Key Elements of Backup Servicing
First Associates broke new ground as the first (and still only) Fintech servicing platform, we are the only servicer in our class to have earned a Morningstar Credit Rating ranking and we have steadily changed the dynamics of backup servicing through technology, out-of-the-box thinking and a keen focus on supporting our clients’ needs.
To truly understand what is needed to create a strong backup servicing contingency, it is important to define the role of a backup servicer:
A back-up servicer is a service provider who agrees to take over the servicing of a portfolio of assets on the occurrence of certain trigger events, most commonly failure of the existing servicer to perform or the servicer’s insolvency.
This sounds simple, like a very easy task – but it isn’t. The promise of being able to effectively take over the servicing of a portfolio upon a trigger event is not the same as actually having the experience, security, capacity and infrastructure to correctly onboard and manage that portfolio in an expeditious and compliant manner.
So, while every client looks for something different, below are some common factors to look for when creating robust backup servicing within the marketplace lending environment:
Would you hire a plumber to fix your air conditioner? Of course not. When looking for a backup servicer, asset experience matters. Companies historically focused on business loans, credit cards or other asset classes will have systems, compliance programs and people relevant to those assets. For a small business lender, business experience matters. Card experience works for cards. If you work with unsecured consumer loans, you will need a company experienced in that asset class. You don’t want your portfolio to be your backup servicer’s market entry point.
A strong backup servicing program requires a servicer with the ability to scale up quickly. Servicers with a SaaS focused, cloud-based platform can scale up much more quickly than a servicer still operating with in-house, proprietary systems. Too frequently we see today’s Fintech platforms anchored to the past by legacy vendors with antiquated systems and processes.
Scalability is also driven by other factors. For example, does the servicer have the office space to physically accommodate an influx of additional personnel? Can the servicer hire quickly? Multi-location servicers have a natural advantage over those with a single location in these respects, as do servicers with locations where the hiring process can be accelerated. Servicers located in small labor markets often struggle to meet growth demands, even in normal times.
Figure 1 is a diagram of the classic backup servicing arrangement. A servicer will take on as much backup servicing as it deems prudent. These relationships are often 30-day conversions with monthly file transfers. In the classic model, the loans’ owner is dependent on the backup servicer’s ability to either absorb the additional volume brought in by the backup servicing event, or to quickly increase staff to meet demand. This is particularly clear in the ratings process with its strong focus on current full-time employees (FTEs) and physical space.
Figure 2 shows First Associates’ large scale backup servicing arrangement. Just as the reinsurance industry evolved to provide risk management at the wholesale level, First Associates provides a “reinsurance” layer to cover catastrophic risk in the backup servicing industry. Through contractual arrangements with outsourced call centers and collection agencies, First Associates can access thousands of agent FTEs while providing continuity of relationships in case of a backup servicing event at certain large marketplace platforms.
Each backup servicing arrangement will have a contractual “conversion time” – the number of days that the backup servicer has to service the portfolio. But can the backup servicer actually make the conversion happen on time? Servicers with in-house, proprietary systems will have a difficult time meeting deadlines less than sixty days. Credit card focused servicers will need to wait for their next “window” with their platform service provider. More traditional entities such as big banks or large, legacy servicers will continue to move at a pace in keeping with their business. First Associates has a demonstrated ability to not just meet these conversion deadlines, but to beat them by a wide margin. In a situation where a platform suddenly goes away, the ability to move fast is critical.
Strong relationships are essential to backup servicers. Healthy, ongoing relationships with investors, warehouse providers and other capital market participants build confidence that the backup servicer is ready and able to step in. At the same time, the backup servicer benefits from advance notice of potential upcoming events prior to formal notification. These relationships, usually across multiple marketplace platforms, create a circle of information flow and enable day-to-day operations to run smoothly.
Relationships with marketplace platforms are equally important, creating strong working relationships across the operating personnel of the platform and the backup servicer. For larger platforms, these working relationships across key people and departments are particularly important as they maintain information flow when dealing with a growing and more complex portfolio and changes in process and servicing cadence. As with the investor relationships, strong platform relationships are generally built across multiple investor programs. Strong relationships also require a commitment to client service and a focus to meeting client needs. First Associates is committed to maintaining and building those relationships.
Compliance is a rapidly growing focus in the marketplace lending industry. Ensuring that backup servicing is, and will be, compliant requires more than just meeting today’s regulatory requirements regarding consumer PII for storing backup data. In converting a client’s loan portfolio, the backup servicer becomes the successor servicer and will need to be compliant with all of the client’s regulatory requirements. The servicer’s experience with similar assets is important for this reason. For some assets, such as small business lending, change is clearly on the horizon and needs to be anticipated. For example, with the Treasury recommending that small business borrowers be treated more like consumers, it makes sense to begin that process sooner rather than later.
Marketplace lenders can secure their business with a high quality, experienced backup servicer. When you are searching for a resource to provide safety and security for your business, make sure you consider a backup servicer with experience in your asset class, the ability to quickly scale up and respond, who has established investor and warehouse lender relationships and who maintains strong compliance and risk management models.
If you have a backup servicing need, please let us know how First Associates can help. We are standing by at 888.486.2509 or solutions@1stAssociates.com.