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Portfolio Management: The Evolution of Backup Servicing
Portfolio Financial Servicing Company (PFSC) (July 11, 2002)

By: Eric Gross, Portfolio Financial Servicing Company (PFSC)

Seems like it was just yesterday when the economy was booming, capital was plentiful and leasing companies dictated to their lenders how business was to be conducted. Then came a dose of reality as we witnessed the failure of a number of commercial equipment leasing companies, many of them the "big players" in the industry.

While bank capital is still accessible to established, well-managed companies, banks are highly focused on credit concerns, return on capital and portfolio management. The leasing industry will continue to manage business and capital cycles in tandem with the economy. These cycles will provide a risk-return analysis on capital deployment and will create winners and losers among the leasing and finance companies.

Lenders are taking a much more "hands-on" approach to monitoring and protecting their investments. As a result, much like the leasing industry, backup servicing has gone through an evolution and has become a critical component of the lenders funding program.

Historically, backup servicer's did little more than receive a monthly data tape from the primary servicer, verify it could be read and placed the tape on a shelf. In fact, many times a backup servicer was not appointed at all. The trustee assumed the role and responsibility under the structure of Successor Servicer. In this role and structure, the Trustee collected the backup servicer fee even though, if required, they did not have the ability or capacity to perform the servicing duties. The rational being that, if a problem arose; the Trustee could locate and contract with the servicer to assume portfolio servicing responsibility.

Until recently, you could argue that this course of action made sense since the backup servicer did little work anyway. Besides, who expected portfolios to become distressed or leasing companies to fail?

To respond to these current industry conditions and to meet the requirements for increased portfolio protection, some backup servicers have taken a proactive approach. Today the major players in the backup servicing business are mapping and converting the primary servicer's data up-front and are performing an independent monthly portfolio analysis. Actions like these ensure the backup servicer is familiar with the portfolio, aware well ahead of any serious portfolio problems and is able, if necessary, to perform a smooth transition to primary servicer.

In addition, major lenders, rating agencies, and credit enhancement groups are now insisting that funding structures include the up-front appointment of a backup servicer. This appointment provides an in-place portfolio transition plan an additional portfolio oversight.

As seen in most industries, adversity often spawns innovation and higher standards and the role of Backup Servicer is now, as never before, in the forefront. Through demands made upon Backup Servicer's to provide more value to the associated transaction, the leasing industry as a whole will emerge stronger and more able to cope with future adversity.



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