by Dan Olsen, Senior Vice President, KeyBank Real Estate Capital
The Servicers Forum is not only the largest of CREFC’s Forums, but also is one of the most actively engaged with numerous initiatives underway. Members include Master Servicers, Special Servicers, Rating Agencies, Trustees, Certificate Administrators, Operating Advisors, Data Providers, and counsel, among others. With over 700 individual members, the Servicers Forum, together with the IRP Committee, plays an integral role in setting industry standards and best practices for the CMBS market. In addition to these important industry initiatives, the Servicers Forum also hosts educational programming. The Forum held four After-Work Seminars this past year in San Francisco, Miami, Dallas, and Charlotte on current issues facing the market and other hot topics.
The industry is currently facing several regulations impacting the CMBS market, including Regulation AB II and Risk Retention, which have a direct impact on the servicing sector. CREFC is addressing implementation issues resulting from these comprehensive rules through various working groups. However, the Servicers Forum and IRP Committee not only address regulatory issues, but also current market business challenges and trends. There are currently nine active working groups, many of which have released final best practice drafts and recommendations. The Servicers Forum’s continued objective is the efficiency and effectiveness of the execution of CMBS servicer related responsibilities, especially with regard to communication and timing, and the promotion of market transparency for all parties, including investors. Here are the highlights of these various initiatives, including why they are important to the market and when they go into effect.
Reg AB II Schedule AL Working Group
In order to ensure a standardized industry approach to implementation of the new asset-level disclosure and reporting requirements in Reg AB II, which was finalized August 27, 2014, CREFC has created a Schedule AL Working Group.
Schedule AL will be used for both the offering disclosure as well as ongoing disclosures. While many of CREFC’s recommendations regarding asset-level data points were adopted, the new Schedule AL does not map exactly to the CREFC IRP or Annex A.
This working group is comprised of master and special servicers and other market participants, and will conduct a line by line comparison of the SEC’s required asset-level data points to the CREFC IRP and Annex A to determine which fields are new or similar, and how to report such information going forward in the most efficient and useful manner. The subject reports must be finalized and fully functional by October 28, 2016.
Operating Statements, Rent Rolls and OSARs (OSAR) Best Practices
The OSARs working group was created to establish best practices for the delivery and information flow of Operating Statements, Rent Rolls and OSARs. The full committee has formed two sub groups, one for Master Servicers and one for Special Servicers. Both groups have reviewed the final best practice draft which is expected to be adopted by year’s end.
17g-5 Best Practices
Effective June 2010, The Securities and Exchange Commission (SEC) promulgated a regulation, 17g-5, which imposed additional disclosure and conflict of interest requirements on nationally recognized statistical rating organizations (“NRSROs”) and, by extension, additional disclosure requirements on issuers, sponsors, and underwriters (collectively, “arrangers”) of structured finance products.
Last fall CREFC formed a 17g-5 working group to address ongoing implementation issues relating to the flow of information through 17g-5 websites between Servicers, Rating Agencies, and IP Providers. Issues include timing of web posts, push confirmations, and technological issues, and inconsistent PSA language.
Based on member comments received, the CREFC Forums are expected to adopt best practices #1 through #7 by year’s end. Best practices #8 and #9 will be incorporated at a later time. This working group also plans to engage the SEC to determine whether 17g-5 applies to servicer reviews and post-securitization, among other things.
Special Servicer Transfers Best Practices
The Special Servicers Transfers working group is addressing the challenges that arise when dealing with the transfer of the named Special Servicer on a CMBS trust, including the flow of information and documents between Servicers, RACs, logistical and timing issues, appraisals, and reporting/communication issues.
The working group co-chairs have received input from rating agencies and investors on a final draft, which is expected to be adopted by year’s end.
Credit Rating Agency Data Standardization Project
CREFC created a working group to explore the possibility of developing a standardized set of data that Master Servicers and Special Servicers will provide simultaneously to all Rating Agencies on a quarterly, semi-annual and annual basis.
Initial conversations were held with each of the Rating Agencies to ensure their buy in on such an initiative. A field by field comparison of primary and master servicer Rating Agency data requests and IRP fields has been completed to determine where current overlap exists. The working group will be soliciting volunteers who will produce information in order to compile comments/frustrations with the current process to make sure we are working toward the proper objectives.
Best Practices for Reporting on Excess Liquidation Proceeds
This best practice working group was formed as a result of discussions held at CREFC’s 2014 Annual Conference IRP Committee meeting. The working group addressed reporting issues under circumstances when there is an REO loan that subsequently is sold and results in excess proceeds. A final best practice draft will be in effect by year’s end.
Best Practices for Writing-off B-notes and Realized Loss Reporting
This best practice working group was formed as a result of discussions held at CREFC’s 2014 Annual Conference IRP Committee meeting. The working group will develop best practices on reporting subsequent losses on B-notes in a modified loan situation. A final best practice draft will be in effect by year’s end.
New and Revised Watchlist Criteria
Last fall CREFC launched an initiative to perform a comprehensive review of the current Watchlist criteria and reporting practices with the objective of making recommendations to enhance the value of the Watchlist to market participants, especially investors. The Watchlist serves as an early warning system that identifies loans with a high potential for default.
As a result of several months of working group meetings along with input from the Servicers Forum and IG Bondholders Forum, the IRP Committee and Watchlist Subcommittee have approved proposed changes to the CREFC Watchlist, Portfolio Review Guidelines, and newly created Implementation Guideline. The Implementation Guideline, designed to assist Servicers and Investors, contains best practices for commentary and provides further clarification for triggers.
One of the biggest changes users of the Watchlist will find is the creation of a “Credit or Informational” column on the Watchlist and in the Portfolio Review Guidelines to accompany each trigger. The purpose of this new column is to help users navigate the Watchlist more efficiently so that loans triggering for “Credit” issues are easily identified.
The implementation date for these updates is June 1, 2015.
Loan and REO Liquidation Reports Best Practices
The Loan and REO Liquidation Reports best practices working group was created to develop a best practices document. The working has addressed the following issues:
- Determine what codes from the IRP file can be auto populated to the Loan and REO Liquidation templates
- Reach out to the investor community and solicit their feedback on the reporting of loan and REO resolutions
- Establish consistent information reported on the Loan and REO Liquidation Templates (i.e. add/delete fields, participated loans, multi-property loans)
- Clarify fields reported on the Loan and REO Liquidation Templates (i.e. total fees to special servicer affiliated entities)
- Identify reporting contacts at the Master Servicer and Certificate Administrator for template submission
CREFC held an open comment period from July 31 to August 15, 2014 for members to submit their input on these proposed changes. The best practices were then adopted and will be incorporated into the IRP by year’s end.