Master Servicers Get More Scrutiny from Fitch.

The role of servicer in commercial mortgage transactions has come a long way since the Resolution Trust Corp. days of the early '90s.

With the increasing complexity of commercial mortgage deals and the growth of the commercial mortgage-backed securities market, the servicer's activities have expanded beyond loan administration and payment processing. For one, investor reporting activities have become more complex, involving multiple investors and loan structures. Another fundamental change is that the servicer has along the way become responsible for making advances.

Acknowledging the larger role that servicers play, Fitch Ratings has decided to incorporate the ratings of master servicers in their CMBS rating model. The rating agency believes that "master servicers who have strong controls regarding advancing and recoverability determinations, proactively transfer assets in a timely manner to special servicing, and employ sound credit policies regarding loan assumptions and borrower requests can serve to mitigate risks in CMBS structures."

Stephanie Petosa, a senior director with Fitch's CMBS group, said that the servicing process has become "much more complicated and challenging," involving a "whole lot more than just collecting payments," leading to the increased use of technology. She said, "In the early '90s, you didn't tell anybody anything. Servicers had no information. Those were the days when financials weren't even required to be collected from borrowers. When you get and receive more information from the borrowers, then you have investors that want to receive more information as well." And Richard Carlson, a director with Fitch's CMBS group, noted that loan structures have become more complex "with 'A' notes and "B' notes and 'C' notes, mezzanine loans, loans that have springing lock boxes and other debt service coverage triggers that have to be monitored." Also, he observed that "there is a lot more real estate knowledge that is required now in servicing than there was in the past."

The role of the servicer in making advances is also getting more formalized. Ms. Petosa has seen the language in pooling and servicing agreements getting tighter in that "the parties involved are trying to get more structured language in there." And she has seen more discussions on whether there should be limits on advances and more stringent rules for recovery. "It's at a point in the industry now where people are ...