- S&P Global Ratings has consistently incorporated environmental, social, and governance (ESG) factors into its servicer evaluation rankings.
- Governance dynamics, which can have a direct impact on a servicer's operating effectiveness, are the most relevant ESG considerations in our analysis.
- Recent events such as the COVID-19 pandemic, wildfires, and hurricanes, along with a challenging regulatory environment in some cases, highlight the importance of pertinent ESG factors to our servicer rankings.
There has been a heightened awareness among company leadership teams, investors, and other market participants regarding the importance of environmental, social, and governance (ESG) factors when evaluating company risk and performance. Companies in the loan servicing industry are certainly no exception. S&P Global Ratings is seeing loan servicers place a renewed focus on--or, in some cases, a broader adoption of--practices to address ESG factors as they internally identify the benefits of investing in and further developing these areas. This is especially so since the start of the COVID-19 pandemic, as servicers across the board implemented employee-focused initiatives to enable the vast majority of employees to work remotely for an extended period.
ESG In Servicer Evaluations
S&P Global Ratings' servicer evaluation rankings assess a servicer's business governance, management structure and experience, internal controls, and other operational and administrative practices in place to manage risk, while still driving operational performance. There are many factors that we consider in our assessment, some of which are components of ESG.
ESG components are a significant element in our management and organization subranking (see chart) and thus are an inherent part of our analysis. This is particularly the case in areas of governance, which is the most meaningful ESG component in our servicer assessments. Social factors can also have an indirect effect on performance and operational risk; as such, certain social practices factor into our analysis too. Environmental factors tend to have little to no effect on a loan servicers' operational effectiveness as a whole and have historically played less of a role in our assessments.
Servicers operate in a constantly evolving landscape, which presents risks no matter the company size or operating budget. On top of this, they service loan products and collateral that are often complex. The governance factors that we assess in our analysis are considered an integral part in driving performance while managing those operational risks. We consider several quantitative and qualitative aspects of a servicer's management team and staff as part of our evaluation. In our view, a company with a seasoned and tenured management team and staff has the potential to outperform during periods of stress because it can draw from best practices and experience gained from managing through prior downturns. Additionally, our analysis includes an assessment of a servicer's information security and cybersecurity practices, as threats such as ransomware attacks remain a risk. We also consider the comprehensiveness of a servicer's business continuity and disaster recovery plans in our assessment. We have observed our ranked servicers most recently implemented their business continuity plans in response to the COVID-19 pandemic. Based on a survey we conducted, these servicers reported transitioning their operations to a remote work environment with no material disruptions.
While the governance practices considered in our analysis are generally consistent across servicers of all asset classes, the degree of exposure to governance factors is often product specific. Consumer-related loans, such as residential mortgage or student loans, have a higher degree of regulatory scrutiny than commercial loans, where the relationship between servicers and borrowers is typically business-to-business. Our analysis considers a servicer's policies, procedures, compliance monitoring, and change management governance in place to manage the regulatory risks associated with servicing these types of loans.
Social factors, such as human capital management, underpin elements that can influence operational performance. Examples include the ability to hire and develop appropriately skilled management and staff, as well as maintain staffing levels sufficient to manage the servicing portfolio in both good economic conditions and in times of stress. In addition, employee practices, including ongoing staff training, leadership development programs, and employee engagement initiatives, can influence key analytical considerations such as employee retention (i.e., turnover), bench strength of management and staff, and depth of industry expertise to handle complex issues.
The degree to which social factors are measured in our analysis can depend on the servicing sector. For example, commercial mortgage servicers are less directly consumer oriented than companies servicing other asset classes, so consumer-related social factors carry less weight in our analysis of these types of servicers. In contrast, for residential mortgage loan and other consumer-oriented servicers, conduct risk presents direct consumer-related social exposure, particularly as regulators increasingly focus on ensuring that servicers treat customers fairly. Servicers often address such risk by providing soft-skills training, complaint handling practices, and plain language communications to improve the customer experience and enhance operational efficiency, and potentially mitigate regulatory risk.
Environmental factors play a minimal role in our assessment, as they typically have little effect on a servicer's operational effectiveness. Servicers may have exposure to various environmental factors, such as hurricanes, and wildfires. The most obvious example includes using a data center or having key servicing sites in geographies that are more prone to these factors. Our analysis considers the potential for business disruption in the event of a natural disaster, and the servicer's disaster recovery and business continuity preparedness for these risks.
Separately, we note that technologies many servicers are deploying to provide efficiencies and improve controls may concurrently provide environmental benefits, such as the transition to paperless processes (though the environmental benefit does not factor into our evaluation).
Essential To Our Rankings
The constantly changing investor and regulatory landscapes, not to mention recent events such as the coronavirus pandemic, demonstrate that a servicer's managing of certain ESG factors plays a critical role in its operating effectiveness. Many of these factors are key considerations in S&P Global Ratings' servicer evaluations. We believe they will continue to be important components to our ranking analysis, but because of the wide range of factors that we consider, a single factor--or even a small number of factors, including any that may be related to ESG--does not typically affect a ranking. Although governance remains the most relevant ESG component to our rankings, the emergence of servicers' social factor awareness cannot be ignored, and the COVID-19 outbreak has showcased the value of a strong continuity plan. Through the continued surveillance of our rankings, we will continue to monitor servicer risk and performance based on our analytical approach, including practices to address components of ESG.
This report does not constitute a rating action.
- Canadian Mortgage Servicers Operating In Unusual Times, May 11, 2020
- The ESG Lens On COVID-19, Part 2: How Companies Deal With Disruption, April 28, 2020
- The ESG Lens On COVID-19, Part 1, April 20, 2020
- Servicer Evaluation Spotlight Report: U.S. Residential Mortgage Servicers Gear Up To Face COVID-19 Related Challenges, April 10, 2020
- U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
- ESG Industry Report Card: U.S. And Canadian Banks, Feb. 11, 2020
- Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
|Servicer Analyst:||Jason Riche, Farmers Branch + 1 (214) 468 3495;|
|Analytical Manager:||Robert J Radziul, New York (1) 212-438-1051;|
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