You are on page 1of 28

Operational Risk Assessments

Carrington Property Services, LLC


August 2016
Operational Classifications:

Residential Vendor (REO Asset Management)


Residential Vendor (Single-Family Rental Property Manager)

Assigned Rankings:

Residential Vendor (Both Rankings): MOR RV1

Forecast:

Stable-Both Rankings

Analyst:

Richard W. Koch, richard.koch@morningstar.com, +1 646 560-4519

Rationale
Morningstar Credit Ratings, LLC affirms Carrington Property Services, LLCs MOR RV 1 rankings as a residential vendor, both as a real
estate owned asset manager and property manager for residential single-family rental properties. The forecast is Stable for both
rankings.
The affirmed rankings reflect our assessment of CPS operational infrastructure and client-driven performance results. The Stable
forecast reflects a pervasive audit, quality-control, and compliance culture across the enterprise arising from a solid training regimen,
comprehensive and client-driven policies and procedures, internal performance monitoring and reporting, and proactive vendormanagement protocols. Management continues to refine processes and implement technology enhancements to improve operational
efficiencies. CPS management team employs a robust scorecard system that measures the companys performance for its clients
effectively monitoring execution of key performance indicators pursuant to service level agreements.
As a subsidiary of Carrington Holding Company, LLC, CPS is able to leverage various corporate services, such as accounting and
finance, human resources, information technology, legal and compliance, risk management, and internal audit. Additionally, CPS
benefits from an extensive performance history as a single-family rental property manager dating back to 2007. CPS has developed a
national residential property manager footprint, managing more than 48,500 units since inception, and, in the process, developed a
national property-manager network. In 2015, CPS became the first residential property-management firm to serve as a standby
property manager on a single-family rental securitization. CPS has created the requisite technology and infrastructure to continue
serving as a master single-family rental property manager for a government-sponsored enterprise as well as third-party clients.
In particular, Morningstars assessment and assigned rankings are based on these factors:

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Single-Family Rental Property Manager:

Performance History: CPS has established a national footprint as a residential property manager, managing more than 48,500 units
with a current active network of approximately 250 active property managers and hundreds more in reserve. CPS can serve as a
master, oversight, or standby residential property manager.

Technology: CPS has developed proprietary technology that handles all aspects of the rental property management lifecycle and
provides in-depth performance monitoring, data collection, and scoring of property-manager performance.

Business Model: CPS has developed the requisite infrastructure and human resources to provide third-party clients with
comprehensive property-management services that include property condition and repair evaluation; estimated market rent opinion
and rental viability; property repair and marketing oversight; tenant screening; rent collection; 24/7 customer-service availability; and
delinquency and eviction process management.

Residential Real Estate Owned (REO Asset Manager):

Performance History: CPS has managed just under 25,000 REO assets since 2009 and has sold between $500 million and $1 billion in
REO properties in previous years.

Vendor Management: A continuous scoring and feedback loop between management and vendors as well as extensive performance
data collection and reporting to management provides CPS with the ability to monitor compliance with client-specific key
performance indicators.

Operational Risk Functions:

Organizational Structure: CPS leverages various shared services from its corporate parent, including accounting, audit and risk
management, information technology, human resources, legal and compliance, training and recruiting, and project management,
which gives CPS a competitive business advantage. Training Programs: Morningstars positive opinion of CPS is based on a training
regimen for new and current employees that benefits from a blend of internal and external training solutions coupled with extensive
compliance training. Policies and Procedures: CPS has policies and procedures that incorporate specific client-driven processes that
maximize compliance and performance with the requirements inherent in client-mandated service-level agreements, according to
Morningstar. Technology Environment: Morningstar believes that CPS has an effective technology architecture and systems
infrastructure that support CPS products and services and is fully scalable, commensurate with business goals. Disaster Recovery and
Business Continuity: CPS has an effective disaster-recovery and business-continuity plan that is tested annually. CPS employs
geographical redundancy between its main server site in Phoenix and a reciprocal site located in Salt Lake City.

Risk Management: CPS has implemented a multilayered control environment throughout the organization by instituting sound
internal controls. These controls include training programs, comprehensive procedures, continuous performance monitoring and
review, internal self-evaluation risk reviews, an independent corporate internal audit program, and a comprehensive security strategy.

Management Team: CPS is led by an experienced and tenured management team averaging more than 22 years of relevant industry
experience.

2
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Forecast
The forecast for the rankings is Stable. CPS extensive track record in single-family rental property management should strongly position the
company as a master, oversight, and standby residential property manager as the volume of single-family rental securitizations is projected to
increase in the next 18 months. CPS was designated as a standby property manager on the FirstKey Lending, LLC 2015-SFR1 multiborrower
single-family rental securitization that was rated by Morningstar in 2015. Additionally, CPS has expanded its REO asset-management product
offerings to include servicing approximately 2,000 reverse mortgage REO assets for third-party clients and now offers component services
including redemption management, eviction management, and homeowners association management. CPS extensive track record in the REO
asset-management business and position as a market leader should continue to represent a proportional share of the REO asset-management
market, although traditional REO volume, in general, will continue to decline somewhat in 2016 because of the decline in delinquency rates and
corresponding reduction in foreclosures.

3
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Table of Contents
Page
Company Profile and Business Overview .................................................................................................................................................. 5
Operational Infrastructure and Risk Management ................................................................................................................................... 6
Management and Staff Experience ...................................................................................................................................................... 6
Management and Staff Turnover ......................................................................................................................................................... 6
Training.................................................................................................................................................................................................. 7
Audit, Compliance, and Procedural Completeness .............................................................................................................................. 7
Legal Liability and Corporate Insurance ............................................................................................................................................... 9
Systems Architecture, Project Management, Network Security, and Disaster Recovery .................................................................. 9
Performance Management: Vendor Performance Metrics ..................................................................................................................... 11
(MOR RS1) Single-Family Rental Property Manager ......................................................................................................................... 11
Tenant Relationship Management ..................................................................................................................................................... 14
Rent Collection and Delinquency Management ................................................................................................................................ 15
Valuation Services ............................................................................................................................................................................... 17
Performance Management: Vendor Performance Metrics ..................................................................................................................... 20
Loan Boarding and Prelisting.............................................................................................................................................................. 20
Title, Homeowners Association, and Real Estate Tax Administration ............................................................................................... 21
REO Asset Management ..................................................................................................................................................................... 22
Accounting and Invoice Management ............................................................................................................................................... 26
Ranking Definitions .................................................................................................................................................................................. 27
Disclaimer ................................................................................................................................................................................................. 28

4
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Company Profile and Business Overview


Carrington Property Services is a subsidiary of Carrington Holding Company, which provides centralized corporate support services for CPS,
including information technology, legal and compliance, finance and accounting, risk management (audit, call monitoring, and fraud detection),
human resources, learning and development, program management, and internal and external communications. CHCs core capabilities include
investment and fund management, residential mortgage servicing and origination, property management and maintenance, and real estate
brokerage and settlement services. The CPS business model arose in 2006 from a specialized loss mitigation approach to develop alternate
strategies for managing REO properties. As such, CPS became an REO asset-management company with the goal of providing property-specific
exit strategies designed to maximize the underlying property value for its clients. In 2007, CPS launched its REO rental program, and in 2009
was selected by a government-sponsored enterprise to be the primary vendor in its rental program. CPS has managed more than 48,500 rental
units since inception. CPS is qualified to do business in all 50 states as well as Washington, D.C., Puerto Rico, Guam, and the U.S. Virgin
Islands.
CPS corporate office is in Anaheim, California. CPS oversees a growing national network of over 250 active property managers, with hundreds
more in reserve, as well as thousands of field-service personnel who perform property preservation and repair work and collectively provide
local market knowledge, market presence, and support. CPS has over eight years of experience in single-family rental management and asset
valuations and has developed best practices commensurate with that experience. CPS has experience taking over management services on
more than 3,500 units while managing daily volume inflow and has performed asset-valuation services on more than $6.8 billion in
nonperforming assets and rental property acquisitions. CPS ability to leverage corporate support services, its national footprint, its proprietary
technology and history, provide CPS with a market advantage as master, oversight, or standby residential single-family property manager.

5
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Figure 1 - (CHC Organizational Structure)

Car
Operational Infrastructure and Risk Management (MOR RV1)
Management and Staff Experience
Within the organization, the executive team has an average of over 22 years of relevant industry experience. The senior management team in
the asset-management area averages an impressive 18 years of industry experience. The senior management team in the propertymanagement division has over 26 years of industry experience, and the staff has an average of nine years of relevant industry experience.
Carrington has approximately 4,500 full time and contract employees corporatewide among 90 locations nationwide. Carrington has major
operational locations in Connecticut, California, Indiana, and Florida.
Management and Staff Turnover
The company reported a management turnover rate of 43% and a 33% staff turnover rate in the property-management division. In the assetmanagement area, the company reported a 15% management turnover and a staff turnover rate of 9%.
6
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Assessment: CPS has a seasoned executive management and professional team within an organizational structure suitably designed
for its current business needs and continued growth in various business lines. CPS property-management division did experience
some elevated turnover during the 2015 calendar year; however, it has the overall professional expertise and competency to provide
REO asset-management and residential property-management services to investors and third-party clients. CPS organizational
structure and ability to leverage CHCs corporate infrastructure provide CPS with the requisite risk-management protocols, training,
and recruiting resources It also allows for performance-management tracking and reporting capabilities and the flexible technology
necessary to position CPS to continue to be a leading REO asset manager and residential rental property manager.
Training
CPS has a dedicated learning and development department program that provides a training program for all new hires that includes classroom
instruction, and Internet-based and third-party programs. The human resources recruiting team consists of 16 full-time staff using an applicanttracking system that contains over 25,000 candidate profiles. In March 2016, a new applicant tracking system was implemented with an
improved candidate and hiring manager interface. Human resources management represents that up to 150 additions can be hired within a
five-week period satisfying immediate high-volume staffing needs. The Carrington Education Portal is a learning management system that offers
training through online courses, instructor-led webinars, and instructor-led classroom recorded content. The portal is designed around four main
education goals: professional development, business skills, leadership development, and compliance. A company orientation program is
mandatory. In addition, the company provides formalized training for employees involved in debt collection and related activities. Fair Debt
Collection Practices Act training is required, and testing and certification are mandatory. Employee training hours are tracked, and business-unit
leaders can monitor employee progress and completion of applicable curriculum. Overall, during the first 30 days of employment, 11 compliance
courses are required, including courses covering the Gramm Leach Bliley Act; Fair Housing Act; Servicemembers Civil Relief Act; and a course
on the unfair, deceptive, or abusive acts or practices in the collection of consumer debts; as well as other training. Technology training is
provided for all new hires, and cross training is emphasized because CPS core businesses encourage an interchangeable skill set among its
employees. Security-awareness training is mandatory for all new hires and is repeated annually for all employees. Each business unit has a
trainer and implementation teams are assigned for each client. Training is tailored based on core job functions and support positions, which
usually consist of clerical or administrative functions. Some job requirements may be considered client-driven and as such incorporate
customized training. Supplemental training is provided via external vendors, including law firms, title companies, and real estate agents. The
ELITE Management Program provides first level management training and LeaderSHIFT, an internally developed leadership program, consists of
a 10-month program of individuals nominated by senior leaders learning skills through classroom instruction, one-on-one coaching, online
coursework, and practical application. Business teams meet at least weekly to discuss best practices and to discuss and implement business
process changes. To communicate critical changes to policies and procedures, urgent operational communications are distributed via email to
employees. All employees are also provided access to the companys intranet website, which is used to publish policies, procedures, and UOCs.
CHC has also developed a two-year management-training program for recent college graduates during which the candidates move among the
different functional areas of CHC in order to learn all aspects of the business. Upon graduation from the program they are placed in a
permanent position that is best suited for their skill sets, ambitions, and corporate needs.
Assessment: CPS has a highly evolved and effective training function commensurate with the size of the organization and the scope
of its business products.
Audit, Compliance, and Procedural Completeness
As a vendor, CPS engages an external auditing firm to perform an annual Service Organization Control 1 Report evaluation. A review of the SOC
1 report for the period ended June 30, 2015, contained only minor exceptions and did not indicate any systemic control issues. The risk7
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

management and internal audit department reports directly to the audit committee and performs independent risk and control evaluations of all
company affiliates, including CPS. The companys risk-control framework is based on the three lines of defense including operational
management, internal monitoring and oversight functions, and internal audit. The internal risk-management plan, reviewed annually, is
comprehensive, encompassing financial, operational, compliance, and reputation risk. Audits are categorized based on high, medium, or low
risk. A fundamental aspect of the companys audit approach is the self-evaluation program. The program methodology requires business unit
managers to identify risks associated within their business on a monthly basis. Risk management and the business heads jointly review the selfevaluation program audits on a semiannual basis to determine the risk level of the business unit on a continuous basis. High-risk audits are
performed annually, medium-risk audits are completed every 18 months, and low-risk audits are assessed every two years. Detailed audit
reports require a management response that may include addressing each audit finding or process improvement recommendations; corrective
actions including a timeline for implementation and responsible party; or interim measures to mitigate risk where corrective actions will be
implemented. Audits that have a high-risk finding require a 90-day follow-up by the audit group. High-risk audit findings not corrected within
the specified time frame are escalated to the executive management and the senior vice president of internal audit. An audit reporting and
tracking system is used to monitor audit findings with a risk rating of high, in addition to all process-improvement recommendations by the
corrective action commitment date.
Legal issues and regulatory compliance are handled by in-house counsel, external counsel, and the compliance committee. The legal staff
monitors legislative changes, summarize applicable changes for business leaders and partner with business units and support functions to
revise policies, procedures, and training materials. Within 60 days of a newly enacted law, internal audit and/or quality assurance will confirm
the appropriate implementation, enforcement, and compliance by affected business areas. Changes to laws and regulations that may affect the
business lines are discussed at monthly regulatory compliance committee meetings which are attended by counsel, business leaders, subject
matter experts, and executive management. On a monthly review cycle, quality assurance reviews, litigation reviews, audit summaries, and
compliance meetings are examined by the committee.
CHC reviews its security strategy on an annual basis through the enterprise information systems security steering committee, headed by the
chief information officer and the head of security, and is responsible for the oversight and implementation of information technology controls
and the assessment of the effectiveness of those controls. The steering committee approves all employee communications issued by the
information technology area designed to make employees aware of security threats.
Internal accounting controls are in place and are delineated by segregation of duties, multiple reviews and signoff protocols by CPS and CHC.
Performance measurement pursuant to service-level agreements is accomplished through various scorecards that track internal performance
metrics which are then rolled up daily, weekly, and monthly and escalated through various management channels. Blank check stock is stored
in a room protected by card key access and video monitors. CPS proprietary technology environment enables the company to store client
specific parameters including customized processing and delegated authority levels that help to ensure compliance with client guidelines. A
dedicated security officer is responsible for overseeing systems and network security. Monthly reports encompassing operating performance
metrics and financial data are developed by the business units and roll up to the executive team.
CPS maintains documented policies and procedures on its enterprise intranet site that encompass its core business practices. Policies are
reviewed annually by a committee consisting of senior management prior to implementation. Procedures are approved by the requisite business
head before they are released. Four full-time associates are dedicated to the development, maintenance, and distribution of policy and

8
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

procedure updates enterprisewide. A third-party software application is used to develop policies and procedures and versioning is used to
create an audit trail as policies are updated. Policy and process manuals are customized based on specific client requirements to ensure
compliance with service-level agreements. An annual review (or sooner when necessary) is held among the business units to discuss and
implement policy and procedure updates.
Assessment: CPS has sound multilevel auditing and quality-control mechanisms in place to monitor operational controls and
adherence to established procedures. We believe the companys policies and procedures adequately address core areas of vendor
business processes.
Legal Liability and Corporate Insurance
CPS management represents that it is not a participant in any pending material litigation related to its operations. The company maintains
appropriate business insurance coverage to protect against various liabilities and contingencies.
Assessment: CPS, based on its representations, effectively addresses its corporate insurance requirements and is not subject to any
outstanding material litigation.
Systems Architecture, Project Management, Network Security, and Disaster Recovery
CPS uses a variety of proprietary and third-party technology applications in its daily business transactions. The systems architecture is fully
scalable and flexible from a processing and business growth perspective. RentPointe is a proprietary web-based application that is used to
monitor and track the status of all properties, tenants and property managers. The RentPointe application is used as a client portal, document
repository, data reporting tool, and invoice processing tool. The Equator workstation and RES.Net are used to interact with certain clients.
Employee access to various system applications is role-based and monitored by human resources and information technology. The company has
a 90-day change-password policy and a monthly review is undertaken to reconcile user access permissions with official records. Annual
security-awareness training is mandatory for all employees and a clean-desk policy is enforced. Intrusion detection and network protection
systems are in place. The company has comprehensive enterprisewide encryption and firewall policies and methodologies in place to protect
the integrity of confidential data as it is stored or communicated internally and externally. Active network scanning and security monitoring is
routinely performed to identify system vulnerabilities.
The companys disaster-recovery and business-resumption plan is based on geographical redundancy. The companys Fishers, Indiana,
operational platform provides operational redundancies between that site and the Anaheim operational center. The primary data center is in
Phoenix with a secondary hot-site data center site in Salt Lake City. The Salt Lake City location serves as a data backup site and hot-site for
resumption of critical functions for Carrington employees. Tier 1 critical-data replication is accomplished via a storage area network, providing a
primarily tapeless backup solution with legacy backup tapes stored in a fireproof safe at the location in Salt Lake City. The data-center facility in
Phoenix incorporates redundant cooling, backup uninterruptible power supply UPS battery power and a power generator. There are additional
backup sites in Phoenix and Greenwich, Connecticut. An annual disaster-recovery test is performed, and remote connectivity is also available to
designated employees. A pandemic plan is included in the companys business continuity plan.
A project management methodology is in place that includes process redesign, life cycle, user acceptance testing, and implementation. All
technology development is accomplished in-house. The project management database is routinely updated and technology projects are
prioritized with input by business leaders. Subject-matter experts in the business groups participate in user acceptance testing, and monthly

9
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

technology releases are issued containing system enhancement information. A technology road map is updated annually to review the current
state of enterprisewide technology versus current and future business requirements. A dedicated enterprisewide security officer is responsible
for ensuring network security and user-password protocols.
The information technology area has a dedicated vendor manager that oversees the vendor-approval process and includes establishing
contractual service-level agreements and reporting to monitor performance. The vendor manager also conducts an annual review of third-party
certifications and disaster-recovery testing. An annual review is conducted to assess vendor relationships from a competitive standpoint and
contract renewal. An updated SSAE 16, Type 2 report on internal controls is required from all critical vendors.
Assessment: CPS operates within a technology architecture designed to meet its data-management requirements as well as its
internal processing needs and external client performance management. The companys proprietary technology provides the flexibility
necessary to meet individual client requirements as well as introduce new products and services into the marketplace. CPS has
comprehensive data-integrity and security protocols and is leveraging CHCs technology platform, resources, and geographic location
to provide a robust global disaster-recovery and business-continuity regimen.
Chart 1 - Single-Family Homes Under Management (as of Dec. 31, 2015)
16000
14000

# Rental Homes

12000
10000
8000
6000
4000
2000
0

2010

2011

2012

2013

2014

2015

Total

5266

5460

9523

11,789

14825

9477

Tenant In Place

4970

5456

8507

10,856

13702

7640

Rent To Hold

296

1016

933

1123

1837

Total

Tenant In Place

Rent To Hold

10
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Performance Management: Vendor Performance Metrics


(MOR RS1) Single-Family Rental Property Manager
In 2007, CPS began property-management services as a loss-mitigation strategy for CHCs internal loan portfolio. In 2010, CPS started providing
property-management services to third-party clients, and in 2012, CPS partnered with a large institutional investor to purchase rental properties
but has since exited that business. Presently, the companys focus is on providing third-party property-management services, due-diligence, and
valuation services. The properties under management consist of two types: tenant in place, consisting of properties where the client acquired
properties with existing tenants occupying the home, and properties under a rent-to-hold program. CPS leverages CHCs support departments
for compliance, legal, HR, training and recruiting, information technology, and project management office. CPS uses its RentPointe system to
control the property-management lifecycle including tenant oversight, vendor management, acquisition and disposition tracking, and financial
data and reporting. CPS provides the following services related to the management of single-family rental properties:

Assessment of property condition and repairs that are necessary for rental preparation

Establishment of estimated market rent amount

Assessment of rental viability

Oversight of property repair and marketing

Rent collection and delinquency management

Property expense management and reporting

Management of property performance

Oversight and management of the eviction process when required

CPS has extensive experience in the management of single-family rental homes, managing more than 48,500 units and overseeing over 930
property managers since the programs inception. The structure of CPS property manager network allows for CPS to have surge capacity in the
major population centers across the county. With CPS active network of 250 active property managers along with hundreds of preferred
managers in reserve, CPS can handle a large influx of new inventory. Property managers are individually recruited, trained, and monitored for
consistent quality performance. Property data is loaded into the system via automated client interface and data is validated in the relevant
format and downloaded. Property data may also be loaded manually into the system of record. Data is reconciled with the clients system on a
monthly basis to ensure accuracy. Once a property has been assigned, the property manager must complete a form that documents the
condition of the property. The property manager provides market comparable data and photographs of the property. CPS staff reviews the
information submitted by the property manager to validate the property condition, review suggested repairs, and verify market comparable
data. CPS will also perform a lease review to ensure standardized forms are used and identify exceptions to the client. The company will
reconcile the lease amount to the underwritten lease amounts provided by the owner. CPS reconciles the market comparable data with the
rental estimates provided by the owner, if applicable.

11
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Chart 2: Single-Family Rentals Under Management: Largest Concentration by Geographic Location (# Units and Percentage)
40.00%

6000

35.00%

5000

30.00%
4000

25.00%
20.00%

3000

15.00%

2000

10.00%
1000

5.00%
0.00%

0
1) Florida

2) Illinois

3) California
%

4) Texas

5) New Jersey

OTHER:

# Units

CPS provides services designed to determine occupancy and to ensure that a property is safe, habitable, and in compliance with local safety
laws by performing a thorough assessment of the property. Occupancy resolution is accomplished by making multiple contact attempts and
property visits. For occupied properties, CPS develops training and guidelines to ensure compliance with all applicable laws and regulations. As
necessary, CPS takes steps to secure the property, including rekeying, boarding, and winterization. CPS also handles utilities and property
maintenance and activates utilities for vacant properties and establishes reoccurring services (lawn, pool maintenance) to protect the asset and
avoid potential code and homeowner association violations. CPS also completes any necessary municipal, county, or state property registrations
for vacant properties and rental homes.
CPS provides tenant-screening services for its clients using a web-based application that provides consistent and nondiscriminatory screening
based on client specific requirements, which may include tenant information, credit history, and rental and eviction history, as well as Office of
Foreign Assets Control information. For each application received, a report is generated that indicates tenant application approval or rejection.
The report provides an applicant score based on a complete credit analysis in addition to the applicants eviction and rental lease history,
employment, and residence duration.
CPS manages a nationwide property-manager network that is reviewed and monitored by CPS compliance personnel. Property managers are
required to complete an application and provide information to indicate compliance with local licensing and corporate insurance requirements.
Property-manager information and qualifications are stored in the system including the property managers name, address, and at least one

12
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

contact phone number or email address. CPS staff monitors license and insurance expiration information to ensure that property managers
meet applicable regulatory and policy requirements.
All property managers are overseen by CPS field-management staff including district managers and field directors. Property-manager oversight
is accomplished through scheduled and unscheduled site visits to properties, visits to property-manager offices, and property-manager
scorecards, which include performance metrics such as response times, service quality and compliance. Prior to assigning new properties to
property managers, CPS reviews the property managers performance to ensure that they are performing satisfactorily and if not, new assets
will not be assigned to the property managers. A property-manager review committee reviews the property-manager scorecard on a monthly
basis to determine appropriate inventory levels, identify training needs and promote best practices for the business. The CPS field staff meets
regularly with the property managers to discuss performance and identify action plans where required. If deficiencies are not remedied, CPS
may take further action, including termination of the property-manager relationship.
Standby Property Management
For securitized transactions and lender warehouse requirements, CPS provides oversight of property manager functions as a standby property
manager and also serves as a primary property manager in the event of a default trigger. As part of CPS standby property-management
services, the company will store property-management documents and data for all properties in the financed or securitized portfolio using a
standard template for property managers to submit updated property information, including updates of property level rental performance,
property condition, and property financial data. CPS provides a periodic audit of data and documents including tenant applications, leases,
inspections, property-management agreements, renewals, rental rates, terminations, expenses, and evictions. The property-manager
performance is also evaluated including vacancy, delinquency, time-to-lease, rental rates, and evictions. Compliance with Fair Housing laws is
also evaluated. CPS standby property manager audits focus on:
-Property-manager licensing
-Applicant evaluation (Fair Housing)
-Tenant OFAC checks
-Data quality
-Lease quality and compliance
-Security deposit handling
CPS provides in-depth reporting and analysis via a proprietary system that consolidates data from multiple borrowers into a single platform that
provides for a seamless transfer of property-management responsibilities when necessary. In the event of a notification of default from a
servicer with one or more borrowers, CPS loads data and documents into its property management platform and tenants are notified to route
payments and questions to CPS and/or local property managers. CPS secures the applicable properties and continues to manage rents, repairs,
and other assorted management duties.
Assessment: CPS exhibits strong controls in the acquisition and setup of new rental home properties. Pervasive data-integrity
protocols minimize data input errors and help ensure that CPS and client records are reconciled properly and that property data and
tenant information are correct. CPS has a thorough tenant-screening process that is designed to collect all relevant tenant data and
provide application decisions that are consistent and compliance-oriented. Lastly, CPS provides strong oversight of its propertymanager network through field-management staff that monitors property managers through a combination of personal interaction,
scorecards, and monthly performance reporting.
13
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Tenant Relationship Management


CPS has developed a multichannel approach for handling tenant inquiries. All tenants have access to a 24/7 emergency telephone number for
high-priority incidents. In addition, tenants are provided with contact information for the local property management office, which is responsible
for the initial property assessment, safety and habitability repair, replacing locks and keys and handling any daily tenant issues. Tenants are
provided with a monthly rental remittance statement which includes customer-service contact information at CPS corporate headquarters.
Tenants may call customer service directly if their issue is not being addressed by the local property manager. Tenant issues may also be
escalated to a regionally located CPS district manager or may require intervention by the CPS compliance area. CPS has an extensive
methodology by which complaints are classified low, moderate, high or critical. Complaints classified as low are not considered a significant risk
and can be handled immediately by CPS employees or the local property manager. Similarly, a complaint classified as moderate poses no
significant risk but requires action and resolution by CPS. Complaints classified as high may pose a risk to CPS, clients and affiliates that
requires further action, and complaints deemed critical represent an immediate risk that requires prompt action. In situations of a critical
complaint, clients are notified immediately. CPS defines critical complaints as a situation that poses severe injury or loss of life, the loss of the
asset, legal action, or evidence of fraud or illegal activity. CPS policy requires that unresolved complaints be escalated to the next complaint
level.
CPS tracks all tenant complaints on a form that is completed by the individual recording the issue. All written complaints are forwarded to the
CPS compliance area for appropriate escalation, tracking, and monitoring. The complaint-review process provides valuable insight into property
manager and CPS staff performance. Management performs root-cause analysis of customer complaints to determine if the issue is a lack of
training, unclear or inadequate processes or controls, or an employee or property manager performance issue. Upon completion of the rootcause analysis, CPS will enact any necessary changes including process changes, additional training, enhanced controls, or corrective action.
As tenants approach their lease expiration date, CPS has developed procedures in conjunction with client directions. Based on client direction,
CPS will provide the property manager with the renewal terms. If eligible for renewal, the property manager will contact the tenant to
determine if the tenant is interested in a lease renewal. The property manager will handle lease renewals directly with the tenant by completing
a new lease agreement, verifying that the original information is current and securing the tenants signature on the lease agreement. Additional
steps are taken by the property manager including uploading the new lease agreement into the system and forwarding the agreement to the
client for execution, if applicable. If a renewal is not approved by the client, a notice of nonrenewal is sent to the tenant that includes the
termination date and move-out date. In cases of hardship, exceptions may be made at the direction of the client.
CPS has well-defined procedures for a tenant vacating the property. Based on client guidelines, the property manager will visit the property on
the scheduled move-out day and assess whether the property is in broom swept condition and that all trash and debris has been removed.
The property manager will complete a property move-out assessment form to verify the condition of the property and obtain the tenants
signature. If the property is not in an acceptable condition, the property manager will contact the field manager to initiate further action, which
may include nonmonetary breach and eviction. The property manager is also responsible for completing a security-deposit reconciliation form
which is uploaded into the system. CPS uses a tracking system that monitors the turnaround time of tenants security-deposit refunds to
illustrate compliance with CPS policy and state law, where applicable.

14
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Assessment: CPS has highly effective policies and controls in place to handle the tenant relationship lifecycle. Multiple channels
exist for tenants to register questions, maintenance requests, and complaints, and CPS has internal controls designed to classify and
consequently elevate tenant concerns and complaints for satisfactory resolution. Performing root-cause analysis of tenant issues is an
important component of internally evaluating services provided and identifying areas for improvement. CPS end-of-lease process
affords the tenant the opportunity to learn of any potential security-deposit offset, and CPS has excellent tracking of security-deposit
returns to ensure compliance with company policy and applicable laws while minimizing potential post-move-out consumer issues.
Rent Collection and Delinquency Management
Chart 3 - Single-Family Rental Payment Distribution Channels (2015 12-Month Average)

CPS has instituted controls in the collection of rents by property managers that minimize the chances for fraudulent rent handling or delays in
the transmission of funds. Tenants receive monthly statements, and all tenant payments are made to a third-party lockbox vendor, pay by
phone, or via the tenant web portal. The centralized collection of rents provides timely receipt, posting, and reconciliation of rents. Management
reports are generated to identify potential fraudulent activity by property managers, and CPS field management will investigate potential fraud
situations including unscheduled property assessments and onsite visits to the property managers office. There is an escalation process for
suspected instances of fraud that includes referral to senior management and the legal department. CPS monitors daily activity to the lockbox
by receiving a daily payment file which is audited and posted to the system of record.

15
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Figure 2 - Delinquent Account Collections

Payment activity, or nonactivity, is tracked by exception reporting and by the collections staff. The collections staff is centralized in CPS
Anaheim headquarters and is trained in requirements of the Fair Debt Collection Practices Act. All rental payments are posted in real time to
provide a current view of the payment status. The real-time availability of payment information, together with timely monitoring, allows CPS to
efficiently and quickly resolve payment issues, minimize delinquency, and prevent fraudulent activity. The collections staff also reviews returned
payment items and exceptions from the lockbox. If a tenant fails to pay rent, a client-specific eviction calendar is followed to ensure that tenant
delinquencies do not extend beyond client-allowable days. Short-term payment arrangements can be made and are notated in the system.
When necessary, eviction is referred to local counsel and proceeds according to client-specific guidelines and applicable federal, state, and
local regulations. CPS, in conjunction with the legal area, maintains a network of approved counsel to process eviction actions. Local counsel
provides periodic case updates to CPS advising of the status of the eviction process.

16
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Chart 4 - Single-Family Homes Under Management: Year-End Total Delinquency and Total Vacancy Rates (%)
18%
16%

Percentage

14%
12%
10%
8%
6%
4%
2%
0%

2010

2011

2012

2013

2014

2015

Total Delinquency

16%

9%

14%

17%

9%

8%

Tenant In Place (Delinquency %)

10%

9%

8%

11%

8%

7%

Rent To Hold (Delinquency %)

6%

0%

6%

6%

1%

1%

Total Vacancy

0%

0%

9%

11%

9%

8%

Total Delinquency

Tenant In Place (Delinquency %)

Rent To Hold (Delinquency %)

Total Vacancy

Assessment: CPS demonstrates excellent controls in the collection of tenant rent payments. The acceptance of payments via a
lockbox vendor or automated methods such as pay by phone or tenant web portal improves efficiencies, reduces the risk of human
error or fraudulent activity, and enhances management oversight and reporting over the payment-collection process. The centralized
structure of the collection staff promotes consistency in the collection process. Additionally, having a collection staff trained and
certified in the regulations of the Fair Debt Collection Practices Act minimizes headline, regulatory, and litigation risk arising from
noncompliance with the applicable laws governing delinquent account collection.
Valuation Services
Carrington Price Pointe, a division of CPS, provides valuation and diligence services, including vendor management, appraisal review, collateral
diligence, and other services to the originations, servicing, and investments divisions and subsidiaries of CHC. The unprecedented market
conditions experienced from 2007 onward spurred the development of tools and services intended to better account for market conditions and
the changing needs of end users, including an early focus on rental and nonperforming loan investments. Since 2007, CPP has deployed its
proprietary diligence product on $6.8 billion in NPL acquisitions as well as 33,000 diligence and collateral reviews in support of its investment
operations. CPP has also completed diligence on $1.7 billion of single-family rental assets.

17
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Included among the current product offerings is the BPO Plus, which is an update to the industry standard broker price opinion. It includes
supporting analytics driven by multiple listing service data and more in-depth quality control, such as rule validation, manual review, variance
commentary, comparable weighting and reviewer comparable validation. The BPO Plus also includes an analysts reconciliation and selection of
additional or alternate supporting comps by the reviewer. The analyst reviews MLS photos to validate the accuracy of the agent selected comps
and also during the selection of analyst comps. The result is a more detailed and reliable solution that is not based on an agents subjectivity.
Since introducing its current platform in late 2013, CPP has completed over 81,000 BPO and BPO Plus reports.
In 2013, CPP introduced a platform that incorporates MLS data, MLS Photos, interactive mapping tools, and on-demand market information to
drive efficient but highly detailed home and rental valuations/price estimates. In addition to supporting the BPO Plus, the platform reinforces
CPS ability to provide full collateral diligence, reviews of third-party valuations, and appraisal review services.
CPP provides services on a national basis and uses MLS data in the majority of markets to support advanced products and review services.

18
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Figure 3 - CPP National Footprint

Assessment: The real-time access to a vast amount of data in congruence with CPS 13 years of operational experience yields
accurate and reliable results. From 2007 to Dec. 31, 2015, CPS has completed reconciliations on over 79,000 assets.

19
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Performance Management: Vendor Performance Metrics (MOR RV1)


REO Asset Management
CPS provides REO asset-management services for third-party clients. CPS has over 2,300 assets under management with multiple clients. While
the number of standard REO assets has declined in accordance with market conditions, CPS has serviced approximately 2000 reverse mortgage
REOs for a third-party client. CPS offers various services on a component basis including redemption management, eviction management, and
HOA management. CPS services include determining the estimated market value for as-is and repaired assets and selecting the
appropriate strategy for asset marketing. CPS will monitor market fluctuations, listing activity, changes in property conditions, marketing
expenses, and repair bids. CPS also will oversee offer negotiations, the closing process, and final asset disposition.
Loan Boarding and Prelisting
CPS uses the Equator workstation and RES.net as a communication portal between the companys asset managers and real estate agents to
notate actions during the marketing process on a real-time basis. The systems are used to manage the following processes: eviction-process
tracking, valuation review, inspection tracking, marketing plans and status reports, offer negotiation, closing process tracking client oversight,
and client invoicing.

Eviction Process Tracking

Valuation Review

Inspection Tracking

Marketing Plans and Status Reports

Offer Negotiation

Closing Process Tracking Client Oversight

Client Invoicing

New assets are boarded into the Equator or RES.net systems depending on client specification. Once the property becomes REO, the hazard
and liability insurance is replaced with the appropriate insurance coverage. The REO coordinator orders an updated title search to determine if
the property is free and clear of any encumbrances. If a title issue is disovered, it is referrred to the title curative team for further handling and
resolution. An asset manager is assigned, who is responsible for timeline management and liquidation throughout the entire REO marketing
and disposition process. Real estate agents are assigned to a property based on the following criteria:

Preferred Status (Agents who are established with CPS)

Grade (Performance score that the agent receives)

Proximity to Property

Load Balancing

Experience (Agent should be licensed for minimum of two years)

Exposure Capacity (Sufficient marketing and advertising budget)

Prior to listing the property for sale, the appraisal review department obtains an interior brokers price opinion from the real estate agent and a
secondary independent interior BPO. The appraisal review department reviews the market value information and provides an estimate for both
an as-is and repair sale and the information is updated in the system. An updated interior BPO may be ordered by the REO asset manager every
90 days.

20
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

The selected real estate agent receives an authorization level through the system that outlines the responsibilities required of the agent and
serves as an authorization letter for the agent to act on behalf of CPS. The agent must accept or reject the assignment within 48 hours. The
agent must verify the occupancy status of the property within 24 hours of accepting the assignment.
Assessment: CPS operates within a well-controlled loan boarding environment that includes effective technology for boarding assets
and reconciling data integrity. The multiple levels of review serve to ensure that assets are boarded accurately in accordance with
established company guidelines and client directives.
Title, Homeowners Association, and Real Estate Tax Administration
Unencumbered title is an integral aspect of marketing an REO asset. CPS staff will review the title information for the following information
including:

Declaration of covenants, conditions, and restrictions

Recorded liens by homeowners association

Delinquency notices from homeowners association

Delinquent taxes

Correct vesting

Correct legal description and address

The real estate agent is responsible for providing homeowner association information to CPS, which is reviewed by the marketing coordinator
and the REO redemption coordinator. The HOA expense is approved based upon an REO delegated authority matrix and approved by the proper
individual and the HOA information is entered in the system and an approved vendor payee record is established. A monthly report is
generated that captures all recurring monthly assessments on REO properties that is provided to the requisite accounting area for payment.
On a monthly basis, the REO department provides a list of REO properties to a hazard insurace vendor for payment based on the REO market
value of the property. Similarly, real estate taxes must be paid to maintain clear and marketable title. CPS is notified of taxes owed on REO
properties by email from the Carrington Mortgage Services tax and insurance area. CPS has defined a clear methodology for evaluating if and
when taxes are paid based on property location. Additionally, protocols have been established for internally requesting payment of taxes and
the process levels for generating payment to the taxing authority.
CPS also provides code violation services to its clients. CPS works with the agent, title department and municipality to obtain code violation
information which is then uploaded to the system for tracking. CPS communicates with the agent and municipality to resolve violations
including negotiation and payment. A monthly performance report is reviewed by management that includes operational metrics such as:

Client specific asset status (such as the number of properties boarded and closed, and beginning and ending monthly
balances)

Aged assets beyond 30 days with code violations requiring follow-up and resolution

The specific number of assets and monthly performance, including exceptions

21
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Assessment: CPS operates within a well-controlled title, HOA, and real estate tax administration environment that includes effective
technology for identifying and researching outstanding items related to title issues, outstanding HOA fees, property taxes and code
violations. CPS has well-established timelines for investigating and requesting data and invoices as well as following up on aged
items. The multiple levels of review serve to ensure that assets are boarded accurately in accordance with established company
guidelines and client directives.
Figure 4 - REO Asset Timeline

REO Asset Management


CPS provides REO management services to various clients including government-sponsored enterprises, financial institutions, bank and
nonbank servicers, hedge funds, investment banks and investors of nonperforming loans and residential mortgage-backed securities. The
company services all aspects of the REO disposition lifecycle from post-foreclosure acquisition through marketing and closing.
Chart 5 - REO Assets (Geographic Distribution as of Dec. 31, 2015)

As part of the REO management process, if a property is found to be vacant, a property preservation vendor will arrange to have the locks rekeyed immediately. After the asset manager obtains the re-key information, a secondary property valuation is received. In accordance with the
CPS repair bid matrix, estimates are solicited from vendors to have debris removed from the property. Upon completion of the work, photos are
required to provide evidence of finished work and to process reimbursement of work performed. If property damage exists, CPS will file an
insurance claim for damage reimbursement and apply those funds to reduce the overall loss severity. Agents and assigned vendors have
22
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

delegated authority, (up to a predetermined dollar amount), to take necessary measures to preserve the property. If winterization of the property
is required, it is performed by an authorized property preservation vendor. If repairs are undertaken, the agent asks for repair estimates from
multiple contractors. The asset manager reviews the estimates and selects what repairs are needed. The number of competitive bids required is
outlined in the CPS repair matrix. The asset manager notifies the agent of the repairs ordered so that the agent can oversee the construction
project and verify satisfactory completion of the work performed.
CPS will obtain repair information, comparable property valuations, marketing plans and a reconciled market value for each asset. The CPS
asset manager recommends one of four possible disposition routes including:

Wholesale (a distressed property that should be priced for a quick sale)

Retail As-Is (a property that is sale ready and may be marketed to an owner-occupant or investor)

Retail Repaired (a repair property to appeal to owner-occupant)

Hold for Rent (a property located in markets with the potential for two- to three-year positive appreciation and cash flow)

Chart 6 REO Assets and Evictions Completed Per Calendar Year (2009-15)
8,000

Number

7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
# REO Assets as of 12/31
# Evictions completed for calendar year

2009

2010

2011

2012

2013

2014

2015

7,427

6,276

2,859

2,807

2,568

1,336

1,461

283

336

435

412

232

341

331

# REO Assets as of 12/31

# Evictions completed for calendar year

If the property is occupied, the asset manager may determine that an eviction action is necessary to properly market the property. CPS
continues to adhere to the Protecting Tenants in Foreclosure Act as a corporate best practice and provides the requisite notice to occupants. A
cash-for-keys offer may be made to the occupant and where applicable, the terms will conform to state law and requires asset manager
approval. The eviction coordinator will begin an unlawful detainer action and refer the matter to a CPS-approved attorney who will process the
eviction as follows:

23
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Sending a Demand Letter

Sending a Summons and Complaint

Setting a Hearing Date

Filing an Answer

Requesting a Judgment Date

Filing a Writ of Possession

Scheduling a Lockout

Case Status Updates to CPS

Completing and Confirming Lockout

The eviction coordinator monitors the unlawful detainer process, approves court fees and communicates occupancy and vacancy information as
it occurs.
CPS has developed a network of preservation and maintenance contractors or will use a clients third-party contractor to perform property
maintenance and preservation work according to initial and ongoing timeline matrices. If there is no approved property and maintenance
vendor in a geographic area, the broker will select an independent contractor. CPS has developed specific preservation and maintenance
approval guidelines and disbursement thresholds. The company has an expense variance reconciliation process for those expenses not included
in the original budget or that exceed the budget.
CPS maintains an REO broker scorecard that measures the performance and effectiveness of its broker network. Key performance
measurements include the following:

Days to receive a requested BPO

Days on market with agent

Gross sales price to initial agent BPO

Days in escrow

Once an asset has been listed for marketing, CPS will monitor the property to ensure an efficient and timely disposition and that the property
condition is maintained satisfactorily. The asset manager must review the marketing strategy every 30 days to determine if it needs to be
modified. System-generated task reminders appear each month reminding the sales specialist to review broker status reports to evaluate
activity and consider revising the current market strategy. Marketing strategy revisions may include a list-price reduction and/or performing
repairs. The asset manager may order a new BPO to determine if there have been significant market changes since the asset was listed. A
system template will record changes to the marketing strategy and budget and will be work flowed to the appropriate manager for signoff, if
required.
While purchase offers on REO properties are considered based on a number of criteria, an offer primarily is viewed in relation to the net return
calculation. The asset manager completes an authorization to sell that includes a gain/sale analysis based on the recommended sales price,
information describing the marketing activity and the justification for accepting the offer.
The offer process, including review, acceptance, counter or rejection, and approval are all recorded and processed via automation. The broker is
responsible for completing the offer package and obtaining the requisite buyer signatures and forwarding the package to the closing

24
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

coordinator. The offer is system coded as approval pending and may require additional levels of approval beyond the closing coordinator and
asset manager, including third-party mortgage insurers or clients.
Once an offer is finalized between the buyer and CPS, the listing broker must submit a fully executed contract package (purchase agreement
with the requisite addenda and disclosures) to the closing agent, and the asset is coded as under contract. A closing date is established, and
the closing coordinator manages all timeline steps between contract execution and closing, ensuring that all key dates are met and minimizing
aged inventory. The closing coordinator will also verify third-party expenses, review the HUD 1 settlement statement, track the timely receipt of
wired funds, and reconcile any variance in expected cash proceeds.
Chart 7 - REO Sales Per Calendar Year ($MM)

An asset manager may remove an agent for various reasons, including poor maintenance of the property, failure to follow marketing strategy or
adhering to broker guidelines or CPS standards, or exceeding the maximum number of CPS assignments. An asset manager may reassign the
property to a different agent if no offers have been generated within 120 days of the property listing duration and for other conditions defined
by CPS policy.
CPS has developed comprehensive policies for managing vendor relationships, including the eligibility, selection, and performance monitoring
of various REO vendors. CPS performs due diligence of all vendors, including listing agents, independent contractors, and third-party
subsidiaries and affiliates. CPS reviews third-party vendor qualifications, including business experience, reputation, information security,
document custody practices, disaster recovery and business continuity, capacity and financial viability. The eligibility requirements for REO real
estate brokers and agents requires a valid and current real estate agent and broker license, a current errors and omissions insurance policy, a
completed W-9, and membership in the MLS service area. CPS performs independent monthly reviews of vendors that include a sample review
of REO documents, a review of invoices, and a review for any sanctions or disciplinary action that the vendor has been subject to and is
25
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

required to disclose as part of the CPSvendor agreement. Quarterly vendor meetings are conducted to review performance and discuss any
performance issues. CPS will take remedial action, including termination, if a vendor violates certain policies. Similarly, closing company and
title vendors have eligibility requirements that include Department of Corporations licensing, general liability insurance, and a letter of good
standing and client references. Property preservation and general contracting vendors must possess an active contractor and/or applicable
business license for the state they service and must maintain general liability insurance and workmens compensation insurance of $1 million.
On an enterprisewide level, CPS receives extensive performance feedback from various clients regarding its services. Portfolio performance data
supplied to CPS can include:

Monthly inventory

Total dispositions and assignments

Aged inventory

Portfolio turn rate

Disposition turn rate

Sales recovery (as-is versus repaired sales)

Accuracy rate

Title resolution (number of days)

We have reviewed various scorecards provided to CPS by external clients and note that CPS substantially conforms to performance
requirements as outlined in its service-level agreements.
Assessment: CPS has excellent internal controls and workflow management over its REO asset-management process. Policies,
procedures, and processes are clearly defined, enabling CPS to effectively manage each phase of the REO lifecycle. Every aspect of
REO asset management, from boarding and prelisting to final disposition, is supported by a solid technology environment for
workflow efficiency, task tracking, and follow up as well as performance management. CPS has an effective vendor eligibility,
selection and performance monitoring management program. The organizational structure is designed to provide for various levels of
employee responsibility, and authority levels are clearly established via matrices that delineate reporting lines and signoff authority.
Performance management, especially when determining service-level agreement compliance, is multilayered and consists of internal
and external reviews. Quality-control standards are well defined, and employee performance data is collected and reviewed with
staff. Performance feedback is provided by CPS clients and is reviewed to determine service-level agreement compliance, as well as
identify areas for improvement.
Accounting and Invoice Management
The accounting department provides services to both the rental-property management and REO asset-management divisions of CPS. CPS
accounting provides services that vary by tenant but include rent payment application, client expense and fee reimbursements, and expense
disbursements. Expenses incurred in the marketing and management of REO properties are processed via the Equator expense module or a
clients expense system. Expenses are reviewed for completeness and compliance with client guidelines. If approved, the billing is forwarded
through the clients approval process for disbursement to the vendor. The organizational structure of the accounting area provides the proper
segregation of duties to ensure that cash processing, recording of receipts, and bank account reconciliations are separate. Daily cash
reconciliations are reviewed by an individual other than the preparer.

26
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

All rent payments are posted to the system upon receipt. Posting reports are reviewed daily and reconciled to daily bank reports to ensure that
all transactions have been properly posted. CPS accounting staff review final invoices for rental properties to reconcile work authorizations
compared with completed work and ensure that work has been satisfactorily performed prior to authorizing payment requests. Disbursements
are posted within three business days, and internal controls prevent users who request payment from approving payment and likewise prevent
users who approve payment from generating the payment. Employee access to the accounting system is limited, and CPS management
performs an annual or more frequent review of user-access privileges.
CPS has developed controls to ensure that client funds are held in designated bank accounts segregated from CPS operating fund accounts or
other client accounts. Bank accounts are completely separated for funds once they are identified by property. Bank accounts for rental-property
clients are reconciled daily and reviewed by an individual other than the preparer. A monthly report is generated for the rental-property
management business that details all financial activity including fees earned, expenses paid, rent received, and advances received. All financial
reports are reviewed and approved on a monthly basis by management.
Individuals in the accounting department are cross trained to ensure knowledge depth and minimize turnover.
Assessment: CPS demonstrates solid controls in its accounting practices, supported by an effective technology environment. The
organizational structure of CPS accounting department provides the requisite segregation of duties among invoicing, billing review,
accounts receivable and payable, and general-ledger management. The company has embedded multiple levels of review and
accountability both on the CPS level and with oversight by its corporate parent, CHC.
Ranking Definitions
The numerical scale of MOR RV/RS1 to MOR RV/RS4 is defined as follows:
1

Exceeds prudent loan servicing standards in key areas of risk

Demonstrates proficiency in key areas of risk

Demonstrates compliance in key areas of risk

Demonstrates lack of compliance in one or more key areas of risk

A servicer assigned a ranking of at least MOR RV3/RS3 is deemed to comply with what we view as the minimum prudent loan servicing/vendor
standards and requirements for the servicers/vendors operational category and role. For access to Morningstars Operational Risk Assessments
of Residential Servicers and Vendors: Methodology and Process and other published reports, please visit www.morningstarcreditratings.com.

27
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Operational Risk Assessments: Carrington Property Services, LLC | August 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Disclaimer
The material contained herein (the Material) is being distributed in the United States by Morningstar Credit Ratings, LLC
(Morningstar) and is solely for informational purposes, and should not be considered a solicitation to buy or sell any security. THE
MATERIAL PROVIDED IS AS IS AND NOT SUBJECT TO ANY WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, ANY WARRANTIES OF ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE. Morningstar does not undertake to update any information or opinions contained in the Material. From time to
time, Morningstar and its affiliates and/or or their officers and employees may perform other services for the company and/or its
affiliates mentioned in the Material.
Morningstar rankings, forecasts, and assessments contained in this Material are evaluations and opinions of noncredit related risks, and
therefore, are not credit ratings within the meaning of Section 3 of the Securities Exchange Act of 1934 (Exchange Act) or credit ratings
subject to the Exchange Act requirements and regulations promulgated thereunder with respect to credit ratings issued by nationally
recognized statistical rating organizations.
The past performance of the companies described in this Material is not necessarily indicative of the future performance. While Morningstar
obtains information for its assessment contained from sources it believes are reliable, Morningstar does not audit the information it receives
from third-parties in connection with its assessment and rankings contained in these Materials, and it does not and cannot independently verify
that information, nor is such information subject to any warranty, guaranty, or representation. Certain assumptions, including, but not limited
to, an assumption that the information received from third-parties is complete and accurate, in connection with its assessment, may have been
made by Morningstar in preparing the Material that has resulted in the opinion provided. For more information about Morningstars assessment
methodology, please visit www.morningstarcreditratings.com.
This Material, and the rankings and forecasts contained herein, represent Morningstars opinion as of the date of this Material, and thus are
subject to change and should not be viewed as providing any guarantee. In no event shall Morningstar be liable to any party for any direct,
indirect, incidental, punitive, special or consequential damages, costs, expenses, legal fees or losses in connection with any use of the Material,
even if advised of the possibility of such damages. The Material may not be reproduced, modified, or distributed in any form without the prior
written permission of Morningstar.

28
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.