Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

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Guest Writer – Christopher T. Nixon, Winstead PC
(1st in a series of 2 postings)

In the commercial loan default scenario, CMBS Special Servicers are not able to provide to borrowers many of the accommodations that may be provided to borrowers by portfolio lenders. CMBS Special Servicers are subject to many more restrictions and limitations than to which portfolio lenders are subject in a loan default situation.

Understanding the key differences between CMBS loan workouts and portfolio loan workouts will facilitate a borrower's efforts in attempting to address a CMBS loan default with a Special Servicer. Some of the key differences between CMBS loan workouts and portfolio loan workouts are as follows:

• Standards. A portfolio lender applies its own individualized standards in addressing a loan default; and a third-party servicer will administer the loan in accordance with the servicing standard articulated in its servicing agreement with the lender. A CMBS Special Servicer must administer the loans in accordance with the Servicing Standard set forth in the applicable Pooling and Servicing Agreement (the "PSA") and comply with REMIC rules to protect the federal income tax-free status of the REMIC Trust in which the CMBS loan is pooled.
• Continuity of Relationship. A portfolio loan has continuity in the origination, servicing, and workout of the loan. The portfolio lender has an ongoing relationship with the borrower and retains tight control over any third-party loan servicer. On the other hand, a CMBS loan involves the fragmenting of the obligations, responsibilities, and liabilities for the loan between multiple parties involved.
• Workout Goals. A portfolio lender attempts to preserve the value of the asset and, in some instances, its relationship with the borrower. A CMBS Special Servicer attempts to preserve the integrity of the Trust, while maximizing recovery for the bondholders.
• Preemptive Abilities. A portfolio lender may make additional loan advances or enter into preemptive loan modifications to address a potential loan default. A Master Servicer typically lacks the ability to preemptively address a potential loan default.
• Due Diligence Review. A CMBS Special Servicer's review of due diligence may be more challenging than that of a portfolio lender because the Special Servicer is often not familiar with the loan before the transfer of the loan from the Master Servicer to the Special Servicer (i.e., the "Servicing Transfer Event").

My next posting will list several other differences.  If you have any questions or suggestions, please post a comment.