Since the financial crisis, standby servicing has played an increasingly important role in reassuring investors. As a result, lenders who have not ring fenced their back office functions have felt the heat to have a robust standby servicing provision in place.
This is not only to put investors’ minds at ease, but also to preserve ratings and ensure that they have workable strategies and coping mechanisms in place to deal with any future difficulties that either they or the industry may face.
One critical factor when it comes to implementing a successful standby servicing solution is to ensure there is minimal disruption to the servicing of investors’ portfolios. As a rule, the faster a portfolio can be transferred to the standby servicer, the less disruption’s there will be. Third-party standby servicer arrangements are typically described in terms of temperature – cold, warm and hot – depending on the level of the standby provided and the associated speed to transition the servicing of the portfolio. The more rapid the need for transition, the warmer the level of standby.
The warm level of standby is fast becoming the preferred choice for investors as it involves appropriate preparation in advance, including a full portfolio review and regular monitoring, contingency transfer planning and co-ordination of servicing systems. It also provides reassurance to the investor as they receive a realistic and transparent indication of the time required for transition; along with the associated cost should the service be invoked. This differs drastically from the lengthy and costly ‘cold cover’ transitional period, where the preparatory activities required to transition the service do not commence until the primary servicer is unable to service the portfolio.
To complement the warm standby service, lenders and investors are increasingly looking for one key activity from the hot standby list. This is evidence of periodic data migration and reconciliation. Those service providers with a standard and proven methodology for performing such migrations are well placed to fulfil this requirement and provide the necessary reassurance.
The market is currently seeing an increase in the number of new entrants and new products being launched, both of which often require external investment. Sourcing and selecting a credible and reliable standby servicer with a proven track record is paramount in convincing backers that their investment is adequately protected. Investors need reassurance that the right levels of standby cover are in place, supported by rapid response software and systems. Proof is also needed that the standby service provider has the specialist skills needed to effectively serve its receivables and mitigate the portfolio’s exposure to risk. Standby servicing is therefore becoming ever more important for those lenders looking to protect, develop and strengthen their business, whilst at the same time enhancing their reputation.
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