Rationale

S&P Global Ratings' rankings on Bank of New York Mellon Corp. (BNY Mellon) are AVERAGE as a commercial loan primary, master, and special servicer. On Feb. 12, 2020, we affirmed our overall rankings on BNY Mellon as a primary, master, and special servicer (please see "Bank Of New York Mellon Corp. Commercial Primary, Master, And Special Servicer Rankings Affirmed; Outlooks Stable," published Feb. 12, 2020). The outlook for all three rankings is stable.

Our rankings reflect BNY Mellon's:

• Management team's adequate experience, with well-tenured middle managers and staff;
• Effective audit, compliance, and control processes;
• Effective technology systems, training programs, and applications; and
• Modestly sized primary, master, and special servicing portfolios, which continue to reflect a declining unpaid principal balance (UPB), accompanied by limited property and investor diversity.

Since our prior review (see "Servicer Evaluation: Bank Of New York Mellon Corp.," published Dec. 17, 2018), the following changes and/or developments have occurred:

• The group manager of commercial mortgage services retired in December 2018 and was replaced with an internally promoted employee with over 20 years' experience and 16 years with the company.
• Client services management for U.S. Structured and Specialty was restructured in early 2019, and commercial mortgage services now reports directly to an experienced senior group manager who previously oversaw the team.
• The commercial mortgage-backed securities (CMBS) primary servicing portfolio continues to run off, with only two CMBS loans remaining with a combined UPB of approximately $367.0 million as of Dec. 31, 2019.
• BNY Mellon experienced a 6.1% reduction in its overall primary servicing portfolio to $412.3 million as of Dec. 31, 2019, from $439.5 million as of Dec. 31, 2018.
• Excluding the CMBS portfolio, BNY Mellon now primary services less than $50 million across 55 assets.
• BNY Mellon reported a 54.8% reduction in its master servicing portfolio, with only two loans remaining with a combined UPB of $1.8 million as of Dec. 31, 2019.

The outlook for each of the rankings is stable. Despite continued run-off in its portfolios, we expect BNY Mellon to maintain the staff, processes, and technology systems required to administer its portfolio according to generally accepted servicing practices.

In addition to conducting an onsite meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data until Dec. 31, 2019, as well as other supporting documentation the company provided.

Profile

BNY Mellon is a global investments company, which services financial assets throughout the investment lifecycle. As of Dec. 31, 2019, BNY Mellon had $37.1 trillion in assets under custody and/or administration, and $1.9 trillion in assets under management in 35 countries. BNY Mellon operates under the corporate brand of The Bank of New York Mellon Corp. (Bank) (NYSE: BK).

BNY Mellon's commercial mortgage loan servicing operation, located in Dallas, is part of the Bank's Corporate Trust division. All employees of the servicing operation are Bank employees. The group provides administrative and operational support to the commercial mortgage loan and asset-backed lending markets for securitizations.

The commercial mortgage loan servicing operation, which is operated under the nationwide Bank of the same name, services various commercial asset classes, including CMBS, tax receivables, and franchise and business loans. However, over the past several years, the dollar volume of its modestly sized primary and master servicing portfolio has declined, totaling $414.1 million as of Dec. 31, 2019, compared with $443.5 million as of Dec. 31, 2018, which is a 6.6% reduction in UPB.

The current business strategy of BNY Mellon includes leveraging both existing and new clients to service niche products, such as intercompany loan portfolios and single-family rentals, and the company is engaged in conversations with various firms at this time. Management indicated that they continue to pursue opportunities in primary CMBS; however, due to new issuance consolidations and pricing considerations, no new transactions have been boarded since our last review.

Table 1

Table 2

Table 3

Table 4

Management And Organization

The management and organization subrankings for BNY Mellon are ABOVE AVERAGE for primary, master, and special servicing.

Organizational structure, staff, and turnover

The servicing group reports to a Dallas-based group manager, who in turn reports to the New York-based senior group manager of client services. This group consists of three main areas:

• Commercial mortgage loan asset management, which handles all asset management functions and communications with borrowers.
• Operations, which is responsible for the day-to-day money movement, payment posting, lockbox monitoring, and handling of financial and borrower data updates to the loan system.
• Investor reporting, which is responsible for monthly investor payments and reporting, including Commercial Real Estate Finance Council (CREFC) and trustee reporting, special billings, and financial projects.

These areas are further supported by corporate resources in business development, compliance, human resources, and information technology (IT).

Since our last review, the group manager for asset management retired in December 2018. His position was filled by a new group manager who has been with BNY Mellon for 16 years and has over 20 years' experience in the industry. This group manager reports to the senior group manager of client services who is based in New York and previously managed the group.

As of Dec. 31 2019, BNY Mellon had 11 full-time employees dedicated to primary and master servicing. Within the special servicing area, there are four full-time shared staff members who can devote their resources where needed; however, due to the smaller portfolio, management feels there is little need for dedicated staff. In addition, there are five employees providing shared services and other loan administration support to the servicing group. All levels of management have industry experience that is higher than that of similarly ranked peers. Similarly, the company maintains tenure levels above that of similarly ranked peers at all levels.

Overall, BNY Mellon staffing totals have remained near the same number of people for several years. However, turnover increased since our last review within primary servicing, which experienced a 30% turnover as of the trailing 12-month period ending Dec. 31, 2019. There was no turnover within special servicing as of the same period. We believe the primary figures are somewhat inflated due to the low total number of staff members, and we remain comfortable with management experience and current staffing levels at the existing volume.

Table 5

Training

We believe BNY Mellon's training and retention programs are effective, given the size and experience of the servicing staff. Highlights include:

• BNY Mellon's global learning and organizational development group supports personal and professional development through an extensive array of department-directed courses and human resource programs.
• The company utilizes an automated new-hire curriculum for new employees before they begin their first day with the company, so that on day one they can discuss specific training goals and objectives with their manager.
• The company primarily utilizes web-based training, enabling employees to learn at their own pace. The employee must pass an online exam at the end of the training session to obtain credit.
• All training hours are tracked through the My Development system, which is programmed to send "coming due" and "overdue" emails to employees and managers regarding their training classes.
• The training goal is 40 hours per employee per year. During 2018, the primary and master servicing employees averaged 35 hours of training per year, while the special servicing staff completed an average of 43 hours. According to management, the groups met their training goal with averages of 43 and 41 hours, respectively, for year-end 2019.
• In addition to training and career development, employee engagement committees are managed at the Bank level to enhance employees' company involvement. Additionally, annual employee surveys are conducted to evaluate employee satisfaction, as well as areas of improvement.

Systems and technology

BNY Mellon has efficient technology for its servicing needs, considering the size of the current portfolio. With the operation's small size, some systems are still run manually by an experienced staff. Key elements of its systems and applications, business continuity/disaster recovery programs, and cybersecurity environment are discussed below:

Servicing system applications 

We believe BNY Mellon's servicing system applications are efficient for its current scale and provide a good level of process automation. Additionally, the Bank's four IT professionals provide support to the servicing group. Some notable technology features include:

• Precision 2.0, which is the servicing system for the company. The system provides complete functionality for mortgage loan processing and asset management. The rollout of the next version, Precision 5.0, is expected to be completed in the first-quarter 2020.
• TreasuryEdge, which is a platform internally developed by BNY Mellon. It is used for external fund transfers, primarily commercial mortgage, syndicated loan, and agency services. All incoming and outgoing wires are tracked through TreasuryEdge and reconciled by the reconciliation group.
• Nexen, which is a proprietary system used to transfer funds internally between accounts. Account Control System (ACS) contains a tickler system for each portfolio serviced for all compliance, reporting, and/or cash movements required under the specific servicing agreements. Weekly past-due tickler reports are generated and emailed to the appropriate asset manager and group manager.
• CSC Financial Online, which is a nationally recognized web-based application for tracking and filing Uniform Commercial Code financing statements (UCCs). Additionally, BNY Mellon tracks all UCCs on the Bank's internal iLien system as a secondary tickler-tracking program for all expirations and transactions.
• Advanced Imaging System, which is an internet-based proprietary system used to scan and store loan-level documents, trust indentures, pooling and servicing agreements (PSAs), cash management agreements, etc.

Business continuity and disaster recovery 

BNY Mellon maintains a comprehensive business continuity and disaster recovery plan, which it tests annually. Additional highlights include the following:

• The most recent disaster recovery test occurred on August 2019, with no material issues noted.
• Data is backed up nightly and stored offsite at a Tennessee-based data center, with a backup site located in New Jersey. For all servicing functions, the plan calls for business resumption within one day.
• All employees can work from home via remote virtual private network (VPN), and this capability is tested annually.
• The company maintains a local contingency site near the Dallas office that is on a separate power station and can accommodate all full-time employees. The company also has offices in other cities that could accommodate employees in a disaster situation.

Cybersecurity 

Management believes the company maintains comprehensive cybersecurity policies, with the following attributes:

• The Bank has a dedicated group to identify and protect against cybersecurity threats. They maintain a classification policy that ranks information into different levels of confidentiality, and locks down user controls to only those needing access based on their job function.
• Systems have multiple layers of security controls and are monitored for vulnerabilities and risks. The Bank's cybersecurity and risk management programs constantly evolve based on new threats, which are assessed between all separate business units.
• Phishing emails are sent to employees to test cybersecurity awareness at least twice a year; however, according to management, emails are more commonly sent monthly.
• The company maintains insurance coverage for computer crimes, privacy, and internet liability.
• Penetration testing is conducted quarterly by a third-party vendor. For the most recent test as of fourth-quarter 2019, management provided a summary page, but is unable to provide results because it deems them proprietary.

Internal controls

BNY Mellon maintains controls that include well-documented policies and procedures (P&Ps), internal and external audits. The company also benefits from the Bank's institutional resources, including the features described below.

P&Ps 

BNY Mellon has documented P&Ps, which generally cover their servicing functions. Management does not have specific P&Ps for special serviced loans. While management believes the company's other P&Ps cover this area, we believe this is a shortcoming compared with other ranked peers. Features include the following:

• The online P&P manual is detailed and references forms, system data fields, and reports.
• After being sent to the business standards group for review, senior management approves change requests, which are announced via global emails and followed by specific training sessions for the affected departments.
• P&Ps are not currently being dated with the updates, nor do they include approval signatures to reflect changes. Best practice would dictate that updates be dated.

Compliance and quality control 

The Bank has a dedicated control group to provide quality assurance and review that each business line complies with the Bank's policies, laws, and regulations, along with third-party servicing contracts, including PSAs. The group provides a customized and comprehensive testing plan that includes end-to-end assessments of selected high-risk transactional reviews, process reviews, and special testing as requested by senior management. Furthermore, the control group has a reporting structure that is completely independent of the business line.

Internal and external audits 

Internal audits of the servicing operations are conducted every 36 months by the Bank's internal audit department. Timing of these audits, which is longer than what we typically see with peers, is based on internal audit's assessment of risk and the results of the unit's most recent audit, which was completed in September 2018. Since BNY Mellon's servicing division is part of the broader Bank, they are typically subject to more rigorous banking standards than a typical standalone commercial servicer.

The last audit's scope included cash disbursements and receipts, investor reporting, maturities and loan payoffs, confidential information protections, reconciliations, and reporting against PSAs. Servicing operations were rated satisfactory. The satisfactory ranking is the highest rating available, and management indicated no findings. While neither copies of the audit nor an executive summary were provided due to confidentiality, BNY Mellon detailed their processes and logistics for the recent audit.

A nationally recognized third-party firm performs the annual Uniform Single Attestation Program (USAP) testing requirements for the BNY Mellon servicing group. No material exceptions were identified in the 2018 USAP report. The USAP report covering 2019 is not expected until March 2020. BNY Mellon is not currently subject to Regulation AB attestation.

Vendor management 

We believe BNY Mellon's procedures for managing its vendors are sufficient. Asset managers handle engagement of third-party service providers for appraisals, engineering/environmental reports, property management, and brokers as needed. Management maintains and reviews an approved list of qualified vendors based on performance. Standardized agreements are used, and the structured finance senior manager reviews the work product before payment authorization.

Insurance and legal proceedings 

BNY Mellon has represented that its directors and officers, as well as its errors and omissions insurance coverage, are in line with the requirements of its portfolio size. As of the date of this report, the company reported no material servicing-related pending litigation items.

Loan Administration--Primary Servicing

The loan administration subranking is AVERAGE for primary servicing.

BNY Mellon's strategy is to provide mortgage servicing at a low cost, typically in conjunction with other bank business opportunities. BNY Mellon does not purchase mortgage servicing rights. The company's focus remains on commercial real estate while marketing itself as a specialty provider for various asset types, such as franchises, asset-backed securities (ABS), and insurance securitizations. We do note the continued decline of the servicing portfolio's loan counts and UPB.

As of Dec. 31, 2019, the primary servicing portfolio contained 54 loans with a total UPB of $412.3 million, including two CMBS loans portfolio, collateralized by one property that represents $366 million of the total. Given the modest size of the overall portfolio, we do not consider it to be diverse by any measure, including property type (see table 3), geographic location (see table 3), and investor type (see table 4).

The total number of loans serviced has decline steadily over the past several years. Since our last review, we observed a decline in both the number of loans and UPB after various short-term loans were paid off or matured. Delinquencies have remained minimal since 2015 but increased somewhat in 2018, albeit with only three delinquent loans.

Table 6

New loan boarding

BNY Mellon's operations group handles the loan setup and boarding process. Since our last review, no new loans were boarded. Key process steps include the following:

• Personnel enter all loan and reserve account data into the Precision 2.0 servicing system using the loan documents as the source input documents, and ticklers are created in the ACS.
• New loans for large portfolios are set up in the system via a spreadsheet that is uploaded into Precision 2.0.
• The loan data entry is reviewed by an asset manager or other designated administrator to confirm data integrity.
• Trailing loan documents are tracked via Precision 2.0.
• Welcome letters are sent to borrowers within five business days of new loan boarding.

Payment processing

The operations group handles billing statements and payoff calculations, processes cash receipts, and monitors suspense items. Highlights of payment processing include the following:

• Payments are received via various electronic methods, including automated clearing house (24%), wire transfer (47%), and lockbox (29%).
• Check logs are reconciled to the system entries on a daily basis.
• Any checks received at the servicer location are deposited daily and are not kept in a fireproof safe. The group use copies of checks to post payments to the system.
• BNY Mellon has separate personnel responsible for check batching, deposit preparation, and payment posting to the system.
• Approximately 38% of the primary portfolio consists of adjustable-rate mortgages, and the operations group have a controlled audit process to verify rate adjustments.

Investor reporting

BNY Mellon has CMBS industry-standard reporting capabilities, as well as customized third-party reporting. Highlights of payment processing include the following:

• The three primary responsibilities of investor reporting are to report, remit, and reconcile loan-level payment information.
• The reports are prepared according to the PSA or other relevant servicing agreement. Customized reports and remittances are prepared for the trustee as agreed to in the PSA, including following the CREFC standards for reporting.
• The group has separate personnel for reviewing reports and remitting to trustees or investors. Remittance reports must be approved by the asset manager and the group manager (or designee).
• It is generally the master servicer's responsibility to report directly to the trustees.

The company's investor reporting and asset management staff ensure the accuracy and correctness of all information reported to the trustees.

Escrow administration

We believe the company has effective controls for escrow administration. The function is handled by two separate senior analysts and includes the following:

• After loans are boarded to the system, the escrow administrator conducts a quality control review of the tax and insurance data, verifying all pertinent data points. BNY Mellon works with a third-party vendor to verify real estate taxes.
• Only 10.7% of loans are escrowed, for both taxes and insurance, respectively.
• On escrowed loans, a tax administrator runs reports to verify if impound accounts have the necessary funds to pay taxes. If there is a shortage, the appropriate asset manager will reach out to the borrower.
• On non-escrowed loans, if BNY Mellon receives notifications after the delinquency date that taxes are not being paid by the borrower, the asset manager notifies the borrower that the taxes are overdue. If they are not paid in a timely manner, depending on the servicing agreement, taxes may be advanced and/or the loan may be sent to special servicing.
• An insurance analyst reviews insurance expiration reports for the portfolio. Renewal letters are sent 30-45 days before expiration.
• Per BNY Mellon P&Ps, second-, and final-notice letters are sent 10 days after expiration. Phone calls to the borrower and the insurance agent are made before the expiration date.
• Asset management is kept apprised of insurance issues 10 days prior to any insurance expirations by the insurance specialist, and together they work through resolutions.

Asset and portfolio administration

We believe that BNY Mellon has sound procedures covering asset and portfolio administration tasks. Notable features include the following:

• Asset managers are responsible for regularly reviewing property inspections and property financial statements.
• The Precision 2.0 system uses CREFC criteria and electronically sends watchlist triggers for poor performance to the asset manager to discuss with the borrower.
• Deferred-maintenance-item letters are sent to borrowers generally within 10 days of identification and the items are tracked in the system until completion has been verified.
• Asset managers review and handle loan-level covenant compliance issues and are alerted of due dates by the ACS system-driven triggers.
• The company reported that loans assigned credit risk ratings are not regularly reviewed and updated because changes are handled on an ad hoc basis. We have observed that most of our ranked servicers routinely review all loans on the watchlist for changes (positive or negative) in credit standing.
• Asset management reviews maturity reports monthly and sends maturity notification letters to the borrower at six months and three months before maturity, following up with telephone calls as necessary.
• Copies of these letters are sent to special servicing and the trustee, as appropriate. If a loan is not paid off at maturity, depending on the product type, transfer procedures are followed per the relevant documents.
• UCC administration expiration reports are reviewed for all loans annually. UCC continuation statements are sent to the proper filing authority to be recorded, with all information stored in the automated tracking system.
• Recorded UCC information is updated in the vendor system, as well as the iLien system, to reflect the new lapse date and recording number.

Borrower requests

BNY Mellon has processes in place for asset managers to approve borrower consent requests. Features include the following:

• BNY Mellon credit committee approval is required for transactions, including assumptions and transfers for loans, as well as any required approvals specified in the governing documents.
• The BNY Mellon credit committee's voting members include the senior group manager of structured finance and specialty, a credit risk representative (or appointee), and the group manager of commercial mortgage services. Ex officio members include a representative from the internal legal department, a presenting asset manager, and the credit committee secretary.
• The processes for all transactions are documented in the system and reviewed annually.
• During 2019, BNY Mellon reported no borrower consent requests.

Early stage collections

The servicing staff handle the early stage collections. Noteworthy features include the following:

• Asset management works with borrowers to bring delinquent loans current. According to company policy, the asset manager contacts the borrower by telephone to determine the payment status within 15 days after the loan grace period expires.
• If the loan is still in default on the 30th day after the grace period, a written delinquency notification letter is sent to the borrower.
• The asset manager attempts to have the borrower supplement the payment with personal funds or turn over net operating income generated from the collateral property.
• On the 45th day after the grace period expires, the second delinquency notification letter is sent, notifying the borrower that if payment is not made by the 60th day, the loan will be transferred to the special servicer.

We note that while BNY Mellon has policies for addressing delinquent loans, most servicers we rank make contact by telephone and/or in writing with delinquent borrowers immediately or soon after the grace period expires. In discussions with management, they stated that they are generally more proactive in calling delinquent borrowers, but their policies are written with much longer time frames to allow for different investor requirements.

Loan Administration--Master Servicing

The loan administration subranking is AVERAGE for master servicing.

As of Dec. 31, 2019, BNY Mellon was the named master servicer, where it has subservicer oversight responsibility on only two loans aggregating $1.8 million in UPB (see table 7). As of the same date, it also oversaw two subservicers. Despite a low volume of master serviced loans, the company continues to maintain resources, systems, and processes to comply with its master servicing duties. However, the portfolio's low volume and limited growth prospects inhibit BNY Mellon's ability to display its master servicing capabilities consistently and satisfactorily.

Table 7

New loan boarding

All master serviced loans are set up in Precision 2.0, using the same process as primary serviced loans. Master loan payments are "shadow posted" into Precision 2.0 based on reports received from the primary servicer, and all balances are verified. BNY Mellon handles the trust reporting unless otherwise required in the documents. Key servicing duties are abstracted from servicing agreements for online access by BNY Mellon personnel.

Subservicer accounting and reporting

We believe the company has adequate controls for subservicer accounting and reporting activities. The main features include the following:

• Asset management and the group manager (or designee) reviews and approves remittance reports.
• Different personnel handle the remitting than those who handle the Bank reconciliations. There is a secondary review and sign-off of custodial account reconciliations.
• There were no unidentified items in the custodial accounts aged greater than 60 days as of Dec. 31, 2019.
• There were no penalties for late reporting during 2019.

Subservicer oversight

Escrow administration

We believe the company has adequate controls for subservicer oversight of escrow administration. The main features include the following:

• BNY Mellon reviews loan-level exception reports on both tax escrow and insurance coverage from their subservicers on a monthly basis.
• Subservicer tax administration compliance certifications are reviewed annually.
• In-house staff review the insurance policies.

Asset and portfolio administration  

We believe the company has adequate controls for asset and portfolio administration oversight activities. The main features include the following:

• CREFC watchlist reporting is completed on the master servicing portfolio and reviewed monthly.
• UCC exception reports from subservicers are reviewed monthly.
• Property inspection reports are stored online and accessible via the system. All significant deferred maintenance items are tracked in the system until completion.
• Property financial statements are re-spread and analyzed by BNY Mellon staff.
• BNY Mellon has recurring calls with their subservicers to discuss loan/portfolio status.

Audit and compliance 

BNY Mellon has adequate controls regarding overall subservicer compliance at its current portfolio level. Features include the following:

• BNY Mellon has three staff members dedicated to subservicer oversight and compliance.
• Subservicer audits and compliance reviews are detailed in the P&P manual. Portfolio administration personnel generally perform onsite or desktop reviews annually. BNY Mellon conducts annual desk audits for compliance against the PSA using a standard questionnaire.
• During 2019, three separate desk audits were completed, and management indicated they were performed according to industry standards.

Advancing

Management indicated that advances are rare for the master servicing portfolio. Nonetheless, the company formally tracks each loan's cumulative advances compared to the collateral's liquidation value, limiting its maximum advances to 45% of the value. We believe BNY Mellon has adequate tracking in their system and sufficiently detailed P&Ps in place for advances.

Loan Administration--Special Servicing

The loan administration subranking is AVERAGE for special servicing.

As of Dec. 31, 2019, the company was actively managing two special serviced loans for a total of approximately $200,000 (see table 8). BNY Mellon has no active real estate-owned (REO) assets and, as a result, no dedicated staff. Currently, the asset manager who handles the performing loan becomes the special servicing asset manager if any of the loans in their portfolio become delinquent. Due to limited special servicing work, and two experienced special servicing personnel leaving the company in 2018, it is unclear how much workout experience the remaining staff has for complex issues.

Unlike the majority of special servicers, BNY Mellon maintains no specific P&Ps for their specially serviced loans. The company feels the governing documents for each deal defines the special servicing process required for that specific investor. In our view, this is an inherent weakness to the special servicing operations.

Table 8

Loan recovery and foreclosure management

Since our last review, there have been no significant changes regarding loan recovery and foreclosure management, and resolution activity was minimal (see table 9). Business plans, including loan requirements, collateral property status, local market conditions, resolution alternatives, and economic analyses are completed within 60 days of the loan transfer to special servicing.

The company requires borrowers to sign pre-negotiation letters before commencing workout discussions. It also maintains a committee for evaluating resolution plans, which includes representatives from the line of business, senior management, and the corporate credit risk division.

REO management and dispositions,

BNY Mellon has not managed REO assets since the end of 2011 (and as a company has limited REO management experience) and does not maintain REO P&Ps. Given the resources of the Bank, however, we believe it could maintain adequate controls over REO property cash flows on a limited basis should the need arise.

Table 9

REO accounting and reporting

Due to the small size of the specially serviced portfolio and lack of any REO assets, the company has not conducted any recent onsite accounting audits. BNY Mellon maintains approved vendor lists should site inspections be necessary. Furthermore, existing technology applications are acceptable and capable of delivering required investor reports and tracking property-level activity.

Legal department

The special servicing team uses the Bank's legal department in New York to assist as needed, with one attorney dedicated for BNY Mellon's use. Special servicing asset managers work closely with the Bank's legal department in selecting approved attorneys for particular assignments, reviewing and approving engagement contracts, and monitoring and approving monthly invoices.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Select Servicer List, Feb. 6, 2020
• Bank Of New York Mellon Corp., Oct. 4, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
• Servicer Evaluation: Bank Of New York Mellon Corp., Dec. 17, 2018