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Servicer Evaluation: Paradigm Quest Inc.

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Servicer Evaluation: Paradigm Quest Inc.

Ranking Overview
Subrankings
Servicing Category Overall ranking Management and organization Loan administration Outlook
Canadian Residential Loan Servicer ABOVE AVERAGE ABOVE AVERAGE ABOVE AVERAGE Stable
Financial Position
SUFFICIENT

Rationale

S&P Global Ratings' ranking on Paradigm Quest Inc. are ABOVE AVERAGE as a residential mortgage loan primary servicer. On July 27, 2020, we affirmed the ranking (please see "Paradigm Quest Inc. ABOVE AVERAGE Canadian Primary Residential Mortgage Ranking Affirmed; Outlook Stable," published July 27, 2020). The outlook for the ranking is stable.

Our ranking reflects:

  • A well-experienced senior management team and overall staff turnover rates that are manageable.
  • A track record servicing mortgage-backed securitization loan portfolios.
  • Its key technology systems that are effective to support the servicing operations.
  • An internal control framework that, coupled with external audits and factoring the size of the organization, is capable to monitor and detect risk.
  • Solid loan administration practices relative to the portfolio's size.
  • Servicing performance metrics remain broadly consistent since our last review and demonstrate efficient administration practices.
  • The company's nimble response to manage a rapid increase in borrower requests for payment assistance as a result of the COVID-19 pandemic as an indicator of effectiveness in managing a higher volume of delinquencies.

Furthermore, certain components of PQI's internal control framework are undergoing a transition as it augments the quality monitoring program performed within the servicing operations and transitions the risk and compliance area to a monitoring role. Management indicated that existing ongoing quality reviews within the servicing business units continue during this transition. We will continue to monitor the evolution of the internal control framework.

COVID-19 Preparedness

PQI transitioned nearly all employees to work remotely as part of its business continuity plan in response to the COVID-19 pandemic. Management reported no material disruption to key servicing operations.

Similar to many servicers in the industry, PQI experienced a significant spike in call volume in the early stages of the pandemic from borrowers requesting payment assistance. The company redeployed staff to take inbound calls and manage other administrative tasks to review and set up payment deferrals. The company also leveraged its website and automated much of the process to reduce the time it takes to respond to borrowers and make system changes to reflect the payment deferral.

Since our prior review (see "Servicer Evaluation: Paradigm Quest Inc.," published Aug. 16, 2018), the following changes and/or developments have occurred:

  • A new senior vice president of servicing operations transitioned from another leadership role at the company.
  • The board of directors expanded and established a more formal audit reporting and oversight process.
  • The company added a dedicated trainer that is assigned to the servicing operations group.
  • PQI transitioned parts of its internal control framework by evolving the risk management area into a formal monitoring role and is developing a more formalized quality assurance reviews within the business units.
  • PQI transitioned to digital data backups from tape backups for disaster recovery.

The stable outlook reflects our base-case expectation that PQI will continue to perform as a primary servicer, underpinned by its experienced senior management team. Our overall ABOVE AVERAGE Canadian residential mortgage primary servicer ranking is limited to a servicing portfolio of similar size and characteristics to PQI's current portfolio (number of assets under management, a predominantly prime credit profile, etc.). Should the portfolio size increase materially or the composition change, it may affect our current ranking or outlook.

We believe PQI, like most servicers, could face operational challenges associated with a high volume of mortgage payment relief requests or managing an increased volume of loan delinquency should the economic downturn persist beyond the terms of the payment deferrals already granted to borrowers. We expect that management will redeploy or add staffing resources as needed should delinquencies rise. We will continue to monitor PQI's portfolio performance and default resolution effectiveness.

In addition to conducting a virtual meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2019, as well as other supporting documentation provided by the company.

Profile

Servicer Profile
Servicing location Toronto
Loan servicing system RUBI
Portfolio types RMBS Prime
As of Dec. 31, 2019
Number of servicing employees 52
Volume (mil. C$ unpaid principal balance) 27,442
Loan count 103,719

Established in 2004, PQI is a nonbank Canadian mortgage outsourcing company that provides third-party and private-label mortgage servicing and underwriting to Canadian mortgage investors. In 2013, Fortress Investment Group LLC (Fortress) purchased a majority stake in PQI. Fortress is a U.S. private equity firm with $43.5 billion in assets under management as of Dec. 31, 2019.

PQI primarily serves financial institutions, which are subject to Canadian bank regulations under which all mortgages with loan-to-value (LTV) ratios above 80% must be insured. Private lenders do not face the same LTV or insurance requirements and may fund riskier mortgage products.

PQI is approved to underwrite and service mortgages insured by the Canada Mortgage Housing Corporation (CMHC), Canada Guaranty, and Genworth Financial. It has three servicing sites: its headquarters in Toronto and offices in Vancouver and Montreal. In aggregate, PQI's servicing portfolio increased marginally (2.4%) year over year by loan count (see table 1). This continues a trend of modest growth. Insured mortgages comprise roughly 91% of the portfolio, down from 93% the prior year.

Table 1

Portfolio Volume
Units (number) % change Volume (mil. C$) % change
Dec. 31, 2019 103,719 2.45 27,442 2.92
Dec. 31, 2018 101,240 3.41 26,663 4.04
Dec. 31, 2017 97,904 0.02 25,628 0.39
Dec. 31, 2016 97,889 12.17 25,528 14.71
Dec. 31, 2015 87,267 11.14 22,255 14.29
Dec. 31, 2014 78,521 19,473

Table 2

Portfolio Distribution By Province/Territory(i)
Units % (overall) Unpaid principal balance % (overall)
Ontario 37 40
Alberta 24 25
British Columbia 14 16
Quebec 8 6
Saskatchewan 6 6
Manitoba 4 3
Newfoundland 3 2
Nova Scotia 2 1
New Brunswick 2 1
Total 100 100
(i)As of Dec. 31, 2019.

Management And Organization

The management and organization subranking is ABOVE AVERAGE for primary residential mortgage servicing.

Staffing, turnover, and organizational structure

PQI's senior and middle management team exhibits solid industry experience. Middle management's industry experience indicates good management depth and bench strength. The senior and middle management's company tenure levels are satisfactory, although they are lower than other Canadian servicers that we rank. Annualized turnover levels for management and staff remain manageable. Furthermore:

Senior management averages 20 years industry experience and 13 years company tenure;

Middle managers average 18 years industry experience and six years company tenure; and

There was no reported turnover for management and 9.6% annualized turnover for staff. The turnover rates are similar to other Canadian servicers that we rank.

PQI's organizational structure aligns most servicing functions under the executive vice president (EVP) of operations. The current EVP of operations took over the role following the departure of the prior executive in August 2019. Based on the background shared with us, the new EVP of operations has good industry experience. However, while not a cause for concern at this time, we note that this represents three changes since 2016.

The overall servicing staff count has remained relatively stable year over year while the servicing portfolio volume marginally increased. This caused the loans per employee (LPE) ratio to increase slightly year over year. Despite the increase in LPE, the servicing performance metrics have remained generally stable. As noted in our outlook, should the economic downturn caused by the COVID-19 pandemic persist longer than the terms of payment deferrals granted to borrower provide payment relief, we expect that management will redeploy or add staffing resources as needed should delinquencies rise. We will continue to monitor staffing levels.

Training

PQI maintains a sound training program for new and existing employees. It uses a learning management system to distribute and track completion of required annual and new-hire training. The company added a trainer position dedicated to the servicing operations group, which is a positive factor considering the size of the organization. Other training aspects we considered in our analysis include:

  • The new-hire training program is comprehensive.
  • Minimum knowledge standards are enforced by a certification process for certain roles.
  • PQI requires employees to complete anti-money laundering and cybersecurity awareness training annually.
  • New-hire training hours for customer service staff (80 hours) are adequate, but are lower than other Canadian servicers that we rank.
  • The leadership development program is informal.
Systems and technology

We believe PQI has effective technology to meet its primary servicing requirements. Its technology group manages and maintains the technology for all mortgage-related functions and governs the organization's information technology and operations. It has well-designed data backup routines and disaster recovery preparedness.

Servicing system applications 

It operates in an automated environment that uses a combination of vendor-supplied and proprietary systems. The company uses a proprietary servicing and underwriting system named RUBI. This system is integrated with its mortgage origination system, which interfaces with PQI's customer website.

Business continuity and disaster recovery 

PQI maintains a formal disaster recovery and business continuity plan to mitigate business disruption. The company recently implemented its plan due to COVID-19. PQI transitioned the vast majority of its workforce to work remotely. Management noted that it was able to conduct all key servicing functions remotely and experienced no significant disruption to the company's operations or data facilities.

It uses data replication as well as digital data backups (daily, monthly, and yearly) to provide failover recoverability and point-in-time data recovery capability. Its data-backup site is less than 30 kilometers away (approximately 20 miles) from the company's home office, and it is on a separate power grid. We believe the close proximity between the primary and backup data sites present certain risks and is not a best practice.

We view having certain redundant servicing functions performed in multiple offices favorably as a measure to mitigate business disruption risk. The most recent disaster recovery test was completed in October 2019, and the company reported meeting all recovery time objectives.

Cybersecurity 

PQI deploys cyber and information security protocols to protect data and mitigate the risk of cyber threats. Security practices and measures include:

  • Network penetration testing (internally monthly and annually by a third party).
  • Required annual security awareness training for all employees.
  • Periodic phishing email simulation campaigns.
  • Threat and vulnerability detection mechanisms such as network monitoring, intrusion prevention systems, and vulnerability scanning.
  • System patches that are updated as necessary.
  • Multi-factor authentication for core platforms and quarterly system access audits.
Internal controls

We believe, considering the size of the organization and federal and provincial regulatory environments, PQI's risk management and control framework, when factored in conjunction with audits by external parties sufficiently detects risk and monitors compliance with regulatory and investor/insurer requirements.

Policies and procedures 

The company's policies and procedures manual is stored on its intranet. As part of its change management process, all policy changes must be approved by the risk committee, and material procedure changes require approval from senior leadership of the operations area.

Quality assurance (and call monitoring)

The first line of defense is comprised of quality monitoring measures within the various servicing business units. The company is in the initial phases of transitioning to a more formal and structured quality monitoring program within the servicing operations business units. Management indicated existing ongoing quality reviews remain in place during the transition. Front line quality assurance and control activities include the following:

  • Exception reporting, on-going various in-line quality reviews, and post mortem testing of key servicing functions determined to be high risk by the risk and compliance department.
  • Periodic servicing staff performance scorecards.
  • Call quality monitoring for customer service and collections staff.

Compliance and quality control

PQI maintains a risk management and compliance department that is separate from the operational lines of business. Risk management practices include:

  • Regulatory and investor compliance support to the servicing operations.
  • Monitoring of front line quality testing
  • Periodic risk assessments for key servicing functions.
  • Management and oversight of corrective action plans in place to resolve control issues.

Internal and external audits  

PQI has in internal audit program that provides an independent review of key servicing functions. The internal audit program is unseasoned as it was initiated in 2016 and paused for a period of time after it was established.

The internal audit planning and scheduling is led by the chief risk officer and determined by the department's assessment of risk. We note that the audit planning and prioritization of audits is less structured and more informal compared to what we see at similarly ranked servicers. In addition, internal audits of key servicing functions is less frequent.

Notwithstanding a less structured audit planning process, PQI's audit methodology is sound. It is characterized by a comprehensive internal audit universe, audit issues that are categorized by severity, an industry-common audit rating system (satisfactory, needs improvement, and unsatisfactory), and monthly and quarterly audit reporting to the risk committee and board of directors respectively.

PQI augments its internal testing with an annual Canadian Standard on Assurance Engagements 3416 (CSAE 3416), and there are multiple audits by lenders and mortgage insurers. The 2019 CSAE 3416 report that we reviewed indicated no exceptions that we consider material. PQI also indicated CMHC performed multiple on-site reviews in 2019 and 2020, during which management indicated there were no material issues.

Complaint management

There is a defined complaint-handling process and a designated complaint officer. Complaints are typically received through a customer service channel, and personnel are trained in complaint and incident handling. Complaints that are not resolved at the customer service level are routed following an escalation tree until resolved. Complaints are logged in the servicing system and a complaint database. PQI reviews complaints on a quarterly basis for trending and root cause analysis.

Vendor management

The company uses a limited number of vendors within its servicing operations, and the business units are responsible for day-to-day oversight of their respective vendors. Vendor performance is managed largely through service-level reporting and external audits by third parties such as lenders. While PQI lacks formal vendor management and monitoring framework, we consider that its vendor management practices adequate considering the limited number of vendors, the size of the servicing portfolio, and that most vendors are industry recognized. If the servicing portfolio or scope of vendor work were to expand, we believe the lack of a formal framework would increase risk.

Insurance and legal proceedings

PQI 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 pending litigation items.

Loan Administration - Primary

The loan administration subranking is ABOVE AVERAGE for primary servicing.

New-loan boarding

PQI's boarding process can accommodate new loans from bulk and flow transactions. It has a single integrated system for underwriting and servicing that facilitates an efficient transition from underwriting to loan boarding. The company has experience with bulk acquisitions. It boards smaller acquisitions periodically, although the most recent large bulk acquisition was in 2011. Key loan boarding procedures and controls include the following:

Automated data validation checks are completed prior to boarding. The checks are integrated into the system, and stops are in place to prevent loans from boarding with incomplete or invalid data.

PQI monitors missing documents and has procedures to follow up with the closing vendor.

The loan documents are stored with the closing vendor and are accessible to the servicing team via an online portal.

A welcome call to new borrowers provides a recorded message with the option to speak with a live agent following the boarding of a new loan.

Payment processing

Approximately 99% of payments are drafted through the pre-authorized debit program, which is consistent with other Canadian servicers we rank. Key factors we considered in our analysis include the following:

  • There is a secure cash area for cash processing of any physical checks received.
  • The company reported no turnover rate within its cash processing area.
  • Prepayment penalties are system-calculated, which mitigates the risk of error.
  • A defined process identifies rejected payments.
  • A second-look review and quality testing watch for changes to prime rates in the servicing system.
Investor reporting and investor accounting

PQI provides daily, weekly, and monthly reporting as required by investors. All reports are delivered electronically, and there is a review of data using automated checks prior to reporting to investors.

The company maintains lender-specific custodial accounts and has daily reporting to manage remittance and reconciliation processes. It uses multi-factor authentication on its banking website, and multiple authorizations are required for wire transfers. Accounts are reconciled daily, and the company has a good track record of no reconciliation items aged over 60 days. Staff are cross trained across investor portfolios, which mitigates continuity risk within a small team. Staff turnover (17% annualized) within the investor accounting team is manageable.

Table 3

Portfolio Breakdown By Investor(i)
Prime portfolio (%)
Mortgage-backed securitization investor 86.2
Other investor 13.8
Total 100
(i)As of Dec. 31, 2019
Escrow administration

PQI maintains an effective process for escrow administration considering that a small percentage (11%) of the servicing portfolio is escrowed for taxes. Escrow administration, including tax line set-up and disbursements, is largely handled by the tax administrator in the funding and shared services department.

Key processes and controls we considered in our analysis include the following:

  • The monthly escrow amount collected for taxes is re-calculated at least annually to collect the correct amount necessary to cover the anticipated tax disbursement.
  • The company assigns a recovery officer to contact the borrower if a pending tax sale notice is received.
  • Recovery specialists also work to resolve delinquent tax or condo association issues.
  • Homeowners insurance cancellation dates are stored in the servicing system.
  • Collections calls to borrowers and up to three letters are mailed to customers following the receipt of an insurance cancellation notice (to obtain in-force coverage).
Mortgage reconveyance

The company's discharge process is largely automated. Payoff statements are system-generated and a penalty calculator is used to determine the prepayment penalty amount if applicable. The company reported no discharges were processed outside of statutory compliance.

Customer service

PQI maintains systems and resources to effectively manage customer service inquiries for its portfolio. It deploys multiple channels for customer service inquiries including phone, email, chat, and its borrower web portal. Customer service personnel (CSR) are located in geographically diverse locations (Toronto, Vancouver, and Montreal), which improves business continuity preparedness.

It does not utilize an interactive voice response (IVR) system, which is a common technology among Canadian servicers we rank. Although an IVR is not in place, notwithstanding the significant short-term spike in call volume related to COVID-19, the call center metrics indicate that call volume is manageable based on historical call volume and the size of the servicing portfolio. The percentage of registered web site users nearly doubled year over year to 33%. This is a positive trend as self-service capabilities are typically more scalable and well controlled. We note, however, that that percentage is lower than other Canadian servicers that we rank. Key customer service processes and metrics considered in our review include the following:

A customer satisfaction survey is in place to measure underwriter performance.

Annualized turnover within customer service staff is 8%, which we consider manageable and is in-line with other Canadian servicers we rank.

PQI reported the customer service abandonment rate (ABA) and average speed answered (ASA) were 6.1% and nine seconds, respectively.

The ABA worsened year over year. We consider it satisfactory, although it compares favorably to other Canadian servicers that we rank. The ASA has improved marginally and compares favorably to the company's peers'.

PQI monitors a minimum of two calls per month per CSR, which is fewer than the average we typically see at other Canadian servicers we rank.

PQI has a dedicated retention team to handle its retention efforts, as Canadian residential mortgages typically have short maturity terms (commonly five years). The company proactively manages retention staff based on expected loan maturity volumes. Loans are assigned to retention specialists as they approach maturity. The retention specialists initiate contact with the customer to discuss renewal options as early as 120 days before maturity. In addition to direct and automated outbound calls, PQI also mails renewal notices to inform borrowers of renewal options.

Default management

PQI has sound default processes to resolve delinquencies through payment arrangement or legal action. Its default area is organized into collections and recovery teams. The collections team works to resolve delinquencies through payment arrangements before commencing legal action. Recovery specialists work to mitigate losses through resolution efforts and monitor legal actions.

Portfolio performance improved year over year, in part reflecting benign economic conditions. We note that the portfolio delinquency does not reflect the period of deteriorating economic activity in Canada following the COVID-19 pandemic. The effects on residential mortgage portfolio performance remains uncertain.

Table 4

Delinquency Rates
Delinquencies (%)
30-59 days 60-89 days 90+ days Total delinquencies (%) Foreclosure (%)
Dec. 31, 2019 0.15 0.05 0.30 0.49 0.36
Dec. 31, 2018 0.23 0.06 0.51 0.80 0.52
Dec. 31, 2017 0.26 0.06 0.50 0.82 0.54
Dec. 31, 2016 0.25 0.07 0.42 0.73 0.48
Dec. 31, 2015 0.28 0.09 0.49 0.86 0.51
Dec. 31, 2014 0.35 0.12 0.61 1.08 0.62

The default management team and staff have solid industry experience levels that compare favorably to other Canadian servicers we rank, and satisfactory tenure with the company (see table 5).

Table 5

Experience And Tenure
Management Staff
Avg. industry experience (years) Avg. present employer experience (years) Avg. industry experience (years) Avg. present employer experience (years)
Collection 22 4 18 6
Recovery 23 7 20 11
Collections

PQI maintains sound collections practices and resources considering the loan characteristics of the servicing portfolio. The collections department is organized into early- and late-stage collectors, with late-stage collectors being more experienced personnel. It also leverages a vendor to supplement internal outbound calls during the initial stages of delinquency. The vendor uses an outbound dialer that presents borrowers with an automated message and the option to speak with a live collector. Collections staffing is unchanged since our last review, and the company redeployed staff that had prior collections experience in response to higher call volumes related to the payment assistance requests. Key collections strategies and controls include the following:

Outbound calls begin on the first reported day of delinquency.

A combination of dialer and manual calling improve contact rates.

Loans more than 60 days past due (DPD) are assigned to the late-stage collectors, who are usually more experienced personnel.

Repeat delinquency loans are assigned directly to an internal collector.

An occupancy check is initiated once a loan is 36 DPD.

Collections workflow and loan assignments are controlled through system-based reports, which is manageable considering the low delinquency levels.

Collections staff's 7.1% turnover rate is manageable

A minimum of three calls are monitored for each collector in a month, which is lower than other Canadian servicers we rank. Each collector has a monthly coaching session to review the monitoring scorecards.

The company reported a 6% ABA and 15 second ASA for collections calls. The disparity between the high percentage of abandoned calls and good average answer time is uncommon. This is attributable to the unpredictability of the response rate of the vendor dialer campaigns. The ABA improved from 7% reported in our prior report, although it is higher compared to the average of other Canadian servicers that we rank. The ASA has remained mostly stable and compares favorably to peers.

Loss Mitigation

PQI offers multiple workout options to cure defaults, including capitalization and payment deferral solutions as well as liquidation options such as short sales. Loss mitigation options are largely prescribed by the insurer or investor, and PQI's recovery specialists will often work directly with the insurer to facilitate the workout.

The company reported a significant increase in borrower requests for mortgage payment assistance as a result of government measures put in place to combat the COVID-19 pandemic. A spike in requests for payment relief adds stress to call center operations as well as administrative operations that must underwrite, make system changes, and provide communications to borrowers. Following investor and insurer guidance, it offered payment deferrals, mostly for a period of three to four months, to provide relief to borrowers. Management indicated that it took a number of measures to manage the spike in volume, including a dedicated phone number and email address. It updated telephone hold messaging, and it automated much of the underwriting and processing of the mortgage deferral process. We view the automation as a positive as it allows the company to manage periods of higher mortgage payment defaults. We note, however, that it remains unclear if the mortgage payment deferrals will be enough. The effectiveness of the payment deferrals will depend on if borrowers are able to resume making their payments by the end of the deferral period. If worsened economic conditions persist for a longer period of time and borrower hardships become longer lasting or permanent, the company may be faced with increased delinquency rates.

Table 6

Loss Mitigation Breakdown
Overall Portfolio (%)
Special payment arrangement N/A
Payment deferement N/A
Short payoff/shortfall N/A
Paid in full 16.75
Modification/restructure N/A
Transferred to insurer 5.76
Completed foreclosure/power of sale 35.08
Other workouts/loss mitigation 42.41
N/A--Not applicable.
Foreclosure and bankruptcy

We believe PQI has appropriate oversight over the administration of the recovery process. It uses a task-based online software, CollectLink, to manage and monitor loans through the legal process. Management indicated it typically maintains one to two law firms for each province in its approved lawyer network, and that it could add additional law firms, if needed, to handle increased volume. Considering caseload and capacity, we also considered that for a meaningful percentage of the servicing portfolio, the investor, rather than PQI, manages the mortgage enforcement process. Legal proceeding administration and controls include:

All files are reviewed by management prior to initiating legal action.

The CollectLink system provides reporting to monitor timelines and law firm performance.

Bankruptcy administration is managed by a vendor and processed through the vendor's web-based portal.

The recovery specialist monitors all loans in a bankruptcy status even if they remain current.

Real estate-owned (REO)

In Canada, depending on the province, lenders can use "power of sale" provisions that exist in mortgages to liquidate properties following mortgage default without having to go through the court's judicial process. PQI leverages the power of sale process when applicable to expedite the timeline of resolving defaulted mortgages. It also uses multiple channels to market properties including online and auctions.

Financial Position

The financial position is SUFFICIENT.

RELATED RESEARCH

Servicer Analyst:Jason Riche, Farmers Branch + 1 (214) 468 3495;
jason.riche@spglobal.com
Secondary Contact:Leigh Stafford McLean, Farmers Branch + 1 (214) 765 5867;
leigh.stafford@spglobal.com
Analytical Manager, Servicer Evaluations:Robert J Radziul, New York (1) 212-438-1051;
robert.radziul@spglobal.com

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