Rationale

S&P Global Ratings' ranking on First National Financial L.P. (FNF) is ABOVE AVERAGE as a residential mortgage loan primary servicer. On Sept. 20, 2024, we affirmed the ranking (please see "First National Financial L.P. ABOVE AVERAGE Residential Mortgage Primary Servicer Ranking Affirmed," published Sept. 20, 2024). The ranking outlook is stable.

Our ranking reflects FNF's:

• Experienced management team and staff with good overall tenure;
• Solid technology and systems environment, and its continued investment in technology to create operational efficiencies and support information security;
• Sound internal audit program;
• Detailed policies and procedures, which are reviewed and updated annually;
• Long history of originating and servicing residential mortgage loans for FNF's own book and for third-party investors;
• Solid loan administration practices relative to the portfolio's size; and
• Historically low delinquency rates.

Since our prior review (see "Servicer Evaluation: First National Financial L.P.," published Oct. 12, 2022), the following changes and/or developments have occurred:

• The heads of default management and customer service retired and were replaced by long-term FNF employees.
• As part of its HR initiatives, it performed a pay equity and title review, and established an annual corporate succession planning process.
• The company transitioned to a new learning management platform.
• A learning partner program was established where business unit subject matter experts work with the training team.
• Its residential call center software was upgraded, which increased its functionality.
• The compliance department now reports to the head of risk management rather than the CFO.
• Audit management software was implemented to manage internal audits along with a risk management module within the software to map risks and controls.
• A vendor management platform was launched.
• FNF began using a third-party portal for managing discharge requests and fulfillment.
• The collections department migrated to the workflow system.

The ranking outlook is stable. FNF continues to invest in the residential servicing operations. The company continues to improve its technology and systems sophistication along with its risk infrastructure to support its efficient and stable residential mortgage servicing operation.

In addition to conducting an onsite meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2024, as well as other supporting documentation provided by the company.

Profile

FNF was founded in 1988 as a mortgage company, to originate and service residential mortgage loans. It started offering and servicing multifamily residential and commercial mortgage loans in 1990 including construction lending for single-family tract, multifamily, and condominium developments. The original principal partners remain active in the company. The parent company of FNF, First National Financial Corp., is a Canadian originator, underwriter, and servicer of predominantly prime residential (single-family and multifamily) and commercial mortgage loans.

With almost C$144 billion in mortgage loans under administration as of year-end 2023, FNF is one of Canada's largest nonbank mortgage originator and underwriter and is among the top three in the Canadian mortgage broker market. It also performs white label servicing for others. FNF is an approved lender for mortgage loans insured by the Canada Mortgage and Housing Corp. (CMHC), with origination offices in Toronto; Montreal; Vancouver; Halifax, Nova Scotia; and Calgary, Alberta. The company originates loans in all 10 Canadian provinces and three territories. FNF's headquarters and centralized servicing operations are in Toronto. The company's customer service center in Montreal also assists French-speaking borrowers.

While its portfolio growth slowed in the first half of 2024, FNF had just over 5% year over year growth (in units) for its residential portfolio in recent years between 2022 and 2023 (see table 1). Forty percent of FNF's residential portfolio comprises loans on properties in Ontario (see table 2). While this would typically signal a concentration risk, based on the population rate of Ontario versus the other Canadian provinces and territories, we do not consider this to be out of the norm.

Table 1

Table 2

Table 3

Management And Organization

The management and organization subranking is ABOVE AVERAGE.

Organizational structure, staff, and turnover

The senior vice president of residential servicing has oversight of the residential servicing operations. She reports directly to the president and CEO who, in turn, reports to the chairman. FNF's management team and staff exhibit overall satisfactory experience and tenure. Notable aspects include:

• Senior management's average industry experience of 27 years and tenure of 16 years is longer than peers'.
• Middle management industry experience of 12 years is comparable to peers'; their tenure averages 11 years, which is longer than peers'.
• The turnover rates for both management and staff were 4%, which is better than the average reported by peers.

Since our prior review, FNF has implemented the following human resource initiatives:

• It moved to a hybrid work environment.
• FNF performed a pay equity and title review to ensure alignment with others in the industry and as an employee retention initiative.
• It established an annual corporate succession planning process.

FNF performs annual capacity planning as part of its budgeting process, and the residential administration team performs regular reviews of volume compared to staffing capacity. Staffing levels have remained fairly consistent for residential servicing, even with slight increases in volume, in part due to efficiency gains resulting from technology enhancements.

Training

FNF has a comprehensive training and staff development program. Companywide, there are 20 people in the training group, an increase of seven since our previous review, divided into residential underwriting, residential servicing, commercial, and an operations group, which includes an instructional designer. Training features include:

• The majority of job-specific training is developed internally using a training design model that incorporates analysis, design, development, implementation, and evaluation.
• Evaluation surveys are sent to participants.
• A course maintenance schedule is in place to ensure content is accurate and up to date.
• Various delivery methods are used for training, including classroom, virtual, and e-learning.
• A centralized training hub was created since our prior review to consolidate training and reference material for learners.
• The company moved to a new learning management platform in early 2023that is used to track training and also houses soft-skill and developmental programs that are available to staff on demand.
• The new-hire training curriculum is comprehensive, including orientation, role-specific, and compliance courses.
• FNF has a learning partner program, also established since our prior review, where business unit subject matter experts work with the training team to develop training resource material.
• There is a management training curriculum for current managers and for staff members who are interested in moving to a managerial role.
• Training and development plans are established for high-potential and high-performance employees.
• Job shadowing and temporary transfers are part of FNF's cross-training initiatives available to staff.
• There is a bilingual facilitator in Montreal.

Systems and technology

FNF has effective technology to meet its residential servicing requirements. The company continues to focus on technology enhancement projects to further streamline and automate servicing tasks across various loan administration functions. It has well-designed data backup routines and disaster recovery preparedness. Over the past four years, FNF has restructured and built out its technology group, increasing its size to 200 people from 70 in 2020.

Servicing system applications

FNF uses a proprietary origination system, Merlin, that automatically transfers residential mortgage loans to Optimus, the main servicing system for both commercial and residential mortgage loans. Optimus (an MCAP Solutions Corp. product) has been the main servicing system for both residential and commercial mortgage loans since 2001. FNF utilizes version R4.5 of Optimus, which runs on an AS400/DB2 platform and interfaces with FNF's general ledger. Other notable features include:

• An investor portal provides portfolio-, asset-, and property-level information to assess pool and loan performance.
• The Microsoft Power BI tool generates dynamic reports, including data visualization.
• DocuSign is used companywide for internal signatures and approvals to keep workflows moving in the case of remote employees. It is also used to facilitate renewals in residential servicing.
• The servicing workflow system, which was developed internally by the FNF IT department to manage and monitor workflows within the servicing departments, has been used in residential servicing since November 2021, and the first phase of the commercial workflow was implemented in early 2024.
• The residential call center software was upgraded in February 2024 with added functionality including administrative dashboards for agent and queue monitoring and immediate feedback of call monitoring reviews to the agent.
• The customer service staff have live chat technology in both English and French.
• There is a proprietary residential borrower portal, developed and managed by IT.

Business continuity and disaster recovery

FNF's disaster recovery and business resumption plan is sufficiently detailed and includes the following features:

• FNF performs a test of its recover plan annually. There were no material issues identified during the most recent full test, conducted on April 6, 2024.
• FNF's data backup sites are in Markham and Mississauga, Ontario, which are each less than 30 kilometers away from the home office but are on a separate power grid from Toronto and from each other. Having backup locations this close to the central location is not a best practice.
• FNF has an agreement with a major systems supplier to provide an emergency operations center (EOC). This EOC has seating for 50 employees, 24 hours a day, for a minimum of two weeks.
• Employees can work remotely, which is the primary business continuity response.
• All core systems are replicated in real time and backed up to tape daily.

Cyber security

FNF has IT staff and procedures dedicated to cyber security and its information security program. Program highlights include:

• There is a defined incident response plan in the event of a security breach that includes measures to close any gaps and prevent future issues. The plan is reviewed annually.
• Tabletop exercises for testing both technical and non-technical responses are performed annually.
• IT generates and monitors user network and application password updates, and managers review and validate user access semiannually.
• FNF uses a third-party security operations center to monitor network intrusions and to identify suspicious or malicious activity in real time.
• Penetration tests are performed annually by a third party. The most recent test, completed on Oct. 3, 2023, did not identify any material issues.
• System patches and routines are applied based on the criticality of any identified vulnerabilities, with critical patches being deployed within seven days.
• Daily vulnerability scans of both internal and external devices and websites are performed.
• The company has a standalone cyber security insurance policy and access to a cyber security attorney as needed.
• The company's IT department works closely with internal legal counsel and audit teams to ensure they are taking necessary precautions to protect access to the borrowers' personal information and are adhering to all applicable laws and requirements.
• Phishing simulation tests are performed quarterly.
• All employees are required to complete annual training courses related to information privacy and security, including online cyber security courses, social engineering, and email security training.

Despite servicers' expenditure on cyber security staff and systems to support their programs, these preventative measures are only effective if the program is successfully implemented and maintained. Notwithstanding, even the best preventative measures will be continuously challenged by the ever-increasing sophistication of attacks.

Internal Controls

FNF's internal audit function, coupled with external audits, are effective in mitigating risk and monitoring compliance with its own servicing standards, investor requirements, and those of the mortgage insurers (CMHC, Genworth Financial, and Canada Guaranty), based on its portfolio composition. The risk oversight module of its internal audit management system was implemented in July 2024. This module will be used to identify risks and their associated controls.

Policies and procedures

FNF's policies and procedures (P&P) manuals include detailed process descriptions and adequately address all critical areas of servicing. The manuals are available online and in hardcopy for all employees. A dedicated individual is responsible for managing the updates and provides them as needed. Senior managers review and approve all updates and suggested changes before they are implemented. P&Ps are reviewed at least annually.

Letter templates are maintained in SharePoint by the business analyst (BA) team, which manages site access and archiving of retired communications. Requests for new letters follow standard change management processes, which include a review and approval by internal legal counsel and marketing. Professional translation services are used to create French versions. Department managers review their templates annually.

Quality assurance call monitoring

The first line of defense comprises quality monitoring measures within customer service and collections. A minimum of eight calls per customer service rep, which is slightly higher than peers', and three calls per collector, which is less than peers', are monitored monthly. Quality scorecards are used when assessing calls, which include assessments of both qualitative and quantitative factors. The scorecards are used for employee assessment as well as coaching.

Compliance and quality control

FNF's second line of defense is compliance, which at the time of our last review reported to the CFO, but now reports to the head of the risk management department. Compliance is responsible for establishing and maintaining compliance P&Ps to address regulatory requirements. It also partners with the legal department and BA team for regulatory change management.

FNF's compliance department monitors and performs sample testing of the work performed by the business units' first line of defense to assess the effectiveness of controls and addresses privacy and anti-money laundering (AML) regulations. The AML testing is performed annually, while all other monitoring and validations are performed quarterly. This analysis is summarized and reported to executive management and the board. Although the scope and frequency of FNF's compliance testing are more limited than what we see with other mortgage servicers (who normally perform more frequent transactional testing focused on broader regulatory and investor requirements), this additional regulatory risk is partially mitigated by the internal and external audits performed.

Internal and external audits

FNF has an internal audit program that serves as their third line of defense. FNF's internal audit group, comprising three internal auditors, operates as a separate group within FNF and is led by the vice president of risk management and internal audit. The audits and reviews are designed to address and satisfy traditional risk assessments and performance methodologies through loan-level sampling to assess adherence to stated policy and servicing standards. Features of the audit function include:

• The internal audit group meets with division leaders to review operational risks and controls to determine an overall risk level for the auditable entities.
• Risk scores are used to develop the annual and three-year audit plans, which are reviewed and approved by the board.
• Internal audits are rated on a scale of conformance, major nonconformance, minor nonconformance, and opportunity for improvement.
• A new policy that requires a formal remediation plan for any area of nonconformance was implemented.
• Internal audit issues are reported quarterly to the board of directors and the audit committee.
• An audit management system was implemented in the fourth quarter of 2023.

FNF did not provide copies of the audits but did provide a summary of the audits performed and the status of the findings as well as the audit calendar for 2024. There were no audits cited with a major nonconformance rating. The status of open remediation items did not show any items past due.

In addition to its internal audit process, FNF is subject to external audits by insurers and regulators. While we were not given access to these reports, management stated that there were no identified issues.

We reviewed FNF's 2023 Uniform Single Attestation Program, which noted no areas of non-compliance.

The Canadian Standard on Assurance Engagements 3416 Report assessing the period from Oct. 1, 2022, through Sept. 30, 2023, which covers both commercial and residential servicing, contained four deviations, none of which were considered material and all of which had compensating controls cited.

Complaint management

FNF demonstrates effective management of customer complaints and escalations. Written complaints are received via a centralized email address, the borrower website, fax, or mail. The customer care team, a dedicated team within customer service, reviews all the complaints and logs them into the workflow system. Complaints are directed within the system to a senior member of the operational team for handling. Management reviews the proposed resolution plan. Coding within the system allows for the tracking, management, and reporting of the complaints.

Vendor management

FNF vendors are managed at the operational level by the business units, while the legal department manages vendor contract review and renewal. A vendor management committee, comprising technology, information security, legal, compliance, and privacy, is responsible for the program oversight and management.

FNF implemented a vendor risk platform in the second quarter of 2023. The platform is used as the central database and repository for vendor documents, risk assessments, remediation plans, scorecards, and results. The system includes workflow and reporting functionality.

Vendor management program highlights include:

• The vendor management committee meets at least quarterly to discuss vendor effectiveness, protection of private information, timeliness, and other factors.
• A risk assessment is performed by the vendor management committee based on cyber, regulatory and compliance, privacy, reputational, financial, operational, and business continuity risks. This risk assessment determines the level of due diligence to be performed.
• Documents and questionnaire responses are used to perform due diligence on potential new vendors, those with materially changing scope, and at renewal.
• Vendor performance is monitored against service-level agreements and key performance indicators, although there is no specific cadence to these reviews.
• Identified issues with the vendor performance are required to have an action plan to remediate the issue.

Insurance and legal proceedings

FNF 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--Residential Mortgage Loan Primary Servicing

The loan administration subranking is ABOVE AVERAGE.

As of June 30, 2024, the residential division had 216 employees who serviced an aggregate portfolio of almost 320,000 residential mortgage loans totaling approximately C$95 billion, including just under 2,000 second-lien loans, which are not part of our review (see table 1). Residential mortgage servicing comprises seven separate business units, with a business analysis team that is responsible for change and project management across all residential loan servicing.

New-loan boarding

FNF highlights the following aspects of its new-loan boarding and data integrity function:

• Funding personnel act as liaisons between originators/solicitors and servicing staff.
• The boarding function includes an automated bridge from the Merlin origination system to Optimus, whereby borrower insurance and tax data are verified.
• The new account services team performs a crosscheck ensuring that all mortgage loan data elements are correct in the servicing system. They also review the solicitor documentation to validate that the loans were accurately registered.
• Insurance information (carrier, expiration date, policy number, coverage, and agent) is updated on the servicing system for monitoring purposes.
• Optimus also provides system exception reports for new mortgage loans, which staff members review for errors.
• Welcome letters are initiated by the new account services team upon completion of the data validation.
• The new account services team manages the collection of closing documents and submission of the documents to the custodians. A process is in to place to follow up on missing documents.

Overall, FNF has sufficient controls to ensure the integrity of data for new mortgage loans.

Payment processing

FNF's payment processing is highly automated, and a single trust account provides for daily payment receipts that are allocated to the relevant investor and escrowed funds accounts. Investor remitting and reporting are automated from the servicing system and have the following appropriate controls and reconciliation:

• 99.4% of payments are through preauthorized checks or wire transfers.
• The servicing system provides a daily automated interface to the general ledger's subledger accounts for tracking investor and escrow funds.
• The finance and accounting area reconcile daily payment postings to bank account deposits.

FNF's cash management and investor accounting/remitting functions operate under a well-controlled environment, including what we consider to be an appropriate separation of duties.

Investor reporting

FNF has dedicated staff members for the various investor reporting and operational accounting activities that are properly segregated for reporting, remitting, and related account reconciliation processes. Highlights and controls of the process include:

• Reporting is handled through the Optimus servicing system, with automatically generated reports to meet reporting requirements for securitized and balance sheet loans.
• The investor reporting group provides the monthly remittances to the custodians of each pool, less service fees.
• The investor reporting manager reviews and approves all electronically delivered reports before submission.
• FNF reports 100% electronic reporting and remitting to investors.
• The separate finance and accounting areas reconcile the investor funds from each trust account before remittance.
• There were minimal aged items as of June 30, 2024.

Escrow administration

FNF maintains an effective process for managing escrow administration. Its staff handles all borrower property tax and insurance matters. Initially, at loan closing, the funding area reviews the tax and insurance information and establishes appropriate data records on the servicing system.

Some notable features of escrow administration include:

• Approximately 42% of residential mortgage loans are escrowed for taxes.
• FNF uses the servicing system to track taxes for both escrowed and non-escrowed accounts. Reminder letters, which include a request for payment confirmation, are issued for non-escrowed mortgage loans. Tax reminders are issued 30 days after the tax due date, or earlier if it has been confirmed that the tax payments have not been made. FNF does not escrow for insurance, as is typical in Canada, but confirms coverage at loan closing and tracks insurance by collecting and reviewing updated policies to ensure that adequate coverage remains.
• FNF indicates that it closely monitors insurance tracking via exception reports and automated notices until it receives the updated policy from the borrower or their agent.
• In the event of insurance cancellation or non-renewal, FNF sends three system-generated notices over a period of 45 days, after which it force-places the account under FNF's blanket policy.
• Through the customer portal, customers can provide a copy of their insurance policy and their tax bill, which are then directed to the appropriate team via the workflow system.
• For tax escrowed accounts, the Optimus system generates standard disbursement reports, which are manually reconciled to taxing authority bills by the escrow administration staff.

Discharges

Discharge statements are requested by borrowers, their solicitor, or their financial institution to obtain the payoff amount of the mortgage. Beginning in 2023, FNF began using a third-party platform for the statement request and fulfillment. When the account is paid in full, the final discharge documentation is prepared by FNF and sent to the land registry office to discharge the mortgage. At present, two provinces utilize the platform as the portal for the discharge request. The company reported that no discharges were processed outside of statutory compliance.

Renewals

Mortgage loans are tracked within Optimus for approaching maturity dates. Borrowers are contacted before their loan maturity date with their renewal offer. The internal sales team monitors and obtains the signed renewal. If a borrower is registered in FNF's online borrower portal, they receive the renewal offer through the portal and can execute the documents digitally through DocuSign. For those not registered, the renewal offer is mailed to the borrower. Accepted renewals are processed within the servicing and workflow systems by loan servicing. FNF has effective processes in place to manage renewals.

Customer service

Customer service comprises 70 employees, broken into two sub-functions: the customer service phone queue, with 52 agents in both Toronto and Montreal; and the customer service administrative team of 18, which handles back-office support, including emails, faxes, and website requests. Since our prior review, the director of customer service retired and was replaced by a longtime employee. Since our prior review, a tax subject matter expert has been added to each of the customer service teams in Montreal and Toronto.

Customer service performance metrics include:

• Management turnover was 10%, while the customer service representative turnover was 2%, both of which are better than the peer average.
• The average speed of answer for customer service was 55 seconds, with a 2.49% abandonment rate, which we consider fine but worse than the rates reported by peers.
• FNF reported that 70% of its accounts had associated registered website users.

Customer service supervisors perform call monitoring reviews on at least eight calls per agent per month, which is more than peers. Supervisors assess agents using a scoring template on a random selection of calls. Tone, accuracy, compliance, and first call resolution are included in the assessment. With the upgraded phone system, the call scoring results are now immediately sent to the agent for review.

Default management

FNF has sound default processes to resolve delinquencies through payment arrangement or legal action. Its default area is organized into collections and default management. The head of default management retired in August 2022 and was replaced by a 15-year employee of FNF. The collections team works to resolve delinquencies through payment arrangements before commencing legal action. Power of sale and foreclosure administration are the responsibility of the default management team.

The FNF collections and foreclosure departments have sufficiently tenured and experienced management and staff (see table 4). There was no turnover for either management or staff for the first half of 2024, which was better than peers for staff turnover in both groups.

Table 4

Although up slightly, residential mortgage loan default rates remain low (see table 5). While low long-term defaults are typical of Canadian residential mortgages, this is also reflective of FNF's effective default administration.

Table 5

Collections

FNF maintains sound collection processes based on its servicing portfolio. Its collections department is composed of a manager, three supervisors, and 16 collectors. It transitioned to the workflow system in 2023. Since over 99% of payments are made through preauthorized draws, the bulk of collection work begins when a payment is returned due to insufficient funds. When FNF is notified by the bank of the returned item (after representment) FNF initiates borrower phone contact within three days. It will also begin call attempts the first day of arrears and issue an escalated series of letters every 10 days thereafter if there is no customer contact. Furthermore:

• Three calls per agent are monitored by supervisors, ensuring consistency and quality, which is less than we see with peers.
• FNF does not use a dialer or modeling for outbound call campaigns.
• To help cure defaults, collectors may make payment arrangements with borrowers. For accounts at least 30 days delinquent, all payment plans must be approved by a manager.
• Senior staff members review all payment arrangements daily. Any exceptions are returned to the collector to fix.
• After a review that ensures all foreclosure prevention options have been completed and signed off by a manager, FNF recommends the account for legal action and assigns one of several preapproved law firms to the account.
• At 90 days past due, FNF commences power of sale or foreclosure of the property, depending on the province. A power of sale is a provision within the loan documents that allows lenders to dispose of the property without having to resort to the courts or take title to the asset.

Loss mitigation

Delinquency levels in FNF's portfolio have remained low, with total delinquency of 0.14% as of June 30, 2024 (see table 5). The company's collections and default management processes primarily follow CMHC guidelines. Collectors perform a financial assessment based on documentation collected from the borrower, as well as a credit report and title search, when applicable, against the insurer's payment assistance guidelines. Assistance tools include capitalization, interest-only payments, and amortization extensions. A collections supervisor reviews the proposed workout for approval. If approved, the borrower executes the agreement and a supervisor completes the system updates.

Foreclosure and bankruptcy

The foreclosure team is made up of a director, two managers, and six staff. Highlights of the foreclosure process include:

• When collection efforts have been exhausted, the collector gathers documents and information to submit to the default team to review and approve the referral for legal action.
• Once the referral for legal action is approved by the collections manager or director, the file is transferred within the servicing system to one of the default specialists.
• The default specialist selects an approved lawyer for the province to manage the loan. Typically, FNF has two firms approved per province and will rotate file assignments between them.
• Upon receipt of the assignment, the attorney manages the legal process, communicating with the default specialist via email. FNF does not use a separate default system to track and manage mortgage loans in the legal process.
• All vacant properties are secured and any required property preservation steps are completed.

As shown in table 5, FNF has not had active bankruptcies on accounts in its portfolio. Even so, there are policies and procedures in place to address the handling of bankrupt accounts.

Real estate owned (REO)

FNF manages the REO portfolio in-house for those mortgage loans not included in early takeover programs by insurers. FNF's REO management includes:

• Once the property is secured after the foreclosure, quotes are obtained for property repairs and clean-out.
• A sale price is set based on an appraisal and a comparable market analysis within the guidelines of the insuring agency's requirements.
• A realtor activity update is obtained every 30 days.
• Properties are inspected every 14 days and secured if found to be vacant.
• Once the property is sold and sale proceeds are received, the file is referred to the claims team to prepare and file any claims. FNF reported no curtailments for the first half of 2024.
• FNF reported a gross sales-to-market value of just over 107%, slightly higher than that reported by peers.

Financial Position

The financial position is SUFFICIENT.

Related Research

• First National Financial L.P. ABOVE AVERAGE Residential Mortgage Primary Servicer Ranking Affirmed, Sept. 20, 2024
• The Importance Of Cyber Security For U.S. And Canadian Servicers In A Challenging Environment, Aug. 12, 2024
• Select Servicer List, May 17, 2024
• Servicer Evaluation: First National Financial L.P., Oct. 12, 2022
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022