Rationale

S&P Global Ratings' rankings on Bank of America N.A. (BANA) are ABOVE AVERAGE as a residential primary and subordinate servicer and AVERAGE as a subprime servicer. On Aug. 21, 2019, we affirmed these rankings (see "Bank Of America N.A. Residential Primary, Subordinate, and Subprime Servicer Rankings Affirmed; Outlooks are Stable," published Aug. 21, 2019). The outlooks are stable.

Our rankings reflect BANA's:

• Continued sound oversight of the servicing operation, which includes multiple levels of internal controls;
• Experienced management and staff, along with low turnover;
• Servicing metrics that remain competitive with or better than peer averages;
• Investment in technology; and
• Continued runoff of subprime portfolio.

Since our prior review (see "Servicer Evaluation: Bank of America N.A.," published May 11, 2018), the following changes and/or developments have occurred:

• BANA's portfolio loan count decreased almost 14% since December 2017.
• The senior leader of the servicing operations left the company and was replaced with a prior leader of the group.
• BANA rolled out the Global Technology and Operations University that provides learning paths for BANA staff outside of their functional roles.
• The company integrated the compliance and operation risk groups.
• BANA changed the audit methodology from a business entity review to a process review.
• It implemented an enterprise-wide complaint management system.
• BANA continued to consolidate functions into fewer sites (such as customer service and collections).

Outlook

The outlooks are stable. The servicer rankings and outlooks reflect our view that BANA maintains an appropriate level of management oversight and technology and has sufficient internal controls to identify and remediate issues to efficiently and effectively service the portfolio. The subprime business is not a significant business focus for BANA, and the portfolio continues to run off. However, management indicated that BANA continues to provide support to the product, and we observed no deterioration in operational performance in subprime servicing.

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

Profile

Table 1

BANA is an international financial institution providing banking, investing, asset management, and other financial services to individual consumers, small businesses, and large corporations. It has over 4,300 retail centers in the U.S., serving over 66 million consumers and small business clients. The mortgage and vehicle servicing operations manage the bulk of the servicing functions.

At the time of our last review, we noted that the subprime portfolio showed a reduction in unit count by almost 48% between 2016 and 2017. As of December 2018, the subprime portfolio was down by approximately 13% from 2017, which was in line with the year-over-year reductions in the prime (13%) and subordinate (15%) reductions. BANA's strategy is to focus on organic growth through its retail offices and digital applications.

California loans make up a larger part of the portfolio (by balance) than other states (see table 2). While this introduces a level of risk during an economic down cycle, we do not feel this is a major risk at this time. We will monitor the portfolio distribution and associated delinquency if there is a change in the economic environment.

Table 2

Management And Organization

Our subrankings for management and organization are ABOVE AVERAGE for residential primary, subprime, and subordinate-lien servicing.

Organizational structure, staff, and turnover

As of Dec. 31, 2018, BANA had a total of 2,904 full-time equivalent servicing employees. BANA's servicing operations are located in 11 U.S. locations and offshore sites in Mumbai, Hyderabad, and Gurugram, India. The India locations perform numerous back-office administrative functions (including quality assurance) for the servicing operation, with no customer-facing activities.

In our last few reviews we have noted leadership and executive management changes within the mortgage and vehicle servicing operations. Since then, the senior leader of the group left the company and was replaced by the prior leader. While changes in leadership can cause disruption to operations, we feel that by bringing back a former leader to the same role, the disruption risk is mitigated. We will look for stability going forward in the leadership of the mortgage servicing operations. BANA has also consolidated the senior management team by combining functional groups under existing management.

BANA has an experienced and sufficiently tenured management team.

• Senior managers average 30 years of industry experience and 11 years of company tenure.
• Middle management averages 14 years of experience, which is lower than peer averages, and 14 years of company tenure, which is in line with peer averages.
• Management turnover is 0% while overall staff turnover is 10%, which are both in line with peer averages.

Training

We believe BANA has an effective training program for its management and staff. It uses a learning hub to manage content and track employee training. Features of the training program include:

• Enterprise training courses that are required of all BANA employees, as well as all vendors who handle, review, or have access to confidential or proprietary information.
• Role-based new-hire and annual training.
• New manager training, which lasts from six to nine months, for anyone moving from an individual contributor to manager role.
• Ongoing manager excellence training, which provides monthly training sessions, generally via live web sessions, on different management-related topics.
• The addition of a manager's excellence consultant who provides coaching, feedback, and guidance to mid-level managers.
• The rollout of a new learning university that provides opportunities for employees to follow various learning paths focused on global technology and operations functions.

Systems and technology

As part of the multi-year technology strategy, BANA is planning to simplify and modernize the systems it uses within the servicing group, as well as across the bank. Some of the key initiatives include the migration of all core servicing functions to Black Knight's Mortgage Servicing Platform (MSP), migration to an industry-standard platform for collections and recovery, consolidation of existing platforms to an enterprise-wide imaging platform, and implementation of an enterprise-wide case management system to provide a consistent customer experience across all business channels.

Servicing system applications 

BANA uses proprietary platforms for mortgage and home equity loan servicing. As mentioned above, they are in a multi-year process to transition to MSP for both products. In addition to the core platforms, BANA utilizes the following applications:

• Equator for short sale and deed-in-lieu management;
• A proprietary centralized rules-and-decision engine for modifications;
• A proprietary enterprise bankruptcy system; and
• LoanSphere for bankruptcy and foreclosure management.

Business continuity and disaster recovery 

BANA's disaster recovery and business continuity plan is managed at the enterprise level by the global business continuity and recovery organization. BANA uses a redundant site and device-routing process in which disrupted services automatically redirect to the designated alternate system or site for those functions identified as critical. Data centers are located in Texas, Virginia, Pennsylvania, and New York. Critical customer data and application services are backed up electronically and to physical tapes, and intraday transactions are recorded to allow recovery to the point of a disaster. The lines of business update the business impact analyses, in conjunction with its recovery plans, on an annual basis. The criticality of a function is based on this analysis and used to determine recovery time and recovery point objectives as well as the frequency of testing. All functions and supporting technologies are tested, with critical functions tested annually at a minimum. All test results are reported to senior leaders and stakeholders. BANA completed the most recent enterprise business continuity exercise on July 20, 2019. BANA did not provide the results of that test but stated that there were no outstanding issues associated with the test.

Cybersecurity 

BANA's IT security program includes:

• Continuous enterprise scanning to identify known threats and vulnerabilities;
• User access controls, including annual reviews for employees and quarterly reviews for contractors;
• Source code analysis, which scans the application code for security vulnerabilities;
• Penetration testing performed by an internal team;
• Automated antivirus updates;
• Remote desktop policy enforcement, which audits and tests remote access computers for compliance with all security standards;
• Email monitoring for content and appropriate encryption; and
• Controls to prevent nonpublic information from being sent by email.

A monthly executive dashboard is produced, which provides the status of the controls by business area and executive. BANA did not provide the date or results of the most recent penetration test.

Internal controls

BANA's risk management program is comprehensive, relying on multiple levels of auditing to help ensure a good control environment. The enterprise risk management program is managed within a framework approved by the board of directors and includes business unit, independent risk management, and corporate audit functions. BANA uses a governance, risk, and compliance system for tracking and managing issues.

Policies and procedures 

BANA's centralized procedures and correspondence unit is responsible for development and change management of procedures, letters, disclosures, and statements across business lines. We believe that having an enterprise-wide group managing these documents promotes consistency across business functions and a cohesive customer experience.

BANA has good controls for developing and updating procedure manuals. Functional and process highlights include:

• The ability for staff to view the manuals on the company intranet via online portals.
• Manuals, which we believe are well-written, that include an overview, glossary (as applicable), and logical process flows.
• Standards that are tied to the regulatory requirements associated with them.
• Technical writers who are aligned to specific business lines and draft revisions in partnership with the line-of-business subject matter experts.
• Procedures that are reviewed every 12 or 24 months based on a risk ranking.
• Required management or legal approvals, or both, for substantive changes.

The letter and disclosure change support team is responsible for maintaining the letter library and the associated change management process. An application is used to create, revise, track, and store the customer correspondence library. The regulatory requirements driving the letters is maintained in the application as well. BANA's correspondence governance process requires a legal, risk, and compliance review of all new or updated letters. Additionally, periodic reviews are performed every 18 months.

Quality assurance (and call monitoring) 

The quality assurance department reports to the business control division within the servicing operations. Quality assurance performs both in-line and postmortem process quality assurance testing. The enterprise quality assurance and quality control standards provide the requirements for the testing, including sampling, risk-based tolerances, and testing frequency. The business units complete risk control self-assessments twice a year and adjust quality assurance as needed. The quality assurance reporting is included with the exam, audit, and issue reporting presented in a biweekly forum to the senior vice president of mortgage and vehicle servicing operations, his management team, and compliance.

A dedicated quality assurance call monitoring team performs call monitoring of any customer-facing group, including third parties. This team completes a minimum of four customer service and five collection and loss mitigation monitors monthly per employee. The scorecard is based 50% on regulatory items and 50% on customer experience. The scorecard is embedded within the call monitoring software and results are routed to line managers for review and staff training. Managers and team leads also perform call monitoring in addition to those performed by the quality assurance team.

Compliance and quality control 

Since our previous review, BANA has integrated the compliance and operation risk groups. Management feels this integration has resulted in a more comprehensive and efficient process. BANA's global compliance operating model consists of vertical teams and horizontal teams. The vertical teams are aligned with business groups and ensure the appropriate tests are being performed and the quality assurance testing procedures are in accordance with the enterprise's standard requirements. The horizontal teams are the subject matter experts of all rules, laws, and regulations for all business lines. Key components of BANA's compliance model are:

• An impact assessment process for all changes to regulatory and investor rules.
• Annual risk assessments for servicing operations, with targeted assessments performed as needed due to operational or risk environment changes.
• Routine monitoring of mortgage servicing metrics, including key risk indicators, quality assurance results, phone monitoring, vendor scorecards, complaints, and training.
• Transactional testing based on compliance-developed tests scripts is performed by an independent team.
• Reporting of issues and risks, as well as monitoring of remediation plans.
• Management of compliance training requirements, including content and front-line unit training assignments.
• Review and challenge of first line of defense quality assurance and risk assessment programs.

Internal and external audits  

The audit team is independent of any of the business units and reports directly to the board's audit committee. Mortgage auditors undergo what we believe to be an extensive training program, with staff required to complete 80 hours of training annually. Training subjects include issue end-to-end training, best practice training, and business acumen training, among others. Audit results and remediation plan status are reported to management and the audit committee.

In 2019 BANA changed the audit process to assess risks at a process level rather than at a business entity level. The assessments, which include a review of strategic, credit, market, liquidity, operational, compliance, and reputational risks, continue to drive the frequency of the review cycle but the frequency has changed. Now, rather than a one- to three-year review cycle for the business entity, there is a one- to four-year review cycle of the process. In addition to the review cycle, BANA has implemented some continuous audit activities through automated testing. Audit reports are now issued with a rating for each process rather than an overall rating for the business entity. We feel this approach provides better visibility to processes across multiple business lines.

We reviewed the reports for the seven audits completed in 2018 and 2019, some completed for the business entity and some for the process. All had satisfactory ratings with no material findings cited.

The Regulation AB (Reg AB) attestation for 2018 disclosed one instance of material noncompliance (MINC), while the 2018 USAP statement and SSAE 18 covering the period of Oct. 1, 2017, to Sept. 30, 2018, had no findings. Management stated the Reg AB MINC is filed proactively by BANA, in anticipation of the identification of exceptions by the audit firm.

Complaint management

Complaints are managed within the business units but the complaints enterprise process oversight team is responsible for the governance, monitoring, and oversight of the front-line unit's complaint management process, as well as compliance to standards. The complaint management process and structure includes:

• System of record for all complaints, deployed enterprise-wide since our last review;
• Oversight of complaint management to ensure timely resolution and quality documentation.
• Review and reporting of complaints, including root cause analysis, monitoring of themes, and follow-up actions.
• Complaint statistics for responses in compliance with guidelines, which are generally better than we see with peers.
• A slightly higher number of complaints in relation to the number of accounts relative to peers, although the rate is lower since the last reporting period.

Vendor management

BANA has good controls in place for vendor management. The business line owns the risk and responsibility for vendor performance and ultimately approves the vendor. All vendors undergo a risk assessment process, which incorporates information security risks in addition to the risks associated with the product or service. BANA determines vendor risk scores using a risk assessment questionnaire. The global procurement team executes sourcing activities, including executing contracts on behalf of the business unit. The business unit participates in due diligence to ensure all associated risks are understood before selecting and approving the contract and vendor.

The business units manage vendor performance with oversight and support from the enterprise vendor manager assigned to the specific vendor. Vendor performance management includes:

• Vendor scorecards, which include key performance indicators and key risk indicators, are completed quarterly for high-risk vendors;
• Monthly scorecards for enterprise-critical vendors;
• Quality assurance reviews;
• Onsite assessments, which are completed annually for all critical and high-risk vendors; and
• Issue management, including documentation of remediation plans and status.

The vendor management group provides reporting on vendor performance at a third-party governance council meeting held twice a month. Material vendor issues are provided monthly to the third-party risk governance council. Any material risk issue involving a vendor would also be reported to the board of director's enterprise risk committee.

An attorney network firm management (ANFM) group assists in monitoring attorneys. The ANFM acts in an oversight role while the business units perform more of the direct vendor management responsibilities. The oversight performed by ANFM includes:

• On-site firm assessments;
• File transition and termination events;
• New firm on-boarding;
• Attorney certification; and
• Quarterly scorecard production.

Attorney management functions performed by the business units include:

• Attorney file quality assurance;
• Monthly scorecard production;
• Financial billing review;
• Communications;
• Watchlist management;
• Capacity management;
• Referral allocation, monitoring, and control; and
• Invoice management.

Insurance and legal proceedings

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

Management indicated that, although it was difficult to predict ultimate outcomes, it believed it was not subject to any material servicing litigation. For more information, please see the company's SEC filings.

Loan Administration--Residential Primary, Subprime, And Subordinate Servicing

Our subranking is ABOVE AVERAGE for loan administration as a residential mortgage prime and subordinate-lien servicer, and AVERAGE as a residential subprime loan servicer.

New-loan boarding

BANA has the appropriate controls and procedures in place for loan boarding. Highlights and controls of the process include:

• Electronic boarding of 100% of new loans;
• An average boarding time of six business days, which is longer than we see with comparably ranked peers;
• A 100% new loan document to system-check;
• Special handling of transfers of high-risk loans;
• Coordination of data and document validation by front-line units; and
• Management of transfer activities, including contract execution, data and document transmission, and post-transfer support.

Cash management

BANA has a sound and efficient cash management operation. Highlights and controls of the process include the following:

• Less than 1% of payments are manually posted.
• Suspense funds are managed through systemic controls and routed to department queues for disposition instructions. An aging report is distributed daily to queue owners to ensure timely posting.
• A reconciliation of funds received to funds posted is performed daily.
• Staff turnover in the payment processing area was 2.5%, which is lower than peers'.

Investor reporting

We believe BANA has appropriate controls over its investor reporting processes, including an appropriate segregation of duties among reporting, remitting, and reconciliation functions. BANA uses software for reconciliation, which streamlines the process. It services loans for various investors (see table 3).

Table 3

We factored in the following risk management methodologies and metrics into our analysis:

• The department turnover rate is 0%.
• The electronic investor reporting and remittance rates are 99%.
• The company provides web portal access for investors to download reports, and stratify and sort data at the pool level.
• The number of reconciling items aged more than 60 days increased period over period and is higher than peer averages; however, there were no reconciling items aged more than 89 days.

Escrow administration

BANA has escrow accounts on approximately 73% prime, 83% subprime, and less than 1% of its subordinate-lien portfolios. BANA manages escrow analysis and insurance loss draft functions internally while third-party vendors handle insurance and tax monitoring. The insurance vendor also manages customer calls, which are monitored by BANA's quality assurance team. The insurance vendor's average speed of answer (ASA) and abandonment rate are both similar to peers. Non-reimbursable tax penalties of $.03 are also in line with similarly ranked peers. BANA reported that there was no turnover in the escrow department during the period, which is better than reported by comparable servicers.

Mortgage reconveyance

BANA changed responsibility for the lien release process from a BANA subsidiary to a vendor in early 2018. Requests for releases are automated, and a group within the mortgage servicing operations performs the vendor oversight and research activities. There were no reported penalties for failure to timely reconvey, and the reconveyance metrics for those processed outside of statutory compliance and the rejection rate were comparable to those reported by peers.

Customer service

BANA's consumer client services home loans division manages customer service for bank customers including mortgages. Dedicated resources handle the mortgage accounts within customer service and are managed from three domestic sites across the country: Phoenix; Fort Worth, Texas; and Jacksonville, Fla. BANA removed customer service functions from its Simi Valley, Calif. site in April 2019.

Key metrics for customer service include:

• No management turnover, which is better than peers, while staff turnover of 25.68% is worse than peers;
• The ASA and abandonment rates (see table 4) are higher than those reported by peers but are marked improvements from prior reporting periods;
• First-call resolution rate of 86.4%, which is better than peer average; and
• Call monitoring of approximately four per associate per month based on performance, which is fewer than performed by similarly ranked servicers.

Table 4

Default management

Overall, we believe BANA has effective procedures for default management and real estate-owned (REO) assets, efficiently uses technology, and provides satisfactory oversight of its vendor relationships.

Since our last review, BANA moved the collection activity out of the Fort Worth, Texas, site and consolidated it into the other two collection sites located in Greensboro, N.C., and Chandler, Ariz. The 252-person collections team manage all stages of delinquency up to the foreclosure sale date. A risk score is calculated monthly for each account and is segmented by investor type. The risk score triggers the timing of the collector's initial call based on the number of days the account is past the due date. Prime, subprime, and subordinate liens are placed in collector queues. The collectors work in a blended environment with both inbound and outbound dialer calls. Manual call campaigns to cell phones are also utilized. Queues are set up for special handling, including escalations, employee home loan assistance, foreign language, and global wealth management. In December 2017, BANA set up a test program to utilize text to reach out to borrowers, in addition to the email program already implemented to expand its non-voice contact strategy. The program was rolled out to the entire population of those borrowers providing authorization to contact them via their cell phone in 2019.

BANA assigns a customer relationship manager as the account single point of contact (SPOC) at the 45th day of delinquency. The SPOC helps the borrowers through the workout process. When documents are received from a borrower, the income is calculated by an underwriter, who uses the decision engine to determine the workout options. BANA performs an in-line quality assurance review of income calculation on 100% of the loans. Additionally, it reviews approved and denied workouts on a targeted sampling basis.

We believe that BANA exhibits satisfactory years of experience for default management and staff. Turnover rates for default management and staff are generally in line or better than peers, with the exception of the bankruptcy staff turnover, which is higher than peers. (See table 5).

Table 5

BANA's delinquency rates for the prime and subprime portfolios continue to improve, though some of this improvement can be attributed to the transfer of non-performing loans (see tables 6 and 7), while the subordinate portfolios' total delinquency rate increased, driven by a higher rate of 90+ delinquencies (see table 8). Across all portfolios, delinquency rates are comparable to or slightly better than peers. BANA's roll rates generally meet or exceed those reported by peers across the prime, subprime, and subordinate portfolios.

Table 6

Table 7

Table 8

Collections

The department's characteristics, processes, and metrics include:

• Seven calls monitored per associate, which is slightly higher than peers;
• An overall right-party contact rate of 34%, which is much better than the peer average.
• An ASA rate much better than peers, while the abandonment rate is comparable (see table 4);
• Promise-to-pay success rates are 87% and 82% for accounts 30- and 60-days delinquent, respectively, which are better than peer averages.

Loss mitigation

In our view, BANA has appropriate controls for managing its loss mitigation processes. The department employs various workout solutions, which it manages through the loss mitigation decision engine (see table 9).

Table 9

We considered the following key loss mitigation metrics in our analysis:

• 10.9 average days to workout decision for prime, 11.2 days for subprime, and 10.1 days for subordinate liens are all better than peers; and
• An ASA of 11 seconds with an abandonment rate of 1.74%, both of which compare favorably to peers and are much improved since our last review.

Foreclosure and bankruptcy

BANA has several processes in place to ensure it appropriately processes legal actions. Foreclosure cases are managed by BANA staff, which oversee and manage the milestones required to be completed by both BANA and outside counsel. Bankruptcy cases are managed at an enterprise level utilizing a proprietary tracking system which includes Enterprise Bankruptcy Platform and LoanSphere. Highlights and controls of the process include the following:

• Prior to foreclosure referral, the foreclosure referral review group completes two separate reviews to validate that all necessary requirements to refer the loan have been completed.
• Exception reports are used to track foreclosure holds, file-aging, and any issues or illogical items in reporting.
• Loans are certified prior to going to sale, which includes validation that all regulatory and investor requirements were met.
• An impediment management and clearing process is used to resolve foreclosure holds.
• All loans undergo Servicemembers Civil Relief Act compliance checks at various points throughout the foreclosure process.
• Daily monitoring and management of inventory and service-level agreements.
• 100% of proof of claims and motions for relief are reviewed and validated prior to filing.
• Bankruptcy specific loss mitigation specialists handle workout options for borrowers in bankruptcy.
• Prior to closing the bankruptcy module on an account, a final review of all cash posting is completed.
• BANA reported that no proof of claims (POCs) were rejected, which was better than peer metrics. The number of POCs disputed went down to 2.49% in the most recent period, which is in line with the average reported by peers.

Real estate-owned (REO)

BANA utilizes a dual-path approach of marketing REO properties through both retail and auction channels. Since our last review, BANA changed to an all-inclusive vendor strategy where a single vendor handles asset management as well as auction marketing. While BANA uses this company as its primary auction vendor in addition to the asset management work, they do have certain assets with a secondary auction company. It continues to employ a community revitalization and donation program through targeted donations of certain assets to local nonprofit groups or municipalities. Management said it has donated more than 6,000 properties since 2012. All functions related to closing and post-closing are centralized within one area. Asset disposition attributes and metrics include:

• An internal tracking tool that monitors property-related escalations, such as code violations, complaints, and demolition.
• An average inventory turnaround time of 208 days for prime and 182 days for both subprime and subordinate-lien assets.
• A gross sale-to-market-value ratio of 76.50% for prime and 79.48% for both subprime and subordinate-lien assets.
• An overall loss severity of 68.97%, 71.75%, and 114.43% for prime, subprime, and subordinate liens, respectively.

The metrics listed above are generally worse than what was reported by comparably rated peers. Management states that the higher loss severity is due to an aging and smaller portfolio. BANA is working on strategies to liquidate these assets and we will continue to monitor these for improvement.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Bank Of America N.A. Residential Primary, Subordinate, And Subprime Servicer Rankings Affirmed; Outlooks Are Stable, Aug. 21, 2019
• Select Servicer List, June 25, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
• Servicer Evaluation: Bank Of America N.A., May 11, 2018