No loan company wants a back up servicing provider to step in and assume its responsibilities, as it means something has gone wrong and urgent help is required. However, lenders cannot afford to be without a back up servicing provider.
After a trigger event, where a lender struggles to fulfil certain essential functions, a back up servicer will be called on to manage their assets and take care of the business commitments. Any company that manages a portfolio of loans, whether secured or unsecured, would certainly be wise to have a back up servicing facility – just in case events do not go to plan.
Today’s volatile economic environment, with high interest rates and global instability, saw business failures increase by 54% in the first half of 2023 compared with the same period last year, while 2024 may be even more challenging due to ongoing debt following the pandemic, higher borrowing rates and the cost of living crisis.
The regulatory environment is also becoming tougher, and new legislation such as Consumer Duty means that all finance businesses must tread carefully or face action from the FCA. In short, trading conditions are economically challenging and legislatively demanding.
Even at the best of times, no business is immune from commercial risks and should be prepared for setbacks. Investors need to be confident that a safety net is in place when they commit money, while ratings agencies increasingly view a back up servicing arrangement as a sign of prudent risk management and stability.
The benefits of back up servicing
Back up servicing is far more than a box-ticking exercise and should be considered a commercial necessity rather than a luxury. It is a risk management strategy that will ensure business continuity, financial integrity and control, and due diligence if a primary servicer fails to perform or becomes insolvent.
Back up servicing (also known as standby servicing) will provide the following benefits:
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Continuity of cash flow when the primary servicer is under pressure
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Ensure the collection of receivables and the smooth management of all disbursements
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Protect the value of assets for the legal and/or beneficial owners when the primary servicer is unable to
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Fast, seamless portfolio onboarding
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Understand and meet all compliance and reporting requirements
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Help avoid a ratings downgrade because of insufficient contingency planning
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Maintain a positive customer experience and clear communication with all stakeholders
Having a fully ‘plugged in’ back up servicing provider, to handle all the service requirements as quickly as possible, is the best way to deliver a successful invocation.
Servicing levels and options
There are three types of back up servicing:
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Cold standby – this can take up to 90 days as there is little initial preparation and readiness for a handover. Costs will be lower but because implementing the back up service following an invocation takes longer, the loss and reputational damage may be greater.
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Warm standby – usually around 30 days, a warm standby provides swift data mapping verification and validation to ensure a timely transfer of services with minimal friction.
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Hot standby – this is an immediate replacement service with a full team and platform waiting in the wings to ensure a seamless transfer, sometimes with shadow servicing so that all the bases are covered at all times.
How to choose a back up servicing provider
There are several important factors to consider when selecting a standby servicing provider. You should review the back up servicing provider’s industry reputation and client base, and look carefully at key metrics such as asset experience, scalability, compliance, technology stack and technical expertise. For instance, Lenvi protects more than £25 billion in funds across mortgages, SMEs, P2P, motor, and secured and unsecured lending; employs the latest financial technology; and has a proven track record with a large number of investors and lenders.
Business situations and risks vary, and whether you choose a cold, hot, or warm standby solution will depend on individual circumstances. Warm standby is usually the preferred option, while hot standby is not very common and is mainly an option for businesses with a high risk of failure.
Back up servicing in action
As an experienced provider, Lenvi can answer all your back up servicing requirements. Our industry knowledge and fintech capability transform lending and can make the difference between success or failure when standby servicing solutions are needed.
For example, when a German financial services provider faced bankruptcy, Lenvi stepped in and managed the project internally, taking the data in-house. Lenvi redirected the recovery of payments to a new account and ensured clear communication with all stakeholders. The result was effective collaboration in a challenging situation. Operational efficiency was achieved within seven days, meeting borrower needs, and there were no issues with collections.
Another example of swift and effective intervention was when a litigation lender faced insolvency because its lead investor requested an invocation. More than £50m was at stake, and Lenvi worked closely with the investor to secure the continued use of the finance business’s technology, along with several key members of its staff, to ensure continuity. Once again, collaboration and clear communication ensured the optimum outcome.
Yes, back up servicing is necessary
Lenders and investors must protect their interests and safeguard customers in today’s volatile market. A reliable standby servicing provider will inspire confidence and mitigate the damage if a business fails or becomes insolvent.
Find out how Lenvi can help you
Whether you're a lender or an investor, we have the back up servicing technology and skills to protect you.