And how Commercial Servicing (vs Residential) has different needs
Property tax tracking has become one of the most problematic functions today’s mortgage loan servicers must master if they hope to remain profitable in a business where margins have never been thinner and the cost of compliance has never been higher. With thousands of overlapping taxing jurisdictions spread across the country, servicers are spending an inordinate amount of time tracking tax bills, ensuring that they are paid and settling with municipalities when they are not.
Property tax assessment protocols and tax collection procedures are complex as they vary significantly by county, region, and jurisdiction. Moreover, it is very important for lenders to stay up to date on the latest tax changes. A slight miscalculation can have a considerable financial impact and lead to significant customer dissatisfaction. As mortgage servicers become more immersed trying to manage tax payments, they are diluting their core focus of helping customers and delivering superior customer service. We are seeing more and more servicers rely on good technology to manage real estate tax management tasks.
Unfortunately, only specialized technology is capable of unraveling what has become a tangle of property tax liabilities, any one of which if unpaid can result in large interest and fee payments, and even foreclosure or tax sale. The task is even more complicated for commercial mortgagors and the servicers who control the servicing rights to their loans. These firms may have loans that finance multiple properties in numerous taxing jurisdictions, and any mismanagement in tax payments can lead to even higher fees.
In this short article, we’ll leverage our company’s 100-plus years of combined experience in real estate tax servicing, to explore some of the requirements for a platform that can reliably aid mortgage loan servicers to remain fully compliant with all property tax and local jurisdictional requirements.
A list of requirements for a suitable tax platform
Modern mortgage servicing technology does not currently include tax modules that can meet the needs of most residential mortgage servicers, to say nothing of commercial servicers, who face an even more daunting task.
The technology that can get the job done today are proprietary systems that were specially designed for this process. Not all of these systems are built the same way nor do they all have the same functionality. A suitable technology will take into account the following, at a minimum.
- Access to the latest property and tax information: The platform must make it simple for users to board the correct tax line information along with each new loan that hits the servicer’s system. This requires the technology platform to have access to a database that includes all of the required tax authority data for every jurisdiction in which loans are serviced. For nationwide servicers, this requires frequent updates to the platform’s database, which the technology should make easy to accomplish.
- Seamless interface with servicing functions: The technology should interface seamlessly with the servicing system so that servicing personnel will know well in advance of tax bill deadlines. Paying taxes with enough lead time allows the servicer to avoid penalties and increases bottom line profits and customer satisfaction as escrow accounts won’t increase unnecessarily. The technology should allow the servicer to make the payments and update the servicing system easily.
- Easy and tracked communication: The platform should make it easy for a servicer to submit an inquiry to a taxing authority, track that item and allow the firm’s personnel to follow up in a timely manner without losing track of the request for information. Communication between the servicer and municipalities happens often and the technology must make that as easy as possible. Similarly, the platform should make information about tax status, payments, payment dues, etc available to the servicer.
- Flexibility and customization: The software should be built on a Services Oriented Architecture (SOA) to make required changes faster and easier. This allows the servicer’s IT department — or more likely the servicers tax partner — to adjust the platform to meet the specific needs of the servicing firm – quickly and easily.
Qualified tax service partner: Finally, if the servicer partners with an outside firm to provide this platform, which is likely given its development and maintenance falls well outside the scope of the servicer’s core competence, it should be ISO and SSAE 18 certified and subjected to regular audits performed by independent third parties. This may not be as expensive as it sounds. For example, our firm is ISO/IEC 27001: 2013 (Information Security), ISO 9001:2015 (Quality), SSAE 18 (SOC 1) & SOC 2 TYPE II GOE, ISO 22301:2012 (BCP) certified, among other certifications, but still offers flexible cost-effective competitive pricing based on the servicer’s portfolio attributes.
The problem with most commercial tax technology
Even with all of these elements in place, most technology available and in use in the marketplace today may be ‘good enough’ for residential portfolios but does not do a good enough job of helping servicers manage property taxes for commercial real estate. The reason for this is that most software provides data down to the loan level, whereas servicing commercial loans requires software that can access and manage tax data at the property level.
Unlike residential mortgage loans, where one or more taxing authorities will assess taxes against a single property, commercial loans can be written on many properties spread out across locations, or even across the country. Hotel chains, for instance, may take out large commercial mortgage loans on properties in many different states. This requires the servicer to track taxes in multiple jurisdictions and apply them to a single loan in their portfolio.
Most real estate property tax tracking in use today cannot do this effectively. The need is for a platform that has been developed from the ground up to view the data this way and commercial loan servicers are urged to seek out such a platform in order to make it easier to perform this function for loans in their portfolio.
To give the reader an idea of the complexity of this part of the business, consider a benchmarking study performed by the Council on State Taxes (COST), a non-profit trade organization that represents nearly 600 multi-state corporations engaged in interstate and international businesses. In an effort to determine the complexities of property tax compliance for large firms, the organization polled its members.
In all, 32 COST members participated in the study and reported paying property taxes in 38 states, with the smallest respondent having a filing responsibility in seven (though 45% said they filed in over 45 states). Together, these companies reported paying over $3.5 billion in property taxes annually, split roughly 50/50 between real and personal property tax. Perhaps most troubling, 28% of the study’s respondents said they processed over 10,000 property tax bills per year in order to remain in compliance.
Servicing commercial mortgage loans taken out by these types of companies require a software platform that specifically handles these requirements.
Other requirements: The ability to provide accurate reporting, proof of payment, ability to talk to tax experts, etc.
For most executives, the ultimate test of a technology platform can be found in the reports it generates. When it comes to property taxes, the right platform will deliver comprehensive real estate property tax reports as well as certificates with full supporting documentation. Tax vendors that have such technology will find it easy to offer general liability coverage for each parcel – both residential and commercial.
Most servicing executives require customized reports that meet their specific needs and the platform should be capable of providing this. Such a platform allows the tax partner to provide reports tailored to the servicer, and also ensures that the most relevant information is delivered as quickly as possible, allowing executives to make better-informed business decisions.
The platform should also be capable of providing proof of payment directly from the municipality. This provides the evidence that payment has been made, permitting the servicer’s management team to make more informed and effective decisions when dealing with delinquent property tax issues.
With a consistent reporting format, no matter where the servicer does business, there should never be any confusion regarding who to pay, how to pay, when to pay, and how much to pay with respect to the borrower’s real estate property taxes.
But when problems do occur and liens are placed on the property, the right technology should be capable of determining this and reporting it back to the servicer quickly as well. And when there are queries that a servicer or a customer has, they should be able to either obtain the latest information from the platform or be able to contact the partner via phone or chat and be able to talk to an experienced tax professional to get the answers.
This is just an overview of the requirements for a robust partner on a suitable technology platform for managing property taxes for residential and commercial real estate. For a more in-depth discussion, please reach out to us at any time through either our full-time chat or call functionality.