[For the ultimate coverage about special servicers, LNR Partners, CWcapital and CMBS loans, visit our new lender liability site, Lender Liability Lawyers.] Special servicers – these are the folks that take over the handling of loans that are delinquent or in default. In large, commercial mortgages, special servicers are typically given sweeping powers to protect the rights of the noteholders and insure that all amounts due under the note and mortgage are collected. A new probe launched by the New York Department of Financial Services suggests that some of these special servicers may be more interested in lining their pockets than protecting the bondholders. According to a story first appearing in Reuters, CWCapital Asset Management, LNR Partners and C-III Asset Management (the nation’s largest commercial servicer) are now all the subject of an investigation by New York State regulators for potential conflicts of interest.
The probe hopefully recognizes what we already know. No one regulates special servicers. The CFPB has the authority to regulate non-bank servicers but only regarding consumer and residential real estate loans.
The Office of the Comptroller of the Currency (OCC) claims it has authority over nonbank servicers but only of servicing a loan on behalf of a bank. That excludes CMBS loans.
Our primary focus is representing borrowers and property owners defrauded by CMBS special servicers. We are always interested, however, in confidentially speaking with insiders at LNR Partners, CW Capital and other special servicers.
As noted above, special servicers enter the picture when a commercial loan defaults or appears to be in trouble. A document in most CMBS loan documents called a Pooling and Servicing Agreement (PSA) typically gives them very broad powers. Those powers include being able to set the price of the property and then acquiring it for their own portfolio.
That is bad news for property owners, especially those with equity in their property. Special servicers only get paid while the property is in special servicing. That gives them the incentive to hold owners in special servicing, strip away any equity through fees and charges and then push down the value of the property so they can acquire it cheaply.
Officially, their role is to protect the property, collect mortgages and insure the noteholders are protected. Regulators say that the three largest commercial servicing firms – CWCapital Asset Management, LNR Partners and C-III Asset Management – also have their own investment arm to acquire distressed properties. That makes it easier for them to acquire the property for themselves.
Typically, bondholders will sell a nonperforming loan to the highest bidder. The “troubled asset” is removed from the pool of loans held by bondholders and auctioned for the highest price. What happens if the highest bidder is also the same company that is acting as the servicer? How can the special servicer discharge its duty to the noteholders if it wants to acquire the property for itself (presumably at the cheapest price posible)? How can the special servicer fulfill its obligation of good faith and fair dealing to the borrower if it is trying to keep the property in special servicing and maximize the fees it collects?
That is what New York regulators are now examining.
It’s possible to wear more than one hat in a commercial real estate transaction, although the potential for conflict increases dramatically. The noteholders want the highest possible price for the troubled property and rely on the servicer to get the best price. Yet at the same time, an affiliate of the servicer wants to buy the property at the lowest possible price.
There are no allegations of wrongdoing by New York State. At this point, the state’s investigation is in its infancy. We believe, however, that actual conflicts of interest do exist; conflicts that hurt both the struggling property owner and the note holders.
If you have information about practices at CWCapital Asset Management, LNR Partners, C-III Asset Management or any other CMBS servicer, we would like to hear from you. With an estimated $100 billion in commercial loans presently in default or in trouble, there should be plenty of answers to New York’s questions. *If your inside information relates to residential loan servicing, you may be entitled to a cash whistleblower reward.
More importantly, if you are a borrower or property owner and believe you are being wrongfully harmed by a special servicer such as LNR Partners or CWCapital, we can help. To learn more, visit our CMBS information page.
For more information, please contact the author, Brian Mahany, online, by email or by phone at (414) 704-6731 (direct).
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