The Role of a Master Servicer in the CMBS Financing Process
Unlike a traditional bank or credit union loan, a CMBS loan is not serviced by the lender that originated the loan. A third-party loan servicing firm, known as a master servicer, will typically take on this responsibility. Master servicers will handle a borrower’s payments and any additional paperwork that is required after the loan closes. They will also generally be responsible for answering any questions that a borrower has during the term of the loan.
Master Servicers vs. Special Servicers
If a borrower defaults on their loan, the loan will generally be serviced by another third-party firm, referred to as a special servicer. Ideally, a special servicer will work to resolve the default through some type of loan modification, though this doesn’t always work out in practice. Special servicers have somewhat of a bad reputation among borrowers, as they are obligated to work in the best interests of the CMBS investors who own the debt, not the borrower. Plus, special servicers generally are paid more the longer a loan is in default, so they have little financial incentive to help a borrower get out of a sticky situation.
However, a special servicer may not be the only additional servicer assigned to a borrower’s CMBS loan; in certain situations, routine tasks and borrower communication may be handled by a third type of loan servicer, known as a primary servicer. This allows a master servicer to handle a larger volume of loans at once.
Loan Servicing Firms and CMBS Pooling and Servicing Agreements (PSAs)
Information about each loan servicing firm that a CMBS borrower may interact with (as well as each party’s rights and responsibilities) is contained in a document called a Pooling and Servicing Agreement (PSA). These documents are often hundreds of pages, and usually, contain a lot of dense legal and financial language. For this reason, borrowers need to hire expert legal counsel to review all CMBS loan documents they will sign. Otherwise, they may be signing away important rights and making themselves vulnerable to future legal and financial issues. It’s also essential to make sure that you’re working with a master servicer, special servicer, and primary servicer with a decent reputation. Due to the nature of the borrower/servicer relationship, you probably won’t get cozy, but it’s still a good idea to avoid working with disreputable firms when possible.