Rationale

S&P Global Ratings' rankings on Newtek Small Business Finance LLC (NSBF) and Newtek Small Business Lending (NSBL) are AVERAGE as commercial finance business-based primary and special servicers. On May 19, 2021, we affirmed our rankings on each of NSBF and NSBL (please see "Newtek Small Business Finance LLC And Newtek Small Business Lending AVERAGE Business Based Servicer Rankings Affirmed," published May 19, 2021). The outlook on each ranking is stable.

For the purposes of this report, NSBF and NSBL are collectively referred to as Newtek.

Our rankings reflect NSBF and NSBL's:

• Substantial experience servicing loans under the U.S. Small Business Administration (SBA) 7(a) loan program;
• Comprehensive servicing platform and successful track records within their market niches;
• Seasoned and well-tenured senior and middle management;
• Training programs that primarily includes on-the-job-training, along with a relatively low training hour mandate;
• Effective technology to meet servicing requirements, including a continued focus on technology enhancements to further streamline and automate servicing tasks;
• Absence of formal internal audit programs; and
• Proactive management of the resolution of nonperforming loans.

Since our prior review of NSBF and NSBL (see "Servicer Evaluation: Newtek Small Business Finance LLC And Newtek Small Business Lending," published July 11, 2019), the following changes and/or developments have occurred:

• NSBF and NSBL's combined loan portfolio has more than doubled in unpaid principal balance (UPB) and the number of assets increased more than four-fold.
• As a result of the uncertain economic impact to U.S. small businesses created by the COVID-19 pandemic, Newtek temporarily shifted NSBF's focus from originating SBA 7(a) loans to originating Paycheck Protection Program (PPP) loans beginning in March 2020, funding over 10,500 PPP loans for a total UPB of $1.2 billion during 2020.
• In January 2021, Newtek Business Services Corp. (NBSC) closed a $115 million public offering of 5.50% notes due 2026.
• In 2019, an executive vice president (EVP) with over three decades of industry experience was hired to run NSBL's day-to-day operations.
• In 2019, a credit manager with over two decades of industry experience was hired to direct NSBL's credit underwriting activities.
• The senior vice president of credit operations left NSBL in August 2020 with his duties were absorbed by the EVP.
• The senior vice president of risk and operations left NSBL in May 2020, and the position was filled internally through the promotion of an employee with extensive commercial lending and servicing experience.
• In response to growth and activities in its portfolios, Newtek hired a total of 21 employees, including three liquidation officers and three portfolio managers.
• Newtek upgraded its policies and procedures (P&Ps) manual to include specific sections dedicated to portfolio servicing and monitoring, and loan workout and liquidation procedures, as well as providing detailed information for new hires unfamiliar with standard practices.
• Newtek implemented a training and development plan with a focus on keeping employees trained on updated governmental regulations and company P&Ps.

Our rankings consider the same factors for each of NSBF and NSBL because they share the same servicing platform and are only distinguished by their respective portfolio and servicing clients, with NSBF only permitted to service SBA 7(a) loans that it originates. NSBL, which was formed in 2000 and merged into its present ownership in 2016, was established to service third-party loans, including SBA 7(a) and 504 loans. The 7(a)loan program, the SBA's most common loan program, includes financial help for small businesses with special requirements. The uses of proceeds include: the purchase, expansion/renovation, and new construction of real estate; short- and long-term working capital; the refinance of current business debt; and the purchase of furniture, fixtures, and supplies. The 504 loan program provides long-term, fixed rate financing for the purchase of major fixed assets that promote business growth and job creation, and are available through Certified Development Companies (CDCs), SBA's community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.

NSBF has demonstrated continuous portfolio growth since its parent company converted to a business development company in 2014, servicing over 12,000 loans aggregating approximately $2.8 billion in UPB as of Dec. 31, 2020. At the same time, for each of the years ending Dec. 31, 2016, through Dec. 31, 2018, NSBL experienced a decline in its portfolio. In 2019, management implemented a strategic initiative to grow NSBL's portfolio of third-party business. As a result, NSBL has experienced relatively recent growth in its portfolio to reach approximately 1,300 loans aggregating $474 million UPB at Dec. 31, 2020, up from 688 loans aggregating $160 million UPB as of our prior review.

Outlook

The outlook for each ranking is stable. Newtek, like most servicers, has been challenged by increased workloads associated with relief requests from borrowers facing economic difficulties due to the COVID-19 pandemic, particularly following a prior benign default environment. This includes NSBF's involvement as an authorized lender in the PPP, in which it funded over 10,500 loans totaling $1.2 billion UPB. Newtek has responded to the challenges by implementing the technology needed for its employees to work remotely and leveraging resources to handle relief requests. As a result, we believe that Newtek will remain a highly effective servicer based on its long history of small business lending and small business loan servicing experience. Newtek has enhanced its controls since our prior review as demonstrated by its upgraded P&Ps; however, we believe that other factors--such as lacking an internal audit program and a limited formal training program--are not in line with those of higher-ranked servicers.

In addition to conducting a virtual meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data until Dec. 31, 2020, as well as other supporting documentation provided by the company.

Profile

NBSC, founded in 1998 and publicly traded since 2000 (NASDAQ: NEWT), operates as a business development company (BDC), which is an unregistered closed-end investment company that invests in small and mid-sized businesses. NBSC, along with its subsidiaries and portfolio of companies, provides business and financial solutions to small and medium-sized businesses. NSBF is a wholly owned subsidiary of NBSC whereas NSBL is a wholly owned portfolio company of NBSC. Newtek is headquartered in Lake Success, N.Y., approximately 20 miles east of Manhattan, where it maintains servicing and lending operations. Additional lending operations are located in Boca Raton, Fla., and Orlando, Fla. NBSC provides financial products and services, including business lending (primarily SBA 7(a) loans), accounts receivable financing, electronic payment processing, cloud computing, e-commerce, inventory financing, health care receivable financing, web services, data backup, storage and retrieval, payroll services, insurance services, and other proprietary offerings. The company obtains customers through its own direct sales force, from advertising campaigns, and through referrals from various external business partners (e.g., banks, insurance companies, credit unions, and other affinity groups, along with other industry professionals) via its proprietary NewTracker® referral platform.

NBSC's business finance platform also includes Newtek Business Credit Solutions (NBC) and Newtek Business Lending (NBL), as well as Newtek Conventional Lending (NCL), a joint venture with a specialty finance company. NBC provides receivables financing, inventory financing and health care receivable financing, and management services to small and medium -sized businesses. NBL funds SBA 504 loans that provide financing of fixed assets such as real estate or equipment. NCL provides non-conforming conventional commercial and industrial term loans up to $15 million to U.S. middle-market companies and small businesses.

NSBF is one of 14 non-bank SBA-licensed small-business lending companies and has received Preferred Lenders Program status with the SBA, allowing the company to place SBA guarantees on loans it originates without seeking prior SBA review and approval. According to management, the company has consistently been the largest non-bank lender and as of Dec. 31, 2020, and is the third-largest SBA 7(a) lender in the U.S. based on dollar volume. NSBF is only permitted to service SBA 7(a) loans that they originate.

NSBF's business lending primarily consists of partially guaranteed loans it originates under the guidelines of the SBA 7(a) lending program. This is the SBA's primary loan program that provides a guarantee of between 75% and 90% of the principal and interest for loans ranging from $50,000 to $5 million. Losses incurred for the unguaranteed portion of each loan are typically shared pari passu between the SBA and NSBF. NSBF typically sells the guaranteed portion for each SBA 7(a) loan shortly after origination, and it usually securitizes the unguaranteed portions as part of its internal capital markets platform. NSBF retains the servicing for both unguaranteed and guaranteed loans.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allowed NSBF, as an SBA 7(a) lender, to originate loans under the PPP as an expansion of the existing SBA Section 7(a) loan program. Under the PPP, participating lenders were automatically approved to extend 100% of the federally guaranteed loans to certain small businesses for amounts up to 2.5 times of those businesses' average monthly payroll expenses (capped at $10 million). Beginning in March 2020, the company's executive committee and lending team temporarily shifted NSBF's focus to originating PPP loans from originating SBA 7(a) loans. On June 29, 2020, NSBF restarted its SBA 7(a) loan program and began accepting SBA 7(a) loan applications. During the duration of the PPP, NSBF funded over 10,500 loans totaling $1.2 billion during 2020. NSBF partnered with several banks to sell them up to 100% participations in the PPP loans it originated.

NSBL, which was formed in 2000, provides third-party loan servicing for SBA and non-SBA loans and provides lending institutions with outsourced solutions for the entire SBA lending process, including credit analysis, structuring and eligibility, packaging, closing compliance, and servicing. NSBL provides originations, closing, and loan servicing services to NBL and is the servicer for NCL. It services portfolios of loans originated by the U.S. Department of Agriculture and SBA 7(a) loans acquired by the Federal Deposit Insurance Corp. (FDIC) from failed financial institutions.

As of Dec. 31, 2020, the aggregate Newtek primary servicing portfolio comprised more than $3.3 billion in UPB, an increase of 102% from the $1.6 billion UPB as of Dec. 31, 2018, at the time of our previous review (see table 1). During this two-year period, the NSBF portfolio increased 92% by UPB and more than five-fold by the number of loans, while the average loan size decreased to $223,000 from $753,000, due to the volume of PPP loans boarded. The NSBL portfolio grew 196% during the same period, reversing a multi-year decline, due to the strategic initiative to grow its portfolio of third-party business. We anticipate the size of NSBL's portfolio to continue to vary based on market opportunities balanced with the level of troubled SBA loans. As of Dec. 31, 2020, the aggregate Newtek special servicing portfolio comprised $95.5 million in UPB and 444 in the number of assets, decreases of 9.7% from $105.8 million in UPB and 14.3% from 518 in the number of assets as of Dec. 31, 2018, at the time of our previous review (see table 1).

Table 1

Management And Organization

The management and organization subrankings are AVERAGE for each of NSBF and NSBL.

Organizational structure, staff, and turnover

NSBF is led by its president with 34 years of industry experience and 16 years of company tenure. His six direct reports include the senior vice president/director of portfolio servicing; project manager; managing director of capital markets; senior vice president of training and business operations; vice president of loan servicing operations; and vice president of finance and controller.

The portfolio servicing area encompasses client services/special project management, special servicing/liquidations, servicing, vendor management, loan operations, and credit/servicing actions. It is led by the senior vice president/director of portfolio servicing with 34 years of industry experience and 14 years of company tenure. Two servicing managers ensure procedures are followed and servicing activities are delivered as contracted. Reporting directly to these servicing managers are 10 portfolio officers that serve as the primary contact for borrowers.

The liquidation/special servicing manager reviews asset manager recommendations of liquidation/litigation actions to ensure compliance with SBA program rules and regulations, and Lender Service Provider procedures. Eight asset managers/liquidation officers act as liaisons between the lender and the SBA to ensure proper liquidation actions are taken in order to ensure agency compliance, work with struggling borrowers who are responsive to try and keep them in business as recommended by SBA, and engage counsel in liquidation and foreclosure actions when borrowers are unresponsive.

Loan servicing operations encompasses loan boarding, payment processing, accounting, and reporting. It is led by a vice president with 22 years of industry experience and nine years of company tenure. Seven direct reports are responsible for the various areas of loan administration.

NSBL is led by an executive vice president with 36 years of industry experience and one year of company tenure. Directly reporting to the executive vice president are a credit manager with over 20 years of industry experience and two years of company tenure, and a director of credit underwriting with over 11 years of industry experience and three years of company tenure.

Senior managers, middle managers, and asset managers have lengthy industry experience and company tenure levels of over 10 years on average. NSBF and NSBL combined reported relatively low turnover levels of approximately 10% during 2020 and approximately 8% during 2019 (see table 2).

Table 2

Training

Newtek continues to invest resources in training to impart best practice standards in SBA program lending. The senior vice president of training and business operations, who has over 30 years of experience in SBA lending, develops training programs for the lending and servicing staff, in addition to having an active role in developing P&Ps.

Newtek targets a minimum of 10 annual training hours per employee, which is much lower than most servicers we rank. Employees averaged 16 hours of training in 2020 and 24 hours of training in 2019. Training consists mainly of on-the-job training and mentoring, which management stated is common for its servicer type. It also indicated that training is offered by the SBA and numerous other entities that focus on compliance and operations.

Newtek provides a peer-led training period of approximately 90 days for new employees to learn all aspects of their position. As new directives are released from regulatory agencies, mainly the SBA, additional meetings and training sessions are held to keep staff current on P&Ps and SBA standard operating procedures (SOPs).

NBSC human resources (HR) utilizes the iSolved automated software system to record attendance and training class test scores. HR can also generate management reports on an individual basis as needed through this software.

Systems and technology

We believe Newtek has effective technology to meet its servicing requirements. The company continues to focus on technology enhancements to further streamline and automate servicing tasks across various loan administrative functions. Newtek has well-designed data backup routines and disaster recovery preparedness. NSBF and NSBL use the same systems and share five dedicated information technology (IT) employees, whose department head reports to NSBF's president.

Servicing systems and applications 

Newtek uses various systems to service its portfolios, including the following:

• SBA Loan Manager (Loan Manager) is a third-party platform licensed by PCFS Solutions, the primary system used for servicing, monitoring, accounting, reporting, and remitting payments. The system is used to create tickler files for tax, insurance, and financial statement collection, and to track collateral backing the loans. Loan Manager also tracks servicing fees authorized by the SBA. PCFS Solutions provides the remote host environment.
• NewTracker® is a cloud-based, centralized software platform used by Newtek, affiliated companies, and referral partners. The system is used to refer new customers and to manage consumer and marketing data. Newtek uses the system to conduct early screenings to determine if loans are eligible under the SBA guidelines. The system provides pre-qualifications based on preset credit parameters that meet NSBF and SBA standards, populates forms and applications, assembles necessary documents, processes applications and inquiries, and boards customer data. It also creates reports for management and strategic referral partners, provides referral partners with access to process flows, and processes payments.
• Loan Portal is used by the Newtek closing department to house loan files together, and provides consistency and storage in a cloud-based application. The Loan Portal includes the SBA 10-tab files and is also accessible by customers to review their loan documents.
• Sage 500 ERP is a corporate accounting system that receives a direct feed from Loan Manager.
• NSBF Application collects data from loan applicants and produces documents for submission to the SBA for the loans they originate.
• iSolved is used by HR to record attendance and test scores, and generate individual performance reports.
• The Web Extender document imaging system is used if files are not received electronically. All files are retained electronically and are also physically stored in a locked, fireproof file room. Key NSBF loan documents are transferred to a trustee for safekeeping.

Business continuity and disaster recovery 

NBSC's business continuity plans and disaster recovery strategies incorporate multiple redundancies that are designed to allow the company to instantaneously recover all essential and critical elements, systems, and networks to perform key business activities within one business day.

The business continuity plan was implemented in March 2020 due to the COVID-19 pandemic. Management noted no disruptions in business operations with all employees effectively working from home. Management has further indicated that NBSC's real estate footprint shrunk in 2020, and will continue to shrink in 2021 and beyond, as a result of the positive effects of employees working remotely. NBSC has closed or will be closing several physical locations in the near term and has leased additional space in the Lake Success, N.Y., location.

Recovery tests are conducted semiannually; the last test occurred in December 2020. Management indicated that there were no material problems identified. The chief technology officer and chief information officer present the recovery plan to the board of directors. The plan is detailed and includes contact information of key personnel and vendors, approval and revision history, and specific test steps with descriptions and diagrams.

The NTS data center is located in Scottsdale, Ariz., with Phoenix as the backup location for off-site storage. The backup location is less than 25 miles from the main data center and on the same power grid but is located on a separate power sub-station. All data centers are certified as Tier III-compliant.

Cybersecurity 

Newtek maintains generally favorable cybersecurity practices, although it does not perform the routine internal or external network penetration tests of its systems that most servicers perform. Highlights include the following:

• The company represents having a written cybersecurity plan.
• The company sends monthly phishing emails to employees to test awareness.
• The company has a stand-alone cybersecurity insurance policy and reports having the ability to engage specialized legal counsel for cybersecurity issues as necessary.

In addition, management performs the following systems and security tests:

• Newtek Technology Solutions (NTS) performs a periodic test of systems access and security, primarily addressing system password procedures, vendor access, developer controls, and physical access to servicing facilities. Management represented that the June 29, 2020, test results were positive but did not provide the results.
• NTS has installed firewalls, intrusion detection systems (IDS), intrusion protection systems (IPS), and antivirus software on its internal and client networks to help protect them from intrusion, malicious attacks, and hacking attempts. Firewall, IDS, and IPS logs are generated daily and monitored by authorized personnel.

Internal controls

Newtek maintains internal controls, which include its P&Ps along with external audits by third parties, including the SBA.

P&Ps 

Newtek maintains a P&Ps manual that includes all aspects of its lending business including portfolio servicing and monitoring, and loan workout and liquidation procedures. The manual indicates that NSBF will be in compliance with SBA regulations governing post-closing procedures and references specific SBA standard operating procedures. Since our prior review, the P&Ps manual was upgraded to include specific sections dedicated to portfolio servicing and monitoring, and loan workout and liquidation procedures, as well as providing detailed information for new hires unfamiliar with standard practices.

P&P controls include the following:

• The manual is updated periodically by the respective unit supervisors under the direction of senior management, legal counsel, and compliance officers. It was last reviewed and updated in January 2020. The SBA standard operating procedures continue to be added to the manual, though they lack task-specific details.
• The P&Ps are also subject to the Risk Management Committee's (RMC's) approval. The RMC includes the president, various business heads, and the controller. Quality controls and reports were added for efficient loan processing in areas such as pre-closing, loan boarding, tax tracking, and post-closing processes.
• Management indicated that employees are trained when there are changes to P&Ps, and they can access the manual on the shared drive.

Internal and external audits 

Although Newtek does not have an independent internal audit group, the chief risk officer performs random tests of transactions and processes, and they report both entities' findings to the board of directors. Other controls include the following:

• The 2020 Uniform Single Attestation Program audit concluded that NSBF complied with minimum servicing standards and no exceptions were cited. NSBL was not included in this audit.
• NTS undergoes a Service Organization Control Report (SOC 1, Type 2) by a third-party accounting firm, which covers IT general controls (excluding controls of the servers and networking system), customer services, and support systems. NTS is responsible for the systems and technology the company and other affiliated entities use. The technology-based process controls and IT general controls for the customer service and support function performed by NTS on behalf of Newtek were included in the scope of this review. The report for the period Oct. 1, 2019, through Sept. 30, 2020, noted no exceptions.
• NBSC undergoes an annual Sarbanes-Oxley (SOX) audit to assess internal control over financial reporting.
• The SBA audits NSBF's operations on a periodic basis. According to Newtek management, these reviews concentrate mainly on underwriting activities. The most recent audit was performed virtually in May 2020 and received in January 2021. Management has indicated that there nothing worth noting with respect to the audit.

Vendor management

Newtek handles the management and oversight of vendors in a controlled and effective manner. The company has a formal performance review process for all vendors, and maintains approved appraiser and environmental firm lists, which are updated annually. Newtek follows a vendor vetting and management process that includes the following:

• Upon receipt of a vendor recommendation, Newtek requests vetting documentation that includes a background investigation questionnaire, confidentiality agreement, copies of certifications, and proof of insurance.
• Upon return of the vetting documentation, a database check is run through the federal government owned and operated System for Award Management (SAM) database to verify company information.
• Each vendor is notified of its status and, if cleared, the vendor is added to the approved vendor list. Notification is then sent to accounting as well as departments in which the vendor will be utilized.
• Vendors, including insurers, appraisers, environmental firms, attorneys, and site inspectors are reviewed periodically to determine if they should remain eligible for use. The vendor management team reports up through the director of portfolio servicing.
• Certifications and proof of insurance is updated annually.

Insurance and legal proceedings

Newtek has represented that its directors and officers, as well as its errors and omissions insurance coverage, is in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing-related litigation issues.

Loan Administration--Primary Servicing

The loan administration subranking for commercial finance business-based primary servicing is ABOVE AVERAGE for each of NSBF and NSBL.

Newtek manually boards loans because of their complexity, though most functions thereafter are automated, including payment processing and investor reporting. Vendors are used efficiently for managing tax, insurance, and Uniform Commercial Code (UCC) filings. The servicer has a robust portfolio monitoring process, including extensive involvement of the RMC.

The year-end 2020 delinquency rates of over 90 days past due in the NSBF and NSBL portfolios remained at a low point since 2016 and, despite the COVID-19 pandemic, have improved since our prior review. Delinquencies in the NSBL portfolio (10.8% of UPB over 90 days past due as of Dec. 31, 2020) are greater than NSBF (1.53% of UPB over 90 days past due as of Dec. 31, 2020). This difference is primarily due to the nature of the third-party engagements included in the NSBL portfolio, as well as the number of PPP loans in the NSBF portfolio, for which payments are deferred. Management has indicated that NSBL's portfolio makeup contributes to higher delinquencies and that realized SBA guarantee fees are expected (see table 3).

As of Dec. 31, 2020, Newtek's combined servicing portfolio contained over 14,000 loans with a total UPB of over $3.3 billion. The portfolio contained loans across 50 states throughout the U.S., with the largest concentrations in New York, Florida, and California (see table 4). Industry types in the portfolio are somewhat diverse and are categorized by the North American Industry Classification System (see table 5). According to management, the primary collateral types by loan count include commercial real estate, residential real estate, and machinery and equipment.

Table 3

Table 4

Table 5

Newtek's new loan setup process is sound. Most processes (after the manual loan boarding) are highly automated. Features of the new loan setup are as follows:

• The loan accounting department and loan closing group enter preliminary closing data into Loan Manager manually. Management believes manual boarding allows for greater accuracy of loan-level details because of the unique nature of the loans.
• Data is manually boarded for loans into Loan Manager by the loan accounting department. The department completes this process within three business days of loan closing (or receipt of loan tape/documents), and this system directly interfaces into the Sage 500 ERP general ledger system.
• Data entry is verified between Loan Manager and the original loan documentation by a separate individual who did not board the loan manually to facilitate accuracy.
• Borrower welcome letters are automatically generated through the servicing system. The letters are sent within three business days of new loan posting after being reviewed by a servicing officer.
• Management formally tracks loan boarding timeliness metrics but does not track loan boarding accuracy.
• The loan accounting department has primary authority to modify, delete, or upload additional loan records created in Loan Manager after initial data input.
• Various tickler dates are established in Loan Manager and standard reports are available throughout the loan's life to track receipt of closing documents, financial statements, insurance expiration, tax due dates, and other critical information, such as reconciling guarantee fee amounts with the SBA.
• All loan documentation is stored electronically in File Vault. The original documents are also stored in a file room, and the director of portfolio management's (PM) signature is required for document withdrawals.

Payment processing

The loan accounting department is responsible for generating all monthly borrower invoices, processing borrower receipts, and making guarantee fee payments to the SBA, in addition to performing manual monthly custodial account bank reconciliations, which is typically automated by other ranked servicers. Other highlights include the following:

• The majority of borrower payments are received via wire transfer or electronic funds transfer and are posted manually to Loan Manager, which is then automatically fed to the Sage 500 ERP general ledger.
• Any payments received by check at the Newtek offices are scanned the same day via Check 21, which allows for daily direct deposits electronically. USA e-Pay is another option that allows the company to draw payments directly from a borrower's bank account or credit card on an assigned day each month.
• Separate individuals are responsible for depositing, processing, and reconciling payments.

Investor reporting

Newtek has controls in place and a highly automated environment for investor accounting and reporting. The Loan Manager system provides electronic submission of all investor remitting and reporting, including the generation of various SBA forms, such as SBA Form 1502 (i.e., guaranty loan status and lender remittance form) and SBA Form 172 (i.e., transaction report on loans serviced by lender form). All remittances and related reports are reviewed and approved by the departmental manager before release. All account reconciliations are handled monthly. As of Dec. 31, 2020, management reported no unidentified and unresolved items in its custodial accounts that existed for more than 60 days, and it had not incurred any penalties for late remitting.

Forms 1502 and 172 are electronically submitted via email to the fiscal transfer agent (FTA) monthly, where it is electronically fed into the SBA database. The FTA is responsible for administering pools of securitized or sold loans, including:

• Facilitating loan settlement;
• Recording registered holders/investors of a loan;
• Tracking loan payment histories;
• Collecting payments from lenders on sold loans;
• Remitting payments to investors;
• Forwarding all servicing requests from a lender to the investor and then forwarding the response back to the lender;
• Notifying the SBA of delinquent loans; and
• Handling SBA and lender repurchases from the investor.

Escrow administration

Newtek effectively manages third-party vendors that are contracted to assist with managing real estate taxes and property insurance. It does not escrow for taxes or insurance on any of its loans. Notable features include the following:

• Tax due dates and payments are tracked in Loan Manager. Management is notified by local districts of any property tax delinquencies; specially serviced loans may make advances before foreclosure or tax certificate sale. Newtek also contracts with a national real estate tax information provider to monitor all accounts, which generates payment reminder notices when accounts are 30, 45, and 55 days delinquent.
• The SBA requires borrowers to provide proof of life, flood, and/or hazard insurance before loan closing. Policy expiration dates and coverage limit data are stored in Loan Manager. A third-party insurance vendor tracks coverage requirements, carrier rating compliance, and policy expiration dates. Unlike most servicers, however, insurance carrier ratings are not monitored after the loan closes.
• The vendor is responsible for determining life-of-loan flood certifications at new loan setup; checking flood coverage and map changes annually; sending a series of reminder letters (on the expiration date and also 30, 45, and 60 days prior to expiration) for the required coverage updates to ensure all insurance coverage is adequate and current; and alerting management when Federal Emergency Management Agency declarations affect zip codes containing portfolio collateral in the case of disasters. Management stated that they receive reports from the vendor to track insurance certifications.
• The servicer's force-placed policy provides insurance in instances of coverage lapses and has a 90-day look-back period. As of Dec. 31, 2020, 189 loans in the Newtek portfolio were subject to force-placed coverage.

Asset and portfolio management: Collateral and credit monitoring

Newtek has P&Ps to handle collateral and credit monitoring of its loans. Management reported the following as of Dec.31, 2020:

• There were 27 servicing staff (20 NBSF and seven NBSL) dedicated to portfolio monitoring.
• Loan-level covenant compliance requirements are centrally tracked.
• The watchlist contains 419 loans, including 412 from NSBF (3.2% of its portfolio by number of loans) and seven from NSBL (0.5% of its portfolio by number of loans).
• There were 419 properties, including 417 from NSBF and two from NSBL, requiring site inspection during the last six months of 2020, and all inspection reports were received within 30 days of Newtek's request. The majority of inspections are performed by third-party vendors, and management indicated inspection scopes have been modified based on government restrictions due to the pandemic.
• Account monitoring activity is principally driven by risk ratings assigned by servicing staff members to all loans in the portfolio.
• Portfolio administrative assistants prepare UCC continuation statements and arrange for UCC continuation filing through an authorized third-party vendor that records, updates, and searches by county. Loan Manager maintains continuation dates and tracks other pertinent data. No lapsed UCC filings were reported as of Dec. 31, 2020.

The risk ratings are represented on a scale of one (best) to eight (worst), similar to the Federal Financial Institution Examinations Council's Uniform Classification System, which in turn may dictate a loan's inclusion on a watchlist. Initial risk ratings are assigned by the underwriters when loans are underwritten. Asset managers then review all material received from the underwriting department to determine if risk-rating adjustments are warranted after origination. The portfolio is continuously monitored during the life of the loan, and risk ratings are refreshed based on market conditions, collateral type, payment history, loan-to-value ratios, and portfolio trends, among other factors. Any changes in risk ratings require the approval of the director of portfolio servicing and are subsequently ratified by the RMC.

PM personnel proactively send out requests for updated financial information to all customers, such as financial statements for businesses and/or their guarantors and personal tax returns for individuals. All information provided on business income tax returns are verified with IRS filings. The servicing system contains a tickler function that automatically sends out the annual request for updated financial information with a subsequent request after 60 days if needed. Follow-up phone calls are also placed periodically when financial information is not received.

Although management indicated that it requests financial information for all performing borrowers, it also reported that only approximately 40-45% of the requested financial information is typically received. It was further indicated that non-compliance was not an event of default under the loan documents. When received, the financial information is reviewed and compared to prior-year results. Management enhances monitoring and increases communication with borrowers that have significant deterioration in financial information.

Financial statements are required to be reviewed prior to processing any credit requests, such as collateral or payment deferments or reductions. All modifications require managerial approval. Loan Manager is updated to reflect approved modifications and reported to the SBA via the monthly Form 1502 report. Management does not continue to request financial statements from nonperforming borrowers when it is focused on collateral liquidation, in most circumstances.

Site visits are performed semiannually for loans with imminent default issues. Asset managers attempt to negotiate remediation plans with borrowers when deferred maintenance is noted in site inspection reports. Loan Manager has a tickler alert for when site visits are required and tracks the status of these requests. Once inspections are received, all reports are stored electronically in Loan Manager and in the file room.

Borrower requests

Newtek addresses borrower requests in a proactive and well-controlled manner. Highlights include the following:

• NSBF and NSBL have separate customer service staff that are the main point of contact for the borrower to process borrower requests. All requests are centrally tracked by asset management in the servicing system.
• Customer service reps conduct outbound calls to each borrower every 90 days to identify opportunities and issues. The outbound calls address how the business is doing as well as any existing borrower needs and related servicing actions.
• Requests are referred to the asset management area, which conducts due diligence by underwriting and analyzing the request and making a recommendation to a portfolio manager for approval.
• During 2020, the company indicated it received over 30,000 inquiries from existing and potential borrowers facing economic difficulties due to the COVID-19 pandemic. It further reported that over 10,500 borrowers obtained loan approval or closed and funded loans through the first two rounds of the PPP. Additionally, 130 deferment requests were received of which 116 were approved.
• Other borrower requests received during 2020 included 71 collateral releases or substitutions, 52 subordinations, one assumption, one easement, one life insurance swap, and one guarantor substitution.

Early-stage collections

Initial loan delinquency management is acceptably proactive. Borrowers are contacted the day after the grace period ends (loans typically are due on the first day of the month, with a 10-day grace period), and late notices are issued within two days after the grace period expires.

• Newtek makes subsequent borrower calls during the first 30 days and issues written collection notices when accounts are delinquent. All notices are generated through Loan Manager, which tracks collection comment histories.
• The liquidation department takes charge of the account once a loan is 30 days past due. Liquidation officers arrange for on-site inspections from an approved outside vendor for all loans that are at least 45 days past due, and after 15 days for a technical default.
• In situations where credit deterioration accelerates, a formal transfer request is completed to move management of the account to the asset management group for special servicing.

Loan Administration--Special Servicing

The loan administration subranking for commercial finance business-based special servicing is ABOVE AVERAGE for both NSBF and NSBL.

There were 105 NSBF loans in special servicing totaling $36.5 million of unguaranteed UPB outstanding as of Dec. 31, 2020 (see table 6). As of the same date, NSBL had 339 loans in special servicing totaling $59.0 million of unguaranteed UPB outstanding. NSBF's asset management department comprises eight dedicated asset managers who handle the resolution of nonperforming loans; one of which is also dedicated to any real estate-owned (REO) loans (due to historically low REO volume). The staff is experienced, with industry veterans that have a track record during periods characterized by high loan defaults. Dispositions are managed in a proactive manner, the RMC is actively involved, and overall practices are sound. Given existing staffing, the asset to asset manager ratio is approximately 13. Conversely, the five-member NSBL team has an asset to asset manager ratio of approximately 67. This higher asset to asset manager ratio is mitigated by the fact that NSBL works jointly with its clients and clients' counsel, which handle a substantial portion of the processes. In the event that NSBL should manage loans for clients that want their specially serviced loans completely handled by NSBL, we believe the group has the resources, processes, and capabilities to handle that full-service work.

NSBF has the authority to service, modify, and liquidate the SBA 7(a) loans in its portfolio as long as its actions are consistent with the operating procedures and performance standards set by the SBA, subject to notice to and, in certain cases, approval by the SBA and/or investors.

We believe the transfer of problem loans from the servicing department to the asset management area within special servicing is adequately controlled. When a loan is transferred to asset management, the department director assigns it to a portfolio manager who modifies the loan status in Loan Manager. The departmental administrator assists by preparing liquidation files, running new credit reports on each borrower and any guarantor, and performing a UCC lien search.

Table 6

Key initial information for each borrower liquidation file includes:

• Loan balance, including interest;
• SBA guarantee percentage;
• Performance classification;
• Current internal risk rating;
• Proposed changes;
• Reason for transfer to special servicing; and
• Details on collateral securing the loan.

All transfers in or out of the asset management area within special servicing are presented to the RMC monthly for approval. The RMC is composed of seven members of senior management. The director of asset management provides committee members with a report detailing all assets identified as being recommended for a change in status. The proposals can include requests to either change from accrual to nonaccrual status and/or an accompanying change in risk classification level. The recommendations are accompanied by written documentation explaining the reasons for the request. RMC members discuss each case and determine the appropriate action.

Loan recovery and foreclosure management

Newtek loan recovery protocols emphasize default management and asset recovery. As noted earlier, NSBF has the authority to modify and liquidate loans consistent with the operating procedures and performance standards set by the SBA.

Some notable features include the following:

• An approved vendor list is utilized for appraisals, environmental site assessments, and site inspections.
• Outside attorneys are engaged to perform a review of loan documents.
• Insurance coverage is assured to be in force.
• Collateral evaluations are performed for loans in which workouts are in progress.
• Current Phase I and/or Phase II environmental site assessments, appraisals, lien searches, and tax searches are obtained before liquidating collateral.

NSBF tracks borrower-specific detail, including loan balance, collateral, and loss exposure for all nonaccrual and nonperforming loans in its portfolio. However, these details for loans handled by NSBL are not tracked, as NSBL is not contracted to do complete workouts for existing third-party loans. The third-party clients have ownership of the assets and handle the resolution in conjunction with NSBL. The SBA is notified monthly by the director of portfolio servicing for all loans being moved to performing from nonaccrual or liquidation status and vice versa.

Asset managers prepare general recovery plans within 30 days of transfer to special servicing, including cost estimates for resolution. When the loan and/or collateral is specialized or complex, an asset manager produces a more detailed criticized asset resolution plan. The portfolio manager and director of asset management are required to approve all plans, which are provided to the SBA for all SBA-guaranteed loans once the loans are 120 days or more delinquent. The RMC approves all plans for loans greater than or equal to $1 million.

The workout plans include:

• The reason(s) for transfer;
• The cause(s) of the business breakdown;
• Details of the guarantor(s);
• Name of legal counsel, if applicable;
• Budget for legal services expected to be rendered;
• General recovery plan; and
• An estimate for the time for resolution.

The liquidations department determines if a loan modification is warranted. The most common modifications include forbearance, reinstatement of maturity date for loans that had been previously accelerated, deferment, changing repayment term, assumptions, subordination, and voluntary sale of collateral by the borrower. Some modifications such as payment deferrals and assumptions may be subject to additional legal review and senior management approval.

NSBF internally determines its workout strategy and then may establish a repayment plan or negotiate a loan modification in communications with the borrower. This may include an updated appraisal of pledged collateral and the collection of current business and personal financial information. When possible, NSBF attempts to have the collateral for all nonperforming loans revalued by an approved appraiser. The PM reviews the resulting report. A pre-negotiation agreement with the borrower, which we note is a best practice among special servicers, is not required.

Modified loans remain in nonaccrual status for a period of time even if they are no longer considered delinquent. Typically loans that are 90 or more days past due and/or transferred to nonaccrual status will be classified substandard or worse, depending on collateral and other variables. These loans are included in a monthly report that is also provided to the RMC. The director of portfolio servicing must approve loans returned to accrual or non-liquidation status and notify the SBA monthly.

Loans are automatically placed in liquidation for borrower bankruptcy, abandoned collateral, legal action by senior lien holder, or if a receiver is appointed. Loans may also be placed in liquidation if nonpayment continues and is not expected to be cured, if adverse changes occur, or if other reasonable corrective measures are not successful. At times, NSBF may acquire title to the property on behalf of the SBA or for NSBF (with the approval of the SBA), though this is not the preferred liquidation option. Loans are charged off when the loan is considered uncollectible and has little value. The RMC reviews and approves liquidation plans quarterly.

When NSBF determines all means of collection have been exhausted, the director of AM prepares a wrap-up report for the SBA, highlighting any recoveries, expenses incurred during the process, and details on the collateral and its disposition. The process concludes with NSBF's recommendation to close the file, and a demand is submitted for the SBA to repurchase its guaranteed portion. The SBA is provided with copies of all loan origination documents, the related UCC, lien searches, financial information, litigation and legal pleadings (if applicable), appraisals, and liquidation plans.

Under the NSBL liquidation process, NSBL works with the clients' legal counsel and title is acquired in the name of the client as NSBL is not permitted to take title to the asset.

Legal department

NSBF has an experienced attorney as senior counsel for NSBF-originated loans to handle any legal issues. The senior counsel is supported by multiple closers, paralegals, and analysts who are fully integrated in both the day-to-day underwriting and origination of loans. They also support the servicing operations, including engaging outside counsel. The legal department assists with executing standard form engagement contracts and hiring legal counsel prior to liquidations.

When necessary to protect its interests, NSBF engages legal counsel from an approved list of firms. After reviewing loan documentation, attorneys are required to complete a litigation plan, including estimated costs to pursue certain alternatives. PMs are responsible for monitoring legal expenses incurred on their cases and reviewing legal bills before payment.

The liquidation officers work with external lawyers identified by their clients' legal counsel, rather than NSBF counsel, for all NSBL loans.

Financial Position

The financial position for Newtek is SUFFICIENT.

Related Research

• Select Servicer List, June 3, 2021
• Newtek Small Business Finance LLC And Newtek Small Business Lending AVERAGE Business Based Servicer Rankings Affirmed, May 19, 2021
• Servicer Evaluation Spotlight Report: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Servicer Evaluation: Newtek Small Business Finance LLC And Newtek Small Business Lending, July 11, 2019
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019