine whether loan agent-originated loans are fully meeting SBA standards, including those on creditworthiness.

For Lenders with active loan agent relationships, obtain list of loans referred by loan agents, and analyze a sample of loans referred by loan agents to determine whether performance trends and/or credit quality is comparable to book of business originated directly by Lender.

Determine whether SBA Form 159, “Fee Disclosure Form and Compensation

Agreement” has been completed, as applicable, for each loan in which a loan agent has participated.

Determine whether additional file review is appropriate to fully assess loan agent activity.

If so, review a small selection of loan files for loans originated by loan agents to determine whether each decision was reached in accordance with Lender’s and SBA’s policies and to better evaluate Lender’s use of loan agents.

Secondary Market

38. Lender sells and has not provided evidence of account with “trust” language.

Review loan portfolio to identify any loans sold by Lender on secondary market.

Discuss with management its policy for when loans are sold.

Discuss with management any policies which apply only to SBA loans intended for secondary market sale.

Review any differing policies for creditworthiness differences.

Discuss with management any differences in portfolio performance statistics between loans sold and loans maintained.

Request from Lender proof of account with “trust” language as required by form 1086.

Inform management of requirements of account as necessary.

Assess Lender’s ability to respond to requirement and establish account with applicable processes to ensure it is operational.

Obtain satisfactory written evidence of the account.

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What do I see and what does this mean? Risky behavior requires enhanced assessment.

Delegated authority renewal date should be synchronized with report results.

Lender failure to use a LSP that is SBA-approved suggests Lender or LSP does not understand

SBA requirements, or LSP is not functioning properly within the SBA rules.

Lender failure to obtain SBA approval of LSP contract(s) suggests Lender does not understand

SBA rules and may violate SBA restrictions on various types of compensation.

39. Lender has failed to obtain SBA approval of LSP agreements.

Lender failure to track performance of loans generated by its loan agents suggests Lender does not evaluate quality of its loan agent work.

40. Lender cannot identify performance by loan agent origination.

High percentage of secondary market sales suggests Lender may be viewing SBA loans as a cash flow instrument more than as a commercial lending instrument; and may be weakening credit standards to book high volume of loans to be sold for cash flow.

41. Lender sells and has not provided evidence of account with “trust” language.

Portfolio by Originating Bank

Portfolios acquired by Lender may perform markedly different from Lender-generated loans and could skew Lender performance.

42. Lender cannot identify performance of portfolio by origination source WHEN sizeable portion of portfolio is not in-house generated.

Fraud

Borrower fraud is often related to a false equity injection. To protect themselves and SBA against borrower fraud with regard to false equity injections, lenders should:

o If a gift letter is involved, have both the donor and the borrower sign an affidavit detailing the alleged gift and stating the gift does not have to be repaid or returned, and request that the borrower provide a copy of a bank statement showing the injection was made prior to disbursement;

o If funds are transferred by wire (especially from a foreign country), request a copy of the wire transfer and include it in the loan file; and o If an inheritance is cited, verify that the funds exist by obtaining a copy of the inheritance bank statement showing the funds exist prior to disbursement.

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Reviewers should review the policies and procedures that the Lender has in place to analyze equity injections to see if they are in compliance with the recommendations above.

Other borrower fraud is related to: overstating income, understating or failing to disclose liabilities and debts, overvaluing collateral, failing to disclose a criminal record, making false claims of US citizenship, failing to disclose true ownership of the business, using false social security numbers to conceal poor credit histories, submitting altered tax returns, providing fraudulent standby agreements, and creating false work histories.

Assess the lender’s internal controls related to potential fraud as outlined above.

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U.S. Small Business Administration

Office of Credit Risk Management

7(a) Loan Program

Review Pre-Plan

Rubrics Document

FY 2013

Lender Name

(FIRS #)

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Table of Contents

The purpose of this document is to provide sufficient information to complete a Select Review and prepare the RBR

Report, OR to direct execution of additional assessment activities in whatever intensity is required, using choices from the Execution guidance.

This is guidance to be used in concert with the Lender Profile Report, and should have information added to and removed from as dictated by the situation. Not all questions will be answered in the pre-plan; use this guidance to identify what questions may need to be answered during the Review.

Introductory Guidance

PARRiS Pre-Plan

Lender Information Request

Introductory Information

Holding Company

Portfolio Composition and Stratification

Merger Activity

Organization Chart

Agents and Lender Service Providers

Lender Background

SBA Field/District Office Feedback

Lender Software/Tracking Systems

SBA Data Dates

Other Pertinent Planning Information

PARRiS Components

Asset/Liability Management

Regulatory Compliance

Loan Sampling

Targeted or Full Review Information Requested from Lender

Review Event Planning

Approvals

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Introductory Guidance

The information contained in the pre-planning/review planning document will assist the Office of Credit Risk

Management team in determining risks to the SBA based on Lender behavior and performance. The objective of

Review planning is to identify and prioritize high-risk areas for execution of a PARRiS Risk Based Review. Parris is an acronym for: Performance, Asset Management, Regulatory Compliance, Risk Management, and Special Items.

A thorough and well thought out plan is instrumental in the development of the Risk Based Review and ultimately an accurate Risk Based Review Report and Lender Assessment. The plan will assist in the development of a system to measure and evaluate levels of risk and ensure compliance with applicable SBA Laws and Regulations.

The plans should:

1. Identify the risks.

2. Prioritize the risks.

3. Establish a course of exploration (depth and width) to determine the severity of the risk to the SBA and what corrective action(s) needs to be implemented and adhered to going forward.

The purpose of the planning document is to communicate what needs to be done, why it should be done, how it will be done, who will do it, and when it will be done.

As the FA identifies risk, he/she must be cognizant of the actual impact to the SBA posed by the risk in conjunction with an understanding of the labor hours required and cost (both in terms of SBA, Lender, and/or Third Party

Contractor). The effective development of the pre-plan (both in terms of the plan review and generation of a pre-plan document) will assist in effective deployment of resources.

The plan is not a stagnant document. The plan should be continually evaluated throughout the risk review process and modified as necessary. Initial results may reveal facts and circumstances inconsistent with expectations, or planned approaches may become infeasible or inadvisable. Developments such as these must be assessed for their impact on accomplishing review objectives. If warranted, new approaches should be devised to address the new, or changed, situation. This includes requesting additional resources to investigate previously unforeseen problems or reducing planned work and resources when conclusions become obvious.

In addition to currently available information, the FA should be responsive to new information (e.g. updated data, news, etc.) and react accordingly.

The pre-plan/review plan should be consistent while allowing for customization to address identified high risk areas. To do this, the pre-plans should focus on meeting the following key objectives:

1. Evaluating Lender condition and performance in each PARRiS area.

2. Determine the Lender’s overall degree of risk and the factors contributing to the risk.

3. Conveyance of the first two items above so that the Lender can formulate a short and/or long term strategy to address the risk factors and/or compliance with applicable laws and regulations.

In order to achieve the above, the pre-plan should establish, at a minimum:

1. Objectives. Objectives detail what will be accomplished by the Review. They are evaluative in nature and, when achieved, result in a conclusion about a specific area of a Lender’s operation. Objectives should to be tailored to the situation and can be established as a result of:

i. Prior Risk Base Reviews

ii. Interviews with management and staff

iii. Data

2. Scope. The scope establishes what must be done to accomplish the objectives which ensuring effective and efficient resource allocation.

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3. Criteria. The criteria are the requirements, standards, and other items applied when performing Review activities. Specific evaluative criteria are preferable, citing the particular regulation or SOP, when possible.

4. Strategies/Procedures. The strategies/procedures provide guidance which may range from general to specific. The guidance will detail the anticipated path to completion. Strategies/Procedures should identify the nature and extent of analysis expected (including the preliminary depth of testing in an area).

The FA will be provided general guidance via lead sheet; however, the FA should modify (either add to or take away) the lead sheet to meet the objections and specifications of the specific review activity in question.

5. Resource Allocation.