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Servicer Evaluation: Community Loan Servicing LLC -- Residential

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Servicer Evaluation: Community Loan Servicing LLC -- Residential

Ranking Overview
Subrankings
Servicing category Overall ranking Management and organization Loan administration Outlook
Residential special STRONG STRONG STRONG Stable
Financial Position
SUFFICIENT

Rationale

S&P Global Ratings' ranking on Community Loan Servicing LLC (CLS) is STRONG as a residential mortgage loan special servicer. On July 9, 2021, we affirmed the ranking (please see "Community Loan Servicing LLC STRONG Residential Mortgage Loan Servicer Ranking Affirmed; Outlook To Stable From Negative," published July 9, 2021). We revised our outlook on the ranking to stable from negative.

Our ranking reflects CLS':

  • Well-seasoned and tenured management team;
  • Strong compliance management system with multiple lines of monitoring and testing to identify risk;
  • Lack of material internal or external audit issues;
  • Solid vendor oversight and complaint management framework;
  • Continued investment in technology to strengthen controls and provide efficiencies and workflow automation in various areas of the operations;
  • Sound collections and loss mitigation practices that include proactive and innovative strategies, such as using alternative data and creative loss mitigation solutions;
  • Generally solid servicing performance metrics, considering its strategic business transition; and
  • High staff turnover in customer-facing areas.

Since our prior review (see "Servicer Evaluation: Bayview Loan Servicing LLC--Residential And Small-Balance Commercial," published June 10, 2019), the following changes and/or developments have occurred:

  • The company changed its name to CLS from Bayview Loan Servicing LLC.
  • Two internal senior leaders were each promoted to co-CEO and co-president as part of CLS' succession plan. The former president remained chief operating officer of Bayview Asset Management.
  • CLS reduced its office footprint by consolidating to two sites from three in South Florida and closing its Horsham, Pa., office.
  • CLS created an ombudsman role to manage executive and social media complaints.
  • CLS implemented operational risk dashboards to provide greater visibility to emerging risks.
  • CLS introduced new technologies, such as a mobile application, a new user interface for customer-facing staff, and a web-based system to manage its vendor management program.
  • CLS automated its COVID-19 forbearance request process using the borrower portal.
  • CLS implemented several call-handling enhancements, such as an escalation model to predict potential customer escalation issues and a voice analytics system to identify and provide real-time alerts for escalations during the call.
  • CLS enhanced its collections strategies with a best-time-to-call model and an enhanced loan-level, default-risk-score model that incorporates alternative data.
  • Several areas -- such as complaint management, real estate-owned (REO) property preservation, and customer service -- implemented workflow applications to enhance tracking and oversight of key processes.
  • CLS transitioned most employees to work remotely during the COVID-19 pandemic.

Since our last review, CLS entered into an assurance of discontinuance with the Massachusetts attorney general to resolve allegations related to certain legacy debt collection practices, which management indicated have been addressed. CLS was required to pay a civil monetary penalty of $565,000.

The outlook on the ranking was revised to stable. The prior negative outlook reflected operational risk related to high management and staff turnover, mostly in its customer-facing areas, along with elevated call metrics in loss mitigation during the same period as an indicator of potential stress on the operations. Since that time, CLS has implemented several initiatives and technologies that provide increased efficiencies and strengthened controls for its processes. Despite continued elevated turnover in customer-facing areas, the servicing performance metrics have remained generally competitive.

We believe the experienced CLS management teams, sound internal controls, and technology enhancements will continue to support the overall operations and that CLS will remain a capable and stable special servicer of residential loans. We will continue to monitor CLS' staff turnover levels and other performance metrics and keys risks. If we observe any degradation in CLS' special servicing capabilities and performance metrics, or increased operational risks, we could take ranking and/or outlook actions as we deem appropriate.

In addition to conducting an onsite meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology (SEAM) data through Dec. 31, 2020, as well as other supporting documentation provided by the company.

Profile

Servicer Profile
Servicing location Coral Gables, Fla.
Other servicing locations Ft. Lauderdale and Doral, Fla; Ft. Washington, Pa; Tucson, Ariz.; Bedford, Texas
Residential loan servicing system Black Knight LoanSphere MSP®
Small-balance commercial loan servicing system Servicing Director®
Portfolio types Residential special, small-balance commercial primary, and small-balance commercial special
As of Dec. 31, 2020
Number of servicing employees 527
Volume (mil. $ unpaid principal balance) 17,621.32
Loan count 139,931

CLS is a primary and special servicer of residential and commercial loans. The company was formed in 1999, under Interbay Funding LLC, and now operates as a wholly owned subsidiary of Bayview Asset Management LLC (BAM). BAM is wholly owned by Bayview Financial Holdings L.P. CLS is headquartered in Coral Gables, Fla., and has approximately 650 employees in Florida, New York, Texas, and Arizona. Most of the company's residential servicing, including all customer-facing operations, is located in the U.S.; however, some support functions for its residential portfolio are outsourced to Jaipur, India.

As of Dec. 31, 2020, CLS has roughly 140,000 loans in its residential special servicing portfolio -- a 15% decrease by loan count year over year (see table 1).

Table 1

Portfolio Volume
Special servicing
Units (no.) Volume (mil. $)
Dec. 31, 2020 139,931 17,621.32
Dec. 31, 2019 164,475 22,693.14
Dec. 31, 2018 172,822 22,422.06
Dec. 31, 2017 203,946 25,248.06
Dec. 31, 2016 140,433 24,002.62

Management And Organization

The management and organization subranking is STRONG for residential special servicing.

Organizational structure, staff, and turnover

CLS made multiple key senior management, staffing, and organizational changes since our last review. As part of a planned leadership transition, the former president of CLS transitioned out of CLS and will remain the chief operations officer of BAM. Two senior leaders were promoted to co-CEO and co-presidents of the company. In the new dual-CEO structure, core servicing functions are aligned under one leader, and operational and support functions are aligned under the other. Among other changes, the senior vice presidents of default administration and loss mitigation transitioned to roles at a related company and were replaced by internal promotions. Certain support functions, such as training, were also consolidated into other existing departments. We believe, considering the smaller servicing portfolio, the new organization structure effectively addresses operational needs.

The senior management team exhibit good levels of industry experience that are similar to its peer average, and company tenure levels are solid. Metrics include the following:

  • Senior management averages 22 years of industry experience, which is similar to its peer average, and 12 years of company tenure, which compares favorably to peers.
  • Middle managers average 14 years of industry experience and nine years of company tenure.
  • Management turnover rates are 3%, which compare favorably to peers. The overall staff turnover rate of 19% is higher compared to peers.

We noted in our last review that CLS made strategic organizational changes to rightsize the company and pivot to servicing a more performing loan portfolio. We observed elevated turnover partly related to a shift in workforce in certain customer-facing areas and rightsizing staffing levels as the servicing portfolio volume declines. The rightsizing continued during 2019 and 2020, resulting in a 40% reduction in full-time servicing employees during that period. Factoring the lower headcount, the loans-per-employee ratio marginally decreased compared to Dec. 31, 2019, and remains manageable, as demonstrated by a lower-than-peer average ratio. We also consider the increased mix of performing loans, which typically allows for more scale, especially in nondefault areas. In addition, we continue to observe that some management roles were eliminated due to the declining portfolio size and/or efficiency gains. In other cases, replacements were via internal promotions with good levels of company tenure and, in many instances, similar to or more industry experience relative to the predecessor. We believe ongoing turnover and staff reductions create a level of risk, with the potential for operational disruption. We will continue to monitor staffing levels, staff and management experience levels, and operational performance.

Training

CLS has a solid program to train and develop new and existing employees. Like many servicers we rank, CLS transitioned to a virtual training environment due to the COVID-19 pandemic. Notable training aspects we considered in our analysis include the following:

  • An online learning management system disseminates courses and tracks all training activities.
  • A four-week training program for new customer-facing staff provides hands-on training. This includes structured shadowing, call-listening activities, and weekly assessments to gauge knowledge retention.
  • Outsourced vendor staff have similar training requirements to CLS employees.
  • The compliance training curriculum that employees are required to complete annually is comprehensive.
  • Employees have access to professional development courses sourced through a vendor.
  • A leadership development program is offered through online and instructor-led courses.
Systems and technology

CLS operates in a highly automated environment, with effective technology to support its residential servicing operations. It has well-designed data backup routines and disaster recovery preparedness. It also maintains systems and tools to address information security risks.

Servicing system applications 

Key technology applications include the following:

  • Black Knight Financial Services MSP® is the residential loan servicing system.
  • Real Estate Asset Management Model (RAMM) is a proprietary system used for loss mitigation and is advanced, in our view. It manages loss mitigation workflow, automates modification underwriting according to built-in investor rules, and evaluates multiple variables to suggest optimal solutions.
  • Default Tracking System, a proprietary default and bankruptcy loan monitoring system, monitors critical steps (i.e, court filings, litigation timelines, etc.), assigns outside counsel, and tracks overall timelines.
  • Filenet, a cloud-based content management system, serves as the document retention system.
  • A mobile application was launched in 2020 as an additional self-service channel.
  • A borrower portal provides self-service options for borrowers, including common requests as well as requests for forbearance plans related to the COVID-19 pandemic.

In August 2020, the company launched a new workflow-based user interface for its customer-facing staff to use when handling calls. The system provides staff with pertinent loan-level information and, in the current phase, limited task-based functionality. The company indicated it plans to add additional workflow and other enhancements to the interface, which will allow it to be the sole system for customer-facing employees.

Business continuity and disaster recovery 

The company maintains disaster recovery (DR) and business continuity (BC) plans to respond to disaster events. CLS implemented its plans in March 2020 due to the COVID-19 pandemic. The vast majority of employees continue to work remotely, and management noted no material disruptions in business operations. We considered the following features of CLS' BC and DR plans:

  • The primary and back-up data centers are in geographically diverse locations.
  • Data replication and tape backup cycles provide data recovery capabilities.
  • We consider the recovery time and recovery point objectives to be satisfactory for systems it considers tier 0 and tier 1.
  • The BC and DR plans are reviewed and tested annually, including a full-systems DR test. The most recent BC and DR were tests were completed in May and September 2020. We reviewed the summary reports for these tests, which indicated no material issues.

Cybersecurity 

We believe the company has a well-developed system to detect and respond to information security threats. Systems include firewalls at all points where data can be accessed, virus- and system-monitoring software, and encryption on applicable hardware. Furthermore, CLS:

  • Maintains a formal incident response plan and performs an annual tabletop incident response exercise;
  • Performs an annual incident response tabletop exercise;
  • Uses a security information and event management tool to monitor network activity and manage threats;
  • Has an independent third party perform quarterly network penetration testing;
  • Uses a data loss prevention solution;
  • Performs vulnerability scans on a periodic basis;
  • Sends quarterly phishing simulation exercises to employees; and
  • Requires annual security training for employees.
Internal controls

CLS has a solid risk management and control framework to monitor and detect risk. Its framework comprises multiple lines of defense that are all independent of the operations and formal structures for change management and issue management. Compliance and risk committees oversee the risk at the organizational level, and there is appropriate levels of coordination and communication between the different lines.

Policies and procedures 

The company has sound governance for developing, revising, and disseminating its policies, procedures, and letters. The policies and procedures documents, which are reviewed annually, are in a consistent format and sufficiently detailed. Special servicing procedures contain in-depth descriptions of general asset management duties, the loan recovery process and methodology, step-by-step procedures for addressing loan workouts, and REO management and disposition.

Quality assurance and call monitoring 

The first line of defense is a quality assurance team that sits outside of the business units, providing a level of independence. This also provides the opportunity for a more focused and consistent approach to quality testing across the platform. The vast majority of tests are conducted weekly. CLS also augmented its transactional testing with data analysis and dashboard reporting to ensure processes and controls are operating as designed. Business unit managers receive notifications of issues in near real time as they are identified. The reporting cadence and corrective action testing have the same rigor as that of the compliance quality testing.

There is a dedicated team within the business operations that monitors calls for its customer contact areas. In addition to call monitoring, the company uses voice analytics software to review all calls for required disclosures. The application also identifies escalations in real time and provides alerts to supervisors, which we view as positive. Performance is reported to management weekly.

Compliance and quality control 

Compliance and quality control are the second lines of defense. The compliance department provides, among other functions, separate teams dedicated to advisory and regulatory monitoring, change management, issue management, policy and procedure administration, and vendor management.

A regulatory advisory team monitors regulatory and investor changes and communicates those to the operations areas. Regulatory updates are communicated to the business weekly. Compliance counsel reviews any changes to ensure they are sufficient, and the compliance implementation team monitors progress of these changes until completion.

The quality control team operates under the compliance department. It completes transactional testing on a risk-based frequency (either monthly or quarterly) to monitor compliance with regulatory and investor requirements. Vendor-based software is used for sampling and testing. In our view, findings are appropriately communicated to the business units, compliance committee, and other compliance management system areas.

Issues identified from quality control testing, or other lines of defense, and their corrective action plans are documented in CLS' governance, risk, and compliance tool, and tracked by the compliance analysis and implementation team. The team also completes validation testing to ensure the issue is resolved and conducts a root-cause analysis to identify improvement opportunities. Since our last review, CLS made several enhancements to its governance risk and control system and risk reporting. It incorporated a risk register and inventory of controls which, in our view, enhances risk monitoring and change management. It also developed operational risk dashboards that incorporate quality assurance and quality control exams.

Internal and external audits 

The third line of defense is the independent internal audit department. We believe CLS has a reasonable internal audit methodology. Its audit plan is based on risk and is largely derived from its annual risk assessment. The internal audit department also uses continuous monitoring for certain areas. Audit findings are addressed through formal action plans that are tracked on an intranet site. In addition to a discussion with senior audit leadership, CLS shared a summary of internal audits completed in 2019 and 2020. A review of the summaries found that any findings were resolved and validated or have an expected corrective action completion date in the future.

We also reviewed CLS' Uniform Single Attestation Program, Regulation AB, and Statement on Standards for Attestation Engagements No. 18 Service Organization Controls 1 Type 2 reports. The 2020 reports did not identify any issues or exceptions.

Complaint management 

CLS has a proactive approach to managing and responding to customer complaints. In 2020, it added an ombudsman role to manage executive and social media complaints. Practices and metrics that we considered in our analysis include the following:

  • Verbal and written complaints are logged into a tracking system upon receipt and tiered by source and subject matter.
  • Designated specialists research and respond to these issues, and regulatory-related items are reviewed by the compliance department.
  • A centralized intake process triages and logs complaints.
  • Customer sentiment is measured following each borrower interaction. In certain circumstances, CLS will initiate a follow-up from the customer advocate team.
  • Responses to complaints are reviewed by a second-look team before they are mailed.
  • Workflow is managed within a business process management system that provides a consistent procedure to respond to complaints.
  • Complaints are analyzed for root cause, and there are weekly meetings with business units to review trends.
  • CLS acknowledges complaints in an average of 2 days and resolves complaints in an average of 14 days; both compare favorably to peer averages.
Vendor management

The vendor management department facilitates the procurement process, provides ongoing oversight, and supports the business units in monitoring vendor performance. New vendors are subject to a thorough due diligence process that evaluates the vendor's regulatory compliance, information security, and financial condition, among other areas. Depending on several risk factors, vendors are assigned a risk tier of critical, important, or incidental. Additional factors we considered in our analysis include the following:

  • A web-based software-as-a-service system manages procurement and store vendor documents, tracks periodic reviews, and documents performance assessments.
  • On-site reviews with vendor performance assessments occur either quarterly or annually, depending on the assigned risk level.
  • Monthly service-level agreements are monitored.
  • CLS maintains sound oversight routines to monitor its offshore vendor, and the company meets with the vendor weekly to review operational performance.
  • A vendor exit strategy plan is prepared for all vendors.
  • The company uses a formal invoice review and validation process.
  • Attorney vendors are subject to annual on-site reviews and monthly scorecards to monitor key performance indicators.

A separate team within default manages the oversight and performance monitoring for its default attorneys. We view this dedicated oversight as a positive. Attorney vendors are subject to annual on-site reviews and monthly scorecards to monitor key performance indicators. The team also holds bi-weekly calls with the attorney firms. In 2021, CLS began participating in a pilot program to outsource the annual on-site reviews of its attorney network to a company that uses a crowdsource model (i.e., performing a review of a firm for multiple servicers). While this unique approach lacks the intangible data from in-person inspections by CLS, additional intelligence gathered, such as benchmarking performance, may potentially be a positive.

In response to the industrywide reduction in foreclosure referrals and activity due to federal and state-mandated moratoriums on foreclosures, CLS began quarterly financial reviews of its attorney network. In addition, it maintains at least two firms for each state to mitigate risk. Management also indicated it is having proactive discussions with default law firms to gauge preparedness to handle foreclosure volume once the moratoriums are lifted.

Insurance and legal proceedings

CLS 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--Residential Mortgage Special Servicing

The loan administration subranking is STRONG for special servicing.

CLS' residential servicing portfolio is not significantly concentrated in a particular state and is geographically diverse, in our view (see table 2).

Table 2

Portfolio Distribution By State
Special servicing
Top five states Units (%) Unpaid principal balance (%)
California 10.47 20.47
Florida 7.83 7.95
Texas 6.59 4.89
New York 5.73 7.66
Illinois 5.29 5.25
Other 64.09 53.79
Total(i) 100.00 100.01
(i)Total may not sum to 100% due to rounding.
New-loan boarding

CLS has solid experience boarding loans to its platform. It uses Black Knight Financial Services' (BKFS') loan-boarding application. A project coordinator oversees each transfer event, and a dedicated data integration team manages the various data validation routines performed before and after loading loan data to the system. The company has the following controls and processes in place, which we considered in our analysis:

  • CLS has solid experience boarding bulk acquisitions.
  • CLS boards loans through flow arrangements in an average of one day, and other boardings in an average of three days, which is generally similar to the peer average.
  • CLS reported boarding 100% of loans electronically, which largely mitigates data input error.
  • CLS performs pre-boarding data validation checks and post-boarding data reviews.
  • A system-to-document review is performed on all loans boarded, with the number of data fields reviewed based on loan type and loan status.
  • Loan-level reviews are conducted for in-flight loss mitigation.
  • Skip tracing locates contact information prior to boarding.
  • Prior servicer notes are boarded on the system.
  • A first-year experience team, which is the point of contact, researches any boarding-related issues for all servicing areas.
Payment processing

We believe that CLS has effective cash management procedures to post payments and minimize human error. The company offers borrowers multiple payment options, which include certified funds methods and debit card transactions. It offers flex-pay capability that allows borrowers to pay on a biweekly or weekly schedule, which is a positive for a special servicer, in our view. Its lockbox provider offers multiple locations. Approximately 94% of payments are posted electronically, an increase since our prior review. The percentage of payments that are recurring auto-drafts is better relative to the peer average. The remaining percentage of payments are posted manually, which is better compared to the peer average. CLS utilizes a suspense sweep system to clear suspense exceptions automatically rather than requiring posting instructions. Reporting is in place to manage suspense funds that are not automatically posted. The company also has a tool to automate payment posting in certain instances for bankruptcy accounts. Staff turnover within payment processing is 13%, which is favorable compared to the peer average.

Investor reporting

The investor reporting area incorporates segregation of duties among personnel handling, remitting, reporting, and reconciliation functions. Key attributes we factored in our analysis include the following:

  • All reporting and remitting is electronically transmitted.
  • There is a dedicated team for government-sponsored entity loans.
  • All remittance reports are reviewed by a senior team member, and wire requests are reviewed by the department vice president or higher management levels.
  • There was no reported staff turnover, which is better than peers.

CLS reported approximately 33,000 reconciliation items aged over 90 days, which is significantly higher than we commonly see among our ranked servicers. Management indicated that the high number of aged items is largely isolated to a specialized investor portfolio. It also indicated that many of the aged variances are outside of its control and require investor support to address them. In addition, management indicated that it continues to work with the investor to address existing variances and implemented additional controls to reduce the number of new variances. The company expects to largely clear the aged reconciling items by the end of second-quarter 2021. Updated reporting shared with us demonstrated significant progress in addressing the number of aged reconciling items and a meaningful decline in the velocity of new variances. We note that some of the non-controllable variances will continue to occur as loans from this investor portfolio continue to board the platform. In addition, management says that, excluding this portfolio, the number of reconciling items aged 60 and 90 days are 120 and 448, respectively, as of April 30, 2021. We view this as an unusual circumstance, and we will continue to monitor the company's progress in clearing the reconciling items.

Table 3

Portfolio Breakdown By Investor (%)
Investor Special servicing
Fannie Mae 28.52
Freddie Mac 8.36
Ginnie Mae 0.00
Mortgage-backed securities investor 41.82
Portfolio 0.01
Other investor 21.30
Total(i) 100.01
(i)Total may not sum to 100% due to rounding.
Escrow administration

CLS maintains a well-controlled escrow administration area with sound oversight of its tax and insurance vendors. It uses industry-recognized vendors for certain tax functions and all insurance administration. Furthermore:

  • CLS reported no non-reimbursable tax penalties during the most recent SEAM period, which is similar to peers.
  • Dashboard reporting is used to monitor compliance with flood insurance requirements.
  • The insurance vendor's average speed of answer (ASA) and abandonment rate (ABA) are 26 seconds and 1.5%, respectively, which we consider solid.
  • CLS holds weekly meetings with the insurance vendor to review open issues.
  • The insurance vendor monitors an average of 40-50 CLS calls per month and provides a monthly quality report to CLS.
  • The insurance vendor tracks and disburses escrowed residential homeowner's association dues.
  • CLS reported that there was no staff turnover within the escrow department, which compares favorably to peers.
Mortgage reconveyance

CLS has a co-source strategy, using a vendor to prepare and record a large percentage of lien release documents to manage timelines. It also has a back-up vendor that it can deploy, which we view as a positive factor. For lien release documents prepared internally, CLS uses a vendor application; both CLS and the vendor use e-recording when available. CLS reported that less than 1% of reconveyance filings were outside of statutory timelines, which is in line with peers.

Special loans administration

A dedicated team manages special loans administration. There is a two-person input for validation of interest rate indices, and a subsequent review to confirm the indices are correctly input into the system. CLS reviews all loans in the portfolio quarterly to identify loans eligible for Servicemembers Civil Relief Act (SCRA) benefits. There is a report to identify a change in service status, and a control report to identify SCRA system coding changes.

Customer service

CLS provides customers with multiple channels for customer support, including self-service options such as the web and its mobile application. Its customer relations department handles customer service and early-stage collections calls with an automated call distributor that routes calls to the appropriately skilled agent. Key metrics, controls, and attributes that we considered are as follows:

  • Two call center sites somewhat mitigate business disruption risk in the event of an outage or natural disaster.
  • Its interactive voice response (IVR) capture rate (49%) compares favorably to peers.
  • The percentage of borrowers who are registered web users (53%) continues to increase but lags the peer average.
  • CLS conducts a customer satisfaction survey to measure customer experience.
  • Self-service options allow borrowers to manage common requests.
  • CLS implemented an escalation model, which we view as innovative, to predict and proactively manage issues with a potential for escalation.
  • All calls are recorded with screen capture.
  • Speech analytics software is used to review all calls for required disclosures and customer escalation phrases.
  • CLS monitors a minimum of 10 calls monthly, and 10 loans per month undergo a documentation audit to review system documentation for completeness.
  • System screen pops identify call type to the call agent (e.g., red for COVID-19-related forbearance)
  • An administrative supervisor position allows supervisors to spend more time coaching staff.
  • Senior management has periodic meetings to listen to calls and review correspondence to keep pulse and identify customer pain points.
  • Customer service ASA and ABA metrics are generally in-line with peer averages (see table 4), and we consider them to be satisfactory.

Table 4

Average Speed Of Answer And Abandonment Rate
Average speed of answer (seconds) Abandonment rate (%)
Customer service 58.81 2.97
Collection 76.11 2.97
Loss mitigation 76.10 3.51

In our last review, we noted that CLS was rightsizing and recalibrating its customer-facing areas, which includes customer service, as performing and re-performing loans comprise a growing share of the servicing portfolio. To better position itself to manage customer service and early related collections calls, it shifted full-time employees from loss mitigation to its customer service department, and implemented new call center technology. Staff turnover (76%) within its customer relations area remains high, as CLS continues to right-size staffing to a smaller portfolio. While we believe turnover presents risk, call metrics have normalized. The company also implemented technologies such as voice analytics and a new user system interface to strengthen controls and improve efficiencies, which we believe somewhat mitigates risk. It also implemented enhanced hiring practices, tangible career pathing within the department, and an employee engagement initiative to improve retention. We will continue to monitor staffing levels, controls, and performance metrics.

Default management

While a growing percentage of the portfolio includes performing/re-performing loans, CLS' core philosophy involves resolving nonperforming loans. CLS has proactive and effective default management practices to resolve delinquent loans.

Table 5

Residential Special Delinquency Rates
Year Total delinquency (%) 30-59 days delinquency (%) 60-89 days delinquency (%) 90+ days delinquency (%) Bankruptcy (%) Foreclosure (%) Real estate-owned (no.)
Dec. 31, 2020 28.77 4.81 2.74 21.22 2.73 4.56 206
Dec. 31, 2019 27.13 8.11 4.39 14.62 3.92 7.56 1,464
Dec. 31, 2018 28.31 7.78 4.14 16.39 4.11 9.25 2,243
Dec. 31, 2017 30.32 7.75 4.26 18.31 4.38 9.39 3,896
Dec. 31, 2016 30.65 6.56 2.99 21.10 4.00 14.43 9,451

Management industry experience levels throughout default are generally competitive with peers, with the exception of collections and loss mitigation, which, while solid, are lower relative to peer averages (see table 6). Default staff exhibit industry experience averages that are competitive with or better than peers. The exception is collections staff, which we consider having adequate industry experience.

Table 6

Experience And Tenure
Management Staff
Avg. industry experience (years) Avg. present employer experience (years) Turnover rate (%) Avg. industry experience (years) Avg. present employer experience (years) Turnover rate (%)
Collection 13.85 5.14 0.00 1.91 1.33 75.79
Loss mitigation 11.33 6.13 36.36 11.93 5.47 34.26
Foreclosure 17.29 9.06 0.00 10.35 8.27 5.88
Bankruptcy 13.36 12.92 0.00 16.33 7.49 22.88
Real estate-owned 21.86 18.19 0.00 19.25 13.54 0.00

Collections 

CLS has sound collections methodologies to establish contact with borrowers. It has effective use of risk modeling and data analysis to maximize contact efforts on at-risk loans and identify loans for outreach campaigns. Our assessment of key collections tools and controls included the following considerations:

  • More experienced collectors are assigned to call loans that are more delinquent.
  • There are system-based controls for federal and state calling compliance.
  • CLS monitors a minimum of 10 calls monthly.
  • CLS implemented an IVR system as a way for borrowers to interact with outbound calls.
  • Bulk and loan-level skip tracing are utilized.
  • CLS integrated alternative data into its risk-score model, which is used to predict roll and target outbound strategies. Management indicated, based on historical testing, the new model was more accurate. We view the use of alternative data in modeling as innovative.
  • CLS implemented a best-time-to-call model during 2020.
  • The promise-to-pay success rates for 30-day and 60-day delinquency loans are 74% and 71%, respectively--generally similar to its peer averages.
  • CLS uses e-mail campaigns as an alternate channel to contact borrowers.
  • Daily collector staff have key performance indicator dashboards to help drive collector performance.
  • We consider the collections ABA rate good and the average speed of answer to be satisfactory (see table 4).

Loss mitigation 

We believe CLS' approach to loss mitigation is effective in engaging borrowers and providing solutions to mitigating loss. Loans are assigned to a single point of contact (SPOC) when a borrower requests assistance or submits at least one loss mitigation request document, or, depending on the investor, as early as 60 days past due. Otherwise, loans that become 60 days past due are assigned to a specialized call representative (SCR) to make outbound calls to engage customers.

The company leverages a workflow approach to loss mitigation processing, using several specialized processing teams that handle the document review, income calculation, and underwriting processes. There are quality assurance routines throughout each step of the process. We believe this approach provides appropriate focus on complex loss mitigation functions.

In addition to traditional and streamlined modification programs, CLS has experience with investor-specific solutions, including those used in natural disaster events, to cure defaults. We view that experience as a positive for special servicers. Its proprietary loss mitigation system, RAMM, evaluates multiple variables in its analysis and includes a present value calculation. Investor-specific rules are programmed into the application, providing a technology-based underwriting controls. We also considered the following in our analysis:

  • CLS utilizes courier delivery for borrowers with no contact.
  • CLS provides borrowers an informational letter that outlines the modification process for customers once they begin a trial plan.
  • CLS conducts a second review for a sample of approvals and all denials that validates income calculations and document inventory.
  • In many cases, modification agreements are delivered to borrowers via e-mail.
  • It uses e-signatures for modification agreements that do not require notarization or recording, which we view as innovative.
  • Customers are able to schedule an appointment with their SPOC using a website.
  • SPOCs communicate directly with borrowers, using a catalog of email templates.
  • The minimum number of loss mitigation calls monitored is four, which is fewer than peers.
  • Modified loan terms are applied in the servicing system, using an automated script for most loan modifications, which reduces risk of manual entry. There is a next-day process to validate the amended terms in the system.
  • We consider the ABA rate to be satisfactory while the ASA is marginally outside of the common industry standard (60 seconds).

In response to the COVID-19 pandemic, the company updated its borrower website to add functionality that allows borrowers to request forbearance plans and forbearance extensions online and via its mobile application. CLS provides forbearance awareness and information to borrowers through channels such as email and periodic statements. It implemented a door-knock campaign to contact borrowers who have expired forbearance plans and have not been in contact with CLS. In many cases, depending on investor, payment deferrals and modifications can be requested online.

Table 7

Loss Mitigation Breakdown (%)
Resolution type Special
Deed-in-lieu 0.00
Short sale 0.00
Repayment plan 0.00
Modification 5.00
Forbearance plan 80.00
Reinstatement 0.00
Other 15.00
Total 100.00

Foreclosure and bankruptcy 

CLS maintains sound systems, processes, and controls to manage foreclosure and bankruptcy administration. Default is organized into separate foreclosure and bankruptcy departments, in addition to a shared default support team that monitors attorney vendors and performs second reviews, among other specialized activities. It uses BKFS' LoanSphere workflow application to track foreclosure and bankruptcy proceedings, and facilitate the communication and document transfers with attorneys.

The default attorney oversight practices are thorough, in our view. There is a due diligence process for prospective attorneys. Oversight activities include annual on-site audits, monthly scorecards to monitor performance relative to key performance indicators, and biweekly meetings to communicate and resolve open items.

Key foreclosure administration attributes, controls, and metrics that we took into consideration during our review are as follows:

  • A checklist is used to review loans prior to foreclosure referral.
  • A specialized team oversees the foreclosure process and timelines.
  • CLS established a dedicated team to resolve foreclosure impediments, such as title issues.
  • Measures are in place, for loans that transfer to CLS, to validate that the foreclosure data boarded to the company's system corresponds with default documents and case status.
  • CLS reported that 84% of foreclosures are completed within standard timelines, which compares favorably to the peer average.
  • Notaries and affiants are required to complete job-specific training.
  • CLS monitors for homeowners association (HOA) liens, using a vendor, and performs a quarterly HOA lien check on loans secured by properties in certain states.
  • All debt affidavits go through a second review by the default operations team.
  • Dashboards and exception reporting are used to monitor key events such as disaster holds, dual tracking, and statutes of limitation, which could present regulatory risk or investor loss.
  • Foreclosure staff turnover was 6%, which compares favorably to peers.

The servicing portfolio is reviewed daily through a batch process to identify new bankruptcy filings or changes to active cases. CLS transitioned to a new service solution to identify new bankruptcy filings and case changes among other services. Furthermore:

  • There were no rejected proofs of claim reported.
  • A specialized team in cash management handles bankruptcy payment processing.
  • Debtor calls are handled by trained associates with the customer relations or loss mitigation areas.
  • A quality review of bankruptcy court documents is completed before and after the document is filed with the court.
  • CLS implemented process automation to open and close the bankruptcy module in its system, as well as aggregate data for motion-for-relief filings.
  • A review is conducted for all accounts exiting bankruptcy (excluding Chapter 7) to validate system coding, documents, and proper application of funds received during the bankruptcy.
REO

As change from our last review, CLS has largely shifted REO asset management in-house under its REO team from what was an asset management vendor and oversight model. Properties are assigned to asset managers based on region so that asset managers can develop expertise in a particular market. Asset managers use an online task-based system to track properties through their REO life cycle. CLS' 52 assets per full-time employee ratio is similar to its peer average. Key REO strategies and metrics we considered are as follows:

  • Real estate brokers are selected based on their location relative to the property and their prior performance.
  • CLS offers cash for keys to improve time to market.
  • Multiple industry-recognized vendors perform property preservation and property registration.
  • CLS uses virtual staging for certain assets.
  • The company has experience with using property rehabilitation as a strategy, which includes a return on investment analysis.
  • Brokers are evaluated following every transaction, and CLS maintains a list of preferred agents based on their performance.
  • CLS reported a gross sales-to-market value ratio of 98%.
  • The average days to market an asset after eviction (262) is competitive with peers.

Financial Position

The financial position is SUFFICIENT.

Related Research

This report does not constitute a rating action.

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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