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 Dec. 16, 2022, we affirmed the rankings (please see "Arbor Multifamily Lending LLC ABOVE AVERAGE Commercial Mortgage Loan Primary And Special Servicer Rankings Affirmed," published Dec. 16, 2022). 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 generates servicing portfolio growth;
• Experience, depth, and breadth of management;
• A strong compliance and control environment, despite lack of dedicated internal audit group;
• A proactive credit management structure, which includes a loan rating system;
• Limited portfolio property and investor-type diversity, with 95% of the portfolio unpaid principal balance (UPB) comprised of multifamily loans with a government-sponsored enterprise (GSE) emphasis; and
• A somewhat limited track record in managing, stabilizing, and disposing of real estate-owned (REO) properties.

Since our prior review (see "Servicer Evaluation: Arbor Multifamily Lending LLC," published Aug. 23, 2021), the following changes and/or developments have occurred:

• The primary servicing portfolio increased 25% to $42 billion as of June 30, 2022, from $34 billion as of June 30, 2021, and the special servicing portfolio decreased 59% to $286 million from $697 million.
• In October 2022, the Arbor servicing office was relocated to a new facility in Tonawanda, N.Y. a few miles from the previous Depew, N.Y. office.
• As of June 30, 2022, the single-family rental portfolio increased to 235 loans totaling $988 million in UPB, up from 104 loans totaling $409 million in UPB.
• In August 2022, Arbor hired a VP to assist in the development of the Newport Beach, Calif. team and to manage the company's west coast structured asset management portfolio.
• In August 2022, the manager of loan surveillance was promoted to SVP, portfolio management and loan surveillance.
• In August 2022, the portfolio analyst team was moved from loan surveillance to credit risk management, which is intended to provide a more collaborative working environment and cohesive approach to servicing and asset management.
• In May 2022, the structured asset management team began using a vendor to spread financials.
• In April 2022, Arbor adopted the Real Insight asset management system for their specially serviced loans and their CLO portfolio.
• In March 2022, a managing director, servicing, and agency asset management was hired, replacing the prior head of the group, who retired in late 2021. This new executive has over 30 years of experience in all aspects of commercial lending operations and servicing.
• In October 2021, a VP was promoted to SVP, risk management and was made responsible for overseeing the resolutions of the agency special servicing portfolio.
• In August of 2021, Arbor expanded its partnership with Silver Skills to include their support of open insurance items.
• Arbor upgraded to release version 2021.2.63 of their Enterprise!® servicing platform in the Fall of 2021.
• The company is currently working in stages on a cloud migration for data storage. Per management, this is expected to be completed by the end of 2023.
• Arbor employees have returned to the office since the pandemic. They are generally using a hybrid model with employees coming into the office two days per week at minimum.

We have a stable ranking outlook for each of the rankings. Arbor's experienced staff continues to conduct its primary servicing operations in a well-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 with their consistent strategy to enhance their processes and invest in the technology required to service their portfolio.

In addition to conducting a remote meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2022, as well as other supporting documentation provided by the company.

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.

The company's primary and special servicing staff are largely based in the new Tonawanda, N.Y. office (which they moved to in October 2022 from Depew, N.Y.) and the Uniondale, N.Y. offices. It also operates satellite servicing offices in Atlanta, Boston, Dallas, Miami, and Newport Beach, Calif.

In 2022, Arbor was named a top 10 Fannie Mae delegated underwriting and servicing (DUS®) multifamily lender for the 15th consecutive year (placing sixth); they were also named Fannie Mae's 2021 Top Small Loan Producer, and a Top DUS Producer (placing eighth). Additionally, 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, 2022, Arbor's primary servicing portfolio consisted of 4,791 loans, with an aggregate UPB of approximately $42 billion, including participated interests (see table 1). The primary portfolio continued to grow in both UPB (by $8 billion) while maintaining a relatively flat loan count (up by 20 loans) since June 30, 2021, as the average loan size grew to $8.8 million from $7.0 million. The UPB of the primary servicing portfolio consists mainly of GSE multifamily loans including 43.7% Fannie Mae, 11.2% Freddie Mac, and 2.5% Ginnie Mae. The portfolio also includes $15.2 billion in UPB as of June 30, 2022, 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 eight CRE-CLO transactions containing 350 loans, with an aggregate UPB of $9.5 billion and on 14 Freddie Mac small-balance deals containing 457 loans with $1.1 billion in UPB as of June 30, 2022. The Tonawanda special servicing unit works closely with Fannie Mae in loan workout/disposition and REO acquisition efforts.

The company has a limited number of loans in monetary default. Therefore, their experienced talent in the special servicing group, including a reported 89 full-time employees, are primarily working on complex borrower transactions, maturity issues, and large insurance losses. Of the aforementioned 89 employees, 30 of those handle specially serviced loans and two handle current REO assets.

The active special servicing portfolio has declined to its lowest levels in the last four years. Asset count decreased 50% and UPB decreased 68% since year-end 2018. There was a significant decline from the pandemic high at year end 2020 (see table 1). As of June 30, 2022, the approximately $286 million active special servicing portfolio is comprised of 30 loans ($250.3 million UPB) and four REO assets ($35.7 million) (see table 2).

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, 2022, Arbor reported 208 full-time servicing employees, 119 of which, were dedicated to primary servicing, with the remaining 89 professionals reported within special servicing.

The company has experienced solid portfolio UPB growth, boarding more than 500 new loans in the first half of 2022 and 1,200 new loans in 2021. That growth has been led by a 184% increase in CDO/CLO loans and a 68% increase in balance sheet loans since our last review. To handle the portfolio growth Arbor has increased primary servicing staff by over 7% and made several key enhancements to its organizational structure.

An EVP oversees servicing, agency and the structured asset management departments. The EVP, who has 26 years industry experience and has been with Arbor since 2019, is also the Freddie Mac chief servicing officer and Fannie Mae chief asset manager. The EVP is responsible for loans under his department, as well as loan restructurings for all of Arbor's balance sheet loans, while also charged with leading the expansion of Arbor's servicing and asset management functions. With the EVP overseeing each of these areas, management believes it improves the alignment and communication between departments. Reporting to the EVP are three employees: the MD of servicing and asset management; the MD of structured asset management; and the SVP of special servicing and residential financings. The EVP works out of the Miami office, and routinely travels to Uniondale and Tonawanda.

Reporting directly to the EVP is the MD of servicing and agency asset management, an executive who joined Arbor in March 2022 and has 34 years of commercial real estate industry experience. This group handles the oversight of agency asset management and servicing operations, including new loan boarding, tax, insurance and escrow processing, uniform commercial code (UCC) compliance, and investor reporting and accounting for agency loans. The MD has four SVP's reporting to him, along with numerous directors and assistant vice presidents (AVP's) reporting to their respective managers.

Group leaders reporting to the MD of servicing, agency and structured asset management include:

• The SVP of servicing operations, who has 32 years' industry experience and has been with Arbor for 20 years. The group handles customer service, UCC compliance, tax and insurance issues, investor accounting and reporting, payment processing and escrows and disbursements. In addition, she manages the servicing administration of Arbor's bridge, mezzanine, preferred equity and ARM portfolios.
• The SVP of credit risk management, who has been with the company for 10 years and has 16 years' industry experience. The group monitors key principal concentrations, portfolio market trends, probability of default calculations and quarterly risk tranching and reporting across all business lines. These key reports facilitate the discussions and decisions to migrate loans between portfolio management, loan surveillance and risk management.
• The SVP of portfolio management and loan surveillance, has 17 years of industry experience and has worked with Arbor for 14 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 risk management, has 14 years of industry experience and has been with the company for five years. The group handles special servicing for defaulted Agency loans and works closely with Fannie Mae special asset management and the directing certificate holder on Freddie Mac securitizations to execute on a plan towards resolution including workout, reinstatement and foreclosure. Risk Management also settles loss share, to the extent it exists, with Fannie Mae.

Also a SVP reports separately and directly to the EVP with a dotted line to the SVP of risk management. This SVP, Asset Management, Special Servicing & Residential Financing is based in the Miami office. She has 17 years of industry experience and has been with the company for two and a half years. The team is responsible for the lines of credit, the single -family rentals (SFR) and build to rent (BTR) portfolios as well as non-agency asset management, special servicing, non-agency construction management, securitized CLOs and REO asset management.

The final direct report to the EVP is the MD structured asset management, who has 35 years of commercial real estate industry experience and has been with Arbor for more than 20 years. His group handles structured finance loans, construction projects, single family loans and REO management. They process construction draws for light renovations to full scale construction of build to rent projects, monitoring work status and budgeted guidelines. Team members track loan performance and refinance risk through reviews of monthly operating statements and compliance with borrower's business plans and loan covenants. They also identify and mitigate risk through assessments of portfolio composition, loan metrics and sensitivity analysis. In 2022, the construction group expanded from four to seven staff members, adding a new project manager, a construction analyst, and a construction administrator.

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. Arbor has consistently promoted many of their people from within the company as positions become available which we believe enhances the retention of key individuals and tenured people within the company.

Arbor's primary servicing experience and tenure levels, across the senior and middle management levels as well as the staff, are generally in line with those of similarly ranked servicers except the primary senior management experience level that is slightly below peers (see table 3). The company's senior manager's industry experience in special servicing is comparable to its similarly ranked peers, but its middle management and asset managers' industry experience and company tenure are less than peers.

During the first half of 2022, total turnover was 14% and 12% for primary and special servicing, respectively. Total turnover for the full year 2021 was 32% and 29%. Management attributed the higher turnover in 2021 in part to a tighter labor market and employees leaving as part of the "great resignation" which other S&P ranked servicers have also experienced. Management believes that staffing has stabilized and has grown its head count since the prior year. Given the strong management experience and internal opportunities for advancement, and Arbor's ability to show they can attract new hires – which have access to solid training and mentoring programs - we believe the company effectively manages its staff.

Table 3

Training

Arbor provides a diversified array of ongoing, formal, internal and external training programs, typical of similarly sized peers. In first quarter 2022, the Learning Management System (LMS) hosting Arbor University was updated with a more robust modern look and user-friendly training platform enhancing the user experience. 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, and we believe the company displays a solid commitment to training and employee development.
• New hire training begins with an orientation seminar to familiarize new employees with company policies and procedures (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 2022, primary and special servicing employees averaged 20 and 15 hours of training, respectively. In 2021, primary and special servicing employees averaged 30 and 48 hours of training, respectively. Management stated the slightly below 2021 target levels for primary servicing was related to a lack of availability of in-person training session opportunities which has since been abated.
• Annual required training encompasses: Anti-Money Laundering, Code of Business Conduct and Ethics, Anti-Bribery and Anti-Corruption, Related Person Transactions, Conflict of Interest, Fraud Detection, IT Security awareness, and Red Flags, Corporate Document and Contract Review and Approval and External and Social Media Communications. In addition, OFAC training for Servicing, Underwriting Analysts and Underwriters was completed.
• Arbor continues conducting internal training sessions virtually and utilizes Arbor University (AU). AU is the online training platform, featuring more than 300 training courses, ""of which 161 cover servicing and asset management and include detailed process flows, including 67 "playbooks". AU contains 21 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 2022, Arbor University now includes internally developed curriculum and integrated video modules. Arbor has added "How To Trainings", external training acknowledgements, and surveys. External training conducted outside of the platform is recorded in Arbor University.
• In Fall 2022, a new hire underwriting, portfolio retention, and screening curriculum was developed and added to Arbor University's training library.
• Arbor is now a sponsor in CREF Careers, an initiative to increase visibility in the Commercial Real Estate Finance industry through entry level and mid-career hiring by partnering with various Historically Black Colleges and Universities.
• ART participated in the Project Destined 2022 Summer Session, an innovative and well-reputed internship program that creates partnerships between real estate related organizations and institutions of higher education, to provide a unique, and highly valuable, opportunity for minority youth.
• 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, a total of 393 Arbor team members have successfully completed the program. These sessions are held virtually, with 65 employees from various departments attending the Fall 2022 training.

Systems and technology

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, and recently adopted the Real Insight system for special servicing. Arbor has well-designed data backup routines, disaster recovery preparedness, and cybersecurity capabilities.

Servicing system applications

Arbor's servicing operations, as of June 30, 2022, is supported by a staff of 26 information technology (IT) employees. System highlights include the following:

• Arbor uses Enterprise! version 2021.2.63 as their system of record.
• Select Arbor personnel participate in the Enterprise! users committee, allowing early and key initial input and advanced testing of future system development and upgrades.
• DOMO, a cloud-based data warehouse, is the 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.
• DocSumo is a vendor application utilized to take data points from documents, verify the data and push it into their servicing system. The company uses it for insurance policies and renewals, with plans to include rent rolls and financial statements.
• The special servicing group utilizes Real Insight, which provides an asset management platform to track daily activities and reporting on balance sheet and agency special serviced loans.
• 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.
• Microsoft Azure, a scalable cloud computing service that builds, tests, deploys, and manages 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 a repository for loan applications, and manages borrower relationships, providing real time reporting capabilities.
• The company is working in stages to move their data storage to a Cloud based server. The MS Exchange Online migration and MS Office 365 migration are both completed. OneDrive and Azure files storage migrations are in progress. Management expects the data transfer to be fully completed by year-end 2023.

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 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 in January 2022, and the results were considered successful.
• The plans call for all key servicing functions to be recovered within 24 hours, and for 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 Tonawanda. These sites are 400 miles apart, and each site stores its own data, as well as the data for the other office.

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 verify compliance.
• The company rotates their third-party vendors who test for annual penetration to its systems. No significant issues were noted as of the last test in September 2021. The next test is scheduled to be completed by year-end 2022.
• Advanced artificial intelligence-based security monitoring tracking and alerting unusual user behavior.
• Implemented MS Sentinel and other Microsoft security tools across the environment.
• Ransomware resiliency assessment conducted with their cybersecurity vendor to provide additional testing of the system protocols.
• 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 drives; and they make routine patches as needed.
• The company's employee user password policy has been enhanced to provide additional protections.
• 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 servicing and asset management P&Ps are easily accessible to all staff on Arbor's training platform. Training credit is added to the individual's transcript when accessed. All other department P&P's are easily accessible to all staff via the company's SharePoint site.
• 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 the following:

• 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.
• Since early 2022, the REG AB servicing criteria has been incorporated into the QC reviews to clearly identify the process and results for all applicable parties.
• 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.
• The quarterly compliance servicing review process includes a check on the FHA green loan fees and a review on the Ginnie Mae (HUD) loans with non-critical repairs.
• 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.

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, has adopted an enhanced USAP program which evaluates the effectiveness of operational controls. 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 2021 report.
• Although the company is not required to, nor does it perform Regulation AB (RegAB) attestations, its enhanced USAP program includes quarterly servicing audits which evaluate the adequacy and effectiveness of operational controls similar to RegAB requirements with applicable recommendations made to senior management.
• In Spring 2020, Fannie Mae provided an assessment rating of Arbor as "Good" with no material findings according to management.
• In late 2022, the Freddie Mac limited scope assessment will be performed. The 2021 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 with certified inspectors.
• When Arbor shares sensitive information with vendors, it utilizes confidentiality and non-disclosure agreements.
• All vendors (both company and individuals) working on Arbor's GSE loans are screened against OFAC and FHFA lists.
• All third-party vendors are certified before 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 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, 2022, the portfolio contained 4,791 loans backed by collateral of 11,605 properties with a total UPB of $42 billion. In June 2022, delinquencies have declined to the lowest levels since year end 2018 (see table 4). As previously noted, a substantial portion of the serviced portfolio is backed by multifamily properties (95% of UPB), in 49 states throughout the U.S. (see table 5). The multifamily emphasis 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 allows 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 boarded all new loans onto the Enterprise! system, including 523 loans in the first half of 2022, 1,248 new loans in 2021, and 1,027 loans in 2020.
• 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, 2022.
• Loan boarding accuracy and timeliness are tracked as part of Arbor's QC program. The results are reported to senior servicing management quarterly.
• Welcome letters are automated through the system and are mailed to borrowers within five days of loan boarding.
• All applicable entities/individuals boarded in Enterprise! are automatically run against OFAC, Freddie Mac exclusionary data, 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 the payment processing function includes:

• There is a segregation of duties among the staff that receives payments, makes deposits, and posts payments.
• A staff member performs a daily reconciliation of cash receipts to the Enterprise! System, independent from the above payment functions.
• Enterprise! integrates all lockbox, wire, and automated cash-handling activity, allowing Arbor to electronically receive and post borrower payments. Of the collected payments, 98.0% are 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 992 as of June 30, 2022.
• 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. Highlights include the following:

• Arbor's 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, 2022, nor for all of 2021.
• Bank rating reviews are conducted on a weekly basis to monitor compliance with investor guidelines.

Escrow administration

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 six employees dedicated to managing tax escrows and 32 employees managing the insurance escrow administration across the portfolio.
• As of June 30, 2022, approximately 86% of loans in the portfolio were escrowed for taxes, and 72% were escrowed for insurance. All tax and insurance escrows are re-analysed annually.
• In the Fall of 2021, Arbor expanded its partnership with Silver Skills to include their support of insurance open items. Silver Skills collects evidence of insurance and invoices from insurance agents as well as requests paid in full receipts for Arbor's non-escrowed portfolio.
• The insurance associate unit includes a dedicated team focusing on certificate review completions within 90 days of renewal.
• 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 2022 and during 2021.
• 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 and 120-day look-back period for property and flood insurance, respectively. As of June 30, 2022, a nominal number of loans were on forced placed insurance.
• Insurance carrier ratings and flood coverage maps are reviewed annually for compliance with loan documents and investors.

Asset and portfolio administration

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

• As of June 30, 2022, Arbor reported a 99% 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 reviews comments in-house.
• Arbor's expiration date tracking report which monitors letters of credit (LOC), reflects no issues on LOC renewals as of June 30, 2022.
• UCC filings are tracked in the servicing system, which can produce 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:

• During 2021, Arbor's primary servicing team processed 564 consents, including 149 management changes, 126 assumptions, 101 repair extensions, 39 forbearances, and 149 other transactions. For the first half of 2022, the team has processed an additional 409 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 require only internal approval 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/comments, are chronologically tracked within Enterprise! and, when 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.

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. The special servicing group's general workout philosophy is to maximize recoveries through a concurrent multifaceted approach, including borrower negotiations, modifications, foreclosures and note sales.

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

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.

In Spring 2022, Arbor began using the Real Insight platform for their special servicing loans. In late 2021, Arbor's IT and structured asset management teams worked with the vendor to configure/setup and implement the system and the company used a "phase in" approach period.

As of June 30, 2022, Arbor reported a special servicing portfolio of 30 agency and non-agency loans and four REO assets, with an aggregate UPB totaling approximately $286 million (see table 7). Included in these figures are three loans from CRE-CLO transactions totaling $26 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 21.9 months as of June 30, 2022, compared with 17.6 months as of June 30, 2021, when our last review was performed. The hold times for REO assets have decreased to 101.8 months for June 30, 2022, as compared to 123.7 months for June 30, 2021, although the relevance of the hold time is negligible as there are no real estate mortgage investment conduit restrictions pertaining to REO hold times, with the company being 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. Highlights include the following:

• When monetary defaults occur, asset managers work closely with the legal department and senior management to increase communication to determine the recommended course of action, minimize cash disbursement and maintain the appropriate level of communication with the borrower.
• Borrowers must sign pre-negotiation letters before entering any 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 completed one foreclosure sale in the second half of 2021, which is the only completed foreclosure since 2018.

Arbor's business plan procedures vary by investor type, and we believe they are thorough, well-defined, and well-documented to proactively address problem assets.

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 satisfactory REO management and limited past REO sales oversight. Notable aspects include the following:

• REO business plans must be completed within 30 days of acquiring or foreclosing the asset.
• Business plans are accessed through the central asset management system.
• If possible, asset managers schedule inspections before foreclosure to establish any needed repair expenses.
• Arbor pursues contracting 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.

Table 9

REO accounting and reporting

Notwithstanding limited historical REO asset volume, 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 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 foreclosure filings and the appointment of receivers. Additionally, in-house legal counsel supervises activity performed by outside counsel.
• Legal counsel controls the approved attorney list and engagements.
• Arbor uses a standardized engagement letter for outside counsel.
• Once outside counsel is engaged, a tracking system monitors the status of the work 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 Rankings Affirmed, Dec. 16, 2022
• Select Servicer List , Oct. 13, 2022
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• Servicer Evaluation: Arbor Multifamily Lending LLC , Aug. 23, 2021
• Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Analytical Approach: Global Servicer Evaluations Rankings , Jan. 7, 2019