Rationale

S&P Global Ratings' rankings on Small Business Lending LLC, doing business as Newtek Small Business Lending (NSBL), is AVERAGE as a commercial finance primary and special servicer of business-based loans. On Oct. 27, 2023, we affirmed the rankings (please see "Newtek Small Business Lending AVERAGE Commercial Finance Primary And Special Servicer Rankings Affirmed," published Oct. 27, 2023). The ranking outlook is stable for each ranking.

Our rankings reflect NSBL's:

• Substantial experience servicing loans under the U.S. Small Business Administration (SBA) 7(a) loan program;
• Comprehensive servicing platform and successful track record within its market niche;
• Seasoned and well-tenured senior and middle management;
• Informal training program that primarily includes on-the-job training, along with a relatively low training hour mandate;
• Effective technology to meet its servicing requirements, including a continued focus on technology enhancements to further streamline and automate servicing tasks;
• Increased regulatory and supervisory oversight from the Federal Reserve and the Office of the Comptroller of the Currency (OCC) following its restructure to a financial holding company; and
• Proactive management and resolution of nonperforming loans.

Since our prior review (see "Servicer Evaluation: Newtek Small Business Finance LLC and Newtek Small Business Lending," published June 10, 2021), the following changes and/or developments have occurred:

• We withdrew our overall AVERAGE rankings for Newtek Small Business Finance LLC (NSBF) as a commercial finance primary and special servicer at the company's request because NSBF's loan portfolio is now being serviced by its affiliate, NSBL (see "Newtek Small Business Finance LLC AVERAGE Commercial Finance Primary And Special Servicer Rankings Withdrawn," published Oct. 27, 2023).
• In January 2023, Newtek Business Services Corp. (NBSC) acquired the National Bank of New York City (a 59-year-old nationally chartered bank), renamed it Newtek Bank N.A. (Newtek Bank), and moved the bank's headquarters to Miami from Flushing, N.Y.
• NBSC changed its name to NewtekOne (Newtek), withdrew its business development company (BDC) election, and ceased operating as a BDC after its purchase of Newtek Bank (which is now a wholly owned subsidiary of Newtek). Newtek now operates as a financial holding company.
• In April 2023, Newtek Bank was granted NSBF's Preferred Lenders Program (PLP) status by the SBA to originate SBA 7(a) loans under PLP's delegated authority. NSBF's loan portfolio and employees were subsequently transferred to the NSBL bank subsidiary.
• The primary servicing portfolio decreased nearly 12% in unpaid principal balance (UPB) and the number of loans decreased more than 200%, due primarily to the payoff of Paycheck Protection Program (PPP) loans, while the number of servicing personnel increased by over 11% (as management anticipates an increase in NSBL's servicing portfolio following NBSC's acquisition of Newtek Bank).
• The special servicing loan portfolio decreased more than 15% in UPB and the number of assets decreased more than 47%, primarily from a reduction in unguaranteed loans, while the number of servicing personnel remained stable.
• In May 2023, Newtek hired a chief financial officer who has over 17 years of experience in the financial services industry and an extensive background in banking and accounting.
• The president of NSBL and Newtek Business Credit, with 37 years of industry experience and four years company tenure, resigned in September 2022 to pursue other opportunities.
• The responsibilities of the departed president were assumed by the chief lending officer of Newtek Bank, with 36 years of industry experience and 20 years company tenure, who was also given the title of president of NSBL.
• NSBL as a wholly owned subsidiary of Newtek Bank, is now under the internal control environment of the bank, including the bank's internal audit scope.
• In fourth-quarter 2021, a quality assurance (QA) team was formed to primarily conduct pre- and post-closing reviews of loan files. The team is led by an outside hire who previously worked for the SBA for 14 years.

The ranking outlook is stable for each ranking. We believe that NSBL will remain a highly effective servicer based on its long history of small business lending and loan servicing. The company has enhanced its controls since our prior review by establishing an internal QA program and being under the Newtek Bank internal control environment; however, its formal training program remains limited and is not in line with higher-ranked servicers.

In addition to conducting an on-site meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology (SEAM) data until June 30, 2023, as well as other supporting documentation provided by the company.

Profile

Newtek, formerly NBSC, was founded in 1998, and has been publicly traded since 2000 (NASDAQ: NEWT). Prior to Jan. 6, 2023, it operated as an internally managed non-diversified closed-end management investment company that was regulated as a BDC, which is an unregistered closed-end investment company that invests in small and mid-sized businesses. On Jan. 6, 2023, the company acquired the National Bank of New York City, a 59-year-old nationally chartered bank, renamed it Newtek Bank (a wholly owned subsidiary of Newtek), and subsequently moved the bank's headquarters to Miami from Flushing, N.Y. As a result of the acquisition, Newtek is now a financial holding company subject to the regulation and supervision of the Federal Reserve and the OCC.

Newtek, along with its subsidiaries, provides business and financial solutions to small and medium-sized businesses. Newtek is headquartered in Boca Raton, Fla., and maintains servicing and lending operations in Lake Success, N.Y., approximately 20 miles east of Manhattan. Additional lending operations are located in Boca Raton, Miami, and Orlando, Fla. Management has indicated that the company's real estate footprint has continued to shrink since 2020 as a result of the positive effects of employees working remotely.

Newtek provides financial products and services, including business lending (primarily SBA 7(a) loans), accounts receivable financing, electronic payment processing, cloud computing, e-commerce, inventory financing, health care receivable financing, web services, data backup, storage and retrieval, payroll services, insurance services, and other proprietary offerings. The company obtains customers through its own direct sales force, from advertising campaigns, and through referrals from various external business partners (e.g., banks, insurance companies, credit unions, and other affinity groups, along with other industry professionals) via its proprietary NewTracker referral platform.

NSBL is a consolidated subsidiary of Newtek Bank. As a result of the bank acquisition, SBA 7(a) loan originations have been transitioned from NSBF to Newtek Bank, which has received its PLP status, and the company subsequently transferred NSBF's loan portfolio and employees to Newtek Bank. NSBL also provides third parties with loan servicing for SBA and non-SBA loans.

Newtek has a dedicated senior lending team that is now supporting Newtek Bank, which will originate and service SBA 7(a) loans to qualifying small to medium-sized businesses and will follow the Newtek SBA 7(a) loan business model, as follows: originate SBA 7(a) loans, sell the guaranteed portions of the SBA 7(a) loans, typically within thirty to forty-five days of origination, and retain the unguaranteed portion until accumulating sufficient loans for investment or securitization.

As of June 30, 2023, the primary servicing portfolio comprised over $2.9 billion in UPB, a decrease of nearly 12% from the $3.3 billion UPB as of Dec. 31, 2020, at the time of our previous review (see table 1). During this, the average loan size increased to $624 thousand from $236 thousand, primarily due to a decline in the volume of smaller notional PPP loans remaining in the portfolio.

As of Dec. 31, 2022, the special servicing portfolio comprised $100.6 million in UPB and 304 in the number of assets, decreases of 15% from $119.0 million in UPB and 47% from 575 in the number of assets as of Dec. 31, 2020, at the time of our previous review (see table 1).

Table 1

Management And Organization

The management and organization subrankings are AVERAGE.

Organizational structure, staff, and turnover

NSBL's president, who also holds the title of chief lending officer of Newtek Bank, has 36 years of industry experience and 20 years of company tenure. He reports to the founder of Newtek who also holds the titles of chairman, chief executive officer, and president of Newtek. The NSBL president's direct reports are as follows:

• A vice president, portfolio servicing with 36 years of industry experience and two years of company tenure. Portfolio servicing services loans funded by Newtek affiliates, including its joint ventures. A team of one servicing manager, 16 portfolio managers, and three assistant customer service representatives is responsible for all servicing matters once a loan is closed. Additionally, they also contact their clients regularly to build rapport, improve their understanding of the borrower's business, identify cross-selling opportunities, and refer appropriately to internal partners.
• A vice president, loan servicing operations with 22 years of industry experience and 12 years of company tenure. Loan servicing operations encompasses loan boarding, payment processing, loan accounting, and reporting. The vice president, loan servicing operations has 10 direct reports who are responsible for the various functional areas.
• A senior vice president, director of portfolio servicing with 37 years of industry experience and 17 years of company tenure. The portfolio servicing area encompasses servicing/credit actions (four employees), asset management/project management (nine employees), special servicing/liquidation (11 employees), client services/special project management/vendor management (four employees), and insurance compliance/administration (three employees). The senior vice president, director of portfolio servicing has five direct reports.
• A senior vice president, third-party servicing with eight years of industry experience and company tenure. Third-party servicing provides banks, credit unions, and government agencies, including the FDIC, with loan servicing for commercial, SBA 7(a), and other government guaranteed investments. A team of 12, including the senior vice president, is responsible for this function.

Senior managers, middle managers, and asset managers have lengthy industry experience of approximately 20 years on average, and company tenure levels of approximately nine years on average (see table 2). NSBL reported relatively low turnover levels of approximately 5% in first-half 2023 and approximately 17% during 2022.

Table 2

Training

The senior vice president of training and business operations, who has over 30 years of experience in SBA lending, develops training programs for the lending and servicing staff, in addition to having an active role in developing NSBL's policies and procedures (P&Ps).

NSBL targets a minimum of 10 annual training hours per employee, which is much lower than most servicers we rank. Employees completed an average of six hours of training in first-half 2023 and 16 hours of training in 2022. Training consists mainly of on-the-job training and mentoring, which management stated is common for its servicer type. It also indicated that training is offered by the SBA and numerous other entities that focus on compliance and operations. New employees undergo an induction training period of approximately 90 days with a designated peer to learn all aspects of the position. As new directives are released from the regulatory agencies, mainly SBA, additional meetings and training sessions are held to keep staff current on P&Ps.

Newtek human resources (HR) utilizes the iSolved automated software system to record attendance and training class test scores. HR can also generate management reports on an individual basis as needed through this software.

Systems and technology

NSBL has effective technology to meet its servicing requirements. The company continues to focus on technology enhancement projects to further streamline and automate servicing tasks across various loan administrative functions. NSBL has well-designed data backup routines and disaster recovery preparedness. The NSBL systems are supported by five dedicated information technology (IT) employees, whose department head reports to the president.

Servicing systems and applications 

Newtek uses various systems to service its portfolios, including:

• SBA Loan Manager (Loan Manager), a third-party platform licensed by PCFS Solutions, the primary system used for servicing, monitoring, accounting, reporting, and remitting payments. The system is used to create tickler files for taxes, insurance, and financial statement collection, and to track collateral backing the loans. Loan Manager also tracks servicing fees authorized by the SBA. PCFS Solutions provides the remote host environment.
• NewTracker, a cloud-based, centralized software platform used by Newtek, affiliated companies, and referral partners. The system is used to refer new customers and to manage consumer and marketing data. Newtek uses the system to conduct early screenings to determine if loans are eligible under the SBA guidelines. The system provides pre-qualifications based on preset credit parameters that meet NSBL and SBA standards, populates forms and applications, assembles necessary documents, processes applications and inquiries, and boards customer data. It also creates reports for management and strategic referral partners, provides referral partners with access to process flows, and processes payments.
• Loan Portal, which is used by the Newtek closing departments to house loan files, allows for consistency and storage in a cloud-based application. Loan Portal includes the SBA "ten-tab" files and is also accessible by customers to review their loan documents.
• Sage 500 ERP, a corporate accounting system that receives a direct feed from Loan Manager.
• NSBL Application, which collects data from loan applicants and produces documents for submission to the SBA for the loans they originate.
• iSolved, which is used by HR to record attendance and test scores and generate reports showing individual performance.
• The Web Extender document imaging system, which is used if files are not received electronically. All files are retained electronically and are also physically stored in a locked, fireproof file room.

Business continuity and disaster recovery 

• Newtek's business continuity plans and disaster recovery strategies incorporate multiple redundancies that are designed to allow the company to instantaneously recover all essential and critical elements, systems, and networks to perform key business activities within one business day.
• The company's business continuity plan includes having redundant capabilities in its offices, and remote login is tested daily given its current work-from-home program. Operations are fully functional in a remote environment with access to shared network drives and the servicing system using secure remote access tokens.
• The company's disaster recovery plan was updated in February 2023. The chief technology officer and chief information officer present the recovery plan to the board of directors for approval. The plan is detailed and includes contact information for key personnel and vendors, as well as approval and revision history, along with specific test steps performed with descriptions and diagrams. Disaster recovery tests are conducted annually; the last test occurred in December 2022. Management indicated that there were no material problems identified.
• The NTS data center is located in Scottsdale, Ariz., with Phoenix as the backup location for off-site storage. The backup location is less than 25 miles from the main data center but it is on a separate power sub-station. All data centers are certified as Tier III-compliant.

Cybersecurity  

Newtek maintains generally favorable cybersecurity practices, although it does not perform the routine internal or external network penetration tests of its systems that most servicers perform. Highlights include:

• The company represents having a written cybersecurity plan.
• Mandatory monthly cybersecurity training is required of all employees.
• Monthly phishing emails are sent to employees to test awareness.
• A stand-alone cybersecurity insurance policy is in place, and specialized legal counsel are available for cybersecurity issues as necessary.

In addition, management performs the following systems and security tests:

• Newtek Technology Solutions (NTS) performs a periodic test of systems access and security, primarily addressing system password procedures, vendor access, developer controls, and physical access to servicing facilities. The February 2023 test results were positive.
• NTS has installed firewalls, intrusion detection systems (IDS), intrusion protection systems (IPS), and antivirus software on its internal and client networks to help protect them from intrusion, malicious attacks, and hacking attempts. Firewall, IDS, and IPS logs are generated daily and monitored by authorized personnel.

Internal controls

Newtek maintains internal controls that include its P&Ps, along with external audits by third parties, including the SBA. Additionally, as previously noted, NSBL as a wholly owned subsidiary of Newtek Bank, is now under the internal control environment of the bank. Features are described below.

P&Ps 

NSBL maintains a P&P manual that includes all aspects of its lending business, including portfolio servicing and monitoring along with loan workout and liquidation procedures. The manual indicates that NSBL will be in compliance with SBA regulations governing post-closing procedures and references specific SBA standard operating procedures. Since our prior review, the P&P manual was upgraded to include specific sections dedicated to portfolio servicing and monitoring, and loan workout and liquidation procedures, as well as providing detailed information for new hires unfamiliar with standard practices.

P&P controls include the following:

• The manual is reviewed semiannually by the respective unit supervisors under the direction of senior management, legal counsel, and compliance officers. It was last updated in January 2023. The SBA standard operating procedures continue to be added to the manual, though they lack task-specific details.
• The P&Ps are also subject to approval from the risk management committee (RMC). The RMC includes the president, various business heads, and the controller. Quality controls and reports were added for efficient loan processing in areas such as pre-closing, loan boarding, tax tracking, and post-closing processes.
• Management indicated that employees are trained when there are changes to P&Ps, and they can access the manual on the shared drive.

Internal and external audits 

NSBL as a wholly owned subsidiary of Newtek Bank is now included within the bank's internal audit scope. Additionally, the chief risk officer performs random tests of transactions and processes, and findings are reported to the board of directors. Other controls include the following:

• NTS undergoes a Service Organization Control Report (SOC 1, Type 2) by a third-party accounting firm, which covers IT general controls (excluding controls of the servers and networking system), customer service, and support systems. NTS is responsible for the systems and technology the company and other affiliated entities use. The technology-based process controls and IT general controls for the customer service and support function performed by NTS on behalf of Newtek were included in the scope of this review. The report for the period Oct. 1, 2021, through Sept. 30, 2022, noted no exceptions. The report for the period Oct. 1, 2022, through Sept. 30, 2023, is still in process.
• Newtek undergoes an annual Sarbanes-Oxley audit to assess internal control over financial reporting.
• The SBA audits Newtek's operations on a periodic basis. According to NSBL management, these reviews concentrate mainly on underwriting activities. The most recent audit was performed in March 2023 with management indicating there were no material findings.
• As previously noted, in fourth-quarter 2021, a QA team of 11 was formed to primarily conduct pre- and post-closing reviews of loan files, headed up by an outside hire who had previously worked for the SBA for 14 years. Other responsibilities include preparing loan files for SBA or independent third-party reviews, as well as responding to SBA's requests for additional information.

Vendor management

Newtek handles the management and oversight of vendors in a controlled and effective manner. The company has a formal performance review process for all vendors, and maintains approved appraiser and environmental firm lists, which are updated at least annually. Newtek follows a vendor vetting and management process that includes the following:

• Upon receipt of a vendor recommendation, Newtek requests vetting documentation that includes a background investigation questionnaire, confidentiality agreement, copies of certifications, and proof of insurance.
• Upon return of the vetting documentation, a database check is run through the federal government owned and operated System for Award Management (SAM) database to verify company information.
• Each vendor is notified of its status and, if cleared, the vendor is added to the approved vendor list. Notification is then sent to departments in which the vendor will be utilized as well as accounting.
• Vendors, including insurers, appraisers, environmental firms, attorneys, and site inspectors are reviewed periodically to determine if they should remain eligible for use. The vendor management team reports up through the director of portfolio servicing.
• Certifications and proof of insurance are updated annually.

Insurance and legal proceedings

Newtek has represented that its directors and officers, as well as its errors and omissions insurance coverage, is in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing-related litigation issues.

Loan Administration--Primary Servicing

The loan administration subranking for commercial finance primary servicing of business-based loans is ABOVE AVERAGE.

As of June 30, 2023, the servicing portfolio comprising 4,663 loans, with a UPB of over $2.9 billion, located across 50 states throughout the U.S., with the largest concentrations in Florida, California, Texas, and New York (see table 4). Industry types in the portfolio are somewhat diverse and are categorized by the North American Industry Classification System (NAICS). According to management, the primary collateral types by loan count include commercial real estate, residential real estate, and machinery and equipment. The mid-year 2023 delinquency rates of over 90 days past due are higher since our prior review (see table 3).

Table 3

Table 4

Table 5

New loan boarding

Newtek's new loan setup process is sound. Features of its new loan setup are below:

• The loan accounting department and loan closing group enter all preliminary closing data into Loan Manager manually. Management believes manual boarding allows for greater accuracy of loan-level details because of the unique nature of the loans.
• The department completes the onboarding process within three business days of loan closing (or receipt of loan tape/documents), and this system directly interfaces with the Sage 500 ERP general ledger system.
• To ensure accuracy, data entry is verified between the Loan Manager and the original loan documentation by a separate individual who did not board the loan manually.
• Welcome letters are automatically generated through the servicing system. The letters are sent to the borrower within three business days of new loan posting after being reviewed by a servicing officer.
• Management formally tracks loan boarding timeliness metrics but does not track loan boarding accuracy.
• The loan accounting department has primary authority to modify, delete, or upload additional loan records created in the Loan Manager system after initial data input.
• Various tickler dates are established in Loan Manager and standard reports are available throughout the loan's life to track receipt of closing documents, financial statements, insurance expiration, tax due dates, and other critical information, such as reconciling guarantee fee amounts with the SBA.
• All loan documentation is stored electronically in File Vault. The original documents are also stored in a file room, and the director of portfolio management's signature is required for document withdrawals and returns.

Payment processing

The loan accounting department is responsible for generating all monthly borrower invoices, processing borrower payments, and making guarantee fee payments to the SBA, in addition to performing manual monthly custodial account bank reconciliations (typically automated by other ranked servicers). Other highlights include the following:

• Most borrower payments are received via wire transfer or electronic funds transfer and are posted manually to Loan Manager, which are then automatically fed to the Sage 500 ERP general ledger.
• Any payments received by check at the Newtek offices are scanned the same day via Check 21, which allows for daily direct deposits electronically. USAePay is another option that allows the company to draw payments directly from a borrower's bank account or credit card on an assigned day each month.
• Separate individuals are responsible for depositing, processing, and reconciling payments.

Investor reporting

Newtek has controls in place and a highly automated environment for investor accounting and reporting. The Loan Manager system provides electronic submission of all investor remitting and reporting, including the generation of various SBA forms, such as Form 1502 (Guaranty Loan Status & Lender Remittance Form) and Form 172 (Transaction Report On Loans Serviced By Lender). All remittances and related reports are reviewed and approved by the departmental manager before release. All account reconciliations are handled monthly. As of June 30, 2023, management reported no unidentified and unresolved items in its custodial accounts that existed for more than 60 days, and it had not incurred any penalties for late remitting.

Forms 1502 and 172 are electronically submitted monthly via email to the Fiscal Transfer Agent (FTA), where it is electronically fed into the SBA database. The FTA is responsible for administering pools of securitized or sold loans, including:

• Facilitating loan settlement;
• Recording registered holders/investors of a loan;
• Tracking loan payment history;
• Collecting proceeds from lenders on sold loans;
• Remitting payments to investors;
• Forwarding all servicing requests from a lender to the investor and then forwarding the response back to the lender;
• Notifying the SBA of delinquent loans; and
• Handling SBA and lender repurchases from the investor.

Escrow administration

Newtek effectively manages third-party vendors that are contracted to assist with managing real estate taxes and property insurance. It does not escrow for taxes or insurance on any of its loans. Notable features include the following:

• Tax due dates and payments are tracked in Loan Manager. Management is notified by local districts of any property tax delinquencies, and, on specially serviced loans, may make advances before foreclosure or a tax certificate sale. The company also contracts with a national real estate tax information provider to monitor all accounts, which generates payment reminder notices when accounts are 30-, 45-, and 55-days delinquent.
• The SBA requires borrowers to provide proof of life, flood, and/or hazard insurance before loan closing. Policy expiration dates and coverage limit data are stored in Loan Manager. A third-party insurance vendor tracks coverage requirements, carrier rating compliance, and policy expiration dates. Unlike most servicers, however, insurance carrier ratings are not monitored after the loan closes.
• The vendor is responsible for determining life-of-loan flood certifications at loan setup; checking flood coverage and map changes annually; sending a series of reminder letters (on the expiration date and also 30, 45, and 60 days prior to expiration) for the required coverage updates to ensure all insurance coverage is adequate and current; and, in the case of disasters, alerting management when Federal Emergency Management Agency declarations affect zip codes containing portfolio collateral. Management stated that they receive reports from the vendor to track insurance certifications.
• The servicer's force-placed policy provides insurance in instances of coverage lapses and has a 90-day look-back period for both property and flood coverage. As of June 30, 2023, 363 loans in the portfolio were subject to force-placed coverage.

Asset and portfolio management: collateral and credit monitoring

NSBL has P&Ps to address collateral and credit monitoring of its loans. Management reported the following as of June 30, 2023:

• There were 20 servicing staff dedicated to portfolio monitoring.
• Loan-level covenant compliance requirements are centrally tracked.
• The watchlist contains 958 loans (20% of the portfolio by number of loans).
• There were 908 properties in the portfolio requiring site inspection during the first six months of 2023, and all inspection reports were received within 30 days of request. The majority of inspections are performed by third-party vendors.
• Account monitoring activity is principally driven by risk ratings assigned by servicing staff members to all loans in the portfolio.
• Portfolio administrative assistants prepare Uniform Commercial Code (UCC) continuation statements and arrange for UCC continuation filing through an authorized third-party vendor that records, updates, and searches by county. Loan Manager maintains continuation dates and tracks other pertinent data. No lapsed UCC filings were reported as of June 30, 2023.

The risk ratings are represented on a scale of one (best) to eight (worst), similar to the Federal Financial Institution Examinations Council's Uniform Classification System, which in turn may dictate a loan's inclusion on a watchlist. Initial risk ratings are assigned by the underwriters when loans are underwritten. Asset managers then review all material received from the underwriting department to determine if risk-rating adjustments are warranted after origination. The portfolio is continuously monitored during the life of the loan, and risk ratings are refreshed based on market conditions, collateral type, payment history, loan-to-value ratios, and portfolio trends, among other factors. Any changes in risk ratings require the approval of the director of portfolio servicing and are subsequently ratified by the RMC.

Portfolio management personnel proactively send out requests for updated financial information to all customers, such as financial statements for businesses and/or their guarantors and personal tax returns for individuals. All information provided on business income tax returns are verified with IRS filings. The servicing system contains a tickler function that automatically sends out the annual request for updated financial information with a subsequent request after 60 days if needed. Follow-up phone calls are also placed periodically when financial information is not received.

Although management indicated that it requests financial information for all performing borrowers, it also reported that only approximately 40%-45% of the requested financial information is typically received. It was further indicated that non-compliance was not an event of default under the loan documents. When received, the financial information is reviewed and compared to prior-year results. Management enhances monitoring and increases communication with borrowers who have significant deterioration in financial performance.

Financial statements are, however, required to be received and reviewed prior to processing any credit requests, such as collateral or payment deferments or reductions. All modifications require managerial approval. Loan Manager is updated to reflect approved modifications and reported to the SBA via the monthly Form 1502 report. Management does not continue to request financial statements from nonperforming borrowers in those instances when it is focused on collateral liquidation instead.

Site visits are performed semiannually for loans with imminent default issues. Asset managers attempt to negotiate remediation plans with borrowers when deferred maintenance is noted in site inspection reports. Loan Manager has a tickler alert for when site visits are required and tracks the status of these requests. Once inspections are received, all reports are stored electronically in Loan Manager and in the file room.

Borrower requests

NSBL addresses borrower requests in a proactive and well-controlled manner. Highlights include the following:

• NSBL has a customer service staff that is the main point of contact for the borrower to process borrower requests. All requests are centrally tracked by asset management in the servicing system.
• Customer service staff conduct outbound calls to each borrower every 90 days to identify opportunities and issues. The outbound call queries how each borrower's business is doing, what are its existing needs, and what needs to be addressed with a servicing action.
• Requests are referred to the asset management area, which conducts due diligence by underwriting and analyzing the request and making a recommendation to a portfolio manager for approval.
• In first-half 2023, 72 servicing action requests were received, of which 21 were deferments; for 2022, there were 161 and 31, respectively. Collateral releases or substitutions, guarantor substitutions, subordinations, and assumptions were the most common non-deferment requests.

Early stage collections

Initial loan delinquency management appears to be proactive. Borrowers are contacted the day after the grace period ends (loans typically are due on the first day of the month, with a 10-day grace period), and late notices are issued within two days after the grace period expires.

• NSBL makes subsequent borrower calls during the first 30 days and issues written collection notices when accounts are delinquent. All notices are generated through Loan Manager, which tracks collection comment histories.
• The liquidation department takes charge of the account once a loan is 30 days past due. Liquidation officers arrange for site-visit inspections from an approved outside vendor for all loans that are at least 45 days past due, and after 15 days for a technical default.
• In situations where credit deterioration accelerates, a formal transfer request is completed to move management of the account to the asset management group for special servicing.

Loan Administration--Special Servicing

The loan administration subranking for commercial finance special servicing of business-based loans is ABOVE AVERAGE.

As of June 30, 2023, the special servicing portfolio totaled 304 loans, with $100.6 million of unguaranteed UPB outstanding (see table 6). NSBL's special servicing area manages the resolution of nonperforming loans with nine liquidation officers and one workout officer, all reporting to the vice president, special servicing manager. The staff is experienced, with industry veterans that have a track record during periods characterized by high loan defaults. As of June 30, 2023, the specially serviced asset-to-asset manager ratio is approximately 30. Dispositions are managed in a proactive manner, including regular communication with the RMC.

NSBL has the authority to service, modify, and liquidate the SBA 7(a) loans in its portfolio if its actions are consistent with the operating procedures and performance standards set by the SBA, subject to notice to and, in certain cases, approval by the SBA and/or investors. The special servicing manager reviews recommendations of liquidation/litigation actions to ensure compliance with SBA program rules and regulations, and Lender Service Provider procedures. The liquidation officers and workout officer act as a liaison between the lender and the SBA to ensure proper liquidation actions (that are consistent with agency requirements) are taken. They also work with struggling, but responsive, borrowers to keep them in business, as recommended by the SBA. When borrowers are unresponsive, legal counsel in liquidation and foreclosure actions may be engaged.

We believe the transfer of problem loans from portfolio servicing to special servicing is adequately controlled. When a loan is transferred, the department director assigns it to a portfolio manager who modifies the loan status in Loan Manager. The departmental administrator assists by preparing liquidation files, running new credit reports on each borrower and any guarantor, and performing a UCC lien search.

Table 6

Key initial information for each borrower liquidation file includes:

• Loan balance, including accrued interest;
• SBA guaranty percentage;
• Performance classification;
• Current internal risk rating;
• Proposed changes to the risk rating accrual status, etc.
• Reason for transfer to special servicing; and
• Details on collateral securing the loan.

All transfers in or out of the asset management area within special servicing are presented to the RMC monthly for approval. The RMC is composed of seven members of senior management. The director of asset management provides committee members with a liquidation status change report detailing all assets identified as being recommended for a change in status. The proposals can include requests to either a change from accrual to nonaccrual status and/or an accompanying change in risk classification level. The recommendations are accompanied by written documentation explaining the reasons for the request. RMC members discuss each case and determine the appropriate action.

Loan recovery and foreclosure management

NSBL loan recovery protocols emphasize default management and asset recovery. As noted earlier, NSBL has the authority to modify and liquidate loans consistent with the operating procedures and performance standards set by the SBA.

Some notable features include:

• An approved vendor list is utilized for appraisals, environmental site assessments and site inspections.
• Outside attorneys are engaged to perform a review of loan documents.
• Insurance coverage is assured to be in force.
• Collateral evaluations are performed for loans that are in the process of being worked out.
• Current Phase I and/or Phase II environmental site assessments, appraisals, lien searches, and tax searches are obtained before liquidating collateral.

NSBL tracks borrower-specific detail, including loan balance, collateral, and loss exposure for all nonaccrual and nonperforming loans in its portfolio. Third-party clients have ownership of nonaccrual and nonperforming loans and handle the resolution in conjunction with NSBL. The SBA is notified monthly by the director of portfolio servicing for all loans being moved to performing from nonaccrual or liquidation status and vice versa.

Asset managers prepare general recovery plans within 30 days of transfer to special servicing, including cost estimates for resolution. When the loan and/or collateral is specialized or complex, the asset management department produces a more detailed criticized asset resolution plan. The portfolio manager and director of asset management are required to approve all plans, which are provided to the SBA for all SBA-guaranteed loans once the loans are 120 days or more delinquent. The RMC approves all plans for loans greater than or equal to $1 million.

The workout plans include:

• The reason(s) for transfer;
• The cause(s) of the business breakdown;
• Details of the guarantor(s);
• Name of legal counsel, if applicable;
• Budget for legal services expected to be rendered;
• General recovery plan; and
• An estimate for the time for resolution.

The liquidations department determines if a loan modification is warranted. The most common modifications include forbearance, reinstatement of maturity date for loans that had been previously accelerated, deferment, changing repayment term, assumptions, subordination, and voluntary sale of collateral by the borrower. Some modifications such as payment deferrals and assumptions may be subject to additional legal review and senior management approval.

NSBL internally determines its workout strategy and then may establish a repayment plan or negotiate a loan modification in communication with the borrower. This may include an updated appraisal of pledged collateral and the collection of current business and personal financial information. When possible, NSBL attempts to have the collateral for all nonperforming loans revalued by an approved appraiser and then review by a portfolio manager. A pre-negotiation agreement with the borrower, which we note is a best practice among special servicers, is not required.

Modified loans remain in nonaccrual status for a period of time, even if they are no longer considered delinquent. Typically loans that are 90 or more days past due and/or transferred to nonaccrual status will be classified substandard or worse, depending on collateral and other variables. These loans are included in a monthly report that is also provided to the RMC. The director of portfolio servicing must approve loans returned to accrual or non-liquidation status and notify the SBA monthly.

Loans are automatically placed in liquidation for borrower bankruptcy, abandoned collateral, legal action by a senior lien holder, or if a receiver is appointed. Loans may also be placed in liquidation if nonpayment continues and is not expected to be cured, if adverse changes occur, or if other reasonable corrective measures are not successful. At times, NSBL may acquire title to the property on behalf of the SBA or for NSBL (with the approval of the SBA), though this is not the preferred liquidation option. Loans are charged off when the loan is considered uncollectible and has little value. The RMC reviews and approves liquidation plans quarterly.

When NSBL determines all means of collection have been exhausted, the director of asset management prepares a wrap-up report for the SBA, highlighting any recoveries, expenses incurred during the process, and details on the collateral and its disposition. The process concludes with NSBL's recommendation to close the file, and a demand is submitted for the SBA to repurchase its guaranteed portion. The SBA is provided with copies of all loan origination documents, the related UCC, lien searches, financial information, litigation and legal pleadings (if applicable), appraisals, and liquidation plans.

Under the liquidation process for third-party clients, NSBL works with the clients' legal counsel and title is acquired in the name of the client.

Legal department

NSBL has an experienced in-house attorney as senior counsel for NSBL-originated loans to handle any legal issues. The senior counsel is supported by multiple closers, paralegals, and analysts who are fully integrated in both the day-to-day underwriting and origination of loans. They also support the servicing operations, including engaging outside counsel. The legal department assists with executing standard form engagement contracts and hiring legal counsel prior to liquidations.

When necessary to protect its interests, NSBL engages legal counsel from an approved list of firms. After reviewing loan documentation, attorneys are required to complete a litigation plan, including estimated costs to pursue certain alternatives. PMs are responsible for monitoring legal expenses incurred on their cases and reviewing legal bills before payment.

The liquidation officers work with external lawyers identified by their clients' legal counsel, rather than NSBL counsel, for all third-party loans.

Financial Position

The financial position for Newtek is SUFFICIENT.

Related Research

• Newtek Small Business Lending AVERAGE Commercial Finance Primary And Special Servicer Rankings Affirmed, Oct. 27, 2023
• Newtek Small Business Finance LLC AVERAGE Commercial Finance Primary And Special Servicer Rankings Withdrawn, Oct. 27, 2023
• Select Servicer List, Oct. 27, 2023
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• Servicer Evaluation: Newtek Small Business Finance LLC And Newtek Small Business Lending, June 10, 2021
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019