Rationale

S&P Global Ratings' rankings on U.S. Bank N.A. (U.S. Bank) are ABOVE AVERAGE as a residential mortgage loan primary and subprime servicer. On Aug. 13, 2019, we raised the rankings (please see "U.S. Bank N.A. ABOVE AVERAGE Residential Mortgage Primary And Subprime Servicer Rankings Raised; Outlooks Are Stable"). The outlooks for the rankings are stable.

Our rankings reflect:

• An experienced senior leadership team that has remained stable following a number of changes stemming from its well-executed strategic transition over the last several years.
• A sound risk management and control framework to monitor and detect risk.
• Seasoning of its vendor management framework that includes a level of rigor and oversight that is comparable to similarly ranked peers.
• A good level of technology throughout the operation.
• Proactive collections and loss mitigation strategies, which are notably beneficial for managing the subprime portfolio.
• Servicing performance metrics that are generally in line with similarly ranked peers.
• Industry experience levels for some of the default management team that are lower than peers.

Furthermore, we note U.S. Bank's strengthened business control practices; most notably, vendor oversight, change management, and procedures governance are increasingly vital to operate effectively in the current servicing environment and are now more in line with what we see from ABOVE AVERAGE ranked servicers.

We also recognized its investments in technology and process improvements across its loan administration functions. This provides efficiency, operational performance, and modernized self service capabilities with the ability to scale if needed.

Since our prior review (see "Servicer Evaluation: U.S. Bank N.A.," published Sept. 21, 2017), the following changes and/or developments have occurred:

• U.S. Bank consolidated certain call centers to its Irving, Texas servicing site.
• It completed the implementation and seasoning of certain first-line-of-defense control frameworks across all servicing lines of business.
• It augmented its training capabilities with a new portal for career development and an expanded new-hire customer service training program.
• During 2019, it transitioned to a new borrower portal that provides additional self-service functionality.
• It transitioned handling of tax related calls to its tax vendor and implemented passive homeowner association lien monitoring.
• It rolled out multiple loss mitigation strategies targeting borrowers in the process of selling their home and those affected by natural disasters and large scale life events.

The outlooks were revised to stable from positive reflecting our base-case expectation that U.S. Bank will continue to perform as an overall effective residential primary and subprime servicer. Its experienced senior management team continues to invest in technology and make the procedural adjustments necessary to administer its servicing portfolio in an increasingly complex environment. In addition, it continues to maintain practices and collections and loss mitigation strategies necessary for its subprime servicing portfolio.

In addition to conducting an on-site meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2018, as well as other supporting documentation provided by the company.

Profile

U.S. Bank operates as a subsidiary of U.S. Bancorp and is the fifth-largest commercial bank, by total assets, in the U.S. The nationally chartered bank offers consumer and commercial banking, as well as wealth management and trust services. The servicing operation includes 10 primary servicing sites that perform various servicing activities. The main servicing facility is located in Owensboro, Ky. with other offices located in Missouri, Ohio, California, and Texas. U.S. Bank largely services it's prime and subprime portfolio utilizing the same resources, procedures, and technology.

The number of prime loans in its servicing portfolio decreased marginally since year-end 2017. U.S. Bank continues to offset runoff with new loan production leveraging its branch footprint, in addition to third-party channels to drive loan volume. The number of subprime loans serviced decreased by 15% during the same period (see table 1).

Table 1

Table 2

Management And Organization

The management and organization subrankings are ABOVE AVERAGE for primary and subprime servicing.

Organizational structure, staff, and turnover

U.S. Bank's servicing organizational structure is typical of what we see at similar sized servicers, and we believe the structure effectively addresses operational needs.

The executive management team, which has remained stable following a number of changes over the last several years, exhibits good levels of industry experience. The average company tenure for the senior and middle management team reflects these leadership changes; however, we feel the leadership team brings a fresh approach to the organization. Turnover levels are considered favorably for the management team and manageable for staff.

Organization and staff details are as follows:

• Senior managers average 26 years of industry experience.
• Senior and middle managers average nine and eight years with the company, respectively--both of which are similar to peer averages.
• Management turnover is 1%, which is better than peers, while overall staff turnover of 16% is higher than the peer average.
• While servicing has historically been based in the U.S. the company began an initiative during 2018 to offshore certain back office functions.

Training

U.S Bank has a formal training to support the servicing operations with programs to acclimate new hires as well as provide existing staff with what we view as accretive factors, formal career development, and managerial training courses. During 2018 and 2019, it made a number of changes to its training and development group to support an expanding servicing organization within the enterprise. As part of the re-organization, it hired a new senior leader and added several business subject matter experts as trainers dedicated to its business units. It also expanded the training program for new customer service associates. This expanded program encompasses alternating periods of classroom and job shadowing. Training attributes we considered in our analysis include the following:

• There is a centralized training area that oversees the program for its multiple servicing sites.
• There is an enterprise-wide learning management system that provides tracking.
• U.S. Bank requires annual compliance training for servicing employees.
• It offers career development modules through a newly deployed consumer business banking operations university platform.
• The company's training hours are generally equal to or greater than other ABOVE AVERAGE-ranked servicers.
• It has a formalized refresher training program utilized when managers identify opportunities based on staff performance.
• It has a formal peer mentor approach as part of its on-the-job (OTJ) training in which new hires are assigned a mentor following approximately two weeks of classroom training. The OTJ training progress is monitored by the training department through a sign-off process.
• Leadership development initiatives include a college degree/leadership program.
• There is a newly deployed new manager orientation for all new managers.

Systems and technology

U.S. Bank has effective technology in place to meet its primary servicing requirements. Larger projects and initiatives, as well as information security, are supported by the enterprise technology team. Mortgage servicing information management systems (i.e., data and reporting), light automation, and application development are handled by the servicing strategy team. Additionally, U.S. Bank has data backup routines in place and well-designed disaster recovery preparedness.

Servicing system applications

The company uses Black Knight Financial Services' LoanSphere MSP® as its core servicing system in conjunction with other systems and applications to support the servicing organization. The systems and enhancements support our view that U.S. Bank has capable systems to support its servicing operations. Systems include:

• The borrower website and mobile application, which provide some self-service functionality.
• An industry-recognized interactive voice response (IVR) system.
• BKFS's LoanSphere Foreclosure application, through which U.S. Bank manages the foreclosure process.
• Workflow systems for collections, loss mitigation, and Real Estate Owned (REO) asset management.

Business continuity and disaster recovery

The disaster recovery (DR) and business continuity (BC) plans incorporate business impact analysis, recovery plans, and quarterly testing. BC plan tests include multiple disruption scenarios with a functional testing exercise completed annually. The DR tests are conducted following company policy with mission critical systems tested quarterly. The company produces testing reports to identify plan gaps. U.S. Bank reported no material findings in its February 2019 BC and January 2019 DR tests.

Cybersecurity

Its network and information security policies and protocols are primarily managed at the enterprise level. These include:

• A dedicated security incident response team to manage security events.
• External vendors to conduct intrusion detection exercises.
• Required annual information security awareness and quarterly phishing awareness training for employees.
• Data replication between multiple sites and off-site storage to recover data when necessary.

Internal controls

U.S. Bank's risk management and control framework include multiple levels of oversight, monitoring, and testing comprising its three lines of defense model. In our view, the framework provides an appropriate level of oversight to detect risk and is comparable to similarly ranked servicers.

Policies and procedures

The policies and procedures inventory is catalogued and accessible through an intranet site. All procedures are in a standard template format that provides, in our view, formality, organization, and rigor. A dedicated team manages procedure governance to ensure document integrity and consistency. The procedures are reviewed either annually or every 18 months at a minimum depending on risk. A separate team manages the letter library, and letters are certified annually. Compliance sign off is required for changes to procedures and letters.

Quality assurance

The first line of defense includes a quality management (QM) team that performs testing for mortgage servicing. The QM team sits outside of production lines of business, which provides a level of independence. The testing canvases all primary servicing functions, in our opinion. Reporting is provided to management weekly in a format that illustrates historical trending. In addition to the QM testing, the performing and default areas have dedicated control teams to monitor and test procedures and key performance indicators and manage issues within their respective divisions.

Compliance and operational risk

The corporate compliance and risk teams play key roles in the second line of defense. This area provides oversight and monitoring through their advisory, testing and issue validation, change management, and compliance reporting mechanisms.

Compliance and risk management measures include an enterprise compliance risk assessment, a servicing and control assessment, as well as testing from separate groups. In aggregate, the testing monitors compliance with regulatory and investor requirements as well as performance of key business processes and controls. The frequency of testing for the various requirements is based on risk, with most items tested annually. The test plan is supplemented by targeted reviews for high risk areas. A central issue tracking system tracks testing, findings, and monitors remediation efforts.

U.S. Bank has a well-structured program to identify regulatory and investor changes, assess and disseminate change items to stakeholders, and manage the implementation process for affected business areas. The change process involves communication and coordination between the enterprise legal and regulatory change management team and the servicing change management team, which works as an intermediary and supports the business units during change implementation. The workflow application tracks implementation plan progress and closing certification. When applicable, compliance quality assurance completes post-implementation testing. Since our last review, the servicing change management team completed the integration of all servicing business units into its change management framework, which we view as a positive development.

Internal and external audits

The third line of defense is U.S. Bank's corporate audit services (CAS) team. The CAS team performs independent risk assessments in addition to targeted and risk-based audits every 12, 24, or 36 months depending on a high-, medium-, or low-risk determination, respectively. Audit issues and remediation activities are tracked in a vendor-based application. U.S. Bank did not make audit reports available for review, limiting our ability to evaluate scope, issue analysis, and issue resolution routines, among other things. We consider this a limiting factor in our analysis. We reviewed an outline of servicing related audits. The audits identified some issues; however, we don't consider any of them to be material. We also reviewed the company's Uniform Single Attestation Program (USAP) and Regulation AB (RegAB) reports for 2018. The reports indicated no material instances of non-compliance. We also reviewed the 2018 Statement on Standards for Attestation Engagements (SSAE) 16 SOC 1 Type 2 report that identified exceptions, which we do not consider material.

Complaint management

The practices in place to manage, research, and respond to complaints are sound. New complaints are tiered by source and tracked in an internal enterprise system that provides controls to ensure complaints are managed within bank policy and regulatory requirements. The bank has multiple channels to review complaints in aggregate and share results with key stakeholders and business partners. A dedicated team is also in place to review all complaints for root cause and trends. Complaint data is shared with management and the enterprise complaint teams on a monthly basis. It reported that it resolved complaints in an average of 17 days which is better than the peer average.

Vendor management

The company's third-party risk management program includes oversight at the enterprise level and a dedicated vendor management department within the servicing organization. The servicing vendor management team completed an initiative in 2018 to incorporate all vendors into its oversight framework. This framework includes utilizing monthly performance scorecards to monitor vendor performance, which is a common monitoring component among peers. Vendor management protocols we considered in our analysis include the following:

• Vendors are tiered base on risk, with varying degrees of oversight based on the tier.
• A dedicated team manages the attorney vendors.
• A global support oversight team was established in 2018 to oversee the offshore work.
• In addition to monthly performance scorecards, quarterly performance assessments and, depending on risk tier, on-site reviews are used to monitor vendor performance.
• Monthly calls with vendors occur to discuss open items or performance issues. Meeting minutes are documented to an electronic form that imports a record to the vendor-tracking system.
• Complaints received by vendors are tracked in an enterprise system.
• Fourth-party oversight is part of the annual risk assessment.

Insurance and legal proceedings

The company has represented that it maintains adequate director and officers as well as errors and omissions insurance coverage given the size of its servicing portfolio.

On Jan. 12, 2018, the Federal Reserve Board announced the termination of enforcement actions related to residential and mortgage loan servicing and foreclosure processing issued in 2011. U.S. Bank's parent company noted and described multiple legal and regulatory matters, which were not directly related to mortgage servicing practices, in its 2018 10-K filing.

Loan Administration – Primary and Subprime

The loan administration subrankings are ABOVE AVERAGE for primary and subprime servicing.

New-loan boarding

U.S. Bank has an effective loan set up function that includes multiple procedures and controls to validate that system data match loan documents. During 2018, it integrated optical character recognition technology into the process. This integration automates the identification of document to system data discrepancies, which was previously a manual process. In addition to being more efficient, it could reduce the likelihood of data errors. Controls and other features of new loan setup include:

• The new loan setup area that boards nearly 100% of new loan files electronically within an average of three days, which is in line with the peer average.
• The Black Knight Financial Services' Loansphere boarding application, which is leveraged by the team.
• A review of roughly 185 key loan data points for all loans boarded to the servicing system.
• A process to review flood determination accuracy and detached structure coverage.
• A special loan products department that performs an additional review of all adjustable-rate mortgage loan data.
• Welcome call campaigns, which establish communication, verify contact information, and improve awareness of self-service options.

Payment processing

U.S. Bank has a sound cash administration operation, in our opinion. Approximately 90% of mortgage payments are processed electronically, with the remainder handled at a branch or manually posted. Furthermore:

• The percentage of payments made through its website (18%), although a slight increase year over year, is lower than the peer average.
• Approximately 31% of payments are recurring automatic clearing house drafts, which compares favorably to peers.
• A separate default cash processing team handles funds on delinquent loans or those in loss mitigation, bankruptcy, or foreclosure, which are often more complex.
• There is a suspense sweep-processing tool to systematically apply suspense funds according to programmed logic.

Investor reporting

U.S. Bank has dedicated staff members for the various investor reporting and operational accounting activities that are appropriately segregated for reporting, remitting, and related account reconciliation processes. The electronic reporting and remittance rates (95% for both) are lower than peers, reflecting the non-electronic reporting required by a number of smaller investors, according to the company. The number of account reconciling items aged 60- and 90-plus days has declined year over year, and are now more in line with acceptable ranges. The positive trend demonstrates that the organizational changes that we noted in our prior report seem to have addressed prior issues. We consider the 9% investor accounting staff turnover rate to be manageable, although it is higher than peers.

Table 3

Escrow administration

We believe the company has effective controls for escrow administration functions with appropriate oversight of its tax and insurance vendors. It utilizes an insource/outsource strategy in which industry-recognized vendors handle various aspects of tax, insurance, and loss draft monitoring and processing. In addition, it transitioned the handling of tax related calls to its tax vendor in 2018. Key processes, control activities, and metrics we considered in our analysis include:

• Resources dedicated to quality control within the escrow department. The resources include quality control staff and an implementation team established for research, root cause analysis, and process enhancements for identified quality control exceptions.
• A dedicated flood insurance team that handles processes including flood adequacy calculations, appraisal review, and flood research.
• The 5% escrow staff turnover rate, which is lower than the peers' average.
• No reported non-reimbursable tax penalties, which is comparable to the peer average.
• The tax vendor's average speed of answer (ASA) and abandonment (ABA) rates, which are 30 seconds and 1.62%, which we consider good.
• Recurring meetings with the tax and insurance vendors, and monthly scorecards monitor vendor performance to service level agreements.
• Monthly call calibration meetings that occur with the insurance vendor to review weekly issue log items and call performance.

Mortgage reconveyance

U.S. Bank utilizes a vendor system to create lien release documents that provide state-specific templates as well as time-tacking functionality. A periodic review of the documents is performed to ensure compliance with state requirements. U.S. Bank reported less than 1% of lien releases are processed outside of statutory compliance and a rejection rate that is similar to its peer average.

Special loans administration

For adjustable-rate loans, there are multiple checks in place to verify an index value following a change. For loans affected by the Servicemember's Civil Relief Act (SCRA), the servicing portfolio undergoes a periodic review against the department of manpower data center database, and there are multiple reviews performed before foreclosure referral/sale to confirm the borrower is not affected by these regulations.

Customer relations

Customer service staff are located at multiple site locations, which improves business continuity response as well as access to a larger workforce pool. Based on performance metrics, training, and technology, we believe U.S. Bank has appropriate infrastructure to support customer service activities for its portfolio. Key customer service attributes we considered include the following:

• IVR unit enhancements include a call back functionality and additional self service functions.
• A survey is in place as a measure of customer satisfaction.
• U.S. Bank reported 68% of customers are registered web users, which is higher than peers.
• Its first call resolution rate has improved to 53% from 48% the prior year.
• The call monitoring team monitors 25 calls monthly per agent, which is a significantly larger sample size than peers. The quality control team also reviews 15 tasks monthly for each agent.
• All calls are recorded with screen capture.
• We consider the 3% management turnover rate good and 19% staff turnover rate to be manageable. Both metrics are in line with peer averages.

We consider the customer service ABA to be elevated and the ASA satisfactory (see table 4). Both are generally similar to the peer averages. The elevated ABA can be attributed to a transition in customer service workforce from one site to another that occurred during the reporting period. The company shared call metrics for the months following the transition showing more normalized rates.

Table 4

Default management

U.S. Bank has a good default organization along with a good range of technology to effectively manage loans through the default cycle. The technology provides a level of efficiency and process control allowing some scalability if needed in the event of a rising delinquency environment. It also has strategies to establish contact with customers and provide solutions to mitigate losses when appropriate, including targeted campaigns for large scale events, which we view as proactive. We also note that the company handles prime and subprime loans in substantially the same manner.

Prime and subprime portfolio performance has improved year over year (see table 5). U.S. Bank's roll rates to higher delinquency buckets, and transition rates to lower from higher delinquency buckets have improved modestly year over year across all delinquency buckets in the prime and subprime portfolios. In addition, based its roll rates, U.S. Bank performs well during the early stages of delinquency. Roll rates are more in line with peer averages for later stage delinquency buckets.

Table 5

Table 6

We believe the default management team has good levels of industry experience despite being marginally lower than peer averages in most areas. Loss mitigation management experience is below peer average, although we consider it to be acceptable. Overall management turnover within default is low and is either similar to or favorable to peers (see table 5). Default staff turnover is also mostly similar to or better than peers, with foreclosure staff turnover the exception although it is manageable. Staff generally have what we consider satisfactory experience levels that were mostly lower than peer averages. We note that REO staff exhibit strong levels of industry experience that stand out among peers.

Table 7

Collections

Collection call centers operate from multiple sites in a blended and virtual environment. The broad geographic footprint provides expanded workforce flexibility, access to new talent pools, and additional continuity options. Technology is used to facilitate and manage many aspects of the collections operation. This includes a web-based application that provides collectors with workflow and scripting to offer the appropriate solutions available in addition to customized talking points based on recent loan events, such as a loan modification. Collections strategies and statistics we considered include the following:

• The collections teams are segmented based on delinquency, where less-tenured collectors handle early-stage collections and more-experienced collectors handle late-stage activities.
• It maintains a dedicated Spanish call queue.
• There are targeted campaigns in response to larger scale life events such as disasters and large scale unemployment events.
• Call back functionality was implemented in 2019.
• U.S. Bank has expanded its outbound IVR in response to process milestones such as loss mitigation documentation received.
• A door knock strategy is utilized when appropriate.
• A minimum of five calls are monitored each month. Supervisors monitor one of the five calls and provide coaching for all monitored calls.

We consider the collections ASA to be elevated and the ABA, which compares favorably to the peer average, to be satisfactory (see table 4). We note the elevated ASA is partially attributable to a consolidation of certain servicing sites, and the bank reported a more normalized ASA following the transition.

Loss mitigation

U.S. Bank incorporates multiple loss mitigation options, including those required by investors, to provide eligible borrowers with foreclosure alternatives. It has demonstrated that it continues to evaluate and launch new strategies such as those geared to natural disasters or large scale life events. It utilizes a specialization model for many of its loss mitigation activities to realize efficiencies and subject expertise. In addition, there is a default operations team to manage technology, and a new process support team to centralize issue and project management. A web-based application drives loss mitigation workflows among the various teams based on key events, such as a documents received and a completed application. Depending on the solution, the workflow will initiate for the applicable area. Loss mitigation strategies, controls, and metrics we considered include:

• A new borrower portal that provides additional self-service functionality such has providing financial and hardship information, selecting repayment plans, and viewing loss mitigation status.
• Automation of certain loss mitigation processes such as notification letters and modification system updates, which provides added controls.
• A system that pushes emailed documents directly to the imaging system.
• A new net present value model to determine the best outcome when evaluating a short sale.
• A program to work with defaulted borrowers to not initiate foreclosure for a period of time if the property is listed.
• A quality review of all modification underwriting decisions, including income calculations.
• An operations support team to support issue resolution and change management within the department.

Table 8

Foreclosure and bankruptcy

The foreclosure and bankruptcy groups are organized in a manner that allows them to appropriately manage foreclosure and bankruptcy administration. The foreclosure group utilizes a specialization approach with dedicated teams handling foreclosure administration activities. This is common among larger servicers that we rank as it emphasizes specialization and improves ability to scale. It predominantly leverages an outsource strategy for bankruptcy administration with the vendor handling most processing activities while the bankruptcy team handles various relationship management, analytical, and support roles. The company has multiple mechanisms in place to monitor bankruptcy vendor performance. Monitoring and control routines include control reports, recurring weekly meetings, weekly scorecards that document vendor performance, and an incident form that provides corrective action structure. We considered the following systems, controls, and metrics:

• MSP's LoanSphere Foreclosure is the foreclosure management system.
• The foreclosure referral process is largely automated with a reporting system in place to identify referral impediments as part of its referral review process.
• The foreclosure team maintains frequent communication with loss mitigation through recurring meetings to address stale loss mitigation files.
• A first legal surveillance team monitors first legal filling timing.
• The company reported that 79% of foreclosures were completed within standard timelines, which is better than peers.
• The vendor management team largely monitors and oversees foreclosure vendors.
• The bankruptcy vendor maintains its own quality control protocols and provides reporting to the bankruptcy department.
• The company reported no proof of claim rejections and a 2% dispute rate, which are similar to peer averages.
• The internal bankruptcy quality assurance team reviews all court documents prior to filing.

REO

U.S. Bank leverages two vendors to manage its REO assets. Through the vendors, it utilizes multiple disposition channels including traditional retail and auction and bulk sales in certain scenarios. The marketing, asset management, and closing processes are tracked and monitored through a web-based system, and internal asset managers oversee the vendor. REO inventory has declined 30% year over year as the company has focused on liquidating REO assets. At the same time, some REO metrics have modestly deteriorated, which we believe is largely a function of the declining REO inventory leading to a growing portion of the inventory comprised of less desirable assets. Nonetheless, we view the bank's proactive programs to liquidate challenging assets and maximize returns when economically viable as a positive. Furthermore:

• It launched an accelerated program to accelerate liquidation of distressed REO assets.
• The average eviction and post-eviction marketing times are 116 and 165 days, respectively.
• The gross sale-to-market value percentage is 95%, and the net sale-to-market value percentage was 82%.

Financial Position

U.S. Bank's financial position is SUFFICIENT.

Related Research

• U.S. Bank N.A. ABOVE AVERAGE Residential Mortgage Primary And Subprime Servicer Rankings Raised; Outlooks Are Stable, Aug. 13, 2019
• U.S. Bancorp, July 11, 2019
• Select Servicer List, June 25, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019