Credit ratings agency Fitch Ratings is calling out a troubling trend in the commercial mortgage- backed securities industry. Fitch said special servicers, firms brought in to resolve distressed CMBS, are charging shadow fees, in a potentially irresponsible manner.
Rob Rowan, a senior director at Fitch, emailed his thoughts on the fee structures, calling it a “trend that potentially presents risk to bondholders, borrowers and the recovering CMBS market.”
“Some special servicers charge fees for borrowers seeking loan modifications,” Rowan writes. “Fitch’s concern is not so much the size of any fee that a borrower pays, but the philosophy of the fee itself. Special servicers have a fiduciary duty to the trust and bondholders. Any fee charged to a borrower implicitly puts that fiduciary duty at risk.”
The claim Fitch makes is that such fees are not being appropriately disclosed to investors. The fees are typically allowable under the pooling and servicing agreement on the CMBS, which gives room for ancillary fees such as modification, assumption or extension fees.
These fees may be allowed within the framework of the loan documents or the pooling and servicing agreement. PSAs include specific fee structures for special servicing, liquidation or workout fees. They do not specifically disallow special servicers from charging ancillary fees such as modification, assumption or extension fees, but typically don’t suggest levy guidelines.
“We have been made aware of instances in where modification or extension fees have been charged to the borrower,” Rowan said. “Some were far higher than Fitch would have expected.”
“Most troubling, was that they were not readily disclosed to investors,” he adds. “A fee charged to a borrower and not disclosed to bondholders, especially when the fee is a large one, has the potential to call into question the real rationale behind the modification or extension for which the fee was charged.”
The solution Fitch wishes to implement will be limited by its role as a credit ratings agency. Rowan said that his firm can encourage special servicers to explicitly state the fees, so that investors know of the charges, even if they don’t agree with the logic behind them.