Rationale

S&P Global Ratings' rankings on Community Loan Servicing LLC (CLS) are STRONG as a small-balance commercial mortgage primary and special servicer and AVERAGE as a commercial mortgage special servicer. On July 9, 2021, we affirmed our special servicer rankings (please see "Community Loan Servicing LLC Rankings As Commercial Mortgage Servicer Affirmed," published July 9, 2021. The outlook on each ranking is stable.

Our rankings reflect CLS':

• Well-seasoned and tenured senior management team;
• Strong compliance management system with multiple lines of monitoring and testing to identify risk;
• Lack of material internal and external audit issues;
• Effective technology and continued technology investments to strengthen controls and improve efficiencies;
• Ability to leverage the scale of its residential platform to manage certain small-balance commercial loan administration processes;
• Demonstrated track record of resolving small-balance commercial loans; and
• Limited track record for asset resolution and disposition of complex commercial loans and/or real estate.

Since our prior review (see "Servicer Evaluation: Bayview Loan Servicing LLC--Commercial," published June 10, 2019), the following changes and/or developments have occurred:

• The company changed its name to CLS from Bayview Loan Servicing LLC.
• Two internal senior leaders were each promoted to co-CEO and co-president as part of CLS' succession plan. The former president remained chief operation officer of Bayview Asset Management.
• The senior vice president of commercial servicing left the company and was replaced with an internal hire with over 20 years of experience.
• CLS reduced its office footprint by consolidating to two sites from three in South Florida and closing its Horsham, Pa., office.
• CLS experienced an approximately 41% reduction in overall staffing between October 2018 and February 2021, in part due to their strategic realignment.
• CLS implemented operational risk dashboards to provide greater visibility to emerging risks.
• CLS began transitioning the asset management of its legacy small-balance commercial portfolio to its commercial servicing division from the residential department.
• As of year-end 2020, the commercial loan servicing portfolio increased 11% by unpaid principal balance from year-end 2018.

The outlook for the small-balance commercial mortgage primary and special servicer rankings were revised to stable from negative. The outlook for the commercial mortgage special servicer ranking is stable. Although there have been recent senior management changes, CLS' bench strength allowed the company to promote well-experienced managers to leadership positions. The company also continues to invest in systems, technology, and personnel as it expands its commercial loan portfolios. We expect CLS to remain a highly effective servicer for the commercial loan portfolios it services.

Furthermore, CLS' commercial mortgage loan group is the smaller part of the larger organization; the bulk of which remains residential loan servicing with certain organizational and loan administration functions that are integrated. As such, the small-balance commercial mortgage primary and special servicer, and the commercial mortgage loan special servicer management and organization subrankings are, to a large degree, implicitly tied to that of our residential loan special servicer ranking (see "Community Loan Servicing LLC STRONG Residential Mortgage Loan Servicer Ranking Affirmed; Outlook To Stable From Negative," published July 9, 2021). Thus, any changes to the residential loan management and organization subrankings could potentially affect our small-balance commercial loan or commercial loan servicing management and organization subrankings.

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

Profile

CLS is a primary and special servicer of residential and commercial loans. The company was formed in 1999, under Interbay Funding LLC, and now operates as a wholly owned subsidiary of Bayview Asset Management LLC (BAM). BAM is wholly owned by Bayview Financial Holdings L.P. CLS is headquartered in Coral Gables, Fla., and has approximately 650 employees located in Florida, New York, Texas, and Arizona.

CLS' capabilities include the servicing of small- and large-balance commercial mortgages; however, small-balance commercial mortgages make up the majority of its commercial mortgage portfolio. Operationally, it manages its commercial portfolio based on portfolio designation (legacy, serviced for others, and opportunity fund). Its staff has expertise investing in mortgage-backed securities and asset-backed securities (including collateralized loan obligations).

The large-balance commercial portfolio is primarily composed of BAM's commercial investments, most of which have an unpaid principal balance (UPB) over $1 million. Since our last review, the bulk of the serviced-for-others commercial special servicing portfolio has transferred out or been resolved. The commercial loan special servicing portfolio averages $3.1 million in UPB, with 22 commercial real estate loans aggregating $68.3 million as of Dec. 31, 2020, including a single asset with a UPB of approximately $31 million. The small-balance commercial loan portfolio has an average loan balance of $272,000. The company continues to originate and acquire loans through its affiliates, largely retaining servicing on loans over $1 million in UPB.

Table 1

Table 2

Management And Organization

The management and organization subrankings are STRONG.

Organizational structure, staff, and turnover

CLS made multiple key senior management, staffing, and organizational changes since our last review. As part of a planned leadership transition, the former president of CLS transitioned out of CLS and will remain the chief operating officer of BAM. Two senior leaders were promoted to co-CEO and co-presidents of the company. The senior vice president of commercial servicing left the company at the end of 2019 and was replaced internally by a senior manager with over 20 years' experience, who reports to one of the co-CEOs. In the new dual CEO structure, core servicing functions are aligned under one leader, and operational and support functions are aligned under the other. CLS continues to use a shared services approach for certain administration and internal control areas, such as cash processing, escrow, compliance, vendor management, and internal audit. In our view, the new organization structure effectively addresses operational needs.

In May 2021, the company began a phased initiative to consolidate the servicing of its legacy small-balance commercial loans into its commercial servicing division. Prior to this, the legacy portfolio was managed under its residential division. As part of the consolidation, the two asset managers that handled the legacy portfolio under the residential operation transitioned to the commercial servicing department. With this transition, loans that were assigned to the special servicing asset managers are now being managed under the commercial servicing division. CLS expects to complete the integration of performing legacy loans, including telephony updates and hiring relationship managers, by the third quarter of 2021. Asset management and special servicing activities for its other small-balance commercial investor portfolios (typically newer vintage) are currently managed with the commercial division.

We believe the management and staff members exhibit a solid level of industry experience and possess good tenure with the company to manage its commercial mortgage servicing portfolio (see table 3). Senior management's commercial mortgage background includes significant experience in asset management, including workouts, foreclosures, restructures, and bankruptcies. The commercial servicing staff experience is enhanced by a number of staff holding advanced degrees, broker licenses, and/or professional designations.

Table 3

There are 26 people working directly in the commercial division, including the two asset managers that recently transitioned (i.e., since year-end 2020) from the residential servicing department. Staffing levels in commercial servicing have largely remained stable since our last review. In our view, the servicing operations are staffed adequately, considering the portfolio's size and asset mix. Management indicated that it would add commercial staff as needed if the small-balance commercial or commercial portfolio size increased. Staff turnover was 23.8% for the full-year 2020, a bit higher than peers but a level we consider manageable considering the size of the organization.

Training

CLS has a solid program to train and develop new and existing employees. Like many servicers we rank, CLS transitioned to a virtual training environment due to the COVID-19 pandemic. Commercial servicing personnel averaged 30 hours of training in 2020, which is generally comparable to peers. The learning management system is in place to deliver web-based training modules and track completed courses. The following are notable training attributes:

• An online learning management system disseminates courses and tracks all training activities.
• New hires receive 40 hours of core mortgage servicing, systems, and policies and procedures training.
• New hires are assigned a mentor following training for 30 to 60 days.
• An online third-party analytics training program is provided to new employees.
• Commercial personnel are required to complete at least eight hours of compliance and regulatory training annually.
• Employees have access to professional development courses sourced through a vendor.
• A leadership development program is offered through online and instructor-led courses.

Specific training is provided to individual departments to grow specialized skills. These specialized training programs include:

• An overview of the commercial mortgage-backed securities (CMBS) industry and lending standards;
• An outline of pooling and servicing agreements, focusing on special servicers' roles and responsibilities;
• A real estate mortgage investment conduit (REMIC) overview, including how to identify REMIC violations;
• Advanced environmental, foreclosure, and bankruptcy strategies for large assets;
• Underwriting and financial analysis training; and
• Detailed reviews of new policies and procedures, system changes, and reporting requirements adopted by CLS for CMBS special servicing, including reporting by the Commercial Real Estate Finance Council.

Systems and technology

CLS operates in a highly automated environment, with effective technology to support its commercial servicing operations. It has well-designed data backup routines and disaster recovery preparedness. It also maintains systems and tools to address information security risks.

Servicing system applications 

Key technology applications include the following:

• Servicing Director is the servicing system used by the commercial asset managers for loan detail and property-level data, including changes in loan balances, tracking collateral histories, and monitoring tax/insurance escrows.
• Real Estate Asset Management Module (RAMM), a proprietary system, provides a complete asset management workstation that allows asset managers to view pertinent asset-level information and model various workout scenarios, and track the asset resolution process. RAMM also provides recommended solutions based on net present value.
• Default Tracking System, a proprietary default and bankruptcy loan monitoring system, monitors critical steps (i.e., court filings, litigation timelines, etc.), assigns outside counsel, and tracks overall timelines.
• SharePoint is used for corporate/department communications, including archiving forms and training materials.
• Client Approval System is a secure web portal used to exchange loan request and approval documentation with clients.
• Filenet, a cloud-based content management system, serves as the document retention system.

CLS launched an initiative to transition to a different servicing system, McCracken Strategy, with a planned rollout of mid-2021. The management team anticipates efficiency gains from the new system. It is in the planning stage, with frequent meetings with the vendor to ensure the best customization for their requirements.

Business continuity and disaster recovery 

The company maintains disaster recovery (DR) and business continuity (BC) plans to respond to disaster events. CLS implemented its plans in March 2020 due to the COVID-19 pandemic. The vast majority of employees continue to work remotely, and management noted no material disruptions in business operations. We considered the following features of CLS' BC and DR plans:

• The primary and back-up data centers are in geographically diverse locations.
• Data replication and tape backup cycles provide data recovery capabilities.
• We consider the recovery time and recovery point objectives to be satisfactory for systems it considers tier 0 and tier 1.
• The BC and DR plans are reviewed and tested annually, including a full-systems DR test. The most recent BC and DR tests were completed in May and September 2020. We reviewed the summary reports for these tests, which indicated no material issues.

Cybersecurity 

We believe the company has a well-developed system to detect and respond to information security threats. Systems include firewalls at all points where data can be accessed, virus- and system-monitoring software, and encryption on applicable hardware. Furthermore, CLS:

• Maintains a formal incident response plan and performs an annual tabletop incident response exercise;
• Performs an annual incident response tabletop exercise;
• Uses a security information and event management tool to monitor network activity and manage threats;
• Has an independent third party perform quarterly network penetration testing;
• Uses a data loss prevention solution;
• Performs vulnerability scans on a periodic basis;
• Sends quarterly phishing simulation exercises to employees; and
• Requires annual security training for employees.

Internal controls

CLS has a solid risk management and control framework to monitor and detect risk. Its framework comprises multiple lines of defense that are all independent of the operations and formal structures for change management and issue management. Compliance and risk committees oversee the risk at the organizational level, and there is appropriate levels of coordination and communication between the different lines.

Policies and procedures 

The company has sound governance for developing, revising, and disseminating its policies, procedures, and letters. The policies and procedures documents, which are reviewed annually, are in a consistent format and sufficiently detailed. Special servicing procedures contain in-depth descriptions of general asset management duties, the loan recovery process and methodology, step-by-step procedures for addressing loan workouts, and real estate-owned (REO) management and disposition.

Quality assurance 

The first line of defense is a quality assurance team that sits outside of the business units, providing a level of independence. This also provides the opportunity for a more focused and consistent approach to quality testing across the platform. The vast majority of tests are conducted weekly. CLS also augmented its transactional testing with data analysis and dashboard reporting to ensure processes and controls are operating as designed. Business unit managers receive notifications of issues in near real time as they are identified. The reporting cadence and corrective action testing have the same rigor as that of the compliance quality testing.

Compliance and quality control 

Compliance and quality control are the second lines of defense. The compliance department provides, among other functions, separate teams dedicated to advisory and regulatory monitoring, change management, issue management, policy and procedure administration, and vendor management.

A regulatory advisory team monitors regulatory and investor changes, and communicates those to the operations areas. Regulatory updates are communicated to the business weekly. Compliance counsel reviews any changes to ensure they are sufficient, and the compliance implementation team monitors progress of these changes until completion.

The quality control team operates under the compliance department. It completes transactional testing on a risk-based frequency (either monthly or quarterly) to monitor compliance with regulatory and investor requirements. Vendor-based software is used for sampling and testing. In our view, findings are appropriately communicated to the business units, compliance committee, and other compliance management system areas.

Issues identified from quality control testing, or other lines of defense, and their corrective action plans are documented in CLS' governance, risk, and compliance tool, and tracked by the compliance analysis and implementation team. The team also completes validation testing to ensure the issue is resolved, and conducts a root-cause analysis to identify improvement opportunities. Since our last review, CLS made several enhancements to its governance risk and control system and risk reporting. It incorporated a risk register and inventory of controls which, in our view, enhances risk monitoring and change management. It also developed operational risk dashboards that incorporate quality assurance and quality control exams.

Internal and external audits 

The third line of defense is the independent internal audit department. We believe CLS has a reasonable internal audit methodology. Its audit plan is based on risk, and is largely derived from its annual risk assessment. The internal audit department also uses continuous monitoring for certain areas. Audit findings are addressed through formal action plans that are tracked on an intranet site. In addition to a discussion with senior audit leadership, CLS shared a summary of internal audits completed in 2019 and 2020. A review of the summaries found that any findings were resolved and validated, or have an expected corrective action completion date in the future.

We also reviewed CLS' Uniform Single Attestation Program, Regulation AB, and Statement on Standards for Attestation Engagements No. 18 Service Organization Controls 1 Type 2 reports. The 2020 reports did not identify any issues or exceptions.

Vendor management

The vendor management department facilitates the procurement process, provides ongoing oversight, and supports the business units in monitoring vendor performance. New vendors are subject to a thorough due diligence process that evaluates the vendor's regulatory compliance, information security, and financial condition, among other areas. Depending on several risk factors, vendors are assigned a risk tier of critical, important, or incidental. Additional factors we considered in our analysis include the following:

• A web-based software-as-a-service system manages procurement and store vendor documents, tracks periodic reviews, and documents performance assessments.
• On-site reviews with vendor performance assessments occur either quarterly or annually, depending on the assigned risk level.
• Monthly service-level agreements are monitored.
• CLS maintains sound oversight routines to monitor its offshore vendor, and the company meets with the vendor weekly to review operational performance.
• A vendor exit strategy plan is prepared for all vendors.
• The company uses a formal invoice review and validation process.
• Attorney vendors are subject to annual on-site reviews and monthly scorecards to monitor key performance indicators.

A separate team within default manages the oversight and performance monitoring for its default attorneys. We view this dedicated oversight as a positive. Attorney vendors are subject to annual on-site reviews and monthly scorecards to monitor key performance indicators. The team also holds bi-weekly calls with the attorney firms. In 2021, CLS began participating in a pilot program to outsource the annual on-site reviews of its attorney network to a company that uses a crowdsource model (i.e., performing a review of a firm for multiple servicers). While this unique approach lacks the intangible data from in-person inspections by CLS, additional intelligence gathered, such as benchmarking performance, may potentially be a positive.

In response to the industrywide reduction in foreclosure referrals and activity due to federal and state-mandated moratoriums on foreclosures, CLS began quarterly financial reviews of its attorney network. In addition, it maintains at least two firms for each state to mitigate risk. Management also indicated it is having proactive discussions with default law firms to gauge preparedness to handle foreclosure volume once the moratoriums are lifted.

Insurance and legal proceedings

CLS 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 pending litigation items.

Loan Administration--Small-Balance Commercial Primary Servicing

The loan administration subranking is STRONG for small-balance primary loan servicing.

CLS maintains a well-controlled and efficient loan administration area for small-balance commercial loans. It primarily services small-balance commercial loans for related funds under BAM, including loans originated by an affiliate company and seasoned performing secondary market acquisitions. Its legacy portfolio loans comprise 56% of the primary servicing portfolio, with the next largest cohort being newer vintage loans originated by its Silver Hill affiliate (43%). The portfolio contains a variety of collateral types, with retail, mixed-use, and multi-family making up the majority (see table 4). The collateral mix has remained largely unchanged year over year, although the percentage of office and retail has marginally increased. Many of the loan administration departments manage functions for residential and small-balance commercial loans.

Table 4

New-loan boarding

The loan boarding team handles both residential and commercial assets. CLS has experience boarding new originations and secondary market acquisitions. The boarding of small-balance commercial loans to the servicing system is largely automated, using a data management system. The boarding process includes multiple controls to mitigate the risk of data errors. We note:

• CLS boarded 419 small-balance commercial loans during 2020 compared with 497 during 2019.
• A project coordinator oversees all boarding transactions.
• CLS formally tracks loan boarding accuracy and timeliness metrics, and it targets a maximum of five days to get essential data boarded to process payments and conduct investor reporting.
• Loan data are imported to a test module for data validation before boarding the live system.
• An offshore team completes a 100% document-to-system check that includes over 100 data fields.

Payment processing

CLS has a well-controlled cash management area that processes payments for its commercial and residential loans largely in the same manner. Additional factors we considered in our analysis include the following:

• Most payments are posted electronically -- 76% by lockbox, 11% by automated clearing house, and 9% via the company's website, with the balance paid via check or wire.
• Reporting is in place to monitor loans with a suspense balance; no suspense balances were aged over 60 days.
• The servicing portfolio has approximately 1,800 adjustable-rate loans, and there are multiple validation points for monitoring and updating the indices tables.

Investor reporting

Investor reporting, remitting, and bank account reconciling activities are appropriately segregated, and we note the following:

• Reporting and remitting is 100% electronic.
• Custodial accounts are reconciled monthly.
• Process controls include secondary reviews of all remittance and account reconciliation reports.
• The company reported that there were no unidentified custodial account items aged over 60 days.

Escrow administration

The company maintains sound controls to manage its escrow administration activities. There are separate tax, insurance, and escrow analysis teams that oversee their respective escrow functions. Key controls and metrics include the following:

• The servicing system provides tracking for escrowed and non-escrowed loans, including reserve account information.
• Non-escrowed loans are monitored for unpaid taxes by the tax vendor.
• Insurance policy expiration dates are maintained in its system. CLS sends letters to the borrower following policy expiration.
• The insurance vendor handles claims processing and management for commercial loans.
• Weekly exception reports are sent to the vendors to communicate items that do not meet service-level agreements.
• Asset managers monitor a report of taxes due on commercial loans to provide disbursement instructions.
• Reserve account distribution requests require manager approval.
• CLS reported a minimal amount of non-reimbursable tax penalties during 2020.

Asset and portfolio administration

CLS has sound portfolio management and surveillance practices covering asset and portfolio administration tasks. For its non-legacy, small-balance loans, asset managers are assigned to performing loans as a single point of contact for common administration tasks. Key practices that we considered in our review are as follows:

• A dedicated performing asset manager is assigned as a borrower's single point of contact.
• CLS maintains a watchlist that is system-generated based on predefined triggers.
• Small-balance loan covenants generally do not require borrowers to submit operating statements after closing; as such, CLS received a minimal number of operating statements for its small-balance loans in 2020.
• Third-party vendors primarily conduct the annual site inspections.
• Property inspections are completed annually for performing loans that have a UPB greater than $2 million, and nonperforming small-balance loans are inspected via drive-by inspection monthly.
• A third-party vendor handles uniform commercial code (UCC) filings and renewals. As of Dec. 31, 2020, 2,875 loans (68% of total loans) required UCC filing, and CLS reported no refiling lapses during 2020.

Borrower requests

Borrower requests usually originate from an inbound call to the customer relations department, which instructs borrowers to submit their requests in writing. Dedicated staff on the special loans team handle processing of credit-related requests in conjunction with other departments, including the assigned asset manager if the loan is not current in payment. Excluding request for forbearance, CLS reported completing two borrower requests during 2020.

Early-stage collections

CLS has solid procedures and systems in place to cure defaults or identify asset resolution opportunities, which are managed by an asset manager. The customer relations department handles early-stage collections activities for small-balance commercial legacy portfolio and residential loans, which provides scale. The assigned asset managers handle early stage collections for its other portfolios. Furthermore:

• Specific collections strategies are designed to maximize borrower contact for small-balance commercial loans.
• An early intervention team acts as the SPOC for legacy portfolio loans that are 45 days past due.
• CLS implemented an interactive voice response system as a way for borrowers to interact with outbound calls.
• It implemented a best-time-to-call model during 2020.
• Outbound calls begin when a loan is as early as three days past due, with the timing depending on portfolio requirements.
• Initial written notices are issued five days following a missed payment date, and a second notice issued after day 10.
• An early asset resolution referral system provides a system for staff to document pertinent information and systematically refer asset resolution candidates to asset management. This allows the asset manager to see key information captured during the borrower interview.
• An escalation line is available to staff to speak with subject-matter experts for real-time support on complex scenarios.

Loan Administration--Small-Balance Commercial Special Servicing

The loan administration subranking is STRONG for small-balance special servicing.

CLS has built a track record of managing troubled assets with its hybrid operation designed to maximize recoveries by combining aspects of residential and commercial loan servicing. As an example, as is common in residential servicing, it uses collectors for earlier-stage collections and then transitions loans to an asset manager when an asset resolution opportunity is recognized, or the loan hits a specific delinquency trigger. It applies this special servicing operational approach to its small-balance loan legacy portfolio, which largely comprises small-balance loans with a UPB of $1 million or less. For its other investor portfolios, collections outreach is performed by the assigned asset manager.

As of Dec. 31, 2020, the special servicing portfolio increased 43% year over year in loan count. The increase in loans in special servicing (see table 5) is due to a larger overall small-balance commercial loan portfolio and, to a degree, borrowers affected by the COVID-19 pandemic. The average UPB for loans in special servicing is $257,000, and the vast majority of loans in special servicing (90%) are from the legacy portfolio.

There are two asset managers allocated to the legacy portfolio. Each have an average of 163 loans assigned. CLS' other small-balance commercial loan portfolios are managed by the six asset managers in the commercial servicing department.

Table 5

Loan recovery and foreclosure management

CLS utilizes a high-touch, asset-level approach to resolve nonperforming loans across a broad spectrum of property types, with the majority being retail, mixed use, and multifamily. Depending on the portfolio, asset managers may already be assigned, or in the case of the legacy portfolio, transferred to an asset manager no later than the 60th day of default. Key points:

• Proactive timelines are utilized to initiate borrower contact through telephone calls and letters.
• Written notices are system-generated and sent to delinquent borrowers at pre-established past-due dates.
• Asset managers develop business plans, depending on UPB and other factors, typically within 45 days of the loan assignment.
• The asset summary reviews for nonperforming loans are comprehensive, in our view, and include loan data, sponsor data, a collateral description, and key developments.
• A dedicated valuations team with certified appraisers review all valuations.
• CLS pursues a dual-track model in which it continues efforts to resolve the default with the borrower while the company enforces legal remedies.

The company utilizes multiple options to resolve special servicing assets. Two asset managers handle the legacy portfolio, which each averaging 163 files assigned. Six asset managers handle the other portfolios. Asset managers utilize the RAMM system to track loan status and model various options to determine the optimal resolution based on net present value. A client approval system is in place to provide a secure portal to communicate approval requests to investors.

CLS typically offered forbearance plans to borrowers affected by the COVID-19 pandemic. Asset managers performed frequent follow-up with the borrower through the course of the forbearance plan to develop an exit plan. Asset managers also reviewed financials to determine if partial payments could be made during the forbearance period.

Table 6

CLS effectively manages foreclosure and bankruptcy proceedings with comprehensive oversight of foreclosure and bankruptcy cases. A dedicated foreclosure coordinator and a bankruptcy coordinator handle default administration with support from the asset manager and internal counsel. The coordinator monitors the case timelines and communicates with each of the attorneys. Key default items include the following:

• CLS uses its proprietary Default Tracking System platform to track foreclosure and bankruptcy cases for commercial loans.
• An automated system identifies new bankruptcy cases and changes to existing cases.
• Properties that receive a high environmental risk rating undergo a Phase II environmental site assessment as part of the foreclosure process.
• A formal attorney vendor scorecard is used to monitor attorney performance.

REO management and dispositions

CLS demonstrates effective REO management and sales oversight. Most of the small-balance commercial properties in the servicing portfolio do not generate enough cash flow to warrant property management; however, CLS does have internal resources and procedures for property management oversight. Notable aspects include the following:

• CLS has a dedicated REO asset manager to manage disposition of commercial and residential assets.
• Within 45 days after acquiring an asset, the asset manager develops a business plan, taking into consideration local market conditions and property-specific information.
• Property inspections are performed within 60 days of taking title.
• REO asset managers develop revised business plans for properties listed longer than 90 days, and properties on the market for over 180 days are reviewed with management for alternative disposition strategies.
• CLS completed 62 asset sales during 2020 with a gross sales-to-market-value average of 92% for the second half of 2020.
• CLS monitors broker performance using a scorecard to measure key performance indicators for each transaction.

REO accounting and reporting

Small-balance commercial assets in CLS' portfolio are typically single or small multitenant properties; thus, the management of rental payments and building operating expenses are usually handled internally. Furthermore:

• Property managers submit monthly financial packages that are reviewed by internal accounting staff to ensure accounting practices are sound and meet internal audit requirements.
• REO managers review monthly plans to determine if operating results are in line with business plan strategies.
• When necessary, CLS' internal accounting staff works with the REO managers to ensure accurate REO accounting and downstream reporting.
• All property-level invoices are reviewed by REO managers and then escalated to management for final approval.
• Invoices are submitted and paid through an internal invoice management system.

We believe CLS' controls and procedures for REO property-level oversight are sound, given the limited complexity of its existing collateral.

Legal department

Legal department and outside counsel for commercial small-balance special servicing operations is discussed in the subsequent loan administration commercial special servicing section.

Loan Administration--Commercial Special Servicing

The loan administration subranking is AVERAGE for commercial special servicing.

The AVERAGE subranking reflects CLS' ability to resolve defaulted loans with an experienced asset management team. However, most resolutions have involved defaulted small-balance loans/assets and nontraditional commercial properties. The special servicing portfolio, subject to this assessment, continues to consist mainly of small-balance loans and a limited number of loans secured by larger and more complex assets. Furthermore, CLS does not have an established history of workout and dispositions for complex commercial real estate loans, such as those typically in CMBS transactions, or with REO management of such properties.

The large-balance commercial portfolio consists of nonperforming loans and loans serviced for BAM investments. Given the delinquent loan population and additional loans that require an asset manager, as well as the nature of the collateral, we believe that the workload is manageable with current staff levels. As of Dec. 31, 2020, the large-balance commercial portfolio included 22 loans with a UPB of $68.3 million. This is a 76% decline in loan count but an 11% increase in UPB compared to year-end 2018 (i.e., the time of our prior review).

Table 7

Loan recovery and foreclosure management

The loan recovery and foreclosure management procedures are effective, in our view, considering the portfolio's size. The team includes 10 loan asset managers who are experienced with servicing small-balance, commercial, and CMBS loans. These employees also have an established workout track record of commercial real estate assets. In addition to the commercial special servicing loans table 7, the asset managers also handle certain small-balance commercial portfolios. Management indicated that loan asset managers typically handle approximately 25-30 loans, which, given the collateral's nature, is manageable, in our view. As noted in both tables 7 and 8, data was not provided to assess, in a measurable way, historical special servicing hold and resolution periods. We considered the following in our analysis:

• Borrowers are contacted proactively to determine cause of issues and gather relevant information
• Business plans are written pursuant to specific requirements within client contracts.
• Business plans are completed and approved within 45 days of transfer.
• Plans are updated quarterly, at a minimum, and assets are continually monitored by the asset manager.
• An asset management system is used to determine the optimal course of action (using net present value analysis) to resolve defaulted loans.
• A dual-path approach is utilized to negotiate with the borrower and find a reasonable alternative to foreclosure, while also preparing the asset for foreclosure.

Management noted they enacted proactive measures to address anticipated hardships due to the COVID-19 pandemic. Initial forbearance requests were largely provided to those requesting assistance. Data, including bank statements and forbearance applications, were proactively gathered by asset managers to triage properties. It was noted the proactive measures helped manage issues that arose.

Loan resolutions have remained steady since our last review. CLS completed 107 resolutions in 2019 and 95 in 2020 (see table 8). In 2020, foreclosed loans represented the bulk of resolutions, 63 loans, or 66.3%, but only 14.6% of the aggregate UPB. The returned-to-master resolution (cured) volume is less compared with other resolution types due to the nature of the collateral securing the portfolio. Management notes CLS is continually utilizing every option available for resolution.

Table 8

REO management and dispositions

CLS demonstrates adequate REO management and sales oversight. REO management practices we considered in our analysis include the following:

• Before the foreclosure is finalized, the loan asset manager communicates directly with the dedicated REO asset manager to facilitate the asset's transition.
• An REO asset plan is developed within 45 days of the foreclosure date for each REO property.
• The business plans include property descriptions, necessary improvements, comparable sales, and pricing recommendations.
• All business plans require senior management's approval and, ultimately, the client's approval.
• Due to the low number of properties with active property managers, CLS does not have a formal on-site audit program. On-site audits are a best practice and common among special servicers we rank that have a larger number of REO assets with active property managers.
• REO asset managers are responsible for monitoring property managers and ultimately make recommendations regarding any adjustments for a particular property manager.

Prior to the COVID-19 pandemic, the CLS REO portfolio had declined significantly, as the market has improved. At present, with evictions and foreclosure moratoriums still in place nationwide, the REO market remains minimal. As of Dec. 31, 2020, there was only a single commercial REO asset, totaling $1.1 million. One REO asset manager is responsible for overseeing the REO assets within the commercial portfolio along with disposition of residential REO assets.

The number of REO sales have been historically low due to limited inventory, with no REO sales in 2020 and a single asset sale in 2019. We believe, however, CLS maintains policies and procedures and experienced staff to manage current inventory levels.

REO accounting and reporting

We believe CLS' controls and procedures for REO property-level oversight are sound, given the limited complexity of its existing collateral. Highlights include the following:

• Property managers submit monthly financial packages that are reviewed by internal accounting staff to ensure accounting practices are sound and meet internal audit requirements.
• REO managers review monthly plans to determine if operating results are in line with business plan strategies.
• When necessary, CLS' internal accounting staff works with the REO managers to ensure accurate REO accounting and downstream reporting.
• All property-level invoices are reviewed by REO managers and then escalated to management for final approval.
• Invoices are submitted and paid through an internal invoice management system.
• We believe CLS' controls and procedures for REO property-level oversight are sound, given the limited complexity of its existing collateral.

Subcontracting management

The vendor management team evaluates and manages all third-party vendors and subcontractors that perform services associated with foreclosure management, as well as property management and disposition (e.g., property managers, brokers, appraisers, and environmental firms). Key oversight activities include:

• Managing/monitoring contracts (including the request for proposal process), negotiating terms, tracking for expiration/renewal, and obtaining internal senior management approvals.
• The broker selection process, which includes evaluating proposals from multiple brokers based on experience with the asset type, prior performance, and proximity to the asset.
• Soliciting bids from multiple appraisers before selecting an appraiser.
• Reviews of all third-party appraisals by a valuation team.
• Monitoring performance through a comprehensive scorecard that emphasizes the importance of timeliness, quality, and conformity with contract terms.
• No affiliates providing third-party services related to servicing obligations, avoiding any potential conflicts of interest. REO asset managers use an approved third-party vendor list, provided by the client, to engage real estate brokers for marketing REO assets.
• Oversight of property management companies, including monthly reporting of rent rolls, bankruptcy statements, operating accounts, and bank statements.

Legal department

Eight in-house attorneys provide preliminary reviews of legal and bankruptcy matters and assist in oversight of outside counsel for the special servicing operations. The company maintains an approved list of attorneys. In addition, an in-house legal staff provides support for the default administration and asset manager teams. Two associates monitor critical litigation timelines, court filings, and attorney oversight. Performance scorecards are completed on a monthly basis for all third-party attorneys. REO asset managers provide additional oversight by approving all legal invoices before payment.

Financial Position

The financial position is SUFFICIENT.

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• Servicer Evaluation: Bayview Loan Servicing LLC--Residential And Small-Balance Commercial, June 10, 2019
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• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019