Backup servicing is supposed to provide a path forward when a primary servicer can no longer fulfill its responsibilities. But what happens when the backup servicer is actually needed?
For investors and other capital markets participants, the arrangement creates an expectation of continuity. Whether that expectation holds depends on what the provider can actually take over and whether it's prepared to do the work.
During a recent asset-backed finance fireside chat, Larry Chiavaro, president of LC Advisors Group, described two cases in which backup servicing arrangements were triggered, but the designated providers said they couldn't take over. They explained that they were payment processors, not servicers.
“I call them servicing impostors,” Chiavaro said.
His description points to a fundamental problem: a provider can be designated to assume servicing responsibilities without being able to perform them. When that happens, investors and other stakeholders may be left searching for another provider at the very moment they need the existing arrangement to work.
Evaluating backup coverage starts with understanding what the provider is expected to take over. A provider's designation establishes a role. It doesn't prove the provider can fulfill it.
Backup servicing arrangements can cover different parts of a servicing operation. Depending on the agreement, a provider may be expected to administer payments, maintain account records, manage borrower communications, or produce portfolio reports for investors. Those responsibilities define what the provider must be able to handle if the primary servicer can no longer perform its duties.
As Andrew Coffey, SVP, Enterprise Sales & Partnerships at Concord, explains, “A backup servicer needs to understand what it's being asked to take over. That means knowing the portfolio, understanding the operating model, and being prepared to pick up where the primary servicer left off. The responsibilities need to be clear before a transfer happens, not figured out after the trigger.”
Investors need to look beyond a provider's general description of its services. They should examine whether it can work with the portfolio's data, perform the responsibilities in scope, and provide evidence of both.
A provider needs usable account information to administer payments, maintain records, and produce accurate reports. Ask what portfolio data it receives, how it validates account information, and how it identifies missing or inconsistent records.
If critical information is unavailable or unreliable, the provider may struggle to carry out its assigned responsibilities. Ask how it identifies data gaps, determines their impact, and addresses them to ensure servicing continuity.
Evaluate the provider against the specific duties in your agreement. If payment administration is included, how would it process and reconcile payments? If borrower communications are in scope, how would it access account histories and handle inquiries? If investors require portfolio reporting, can it produce the reports they rely on?
Ask how the provider's systems, staff, and operating processes support those tasks. Identify any responsibilities that depend on outside vendors, additional resources, system access, or arrangements that are not yet in place. A provider's general ability to service loans doesn't establish that it can perform every function your portfolio requires.
Ask the provider to back up its claims with evidence. Review sample reports, examine relevant workflows, and walk through how it would handle specific servicing responsibilities using your portfolio's data. These exercises can reveal gaps that a general description of the provider's services might miss.
The goal is to establish what the provider can do now and what its claims are based on. That assessment gives investors a baseline to revisit as circumstances change.
A provider's capabilities can change after an arrangement is established. Portfolios grow, servicing requirements evolve, and providers change their systems, staffing, or operating models. The original agreement may remain in place even when the assumptions behind it no longer hold.
Material changes should prompt investors to revisit their coverage. If the portfolio has grown or its servicing needs have changed, can the provider still handle the work? If the provider has changed its operations or vendor relationships, are the resources and arrangements needed to perform its responsibilities still available?
Waiting until a backup servicing trigger occurs to answer those questions leaves investors with fewer options. They may have to address capability gaps while trying to maintain continuity, potentially finding another provider under pressure.
A backup servicing agreement establishes who is expected to step in and what responsibilities the provider is supposed to assume. Investors still need to know whether the provider can perform that work and whether the basis for relying on it remains sound. The strength of the arrangement depends on that capability, not simply the designation.
Concord works with lenders and investors to prepare for changes in servicing through backup arrangements tailored to their portfolios and transfer requirements.
4343 N. Scottsdale Rd., Ste. 270
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