Rationale

S&P Global Ratings' rankings on Arbor Multifamily Lending LLC (Arbor) are ABOVE AVERAGE as a commercial mortgage loan primary and special servicer. On Aug. 11, 2021, we affirmed the rankings (please see "Arbor Multifamily Lending LLC ABOVE AVERAGE Commercial Mortgage Loan Primary And Special Servicer Affirmed" published Aug. 11, 2021). The ranking outlook is stable for each of the rankings.

Our rankings reflect Arbor's:

• Status as a top Fannie Mae producer and a Freddie Mac small balance lender, which primarily generate servicing portfolio growth;
• Experience, depth, and breadth of management;
• Strong compliance and control environment;
• Proactive credit management structure, which includes a loan rating system;
• Limited portfolio property and investor-type diversity, with the portfolio consisting of 94.6% multifamily loans based on unpaid principal balance (UPB) along with a government-sponsored enterprise (GSE) emphasis; and
• Limited track record in managing, stabilizing, and disposing of real estate-owned (REO) properties due to the performance of the portfolio.

Furthermore, Arbor maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption as a result of a pandemic event. The company implemented its plan due to the COVID-19 pandemic in March 2020. Management reported that there were no disruptions to the company's operations or data facilities.

Since our prior review (see "Servicer Evaluation: Arbor Multifamily Lending LLC," published Feb. 11, 2020), the following changes and/or developments have occurred:

• In April 2021, the executive vice president (EVP) of structured asset management began to oversee the primary and special servicing (collectively, servicing), agency asset management, and the structured asset management (collectively asset management) departments, while also being approved as the Freddie Mac chief servicing officer and Fannie Mae chief asset manager.
• In April 2021, the senior vice president (SVP) of credit risk management left the company for another opportunity. His duties were mainly divided between two internal managers, although his rating agency responsibilities were shifted to the vice president (VP) of operational compliance.
• Arbor recently contracted with Real Insight for an asset management and special servicing platform license with an anticipated "phase-in" period in the second half of 2021.
• Arbor recently hired seven people in their special servicing group, many of whom have extensive industry experience
• In January 2021, a director was added to the credit risk management area to work with the servicing and asset management teams to identify process improvements, improve existing policies and procedures, and assist in the developing new procedures with Real Insight.
• In March 2020, the SVP of agency asset management was promoted to managing director (MD) of servicing and agency asset management, reporting to the EVP.
• In May 2020, the company added an experienced new hire for SVP of asset management and special servicing, who is working out of the Miami office and reporting to the EVP.
• In September 2020, the analyst team was integrated into the loan surveillance group (instead of being a standalone team within asset management) to provide more comprehensive training to analysts as they prepare for portfolio manager roles.
• In December 2020, Arbor partnered with a third-party vendor to code and spread the bulk of the agency financial statements into the current template.
• In December 2020, Arbor automated the Freddie Mac exclusionary list and the Federal Housing Finance Agency (FHFA) list into Arbor's database. All applicable parties in Arbor's database are now automatically checked against the office of foreign assets control (OFAC) and these two additional lists.

We have a stable ranking outlook for each of the rankings. Arbor's experienced staff continues to conduct its primary servicing operations in a controlled manner while handling the portfolio's growth. The main GSE business lines have historically allowed Arbor to grow its multifamily-centric servicing volume, which we expect will continue. We also expect that the company will continue to enhance their processes and invest in the technology required to service their portfolio; which has allowed for growth without the need for additional headcount.

In addition to conducting a remote meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2021, as well as other supporting documentation provided by the company. Peer comparisons without the analysis were made using Dec. 31, 2020 data.

Profile

Headquartered in Uniondale, N.Y., Arbor is a wholly owned subsidiary of Arbor Realty Trust (ART), a mortgage REIT that specializes in loan origination and servicing for multifamily, senior housing, health care, and other commercial real estate assets.

Arbor is a national direct lender specializing in loan origination and servicing for multifamily, senior housing, health care, and other commercial real estate assets. The company's primary and special servicing staff are largely based in the Depew, N.Y. and the Uniondale, N.Y. offices. It also operates small satellite servicing offices in Atlanta, Dallas, and Miami.

In 2020, Arbor was named a top 10 Fannie Mae delegated underwriting and servicing (DUS®) multifamily lender for the 14th consecutive year, placing sixth; they were also Fannie Mae's number one small loan producer. Additionally, Arbor was awarded the Excellence in Special Servicing award by Fannie Mae. Arbor is a Freddie Mac seller/servicer, a senior housing lender for both Fannie Mae and Freddie Mac, a Federal Housing Administration (FHA) multifamily accelerated processing/lean lender, and a U.S. Department of Housing and Urban Development (HUD) approved low-income housing tax credit lender.

As of June 30, 2021, Arbor's primary servicing portfolio consisted of 4,773 loans, with an aggregate UPB of approximately $33.6 billion, including participated interests (see table 1). This is an increase of $10.0 billion since June 30, 2019, with the number of loans serviced continuing to meaningfully grow year-over-year. Due to Arbor's continued focus on streamlining processes and in system automation, they have been able to absorb additional loans with a limited increase in personnel. The UPB of the primary servicing portfolio consists mainly of GSE multifamily loans including 56.6% Fannie Mae, 13.4% Freddie Mac, and 2.5% Ginnie Mae. The portfolio also includes $5.5 billion in UPB (Dec. 31, 2020) of ART loans either contained on its balance sheet or within an ART-managed commercial real estate-collateralized loan obligation (CRE-CLO).

Arbor's Uniondale special servicing unit is responsible for asset management and the special servicing of non-agency loans, which primarily include ART's structured finance real estate investments. It is also the named special servicer on six CRE-CLO transactions that contain 205 loans, with an aggregate UPB of $4.7 billion and on 14 Freddie Mac small-balance deals that contain 688 loans with $1.7 billion in UPB as of June 30, 2021. The Depew special servicing unit works closely with Fannie Mae in loan workout/disposition and REO acquisition efforts.

The company has a limited number of loans that are actually in monetary default. Therefore, its experienced talent in the special servicing group, which includes a reported 70 full-time employees, primarily works on complex borrower transactions, maturity issues, and large insurance losses.

The active special servicing portfolio has declined to its lowest levels in the last four years. Asset count decreased 25.0% and UPB decreased 21.0% since year-end 2018. There was significant decline in the first six months of 2021 due to the special servicing asset count decreasing 30.0%, and the UPB decreasing 32.0% (see table 1). The approximately $0.7 billion active special servicing portfolio is comprised of 48 loans ($662.0 million UPB) and three REO assets (see table 2). We note that 14 of these loans ($261.9 million UPB), were not in monetary default as of June 30, 2021.

Table 1

Table 2

Management And Organization

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

Organizational structure, staff, and turnover

As of June 30, 2021, Arbor reported 182 full-time servicing employees, 112 of which, were dedicated to primary servicing, with the remaining 70 professionals dedicated to special servicing.

The company has experienced solid organizational growth, boarding more than 550 new loans in the first half of 2021 and 1,000 new loans in 2020. That growth, led by an increase in Freddie Mac small-balance loans and the strong overall commitment to employee development, has enabled the company to make several key enhancements to its organizational structure.

Since our last review, Arbor has promoted multiple employees in various areas, including underwriting, operations, asset management, servicing, and technology, while also promoting various management-level positions. We believe this is a positive move to allow for more growth while encouraging the retention of key individuals and tenured people within the company.

In April 2021, an EVP began to oversee the servicing, agency asset management, and the structured asset management departments, taking over these duties from the EVP of treasury and servicing, who still handles the treasury duties. The EVP, who has 25 years industry experience and has been with Arbor since 2019, has also been approved as the Freddie Mac chief servicing officer and Fannie Mae chief asset manager. The EVP is responsible for loans under his departments, as well as loan restructurings for all of Arbor's balance sheet loans, while also charged with leading the expansion of the Arbor's servicing and asset management functions. With the EVP overseeing these areas, management believes it improves the alignment and communication between departments. Reporting to the EVP are three employees: the MD of servicing, asset management and credit risk; the SVP of structured management; and the SVP of special servicing and single family rentals. The EVP works out of the Miami office, typically traveling to the Uniondale and Depew offices as necessary, albeit travel was limited since our last review due to COVID-19 restrictions.

Reporting to the EVP is the MD of servicing and agency asset management, who is an executive that has been with Arbor for 17 years and has 20 years of commercial real estate industry experience. This group handles the oversight of agency asset management and servicing operations. In particular, the unit handles new loan boarding, tax, insurance and escrow processing, uniform commercial code (UCC) compliance, and investor reporting and accounting for agency loans. The MD has one senior vice president and four VP direct reports as outlined below, along with numerous assistant vice presidents (AVP) and director-level positions reporting to their respective managers.

Group leaders reporting to the MD include:

• The VP of loan surveillance, who has over 18 years industry experience and has been with Arbor for 10 years. The group handles loan monitoring, payoffs, watchlist loans, agency forbearances, and agency construction loans. They also develop action plans to address watchlist items, highlighting drivers of loan ratings, and developing corrective action steps.
• The SVP of servicing operations, who has 31 years industry experience and has been with Arbor for 20 years. The group handles loan servicing, tax and insurance issues, investor accounting and reporting, and escrows and disbursements.
• The VP of portfolio management, who has 42 years industry experience and has been with Arbor for 20 years. The group handles the asset management and routine contacts with borrowers for all performing agency loans in the portfolio, including financials and inspections. The unit also performs periodic risk ratings.
• The VP of risk management, who has 12 years industry experience, and has been with Arbor for over five years. The group handles agency loans in monetary default.
• The VP of credit risk management, who has 15 years industry experience, has been with Arbor for 11 years. The group handles data analytics and reporting across all business lines.

Also reporting to the EVP of servicing, and asset management is Arbors' single-family rental (SFR) group. The structured asset management group is headed by an SVP who has 34 years of industry experience, including nearly 12 years with Arbor. The group is responsible for non-agency asset management, special servicing, non-agency construction management, securitized CLOs and REO asset management. He has two SVPs and four VPs, who are located in various offices, reporting to him. The SVP of structured special servicing and SFR is based out of Miami and has 16 years of industry experience. Her group handles the asset management of the SFR loans, special servicing, loan restructuring, loan workouts, and special projects.

The credit risk management department is headed by a VP, who reports to the MD of servicing and asset management. The VP has 15 years of industry experience and has been with Arbor 11 years. This group coordinates and oversees assessment of credit risk across the Arbor portfolio. The unit is bifurcated into two distinct functions: as the first line of defense for asset management, and portfolio credit controls handling exposure reporting and risk management. Secondarily, the group focuses on oversight of all special servicing, exit strategies, valuations, and loss mitigation. The credit risk management department's primary purpose is to mitigate risk exposure within the agency portfolio and its work includes the following:

• Monthly loan-level oversight: Handles the loan risk rating model; involvement with the monthly watchlist committee; oversight of loan performance; and monitors risk levels from property inspections.
• Quarterly portfolio-level oversight: Monitors the portfolio to assess key principal concentrations; portfolio market trends; probability of default calculations; and quarterly risk tranching.
• Market analysis: Prepares metropolitan statistical area snapshots for the top 30 markets where Arbor has loan exposure; monitors industry trends through various third-party applications; and reviews the appraisal database.
• Operational functions: works with conversions to the Enterprise! version 2018.5.0 system; reviews internal policies and procedures (P&Ps) against investor requirements; performs quality control to verify reporting; and tracks department performance and accuracy via qualitative analytics.

Arbor's primary servicing middle-management experience and tenure levels are generally in line with those of similarly ranked servicers (see table 3). Its senior managers in primary servicing have considerable industry experience, albeit with somewhat less company experience than its peers'. The company's senior manager's industry experience in special servicing is slightly greater than its similarly ranked peers', but its middle management's and asset managers' industry experience and company tenure are slightly less than peers'.

During the first half of 2021, total turnover was 14.0% and 9.0% for primary and special servicing, respectively. Total turnover for the full year 2020 was 13.9% and 23.6%. Primary servicing turnover decreased from 25.7% that was reported in 2019. While the special servicing turnover has declined in 2021, turnover for the full-year 2020 remains high compared to peers. Management attributed the higher turnover in 2020 in part due to some employees leaving the company and moving out of New York City during the COVID-19 pandemic. Given the strong management experience and internal opportunities for advancement, accompanied by solid training, recruiting, and mentoring programs, we believe the company effectively manages its staff.

Table 3

Training

Arbor provides its management and staff with a diversified array of ongoing, formal, internal and external training programs, which is typical of similarly sized peers. Other training features include the following:

• The various department heads work with the operational compliance department to administer and oversee the company training program. Arbor has a dedicated full-time trainer, who we believe displays a solid commitment to training and employee development.
• New hire training begins with an orientation seminar to familiarize new employees with company P&Ps, along with a working knowledge of various company departments, including underwriting, legal, capital markets, structured finance, treasury, portfolio management, asset management, servicing, and marketing.
• The company sets an annual training goal of 40 hours per employee, which is largely consistent with those of other servicers that are similarly ranked by S&P Global Ratings.
• In the first half of 2021, primary and special servicing employees averaged 18 and 25 hours of training, respectively. This is tracking ahead of year-end 2020, when the primary and special servicing employees averaged 22 and 30 hours of training, respectively. Management stated that the below target levels in 2020 was COVID-19 pandemic-related due to a lack of both external and in-person training session opportunities.
• Arbor continues to conduct internal training sessions virtually and utilizes Arbor University (AU). AU is the online training platform, which features more than 300 training courses including 51 "playbooks" of which, 43 cover servicing and asset management and include detailed process flows. AU contains training videos providing customized learning, automated tracking of training hours, and management reports. Courses are regularly added, including agency training, to keep staff abreast of GSE changes. We believe this customized departmental training further enriches and provides career growth for Arbor employees at all levels.
• In December 2020, Arbor's compliance team conducted detailed training for the production and servicing teams for the new "Adverse News" google search process covering entities and individuals. If "hits" are found, they are added to the compliance log detailing names with valid OFAC matches to the Freddie Mac exclusionary list, FHFA list or the adverse news google search.
• Arbor held its seventh, and most recent, annual Servicing and Asset Management Summit for its employees in spring 2019. Due to the COVID-19 pandemic, the summit was not held in 2020, but management believes it will begin again in 2022.
• Arbor requires new asset management and underwriting members to attend the MBA multifamily site inspection training and pass the final exam. All completion certificates are tracked by compliance. Since 2013, Arbor has had more than 350 team members successfully complete the program. These sessions were held in the Uniondale office, but during the COVID-19 pandemic, sessions have been held virtually with 72 employees completing the required training virtually.

Systems and technology

We believe Arbor has effective technology to meet its primary and special servicing requirements. The company continues to focus on technology enhancement projects to further streamline and automate primary servicing tasks across various loan administration functions. Arbor has well-designed data backup routines, disaster recovery preparedness, and cybersecurity capabilities.

Servicing system applications 

Arbor's servicing operations is supported by a staff of 24 employees. System highlights include the following:

• Arbor uses Enterprise! as their system of record.
• Select Arbor personnel participate in the Enterprise! users committee, which allows early and key initial input and advanced testing of future system development and upgrades.
• DOMO, a cloud-based data warehouse, is used as a repository for other systems to collect data under one central location for workplace efficiency. DOMO serves as an intelligence tool and can handle analytics and automate reporting projects.
• In 2021, Real Insight was contracted with to provide an asset management platform to manage daily activities and reporting on balance sheet and agency special serviced loans. This roll out has begun and will be a phased approach through 2021.
• TrinTech is used by the treasury group to reconcile bank versus book balances and generate reports for both treasury and accounting.
• The company uses a SharePoint-secured application service provider (ASP) repository site for storing various servicing documents, including P&Ps and business plans.
• Arbor uses robotic process automation to board certain loan details in Enterprise! and to manage task assignments for some servicing groups such as new loan boarding and insurance data.
• In 2020, the company began using Microsoft Azure, a scalable cloud computing service that allows servicers to build, test, deploy, and manage applications.
• SSR, a Microsoft Office product, is Arbor's report-generating program that is integrated with Enterprise! and Arbor's origination platform.
• Alex+ platform is used as a repository for loan applications, and to manage borrower relationships and provides real time reporting capabilities.

Business continuity and disaster recovery 

Arbor has high levels of security and practices to protect its operations and its critical financial and proprietary loan information. Highlights include:

• Plans for information technology (IT) and facilities are maintained by the EVP, chief technology officer, and SVP of corporate facilities, respectively, and are incorporated into the disaster recovery and business continuity plans maintained and annually recertified by operational compliance.
• Arbor fully tests and updates its disaster recovery plans annually. The last annual disaster recovery testing was performed Sept. 25, 2020, and the results were considered successful.
• The plans call for all key servicing functions to be recovered within 24 hours with noncritical servicing functions to be recovered within 48 hours.
• Routine patches and updates are made to printers, routers, and scanners. All email attachments pass through filters to detect bugs that are detonated remotely before emails are delivered to the intended addressee.
• Arbor migrated emails to a Microsoft cloud-hosted service and implemented multifactor authentication for Microsoft Office and third-party applications.
• The company has offsite data storage in Uniondale and Depew. These sites are 400 miles apart, and each stores its own data, as well as the data for the other office.
• The Enterprise! system is jointly tested annually with Midland Loan Services, consistent with Enterprise! system users. The last test was conducted on May 8, 2021, with no issues found per management.
• Arbor's employees have generally been working remotely from home throughout the COVID-19 pandemic. Since summer 2021, several people have begun working in the various offices, with more expected to return throughout 2021. Management reported no material issues from their staff working remotely.

Cybersecurity 

Arbor maintains comprehensive cybersecurity policies including the following processes:

• Employees are provided annual training covering relevant cybersecurity issues.
• Monthly phishing emails are sent to employees to help identify potential issues.
• Third-party vendors are rotated to test for annual penetration to its systems, and no significant issues were noted as of the last test in December 2020.
• Arbor has binary defense systems run throughout their systems; they have enabled multifactor authentication software; they have disabled employee use of all universal serial bus (USB) drives; and they make routine patches as needed.
• The company has a stand-alone cybersecurity insurance policy but does not have a dedicated in-house counsel for cyber issues.

Internal controls

Arbor maintains solid controls that include documented P&Ps, internal quality control, and various internal and external audits. Features are described below.

Policies and procedures 

Arbor has well-documented P&Ps, which generally cover all servicing functions. Other features include:

• Arbor maintains an independent operational compliance department that reports to the associate general counsel and annually recertifies over 300 company-wide P&Ps.
• The P&Ps are accessible on the company's SharePoint site for ease of use by all staff members.
• P&Ps contain the versioning history for historical reviews if needed.

Compliance and quality control 

In addition to managing the P&Ps, the operational compliance group has responsibility for monitoring changes to federal, state, and local regulations, as well as changes to investor requirements, which are then incorporated into the P&Ps. Compliance and quality control (QC) processes are handled by a two-team approach. Procedures include:

• A dedicated front-end operational compliance team that performs a front-end review of the underwriting documentation for 100% of the closed GSE loans and provides ongoing QC and regulatory training support for underwriting teams. They also enforce certain policies and oversee the vendor management process.
• A dedicated servicing and asset management operational compliance and audit review team, including an insurance compliance specialist, that conducts quarterly post-close servicing reviews on 10.0%-20.0% of closed loans that are randomly selected to evaluate the effectiveness of operational controls and make recommendations to senior management if issues are found.
• The servicing and asset management operational compliance team handles the coordination of all lender assessments and various GSE servicer reviews acting as a liaison between parties.
• The operational compliance team maintains and recertifies servicing and asset management procedures and manages Arbor's organizational charts.
• A quarterly "Eye on Insurance" memo is prepared and distributed to applicable departments to discuss in-depth insurance topics.
• In April 2021, the quarterly compliance servicing review process was updated to include a check on the FHA green loan fees and a review on the Ginnie Mae (HUD) loans with non-critical repairs.
• The quarterly review process was updated to include a check of the minimum name score used when agency asset management performs an OFAC check for entities/individuals. Other groups have been advised of the minimum name score requirements for OFAC searches.
• In the quarterly reviews, the number of reconciliations reviewed was increased to include those accounts that also have investments to ensure proper movement of funds.
• In addition, the team maintains the companywide training platform, AU, including creating operational, enrichment and development, and annual mandatory training.

Internal and external audits 

Although Arbor does not have a separately named internal audit group, its operational compliance group, which reports to the associate general counsel, who in turn reports to the chairman/CEO of Arbor, handles internal compliance issues. Arbor has multiple third parties (Fannie Mae, Freddie Mac, various banks, and HUD) that perform certain independent assessments. Features include the following:

• A nationally recognized firm performs an annual Uniform Single Attestation Program (USAP) review, and there were no material instances of noncompliance in the 2020 report.
• Although the company is not required to, nor does it perform Regulation AB (RegAB) attestations, the operational compliance team has adapted an enhanced USAP program. The program includes quarterly servicing audits to evaluate the adequacy and effectiveness of operational controls similar to RegAB requirements with applicable recommendations made to senior management.
• The 2020, Fannie Mae provided an assessment rating of Arbor as "Good" with a positive outlook, and with no material findings according to management. The next assessment will occur during the first quarter of 2022.
• In 2020, the Freddie Mac limited scope assessment found no material issues according to management.
• Arbor must also comply with annual HUD audit requirements.

Vendor management

Arbor does not have a separate department dedicated to contracting and reviewing third-party vendors; however, internal legal counsel reviews all contracts, and collects vendor performance feedback from applicable departments. Other vendor management features include the following:

• Arbor uses third-party inspectors only on a limited basis for follow up inspections and handles all other property inspections in house.
• When Arbor shares sensitive information with vendors, it utilizes confidentiality and non-disclosure agreements.
• Vendors (both company and individuals) working on Arbor's GSE loans are screened against OFAC and FHFA lists.
• All third-party vendors are certified prior to beginning work with Arbor and are recertified annually to remain on the approved vendor list. This certification includes a review of current licenses; certificate of insurance; current training hours, if needed, for licensing requirements; and corporate financials. They are required to either provide a SOC 2/ISO 27001 or complete a comprehensive questionnaire and provide required documentation to ensure that they meet Arbor's security requirements.
• Depending on the size of the vendor, outside audits may be performed to test a vendor's systems for exceptions. Arbor also maintains the right to audit and inspect the vendors for compliance with the agreement's terms, including data security and internal controls.
• Quarterly third-party vendor assessments are distributed to underwriting staff to rank and review all currently approved appraisal, engineering, and environmental firms. The deputy chief underwriter reviews the vendor assessments.

Insurance and legal proceedings

Arbor 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--Primary Servicing

The loan administration subranking is ABOVE AVERAGE for primary servicing.

As of June 30, 2021, the portfolio contained 4,773 loans backed by collateral of 8,427 properties with a total UPB of $33.6 billion. In June 2021, delinquencies have risen slightly compared to year-end 2020, but still remain near December 2020 levels and are viewed as manageable. (see table 4) As previously noted, a substantial portion of the serviced portfolio is backed by multifamily properties (94.1% via UPB), located in 49 states throughout the U.S. (see table 5). The multifamily orientation is a function of the business model, where Arbor predominately originates and services loans for Fannie Mae and Freddie Mac (see table 6).

We believe Arbor has well-defined processes, procedures, and controls designed to monitor compliance, timeliness, and accuracy within its primary servicing operations. Automation and leverage of its core servicing system allow Arbor to maintain an efficient platform that minimizes manual input and facilitates the generation of loan-level reports that incorporate both performance statistics and narratives for investor dissemination.

Table 4

Table 5

Table 6

New-loan boarding

Based upon its stated practices and written procedures Arbor has sound loan setup functions. Controls and other features of the new loan setup process include:

• The customer service team boards all new loans onto the Enterprise! system, including 564 loans for the first half of 2021, 1,027 new loans in 2020, and 963 loans in 2019.
• Staff performs a detailed check of loan documents when a loan closes, and reviews associated loan-level data before activating the loans in the system.
• All loans are boarded after having a second-level data integrity audit within one day of closing or acquisition.
• Any outstanding trailing loan documents are tracked via spreadsheets. The company reported no trailing loan documents for loans boarded more than six months prior to June 30, 2021.
• Loan boarding accuracy and timeliness are tracked as part of the QC program. The results are reported to senior servicing management on a quarterly basis.
• Welcome letters are now automated through the system and are mailed to borrowers within five days, which is much quicker than what we found during our prior review that reflected 21 days after boarding.
• All applicable entities/individuals boarded in Enterprise! are automatically run against OFAC, Freddie Mac exclusionary, and FHFA lists on a weekly basis.

Payment processing

Arbor's practices and integrated technology tools efficiently address payment processing, cash management, and other complex loan structures with appropriate segregation of duties. Highlights of payment processing include:

• There is a segregation of duties among the staff that receives payments, makes deposits, and posts payments.
• A daily reconciliation of cash receipts to the Enterprise! system is performed by a staff member independent from the above functions.
• Enterprise! integrates all lockbox, wire, and automated cash-handling activity, allowing Arbor to electronically receive and post-borrower payments. 99.0% of the payments are collected via automated cash handling or wire transfers.
• All funds deposited into the general clearing account are identified and posted within 24 hours.
• The general clearing account is balanced daily, followed by daily supervisory review.
• The portfolio management, investor accounting, and reporting areas monitor suspense accounts to identify and resolve aged items.
• The payment processing group performs a periodic quality control check of rate changes for the adjustable rate loans, which totaled 626 as of June 30, 2021.
• To combat wire fraud, Arbor no longer provides payoff quotes or wiring instructions via email; borrowers must obtain both through Arbors' secure portal.
• All payoff funds are received via wire into the general clearing account and are tracked through Enterprise! to facilitate timely processing. Payoffs are then reported and remitted to investors in accordance with their specific guidelines.

Investor reporting

Arbor is highly experienced with Fannie Mae, Freddie Mac, and customized third-party reporting requirements. Arbor has various investor reporting and operational accounting activities that are appropriately segregated for reporting, remitting, and related account reconciliation processes. Other highlights include the following:

• Arbor's eight-member investor reporting team includes separate personnel to handle reporting and remittance approval.
• Monthly reporting schedules are created and maintained to facilitate timely reporting, and remitting is performed in accordance with each investors' guidelines.
• Remittance reports are reviewed and approved by the team manager.
• There is a secondary review and sign-off of custodial account reconciliations, which are reconciled daily to the system.
• There have been no penalties for late reporting during the six-month period ending June 30, 2021.
• Bank rating reviews are conducted on a weekly basis to monitor that accounts are in compliance with investor guidelines.

Escrow administration

We believe the company has sound controls for escrow administration activities. Arbor has dedicated teams for tax and insurance administration, with the asset managers handling loan-level reserve monitoring and analysis for other escrowed events such as tenant improvements and replacement reserves. Other features include:

• All reserve and escrow accounts are set up in Enterprise! within 30 days of the loan closing or acquisition, and are managed throughout the loan's life by the escrow staff.
• Arbor has five employees dedicated to managing tax escrows and 29 employees managing the insurance escrow administration across the portfolio.
• As of June 30, 2021, approximately 89% of loans in the portfolio were escrowed for taxes, and 71% were escrowed for insurance. All tax and insurance escrows are re-analysed annually.
• Arbor uses a tax service vendor for all loans to remit payments to appropriate taxing jurisdictions. A new vendor has recently been implemented for the single-family rental portfolio. Vendor reports are electronically uploaded to the servicing system.
• There was a nominal amount of tax penalties incurred during the first half of 2021 and during 2020.
• Insurance expiration dates and coverage limits are maintained in Enterprise! with notice letters sent to borrowers 60 days prior to expiration.
• Arbor has a forced placed insurance policy with a 365-day look-back period. As of June 30, 2021, 21 loans are forced placed.
• Insurance carrier ratings and flood coverage maps are reviewed annually for compliance with loan documents and investors. Arbor is now using an offshore vendor for insurance administrative support and to board new loan basic data-via ShareFile-without having access to the Enterprise! system.

Asset and portfolio administration

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

• Arbor reported a 99.0% rate of collection, analysis, and reporting on prior year-end collateral property operating statements.
• The company has system-generated triggers to add loans to the watchlist in the event of substandard inspections or property financials.
• The company handles all financial statement spreads and review comments in-house.
• Arbor's expiration date tracking for the letters of credit (LOC) reflect no issues on LOC renewals as of June 30, 2021.
• UCC filings are tracked in the system, which produces monthly exception reports for management. New filings, re-filings, continuations, and terminations of UCC filings are handled directly by Arbor's vendor.
• Arbor uses both a Commercial Real Estate Finance Council watchlist, as well as its own monthly internal watchlist for early detection of default risk.
• Watchlist loans are assigned risk ratings, which are reviewed quarterly by the asset management department heads and the chief underwriter.
• Action plans, highlighting drivers of loan ratings and corrective action steps are created on watchlist loans per the specific investor guidelines.

Borrower requests

Arbor addresses borrower requests internally, in a well-controlled manner, with no vendor input involved in the process. Highlights of this process include the following:

• Discussions were held with any borrowers expressing concern with continued mortgage payment remittance due to the COVID-19 pandemic. After these discussions, Arbor determined if a forbearance would be the correct avenue to pursue. According to management, many of the borrowers were able to keep payments current without the need for a forbearance.
• During 2020, Arbor's primary servicing team processed 733 consents, including 216 management changes, 140 forbearances, 114 repair extensions, 69 assumptions, and 194 other transactions. For the first half of 2021, they have processed an additional 234 consents.
• Borrower transaction requests are reviewed for completeness and a business case is prepared for review and approval by management with any risk factors associated with the request noted. Business cases are stored in the servicing system.
• Certain borrower requests may be approved internally while others must be approved by the specific investor.

Early-stage collections

Arbor has adequate staff allocated to handle the early-stage collections. Noteworthy features include the following:

• Portfolio managers monitor payment status reports to identify distressed loans prior to delinquency.
• The day after the grace period expiration, portfolio managers contact borrowers via telephone and send a written default notice. Second efforts are made to collect funds seven days after the payment is due.
• All collection efforts (with dates and comments) are chronologically tracked within Enterprise! and, if necessary, transfers to special servicing are documented in the system.
• Written action plans are required on certain substandard watchlist loans with all workflows run through Enterprise!.
• Loans that are in imminent default, or where the borrower has indicated they are unable to pay the debt, are immediately transferred to special servicing, subject to senior management approval.
• Forbearances due to the COVID-19 pandemic are not transferred to special servicing unless the borrower is not following the terms of the forbearance agreement.

Loan Administration–-Special Servicing

The loan administration subranking is ABOVE AVERAGE for special servicing.

The special servicing team has experience spanning multiple economic cycles with the bulk of its Arbor history related to multifamily properties. Recent additions to the group have brought additional experience with various commercial real estate investors and varied property types.

The group is largely based in the Uniondale and Depew offices, with smaller groups working in the Miami and Dallas offices. In Uniondale, they are primarily responsible for all asset management and special servicing for non-agency loans and CRE-CLOs.

The Depew special servicing team exhibits the same experience levels and loss mitigation philosophy as its Uniondale counterpart, while working in concert with investors' special servicing groups, primarily for the multifamily agency loans. We note that in 2021, Arbor received Fannie Mae's 2020 Specialty Award for Excellence in Loss Mitigation.

The special servicing group's general workout philosophy is to maximize recoveries through a concurrent multifaceted approach, including borrower negotiation and modification, foreclosure, and note sale.

Arbor has recently contracted with Real Insight for an asset management and special servicing platform license. Arbor IT and structured asset management teams are working with the vendor to configure/setup and implement the system, with an anticipated "phase in" during the second half of 2021.

Arbor's reported special servicing portfolio is atypical, particularly when compared with a CMBS special servicer's portfolio. Assets in the portfolio primarily include ART's structured asset investments (most of which are not distressed or in default but require intensive surveillance) and specially serviced agency loans.

As of June 30, 2021, Arbor reported a special servicing portfolio of 48 agency and non-agency loans and three REO assets, with an aggregate UPB totaling approximately $0.7 billion (see table 7). Included in these figures are two loans from CRE-CLO transactions totaling $29.3 million. Arbor's special servicing group also handles complex transactions on performing loans such as assumptions, modifications, and extensive insurance losses.

Overall average hold times for active non-performing loans in special servicing have increased to 17.6 months as of June 30, 2021, compared with 8.3 months at June 30, 2019, when our last review was performed. The hold times for REO assets have increased to 123.7 months for June 30, 2021, as compared to 57.2 months at June 30, 2019, because they have held the same assets during the past several years on their own balance sheet. The portfolio has no real estate mortgage investment conduit restrictions pertaining to REO hold times with the servicer more focused on maximizing economic value.

Table 7

Loan recovery and foreclosure management

Arbor displays effective and proactive loan recovery and foreclosure management protocols to efficiently resolve nonperforming loans (primarily multifamily). Highlights include the following:

• When monetary defaults occur, asset managers work closely with the legal department and senior management to minimize cash disbursement, increase communication to determine the recommended course of action, and maintain the appropriate level of communication with the borrower.
• Borrowers are required to sign pre-negotiation letters before entering into workout discussions.
• Business plans are approved by a committee, under the appropriate Arbor or pooling and servicing agreement (PSA) delegations of authority, and by senior managers.
• Consistent with the volume and nature of Arbor's special servicing portfolio, recent loan resolution activity has primarily been full payoffs or returns to master servicing (see table 8).
• The company has not completed any foreclosure sales since 2015, but there are 10 loans pending foreclosure as of June 30, 2021.

Arbor's business plan procedures vary by investor type, but we believe they are thorough, well-defined, and well-documented to proactively address assets that are at risk of becoming a liability to the company and its investors.

Table 8

REO management and dispositions

Although Arbor's REO group does not function in a traditional special servicer role, in part due to their significant GSE portfolio, Arbor has demonstrated adequate REO management and past REO sales oversight. Notable aspects include the following:

• REO business plans are required to be completed within 45 days of acquiring or foreclosing the asset.
• Business plans are accessed through the central asset management system.
• If possible, asset managers schedule inspections prior to foreclosure to establish any needed repair expense thresholds.
• Arbor seeks to contract with an independent property management company (not an affiliate of the special servicer or GSE) 90 days prior to taking title of the property.
• Withdrawals of funds are made from the REO account for payment of insurance policy premiums and real estate taxes. If funds are insufficient, the special servicer will request a servicing advance (generally from GSE).
• For sales to third parties, the special servicer uses reasonable efforts to solicit offers in a manner that would realize a fair price within a reasonable time period.

Table 9

REO accounting and reporting

Notwithstanding that historical REO asset volume has been limited, Arbor has sufficient controls over accounting and reporting of foreclosed properties. Highlights include:

• Use of a dual REO operating account setup with property managers;
• For its current portfolio size, Arbor's procedures adequately describe REO accounting and property management reporting requirements;
• Under Arbor's procedures, asset managers are responsible for reconciling foreclosure and REO property accounts against the general ledger each month; and
• The account reconciliation is then reviewed and approved by the senior asset manager and controller, and any discrepancies are reported to the chief financial officer.

If Arbor were to become more active as a CMBS special servicer or have a more sizable REO portfolio, we would expect the company to have more extensive and detailed REO policies and procedures at its current ranking level.

Subcontracting management

Arbor offers sufficient guidance to asset managers when they select and oversee third-party subcontractors and they adhere to the following guidelines:

• Formal procedures governing subcontractor engagement and oversight require that all third-party vendor engagements either come from an approved vendor list or are obtained via competitive bidding.
• Operational compliance and credit underwriting collectively maintain the approved vendor list and monitor all vendors.
• All third-party vendor activity is tracked in spreadsheets, with vendors being recertified annually each January.

Legal department

Arbor's in-house legal team has three employees who primarily support the special servicing team in determining initial legal requirements and the applicable properties' complexities. Other notable aspects include the following:

• The legal functions include special servicing legal actions, such as foreclosure filings and the appointment of receivers. Additionally, in-house legal counsel supervises other litigation performed by outside counsel.
• Legal counsel controls the approved attorney list and engagements.
• Arbor uses a standardized engagement letter to engage outside counsel.
• Once outside counsel is engaged, a tracking system monitors the status of the work being performed and related fees.
• Asset managers review legal bills before payment is authorized.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Arbor Multifamily Lending LLC ABOVE AVERAGE Commercial Mortgage Loan Primary And Special Servicer Affirmed, Aug. 11, 2021
• Select Servicer List, June 3, 2021
• Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Servicer Evaluation Spotlight Report™: U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Servicer Evaluation: Arbor Multifamily Lending LLC, Feb. 11, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019