Rationale

S&P Global Ratings' ranking on SCP Servicing LLC (SCP) is AVERAGE as a commercial mortgage loan special servicer. On Nov. 2, 2020, we assigned the ranking (please see "SCP Servicing LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Assigned; Outlook Is Stable," published Nov. 2, 2020). The outlook is stable.

Our ranking reflects SCP's:

• Experienced senior management and well-designed organizational structure that supports the special servicing platform;
• Comprehensive training regime that is largely delivered on-the-job;
• Good leverage of a third-party asset management and special servicing system;
• Internal control environment built on a solid framework for its current volume;
• Small dedicated asset management team; and
• Special servicing resolution track record, albeit with an emphasis on less complex collateral property types.

SCP's services include the servicing of agency and non-agency performing loan assets, the special servicing of non-performing loans, including CMBS assets, in varying degrees of default, and managing real estate-owned (REO) assets. According to management, since its inception in 2009, it has managed and performed special servicing on approximately $8 billion of commercial real estate debt, representing 5,000 loans and REO.

Our ABOVE AVERAGE subranking for management and organization is substantiated by an experienced senior management team that supports the servicing platform; comprehensive training regime that is largely delivered on-the job; good leverage of a third-party asset management and special servicing system; and an internal control environment that is built on a solid framework for its current volume.

Our AVERAGE subranking for special servicing loan administration is supported by its special servicing resolution track record, albeit with an emphasis on less complex collateral property types; and an experienced but, nevertheless, small dedicated asset management team, which is mitigated in part by a deep bench of staff members who currently perform other roles but have loan workout experience that could be redeployed to handle a larger portfolio.

The outlook is stable. SCP has built the infrastructure to be a capable commercial mortgage loan special servicer. While its active portfolio and dedicated staff are modest in size, the company managed a substantial loan portfolio (albeit largely of small balance collateral) during the Global Financial Crisis (GFC) and has adequate bench strength to handle a larger portfolio, should the need arise.

In addition to conducting a virtual site visit with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2020, as well as other supporting documentation provided by the company.

Profile

SCP, based in Pasadena, Calif., is a wholly owned subsidiary of Sabal Capital Partners LLC (SC Partners), which is headquartered in Irvine, Calif. SC Partners is a wholly-owned subsidiary of Sabal Capital Holdings LLC (SCH), which acquired SC Partners on Aug. 31, 2018 for $194 million. A fund owned by a private equity firm, Stone Point Capital (Stone Point), owns 70% of SCH and management owns the remaining 30%. Stone Point is a private equity firm, focused on financial services and asset management, and based in Greenwich, Conn. Stone Point has raised and managed eight private equity funds with aggregate committed capital of more than $25 billion.

Formed in 2009, SC Partners is a diversified financial services firm specializing in real estate, banking, and lending, acquiring $8.2 billion in assets on behalf of its clients and investors, including investment participations in bank portfolio acquisitions with the Federal Deposit Insurance Corporation (FDIC) following the GFC.

Through its subsidiaries, it originates, sells and services a range of multifamily and commercial real estate (CRE) financing products primarily through licenses obtained from government sponsored enterprises (GSEs). It holds seller/servicer licenses with Freddie Mac in both its small lending program (since 2014), as well as its capital markets execution program, which it obtained earlier this year. In addition, it holds a seller/servicer license from Fannie Mae under its small loan program, which it obtained in 2019. In 2019, it also established a CMBS loan origination platform and closed its initial $400 million private-label transaction in the first quarter of 2020. For the aforementioned lending programs, SC Partners' uses SCP as its sole servicer.

SC Partners also has an investment advisory business that manages CRE debt opportunity funds, including a $188 million fund that focuses on Freddie Mac B-piece investments and a $325 million fund that invests in Freddie Mac B-piece investments, bridge loans, and B-piece investments in securitizations from non-agency loans that it originates and services. It is actively raising capital for a "dislocation fund" to invest in post-COVID-19 CRE opportunities. To date, it has raised $385 million for this fund.

SCP's services include the servicing of agency and non-agency performing loan assets, the special servicing of non-performing loans, including CMBS assets, in varying degrees of default, and managing REO assets. SCP's special servicing functions focus on maximizing investor returns for distressed loans, which include workout, modification, bankruptcy, foreclosure, REO, and disposition services. In addition, SCP provides client reporting including business plans, cash flows, and investor reporting. According to management, since inception it has managed and performed special servicing on more than $5 billion of CRE debt, representing 5,000 loans and REO.

As of June 30, 2020, SCP was the named special servicer on 17 transactions that included 939 loans with an aggregate unpaid principal balance (UPB) of $2.7 billion (including $2.3 billion [880 loans within 16 pools] of Freddie Mac small balance loans and 59 CMBS loans in a transaction aggregating $399 million). However, as of June 30, 2020, its active special servicing portfolio included only 12 assets with a UPB of $27 million (see table 1).

Table 1

SCP's primary servicing functions, which are outside the scope of this review, include a customer care center, cashiering functions, tax and insurance monitoring, reserve administration, Uniform Commercial Code (UCC) monitoring, collection and default management, partial and full releases, analysis of borrower financials and property cash flows, and investor reporting.

Management And Organization

The management and organization subranking is ABOVE AVERAGE.

Organizational structure, staff, and turnover

SCP's servicing operations are headed by a chief servicing officer (CSO), who has 24 years of industry experience, including 10 years of tenure with the company, and who reports to SC Partners' CEO. The CSO is responsible for servicing operations, including oversight and management of special servicing. In addition to the CSO, the special servicing operations is staffed with an experienced director of asset management/head of special servicing (HOSS), who has 22 years of industry experience, including nine with SCP, and a loan administrator, who has 12 years of industry experience and five years of SCP tenure (see table 2). The aforementioned CSO, HOSS, and loan administrator are currently the only three staff members dedicated to special servicing.

While SCP reported no turnover during the first half of 2020, it reported annual turnover levels in excess of 45.0% during each of the last four full years as its overall staffing level declined from a peak of 42 during 2016 to its current level of three in tandem with its drop in its specially serviced portfolio, which historically was comprised of small balance commercial loans and REO.

Notwithstanding its current limited special servicing staffing, which is consistent with its modest portfolio of 12 assets with a UPB of $27 million as of June 30, 2020, management indicated that there are approximately 10 SC Partners staff currently performing other roles (primarily in underwriting) that have loan workout experience that could be redeployed to handle a larger portfolio.

Servicing operations are further supported by a general counsel (GC), which oversees legal, compliance and human resource functions; a chief financial officer, who oversees finance and accounting; and an eight-person information technology department.

Table 2

Training

SCP provides its management and staff with ongoing, formal internal and external training. Noteworthy aspects of SCP's training program include the following:

• SCP has a shared resource from within SC Partners' compliance team, which administers the company's training programs and tracks training hours via a learning management system.
• All new employees participate in an orientation program and on-the-job training, specific to their position, where the company's subject matter experts are available for employee guidance.
• The training goal for each employee is a minimum of 40 annual training hours, including certain mandatory courses. During 2019 and in the first half of 2020, SCP reported its special servicing employees averaged 40 and 20 hours, respectively.
• Each employee is expected to participate in a variety of training programs, starting with a new hire training curriculum, which includes company information and compliance.
• Ongoing training consists of conferences, bi-weekly lunch-and-learn meetings that deliver Sabal Advanced Lender Training, company bi-annual seminars, GSE (i.e., Freddie Mac and Fannie Mae) specific training, compliance training, and legal training.
• SCP also brings in specialists for employee training on specific targeted subjects such as legal, technology, financial and property analysis, insurance and the UCC.

Systems and technology

We believe SCP has an effective technology environment to meet its special servicing requirements. It has well-designed data backup routines and disaster recovery (DR) preparedness. Other notable features are described below.

Servicing system applications 

SCP's key systems and applications used in the servicing operations include the following:

• SCP uses SS&C Technologies' Precision LM v5.1 as its servicing system of record. Precision LM has built-in security controls to allow for managing access to functions and data access is restricted based on role within the organization. Precision LM provides management, administration, accounting, and reporting for SCP's loan servicing operations, including property-level accounting related to REO assets.
• Additionally, Precision LM provides tracking for interested parties, interest accrual methods, loan terms, late fee structures, and escrows. It enables loan status tracking, such as accrual status, billing status, maturity status, paid-to-date, and processing status, as well as generating Commercial Real Estate Finance Council reporting.
• SCP uses Microsoft Dynamics 365 CRM v1612 (8.2.10.24) (Dynamics 365 CRM to manage special servicing assets and the workout of loans. SCP has customized Dynamics 365 CRM to track asset-related data, record interactions with borrowers, and drive key operational workflow.
• Dynamics 365 CRM is a customer relationship management, database-driven platform. Its data continuity ability provides for integrity and consistency, high access and analysis of data, and dashboards, and it is fully integrated with Precision LM. It stores and tracks detailed asset-related data and is a central repository for documenting loan-level communication with borrowers and interested parties. It is fully integrated with Microsoft Outlook and is accessible through remote web access technologies (i.e., Citrix Desktop or virtual private network).
• For document management and retention, SCP utilizes a proprietary document management platform, SNAP DMS (DMS), which allows for full text imaging and indexing, optical character recognition, and thumbnail searchs of required search criteria. DMS is fully integrated with Dynamics 365 CRM and captures all relevant documentation.
• All systems utilize the Microsoft SQL Server, providing for scalability that is only limited by hardware infrastructure. SCP runs all systems on virtual hosted servers that, according to management, can be quickly scaled to meet any data or system requirements as the company grows.
• SCP also uses Microsoft SSRS (SQL Server Reporting Services) to develop custom reporting and Microsoft SSIS (SQL Server Integration Services) to achieve system integrations or automated jobs as needed. Additionally, SCP utilizes Tableau reporting for business intelligence. Automation between Precision LM and the corporation's accounting platform, Microsoft GP, is also used to reduce manual entry and improve quality in the servicing of loans and operation of the business.
• System and application access are provided based on job role and specifically requested and tracked for all users. All system and application platform security are reviewed and verified by both the business owner and information technology owner on a quarterly basis as part of the company's security policies and SOC Type II processes.

Business continuity and disaster recovery 

SCP has a formal, comprehensive business continuity plan (BCP) designed to quickly recover and resume operations. Aspects of its business continuity and DR plan include the following:

• SCP's data and systems are backed up nightly and replicated real-time to a data center in Dallas, Texas with the main data center located in Irvine, Calif. Incremental database backups are done every two hours during the day and shadow copies are stored of all files. The storage area network also keeps multiple versions of all document files stored online within the platform.
• Targets for recovery of servicing functions are four hours.
• Planned frequency of DR testing is annually and no material issues were cited during the most recent test conducted on March 18, 2020.
• SCP implemented its BCP in March 2020 due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities and that its employees, with limited exceptions, have been working remotely.

Cybersecurity 

SCP has a cybersecurity program designed to protect confidential data and prevent cybersecurity attacks. Key aspects of the program include the following:

• SCP completes regular internal penetration testing and recent results demonstrated no significant issues nor changes to documentation or process.
• SCP employs multiple security controls and technologies that operate in real time and report findings immediately either through email notifications or dashboard reporting. In addition, SCP performs quarterly reviews of all systems, included in its SOC audits, to test that its network, systems, and data remain secure, ensure any remediation required has been completed, and to perform any needed upgrades to the security toolsets.
• Identified vulnerabilities arising from real time reporting, vendor provided threat identification, or testing are assigned high priority and remediated as soon as practical.
• Unlike most servicers we rank, management does not use phishing e-mails as a component of its cybersecurity awareness training.
• The company does have a stand-alone cyber insurance policy and maintains access to legal counsel for cybersecurity matters.

Internal controls

SCP maintains a solid internal control environment, albeit with less robust asset management policies and procedures (P&Ps) compared with those we have observed with higher ranked special servicers. In addition to P&Ps, it manages risk through quality control and compliance, and an audit regime.

Policies and procedures 

• P&Ps are available to all employees on the company intranet.
• SCP maintains a collection of P&Ps that support the special servicing operations, including asset management procedures that are controlled by the CSO.
• P&Ps are reviewed annually with any procedural changes requiring the approval of the CSO and a review by the compliance director.
• SC Partners uses a delegation of authority matrix across the firm, which encompasses major approvals for asset management and special servicing decision making.

Compliance and quality control 

• SC Partners' compliance function is housed within its GC's office and includes a compliance director, a shared resource that encompasses the servicing operations of SCP.
• The compliance director is involved in documenting the P&Ps for special servicing, which includes quality control steps that are integrated into the daily process.
• The compliance director is also involved in all external audits involving special servicing, which includes an annual Regulation AB (Reg AB) and an annual SOC I Type II (SOC I) audit.

Internal and external audits 

• Internal audits of special servicing operations are not currently performed. Management indicated that as volume continues to grow in special servicing, an internal audit program will be implemented.
• The company undergoes multiple third-party audits and reviews each year, with its special servicing operations historically encompassed in an FDIC audit (which will cease going forward following the liquidation of legacy assets), Reg AB audit, and SOC I audit.
• The year-end 2019 Reg AB audits (one for transactions and securities associated with its Freddie Mac multifamily mortgage platform and one for its Freddie Mac targeted affordable housing express loan platform) did not reveal any material findings.
• The August 2020 FDIC audit did not identify any findings or observations.
• The 2019 SOC I audit contained no material exceptions.
• SCP is also subject to periodic reviews and audits from clients.

Insurance and legal proceedings

SCP 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

The loan administration subranking is AVERAGE.

SCP manages special servicing from its headquarters in Irvine, Calif. As of June 30, 2020, it reported three full-time special servicing employees, of which two were dedicated loan workout/REO asset management personnel. Its loan asset managers (AMs) also handle REO.

As the company worked to liquidate and resolve legacy assets from its FDIC risk-sharing and bank portfolio acquisitions, the company's active special servicing portfolio (see table 3) declined dramatically until 2018, when the volume largely stabilized, until the COVID-19 pandemic in March 2020. Since March 2020, the six loans transferred to special servicing, aggregating $13.1 million of UPB, have more than offset the three loan resolutions aggregating $8.9 million of UPB achieved during the first half of 2020. Nonetheless, with a portfolio of 11 loans and one REO asset (as well as a real estate property handled by the team that is classified as investment real estate) at June 30, 2020, we believe the company is staffed appropriately to handle this relatively small volume.

According to management, since its formation in 2009, SCP has managed and performed special servicing on more than $5 billion of CRE debt, representing 5,000 loans and REO. While SCP has a track record of managing and disposing troubled assets nationwide, it has largely served as the special servicer for acquired small-balance distressed portfolios; and the vast majority of the assets it has resolved are the less complex collateral types that are typical of such portfolios.

In particular, during the 2016-2019 period SCP completed 461 aggregate loan resolutions (much of it emanating from the GFC) with an average UPB of approximately $620,000 (see table 4). Discounted payoffs/note sales (375), and to a lesser extent, foreclosures (46) and full payoffs (39), comprised all but a single loan resolution. Given the vintage and nature of the collateral, it is unsurprising that SCP would have resolved only one loan via a modification during this period. SCP's average resolution periods during this same period ranged from 45-63 months, longer than CMBS industry norms. While these hold periods are lengthy, we believe they were driven by internal rate of return-driven strategies of its investor clients.

More recently, in the first half of 2020, SCP resolved three loans, including two somewhat larger Freddie Mac multifamily loans (average UPB of nearly $4 million) that it returned to the master servicer after seven months, on average. It completed a deed-in-lieu on the third loan in a relatively favorable timeframe of 8.6 months in our view, given the collateral's location in a judicial foreclosure state.

With respect to its REO portfolio, during the 2016-2019 period, SCP liquidated 358 assets with average gross proceeds of $1.1 million, which averaged 96.4% of estimated market value (see table 5). The average proceeds are reflective of a portfolio of smaller, less complex real estate collateral, as described earlier, with approximately 85.0% of the sales from property types reported as Other (61.5%); single family rental (13.5%); or multifamily (10.1%). No REO was liquidated during the first half of 2020.

The average REO hold period during the 2016-2019 period trended upward each year with monthly levels of 27.1, 30.6, 46.1, and 49.6 months, respectively. We observed similar upward trends amongst CMBS special servicers and believe that average hold periods increased during this period because the portfolio gradually declined to include the most difficult to liquidate assets.

Table 3

Loan recovery and foreclosure management

SCP displays proactive loan recovery and foreclosure management protocols to resolve nonperforming loans across property types, although its operating history has contained an emphasis on multifamily collateral and other non-traditional property types classified as Other. Highlights include the following:

• Loans are assigned to two-person teams consisting of a portfolio manager and an AM. When a new loan is assigned to an AM, they are responsible for reviewing appropriate documentation (i.e., transaction documents, servicing agreement, asset management agreement, etc.) to obtain an understanding of the loan/portfolio composition and risk profile.
• AMs subsequently take a variety of actions, including working with local or internal counsel to send a formal default letter to effectuate the start of initiating foreclosure proceedings.
• An executed pre-negotiation agreement with the borrower is required prior to entering into workout discussions.
• The AM prepares the asset business plan within 60 days of transfer to outline the proposed resolution strategy, using a net present value analysis.
• Special servicing business plans, as well as approval of actions, such as foreclosure, discounted payoff, note sale, or loan modification, require approval of the special servicing committee (SSC), whose members include the CSO, HOSS, and GC.
• In lieu of SSC approval, approval may also be obtained through individual management sign-offs based on delegation of authority (DOA) levels for certain actions.
• Prior to completing foreclosure, the status of title, survey, taxes, insurance, valuation, physical condition, and environmental issues are documented. A Phase I environmental assessment typically is conducted, and depending on the findings of the Phase I, a Phase II and remediation plan may be prepared.

Table 4

REO management and dispositions

SCP's P&Ps outline the responsibilities associated with REO management and sales oversight. Notable aspects include the following:

• The AM who managed the loan typically will also be responsible for the REO asset, which is typical of servicers with a small asset management staff and limited active portfolio. Generally, the strategy for the property's management and liquidation will have been established prior to the completion of foreclosure.
• An REO business plan is prepared within 60 days of obtaining title. The plan, which relies on input from the third-party property manager to develop a budget, discusses the property's current status, including cash flow and valuation, and the marketing plan. The approval process for the plan and budget is similar to that used for loan business plans.
• The DOA document establishes the AM's responsibility with regard to monitoring third-party property management companies, negotiating leases and sales offers, and analyzing budgets and capital expenditures.
• Brokers are required to submit written monthly status reports.

Table 5

REO accounting and reporting

SCP P&Ps outline controls and procedures for property-level accounting and oversight but lack the detail that we have observed in P&Ps of higher-ranked servicers. Highlights include the following:

• A single REO operating account is used by its property managers.
• AMs review and approve all property manager reports and monitor monthly property management operating account activity; although it does not principally use its internal accounting staff to perform the reconciliation of property manager bank accounts, the accounting department has controls in place to obtain authorization and conduct periodic reviews of the property managers for the cash receipt and disbursement processes.
• Given that its REO properties have been historically smaller or non-cash flow producing, SCP has not established a formal program to conduct audits of property managers.

Subcontracting management

SCP engages vendors for various special servicing activities including appraisals, environmental reviews, property management, and brokerage. Subcontracting management at SCP applies the following guidelines:

• The AM will recommend vendors (other than brokers) from an approved vendor list, based on expertise specific to the property type and the local market in which the property is located, and obtain approval under the DOA.
• SCP uses its own standard form of broker agreements with assignments awarded through a request for proposal process with the selected party requiring management approval.
• While SCP has a formal performance review process for its highest risk (i.e., tier 1) vendors, the special servicing operations does not have any vendors classified as tier 1.

Performing loan surveillance

At present, SCP is the special servicer only on loans where it is also the primary servicer, facilitating communication regarding loans on the watchlist. Responsibilities include the following:

• Each month the watchlist is reviewed by the special servicing staff in order to spot trends and monitor ongoing performance.
• For loans of concern, the special servicing staff frequently get involved early, engaging the borrower to ascertain the situation.
• Management reported that during the early weeks of the COVID-19 pandemic, the special servicing staff worked with many CMBS borrowers and amended loan documents in small ways to accommodate borrower needs, while successfully maintaining current loan performance and keeping the loans from being transferred to special servicing.

Borrower requests

In its capacity as special servicer, SCP has historically had a limited role in handling borrower requests. However, during the first half of 2020, it processed three requests. In each case, a borrower was allowed to utilize existing reserves to pay debt service for a stated period. Additionally:

• Pursuant to its P&Ps, SCP's AMs are responsible for reviewing lender consent issues submitted by the borrower.
• Internal approvals are required to be obtained via the SSC or through the DOA document, demonstrating a well-controlled process

Legal department

Special servicing has one in-house attorney that supports the special servicing function, and the legal department is headed by SC Partners' GC, which we view favorably. Notable aspects of legal function controls include the following:

• The servicer has an approved attorney list but does not use a standard engagement letter.
• The legal department controls the approved attorney list and engagement process.
• Attorneys are often selected based on the loan product, i.e., for Freddie Mac loans, SCP uses Freddie Mac's list of approved counsel.
• Legal matters are handled by collaboration between the AM, the portfolio manager, the legal department, and outside law firms.
• Asset managers review legal bills before payment is authorized.

Financial Position

The financial position is SUFFICIENT.

Related Research

• SCP Servicing LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Assigned; Outlook Is Stable, Nov. 2, 2020
• Select Servicer List, Sept. 25, 2020
• U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019