Rationale

S&P Global Ratings' ranking for TaxServ LLC (TaxServ) as a tax-lien servicer is AVERAGE. On April 11, 2022, we affirmed the ranking (see "TaxServ LLC Tax Lien Servicer Ranking Affirmed At AVERAGE," published April 11, 2022). The raking outlook is stable.

Our ranking reflects TaxServ's:

• Good management and staff experience and tenure;
• Deep understanding of the operational and political nuances of taxing authorities;
• Investment in technology to support efficiencies and controls;
• Ability to manage multiple product types;
• Reduction in its tax lien portfolio, in spite of an increase in its overall servicing portfolio; and
• Untested changes to its internal audit program.

Since our prior review (see "Servicer Evaluation: TaxServ LLC" published Sept. 17, 2020), the following changes and/or developments have occurred:

• TaxServ began backup servicing for two new clients;
• New cybersecurity tools including multifactor authentication, phishing simulation and training software, and endpoint monitoring software were implemented;
• TaxServ contracted with a former employee to conduct quarterly audits;
• The company implemented the use of a USPS database to validate mailing addresses; and
• It modified the letter process by joining members of the call center with the mail team to have a more coordinated notice process.

The ranking outlook is stable. TaxServ has public sector contracts for tax lien servicing in place with terms generally ranging from three to four years. Many of these contracts have automatic renewal provisions. While TaxServ continues to develop relationships with taxing authorities to increase its public contracts and targeting private sector opportunities in collections of government receivables, there is an industry trend by private clients to move to self-servicing. TaxServ has responded to this industry change by positioning themselves as a back-up servicer.

In addition to conducting a virtual meeting with servicing management, our review includes current and historical servicer evaluation analytical methodology (SEAM) data through December 31, 2021, as well as other supporting documentation provided by the company.

Profile

TaxServ was established in 1993 as a collector and servicer of government receivables owed to municipalities or third-party owners. TaxServ is based in McLean, Va., with offices in West Palm Beach, Fla., West Hartford, Conn., and Torrington, Conn. The company provides servicing and collection activities for both tax and non-tax receivables.

TaxServ collects and services a variety of municipal-related debts, including real estate tax liens, motor vehicle tax liens, personal property tax liens, non-tax receivables, and municipal court debts for both public and private sector clients. As a tax-lien servicer, TaxServ is responsible for payment processing, reporting, asset management, and liquidation. For its public clients, taxpayers are charged a collection fee in addition to the tax fees and penalties; the collection fee is retained by TaxServ, with no fee sharing to the municipalities.

TaxServ's total portfolio as of Dec. 31, 2021, consisted of approximately 1 million liens with a redemptive value of just over $275 million (see Table 1). The portfolio is comprised of real estate tax liens, past due real estate taxes put for collection, water and sewer liens, municipal tax liens, municipal non-tax collections, and assessment and public land lease collections. The tax lien portfolio under assessment was comprised of approximately 2,100 liens on 798 properties for just over $6 million in redemptive balances (see Table 2). This is a reduction of over 75% from Dec. 31, 2020, which was the result of a client moving its portfolio in house for servicing and the liquidation of a second portfolio. Not reflected in the portfolio numbers are liens for which TaxServ is the backup servicer.

Table 1

Table 2

TaxServ's strategy is to continue to grow public sector contracts, which provide a steady portfolio based on the contract lengths and annual tax placements, while targeting an increase in the private sector tax-lien servicing portfolio over the next three to five years. TaxServ has demonstrated its ability to adapt its processes and systems in order to service new products presented by clients. This flexibility has enabled it to add new clients with differing business models and needs. Management indicated it added a number of clients, both private and municipal, during 2021 as well as backup servicing for two clients.

Management And Organization

The management and organization subranking is AVERAGE for tax lien servicing.

Organizational structure, staff, and turnover

TaxServ has experienced managers in all key areas, including the areas responsible for asset management. The senior management team averages 26 years' industry experience with 17 years' average company tenure, while middle managers average 18 years' industry experience and 14 years' company tenure. There was no turnover in management and 9% staff turnover in the second half of 2021, which we consider manageable.

In addition to its tax-lien servicing background, TaxServ's management team brings a diverse range of experience to the company, including time working in municipal taxing authorities, municipal governments, mortgage servicing, and collections. The experience working in local government not only provides a deep level of understanding of the nuances of governmental processes, but it also brings credibility to the local agencies to build and develop relationships. Per management, this relationship building with the municipal tax collection agencies is a key to success. The management team's diverse background has also enabled TaxServ to take on the collection of debt outside of its standard products, such as municipal court fees and fines collections and public land leases.

As of Dec. 31, 2021, the company had 32 employees devoted to servicing. TaxServ utilizes contractors for various support functions, including technology, which is appropriate for a company of its size. Operational functions are divided among the three sites, with collections performed in West Hartford, servicing administration in West Palm Beach, and corporate and administrative functions in McLean. Client relations and marketing is performed from its Torrington site.

TaxServ uses a professional employer organization for payroll management, new hire onboarding (including background and credit checks), payroll tax administration, and benefits.

Management said that typically municipal tax servicing contracts have terms of three to four years, and many have built in auto-renewals. Due to the length of the contracts and the timeframe involved in executing new contracts, TaxServ feels it can manage capacity effectively. The office locations as well as the technology afford the opportunity for growth.

Training

TaxServ uses a training system that provides and tracks modules for mandatory courses, including cyber security, sexual harassment training, and office safety, as well as optional courses. Additionally, TaxServ offers employees a stipend for employees to attend extracurricular training sessions.

New employees are assigned to a current employee who acts as their mentor and trainer. They are required to complete on-boarding training that is a combination of self-learning and on-the-job training within 30 days of hire. On completion of the on-boarding training, a knowledge check interview is performed by the employee's supervisor and an executive manager. All employees are required to complete annual training courses covering company policy and procedures (P&Ps), core values, corporate mission, cyber security, sexual harassment prevention, and workplace safety. While TaxServ is not required to be in compliance with the Fair Debt Collection Practices Act, collectors are required to take an hour of annual training focused on the Act.

For collectors, the collection supervisor acts as the mentor and the training lasting approximately two weeks, with new collectors able to work independently generally by three weeks. Since the collection staff is located in the same office, help on a call-to-call basis is readily available not only to new hires but to all collectors. Additionally, collectors can use their chat tool to get help with any questions while on calls.

We feel, based on the company's size and the combination of the mentoring program, the experience of the management team and existing staff, and the training system for non-TaxServ specific courses, that the training program is sufficient for the company.

Systems and technology

TaxServ utilizes independent contractors to manage its proprietary servicing system as well as network and information security management. TaxServ utilizes a proprietary system, Asset Information Management (AIM), as its system of record for servicing. An independent contractor manages the AIM system with the help of subcontractors. There is risk associated with the programming knowledge and expertise for the proprietary system being held within a small firm to a limited group of people.

AIM is used to manage the processes for servicing tax liens throughout the life of the lien, including:

• Capturing and maintaining asset data;
• Payment posting;
• Investor reporting and remittance;
• Capturing account activity, correspondence, and notes;
• Collection assignments;
• Payment plan tracking and monitoring;
• Tracking bankruptcy, legal remedy, and foreclosure cases;
• Determining asset disposition with a net present value tool;
• Bankruptcy plan payment management;
• Managing real estate-owned (REO) activity and disposition of assets; and
• Acting as a document repository.

AIM user access is restricted based on function so that not all users have access to all areas within the system. The system maintains a full logging and change management record that captures the date, time, and user for each entry and change. All AIM source code is backed up monthly. TaxServ does not maintain any obligor social security numbers in its servicing system.

TaxServ uses change management software to track all system updates. It is also used as a help desk ticketing system.

Business continuity and disaster recovery 

As part of its disaster recovery protocol, TaxServ utilizes a co-location site to house its servers. While located in south Florida, the site is in a category 5 hurricane-rated building with three generators. In the event of a disaster, users can access applications via remote access.

Each TaxServ site has a designated senior manager in charge of communication during a disaster. Managers have the ability to access systems remotely. TaxServ's cloud-based phone system and remote system access make it possible for staff to work remotely in the event of an emergency.

Servers are replicated with daily backups stored locally and in the cloud. Backup recovery is tested monthly.

Cybersecurity 

TaxServ has the following in place to manage and monitor security:

• Cloud-based event logging and monitoring of firewall activity.
• Read-only access to data provided to clients via Remote Desktop Services.
• Malware detection and antivirus software on all computers and servers.
• Email filtering software.

Since our previous review, TaxServ has deployed the following:

• Multifactor authentication.
• End point detection and response software to all servers and workstations.
• A cybersecurity tool to deploy phishing simulations and provide cybersecurity training.

TaxServ's most recent third-party penetration test was completed in January 2022. A single material item was noted, which has been remediated.

Internal controls

TaxServ monitors regulatory changes through regulatory commissions, industry associations, municipal and legislative liaisons, and outside legal counsel. TaxServ's senior counsel summarizes adopted changes and distributes the summary internally. This change summary is used to update the P&Ps manual and make changes to the servicing system as needed. While not in a standardized or consistent format, TaxServ has a detailed and comprehensive published P&Ps manual. Staff is notified of updates and changes directly by management.

Compliance and quality control 

The individual business units perform quality checks that are built into the workflow processes, including:

• Collection activity reports are used to ensure that collector activity is appropriate and timely.
• The call center manager performs regular account reviews to monitor collector activity against regulatory and contractual requirements.
• All letter batches have a quality review internally before they are sent to the client for sign off.
• A dual count of all customer checks received for payment posting is performed.
• Wire entry requests and approvals are performed independently by different managers.

Internal and external audits 

Seven divisions within the company have been broken out and risk rated and are subject to audit. Two audits are run in quarters one through three, and one is conducted in quarter four. Audits are performed by either the president or the executive vice president. We would typically expect that the internal audit group maintain its independence from the operational groups; however, it is not unusual to see this function as part of senior management duties in smaller organizations. TaxServ said it has engaged a former employee as a consultant to complete quarterly audits beginning in the first quarter of 2022, which, while untested, we see as a positive move to separate audit from the executive management responsibilities.

We reviewed the audit memos and associated audit scorecards for the audits completed in the second half of 2020 and the first half of 2021. While the documented audit process includes steps required to assess the managers' understanding of the internal controls for their operations, the final audit memorandum does not include the results of that assessment. Without this summary to tie the testing back to the control, the audit report reviewed was more akin to those we typically see for compliance audits, where testing and recommendations are focused at a transactional level and do not have a clear tie to the risks and controls.

All issues discovered within audits are detailed, and remediation items are noted within the audit report. One month after an audit review is completed, applicable management holds a meeting to review remediation progress. Any permanent changes due to remediation are memorialized in the P&Ps.

In those states requiring licensing as a collection agency (Connecticut, Massachusetts, Maryland, and Florida), the states perform periodic operational audits. Florida and Connecticut perform on-site and/or phone audits, while the others perform desk audits. Management stated that there have been no state banking committee audits since our previous review.

In addition to its internal audit program, we factored in TaxServ's SSAE 18 SOC 1 Type 2 report for the June 1, 2020, through May 31, 2021, period, which cited no deviations to assess its control environment.

Complaint management

TaxServ has developed a taxpayer information sheet, which is provided to obligors through the collection letter process. This sheet includes information regarding debt disputes. TaxServ requests that obligors provide disputes in writing and has an email address specifically for these items. Obligors can also fill out a form on TaxServ's website, which is directed to the dispute email inbox on submission.

Though there is no requirement for TaxServ to register under the CFPB complaint database, it has voluntarily elected to do so. There have been minimal complaints file through CFPB complaint database and none since our prior review.

Vendor management

TaxServ's vendor management program includes due diligence prior to engaging a new vendor, operational oversight to ensure adherence with service level agreements, and annual vendor scorecards. Primary vendors include those used for administrative functions (IT service providers, human resources service provider, and database manager) as well as those utilized for operational processes (the bulk mail vendor, foreclosure attorneys, bankruptcy attorneys, and REO brokers).

Vendors are selected by senior management after a due diligence review that includes:

• A risk assessment based on the potential impact to TaxServ or its clients due to vendor failure;
• A review of the vendors' insurance and licensing; and
• A background check including references, Better Business Bureau reviews, and regulatory agency findings or complaints.

Ongoing performance is measured based on operational interactions and adherence to service level agreements. An annual score card is completed for each vendor incorporating qualitative metrics for administration, operational, and staff performance. TaxServ requires vendors to follow the bond and insurance requirements of the clients.

Insurance and legal proceedings

TaxServ 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

The loan administration subranking is AVERAGE.

New lien set-up

TaxServ boards new liens to its servicing system via electronic file uploads from municipalities and private clients. Before upload, the new placement file is scrubbed to identify liens under the same obligor in order to link the new liens to the existing account within AIM. TaxServ receives new placements from the public clients every six months or annually depending on the tax cycle of the municipality.

Once the liens are boarded to the servicing system, reports are run to reconcile balances and lien counts to the boarding files provided or the city tax lien system, as applicable. In addition to the boarding reconciliation, the first post-boarding monthly report includes additional reviews and validation prior to sending to the client.

Payment processing

Obligors remit lien payments directly to TaxServ by check, cash, or credit card; by lockbox; or to the taxing authority, who then sends an electronic file identifying the payments to TaxServ. For the payments received directly by TaxServ, the following controls are utilized by the cash management team:

• There are transfer-of-custody processes for the handling of original checks.
• Checks are stored in a locked fireproof box until deposited to the client trust accounts.
• Reconciliation of funds received versus payments posted is performed weekly.
• Payments are posted to AIM in batches, which are reconciled to the bank deposits slips.
• All checks and accompanying envelopes are scanned and uploaded to AIM.
• The payment waterfall is controlled within AIM.

Payments via credit card, debit card, or Automated Clearing House through TaxServ's website are included in an electronic file transmitted by the card-processing vendor to TaxServ through a file transfer protocol site and uploaded to the AIM system, where the payments are automatically applied. TaxServ does not hold or have access to any obligor credit or debit card account numbers.

TaxServ processes 89% of its payments through lockbox and its website with the remaining 11% manually posted.

Investor reporting

Funds for payments collected are remitted to clients on a weekly basis (or other frequency as requested by the client) via wire or check. Wire requests and wire approvals are performed by two separate people to ensure segregation of duties.

TaxServ provides reporting packages to its clients on a monthly or quarterly basis, per the client's preference. Clients also have access to a client portal through which they have read-only access to account activity reports.

Collateral tracking and lien release

As noted, at the time of boarding, new accounts are scrubbed and matched to existing records within AIM. This process allows for clear visibility of all liens serviced for a single property. The cash management team is responsible for processing and tracking lien redemptions and posting payments.

In most municipalities today, there are no longer physical lien certificates. While TaxServ has historically held limited physical certificates, with the addition of private clients, the number has increased, and TaxServ has a full-time employee managing the tax certificates. TaxServ has P&Ps for the management of those certificates. At the time of boarding, all original tax certificates received are reconciled to the client-boarding document and to AIM. A copy of the tax certificate is uploaded to AIM, while the original is kept in a fireproof cabinet. An inventory of all certificates is prepared and used to reconcile the physical certificates to the liens in AIM. When a lien is to be released, TaxServ prepares the release and sends the release with the original tax certificate via tracked mail to either the attorney or county for recording.

Administration

The company develops a strategy for each portfolio based on statutory requirements and client needs. As part of TaxServ's new client interview process it develops the strategy for managing the client's portfolio.

The financial system of record for public sector accounts is that of the municipality, not TaxServ. Because of this, TaxServ downloads data from the municipal systems on a monthly basis. That data is then uploaded into AIM, and any accounts in AIM where the obligors paid the municipality directly are updated. TaxServ reconciles AIM with the public clients' systems of record on a weekly basis by uploading data from the municipalities to AIM. This process identifies any adjustment to taxes due as a result of disputes or payments made directly to the taxing authority.

TaxServ utilizes a print vendor to prepare and send obligor letters. TaxServ works with the client and the vendor through a change-management process to update or create new letters. Revisions, approvals, revision dates, and prior versions of the letters are maintained in a network folder.

Since our prior review, TaxServ has modified the letter processes by:

• Implementing the use of the USPS database to validate mailing addresses, which management states has reduced the return mail by approximately 50%; and
• Creating teams of call center and mail team staff who work together to coordinate notices.

Returned letters are scanned and attached to the account in AIM. Skip-tracing tools are utilized to locate a valid obligor address.

Collection and payment plans

TaxServ's collection team is made up of well-tenured and seasoned management and staff. Collection management has an average of 14 years of industry experience and 13.5 years of company tenure, while the collection staff averages 13 years of industry experience and 9.5 years of tenure. The account managers are assigned specific portfolios and loss mitigation functions.

Accounts are assigned to collectors through the AIM system. The liens of the largest clients are disbursed among collectors; for clients with smaller portfolios, the total book is typically assigned to one or two collectors.

A series of letters are sent to obligors based on the collection strategy of the client. Collectors provide payoff amounts, answer questions regarding the amount due, and work with obligors on voluntary payment plans. Outbound call campaigns are targeted to receipt notice recipients, obligors change in payment habits, and high balance accounts.

TaxServ has clients that accept payment plans. Collectors have delegated authority to enter into plans within the clients' guidelines. The AIM system has the functionality to manage and track the plans. The account managers monitor the payment plans and manage the foreclosure holds based on client guidelines. As of Dec. 31, 2021, TaxServ had payment plans in place for 29 liens, 22 of which were current.

Collection management reviews account notes in AIM for collector coaching and feedback. Productivity reports are also produced to manage collector performance. TaxServ utilizes call center software that provides tools for call center management, including:

• A real-time dashboard;
• Live monitoring of calls; and
• Improved reporting functionality.

TaxServ reports good call center metrics including a 10 second average speed of answer and a 1.5% abandonment rate.

The call center manager performs call monitoring of agents weekly. Staff reviews are performed monthly and include call monitoring results, collection management reviews of account notes in AIM, and productivity reports.

While TaxServ is not subject to the requirements under the FDCPA or the Telephone Consumer Protection Act, as a best practice, its P&Ps comply with both regulations.

Bankruptcy

For public clients, all bankruptcy accounts are returned to the client. For private clients, due to the costs of engaging an attorney versus the lien balance, most bankruptcy work is completed in-house. TaxServ will engage counsel when necessary. The servicing system includes a bankruptcy module with detailed steps for monitoring and managing the bankruptcy. The bankruptcy plan can be set up in AIM for appropriate payment posting tracking of trustee payments.

TaxServ identifies bankruptcy filings through skip-tracing activities and relies on its clients' or debtors' counsel to notify them of new filings. Once identified, TaxServ utilizes PACER to obtain details on the bankruptcy. We generally see servicers utilizing a bankruptcy filing notification system such as PACER to identify new filings. Utilizing such a service helps to identify accounts for obligors in bankruptcy quickly for proper handling.

Foreclosure management

Before initiating foreclosure, the asset manager will provide a case summary to the senior management committee and the client for review and approval. This case summary includes an economic and financial analysis based on the property value, environmental condition, and title status, as well as a risk analysis based on the anticipated time and expense of litigation. Management compares this analysis with the options for workout solutions to determine the best path to mitigate loss.

Foreclosures are referred to attorneys within TaxServ's approved legal network. TaxServ and its attorneys utilize the foreclosure module within AIM to manage the foreclosure steps and processes. Timetables are built into the system based on property jurisdiction and are used to manage and monitor attorney performance. Asset managers are also responsible for reviewing and validating that attorney invoices are accurate and recoverable.

TaxServ also has processes for managing administrative tax deeds. The requirements vary by state, and the asset manager is required to work with senior counsel through the process.

As of Dec. 31, 2021, the company was managing only five liens in the foreclosure process and had completed one foreclosure. As noted in table 3, TaxServ saw a large decrease of initiated foreclosures between Dec. 31, 2020, and Dec. 31, 2021.

Table 3

REO management

TaxServ had one REO property as of Dec. 31, 2021. Tax deed sales are not managed for public clients by TaxServ, but are instead returned to the municipality.

TaxServ coordinates the property acquisition activity from the foreclosure sale to final disposition for its private clients. Attorneys are used to manage the eviction process, while the asset manager engages a broker from TaxServ's approved broker list to manage the property preservation, listing, marketing, and inspections of the property. The asset manager obtains approval from both the senior management committee and the client before finalizing list prices or the sale price.

Until the sale of the asset, the asset manager will oversee the broker's marketing and property management activity, analyze any bids received, obtain credit committee approval for bids, and coordinate the closing of the sale. As with the other servicing processes, AIM includes an REO module that has specific steps and timelines for the marketing and sale of REOs. These timelines are used to manage and monitor real estate brokers and attorneys.

Financial Position

The financial position is SUFFICIENT.

Related research

• Select Servicer List, April 19, 2022
• TaxServ LLC Tax Lien Servicer Ranking Affirmed At AVERAGE, April 11, 2022
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• Servicer Evaluation Spotlight Report: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Servicer Evaluation: TaxServ LLC, Sept. 17, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019