POISED BETWEEN THE BORROWER AND INVESTOR, THE COMMERCIAL MORTGAGE loan servicer performs a function that involves far more than just the collection of payments from the borrower and remittance of funds to the investor. The servicer must understand and interpret loan documents and servicing agreements, protect the rights of lenders while respecting the rights of borrowers and provide service to both borrowers and lenders. [??] The servicer also has to navigate through borrower and lender issues that were not anticipated in either the loan documents or servicing agreements, but which inevitably arise over the course of a five- to 10-year servicing relationship. [??] The commercial mortgage loan servicing industry, driven primarily by securitization, has transitioned from a task-oriented, borrower-focused business to one requiring the ability to process and report more and more timely information and to coordinate among a variety of decision-making parties, sometimes with conflicting interests. The relentless drive of investors to have more information and increased involvement in decision-making has changed the face of commercial mortgage loan servicing.
As a result, the industry has gone from being a back-office operation to one requiring the ability to process and interpret volumes of loan information; negotiate loan document terms with borrower and non-borrower interests; negotiate servicing agreement terms with investor and non-investor interests; and provide high-quality customer service not only to borrowers, but also to non-borrower parties.
This is a challenge, at best. In order to serve the needs of both the borrowing and investing communities, servicers have responded with solutions that include technology-driven productivity increases, expanded staffs, enhanced training and non-traditional processing methods.
Traditional commercial mortgage loan servicing
The Mortgage Bankers Association's (MBA's) 1995 publication, Policy and Procedure Guide for Commercial Loan Administrators divided servicer responsibilities into the following six broad categories:
* Loan Setup: Reviewing loan documents and boarding pertinent information to the servicing system;
* Loan Administration: Collecting and remitting payments, reporting, delinquency and property protection advances, property insurance and real estate taxes;
* Loan Monitoring: Property inspections, appraisals and financial analysis;
* Borrower Requests: Processing loan transfers/assumptions, secondary financing, easements and partial releases, new leases and lease modifications, Subordination and Non-Disturbance Agreements (SNDAs) and payoffs;
* Watchlist: Tracking identified factors that may adversely impact performance of the loan; and
* Workouts: Establishing preworkout agreements and modifications, monitoring modified loans, defaults and foreclosures and managing real estate-owned (REO).
In that era of portfolio lending, commercial mortgage loans generally were serviced by the company with the borrower relationship. Where decision-making was not delegated to the servicer, the portfolio lender acted as the decision maker.
Government-sponsored enterprise (GSE) (Fannie Mae, Freddie Mac and Ginnie Mae) lending followed similar guidelines--although for their programs, the GSEs imposed on servicers certain financial qualifications, servicing requirements and uniformity in reporting requirements. As lenders, the GSEs looked to the servicer to provide borrower and property-level services for the life of the loan. No distinction was made between servicing a performing and nonperforming asset. Again, where decision-making was not delegated to the servicer, the GSE--as lender--made decisions.
The commercial mortgage-backed securities (CMBS) industry developed along different lines. Without a single lender to act as decision maker, servicing responsibilities were bifurcated between a "master servicer" and a "special servicer." Subject to the servicing agreement, the master servicer was the decision maker for performing loans and the special servicer was the decision maker for nonperforming loans.
The special servicer, however, was appointed and served (subject to rating agency acceptability) at the will of the most subordinate bond holders (B-piece holders)...