Following the Backup Plan – Part Two: We Talk to CAR Financial Services on the Keys to Successfully Engaging a Backup Servicer

This is part two of our interview with the executive team at CAR Financial Services, a subprime auto finance company with over 25 years of experience providing customized backup and successor servicing. In part one of our interview, we discussed the benefits of having a backup servicer in place before trouble starts.

But once you decide to take the prudent course and engage a backup servicer, how do you know you are getting the best value from the relationship?

Here, we discuss with CAR the keys to a successful relationship.

Industry Professional’s Advice on the Keys to Choosing and Engaging a Backup Servicer

What areas of servicing expertise are most beneficial for a successful engagement?

Your backup servicer may one day be your provider in your most desperate hour of need. With that in mind, you should partner with a company with expertise specific to the portfolio you are transitioning and one with a full spectrum of capabilities to handle all facets of that portfolio’s collection and liquidation for the benefit of the lender and borrower.

Specific areas of expertise should include:

  • Collection efficiency, compliance with state-by-state laws and asset liquidations.
  • Specialized reporting related to revolving credit or securitized lines of credit.
  • Custodial expertise related to title management and the use of e-title systems.
  • Legal expertise with in house counsel to handle bankruptcies and other litigation matters.
  • Dedicated experienced teams in skip tracing and specialty devices such as Starter Interrupt and GPS.
  • Facility and IT scalability – your backup servicer or successor servicer should be able to scale quickly for large complex portfolios.

In sum, a high quality backup servicing company will have in-house capacity to perform all of the above. A dedicated facility that can be scaled as necessary to take on portfolios both big and small will ensure minimal issues and maximum protection against portfolio degradation. Also, a tremendous value-add is if your backup servicer also has the ability to purchase the receivables they are servicing for you, either completely or in part. This provides an additional avenue of expedited liquidation that can help speed up the return of investment back to the lender.

Can you give an example of a situation where the portfolio or platform suffered significant losses which could have been avoided if a backup servicer had been in place?

There have been plenty of recent highly publicized multi-million dollar defaults by high profile subprime auto finance companies over the last 12-18 months. All were backed by experienced sector lenders and all were symptomatic of similar issues that could have been mitigated through collaborative proactive backup servicing with a provider that has proven credentials in this space, not a company that in essence is a collection generalist.

Many things may lead to an extension of losses within a portfolio. Through ongoing analysis by an active backup servicer, they may be flagged early on and allow the lender time to take corrective actions or rapidly transition to servicing. A backup servicer should be able to provide lenders additional vision to portfolio performance and fraud indicators. Flags from these areas may identify changes in underwriting or oversight that is detrimental to the long term success of the portfolio. High growth rates mask poor underlying performance that doesn’t expose itself until the pace of growth slows or stops. Portfolios where there is tampering with collections or over use of extensions to manipulate reporting by the borrower can also be flagged by a proactive backup servicer. Once the decision is made to move a portfolio into servicing, a high quality backup servicer should be able to effectively and efficiently transition a customer collection base very quickly – usually within a few business days–to avoid any more account manipulation and expansion of losses from lack of control.

Do you have any advice on getting the relationship off on the best footing?

Once you engage a backup servicer, getting the verification that the necessary data mapping for transitioning has been completed is critical. This should include proof of account data loaded into the system of record of the backup servicer, a letter certifying the backup mapping is complete and that upon request of the lender the backup servicer attests to their ability to actually transition the accounts, should it ever be necessary.

As noted in the first part of our interview, a positive first step toward a productive relationship would be to get a portfolio evaluation, which CAR Financial Services provides for free.

Looking Ahead

If the subprime auto market deteriorates, for the benefit of the lender, transitioning quickly to successor servicing will limit what could potentially be catastrophic losses. This is especially true if there has been any data manipulation that was never flagged for the lender without a backup servicer. It makes sense at this time for lenders and owners to consider undertaking risk and value assessments for their loan portfolios.