Pooling and Servicing Agreements for CMBS Loans

A pooling and servicing agreement (PSA), is a contract that is required when loans, including CMBS loans, are pooled together and packaged into mortgage backed securities. For CMBS loan borrowers, this means that they must abide by both the terms of the loan agreement, and by the terms of their loan’s pooling and servicing agreement.

CMBS Pooling and Servicing Agreements Can Be Complex

Unfortunately for borrowers, CMBS pooling and servicing agreements are extremely long-- sometimes more than 500 pages (generally including 100 pages or more of definitions alone). PSAs define the exact rights and responsibilities of each party throughout the life of a CMBS transaction, including the borrower, the master servicer, which generally handles day-to-day requests from borrowers, the special servicer, which handles a loan if the borrower defaults, and investors, which generally have little say in the process, but can generally replace a special servicer if they believe the special servicer is not operating in the investors’ best interests. While PSAs were supposed to standardize roles throughout the industry, in practice, PSAs are all a little different, which has actually increased confusion among conduit loan borrowers.

Restrictive pooling and servicing agreements often prevent lenders and servicers from making changes to the structure of a loan, even if it would be in the best interests of a both the borrower and the investors.

Definitions Can Vary Between Loan Agreements and PSAs

Just as the rights, responsibilities, and roles of master servicers and special servicers can vary between different PSAs, so can the definitions of basic terms, such as net operating income (NOI). In fact, the definition of a term can actually vary significantly between a CMBS loan agreement and a pooling and servicing agreement-- for the same exact loan. While this may not make a huge difference if a borrower is making all their payments on time, if financial issues or other unseen problems arise, minor variations in definitions could mean the difference between smooth sailing and a catastrophic loan default.

Due to these complexities, CMBS borrowers should always make sure to work with an experienced team of advisors who can make sure that they understand exactly what they are getting themselves into. Otherwise, borrowers could be in for an unpleasant surprise.

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