status: draft

Servicing agreement

The Servicing Agreement (or Servicing Annex, sometimes embedded in the PSA) governs how loans are serviced, cash is collected, and what happens if servicing standards are not met. For originators who service their own loans, this agreement defines your ongoing operational obligations and the circumstances under which you can lose servicing rights.

status: draft

Servicing standards

The servicing standard defines how you must service the assets. This seemingly simple provision determines your operational flexibility.

Common formulations

Standard	Meaning	Flexibility Level
Same care as servicer’s own loans	Service these loans the same way you service your balance sheet loans	Highest; aligns with your existing practices
Prudent industry practice	Service consistent with how a reasonable servicer in the industry would	Moderate; allows variation within reasonable bounds
Same as servicer’s own loans and prudent industry	Both standards apply	Moderate; your practices must also be prudent
Specific servicing procedures	Follow detailed procedures in an exhibit	Lowest; locked into exhibit provisions

Why this matters

If you modify loans aggressively on your balance sheet (extending terms, reducing rates, deferring payments), a “same care as own loans” standard gives you that flexibility for facility assets. If the servicing standard is “specific procedures,” you can only do what the exhibit permits.

Negotiation strategy: Start with “same care as servicer’s own loans” as the primary standard. Resist detailed procedural exhibits unless the capital provider insists. If you must accept an exhibit, ensure it captures your actual practices, not an idealized version.

Evolution during the deal

Servicing procedures exhibits are often the last item negotiated. In the rush to close, parties sometimes accept exhibits that do not match actual practice. Review the exhibit against your operations manual before signing.

status: draft

Modification authority

This is often the most negotiated servicing provision. Your ability to modify troubled loans determines whether you can manage through stress or must watch the portfolio deteriorate.

Typical parameters

Modification Type	Common Limit	What to Negotiate
Rate reduction	Max 200 bps reduction	Push for 300-400 bps in stress scenarios
Term extension	Max 12 months	Push for 24 months
Principal forgiveness	Not permitted	Try for de minimis carveout (e.g., up to 5% of balance)
Payment deferral	Max 6 months	Push for 12 months
Capitalization of arrears	Permitted with limits	Align with your standard practice
Aggregate modifications	5-10% of pool by UPB	Push for 15-20%
Per-asset limit	One modification per asset	Push for multiple modifications over life

Timing of negotiation

Your modification authority is most important when you do not need it. Negotiate the limits at closing when you have leverage. When defaults spike and you actually need flexibility, you will not be able to expand the limits.

Modification notification vs. approval

Structure	Meaning	Operational Impact
Prior approval required	Must get capital provider sign-off before modifying	Slow; creates bottleneck
Prior notification	Must notify, but can proceed unless objection within X days	Moderate delay
Modification permitted; reporting only	Modify per guidelines, report in monthly servicer report	Most efficient
Exceeds limits: requires approval	Small mods at discretion; large mods need consent	Balanced approach

Preferred structure: Within defined parameters, servicer can modify without approval. Modifications exceeding parameters require notification (not approval) with 5-10 business days to object.

Workout flexibility

Separate from standard modifications, you need authority to manage defaulted loans. Negotiate carve-outs for:

Deed-in-lieu of foreclosure
Short sale
Settlement for less than full amount
Forbearance arrangements
REO management and disposition

status: draft

Remittance and commingling

How quickly must you remit collections to the SPV? This affects both operations and bankruptcy remoteness.

Remittance timelines

Timeline	Description	Operational Burden	True Sale Impact
Daily sweep	Collections swept from lockbox daily	Low (automated)	Strongest
2-day remittance	Collections remitted within 2 business days	Moderate	Strong
Weekly	Collections remitted weekly	Low	Acceptable
Monthly	Collections remitted monthly	Low	Weaker; needs other protections

If you commingle collections (mix them with your operating cash), the time limit matters for bankruptcy remoteness. Most bank capital providers require 2-day remittance or daily sweep to a lockbox to minimize commingling risk.

Lockbox structures

Most facilities require a lockbox arrangement where obligors pay directly to a bank account controlled by the capital provider or trustee.

Lockbox Type	Collections Flow	Servicer Access
Hard lockbox	Obligors pay to lockbox; swept daily	No access; funds go to SPV accounts
Soft lockbox	Obligors pay to lockbox; servicer can access pre-default	Access until notification of default
Springing lockbox	Obligors pay servicer; redirected to lockbox upon trigger	Normal access until trigger

Negotiation: If a hard lockbox is required, ensure the operating procedures allow for routine servicer expenses to be paid from collections before sweep. Otherwise, you need a separate arrangement to fund servicing operations.

Commingling periods

If any commingling is permitted, the agreement should specify:

Maximum commingling period (hours or days)
Commingled funds must be held in segregated accounts
Commingled funds are held in trust for the SPV
Insurance or credit support for commingling risk

status: draft

Servicer reporting

The servicing agreement specifies what reports you must deliver and when.

Standard reporting requirements

Report	Typical Frequency	Content
Collection report	Monthly	Collections received, by asset and category
Delinquency report	Monthly	Aging, roll rates, foreclosure pipeline
Modification report	Monthly	Modifications made, by type and amount
Asset-level tape	Monthly	Full data on every asset in the pool
Servicer certificate	Monthly	Certification of compliance with servicing standards
Exception report	As needed	Breaches of servicing standards, required notifications
Watchlist	Monthly or quarterly	Assets requiring heightened attention

Operational feasibility

Before signing, verify you can actually produce the required reports from your servicing system.

Common problems:

Report definitions do not match system fields
Frequency is operationally burdensome (e.g., weekly tape updates)
Deadline is too tight (e.g., 2 business days after month-end)
Format requirements (Excel templates) do not match system output

Negotiation: Push for reasonable deadlines (5-10 business days after month-end for most reports). Reserve the right to modify format with mutual agreement. Include a 30-day cure period for late reports before it becomes a Servicer Default.

status: draft

Servicer termination events

When can you be fired as servicer? This is existential for originator-servicers.

Standard triggers

Trigger	Standard Cure	Watch Out For
Failure to remit collections	2-5 business days	No cure period
Failure to deliver reports	After multiple failures	Single failure triggers default
Failure to maintain licenses	30 days	Automatic termination
Breach of servicing standard	30-60 days	No cure for “material” breach
Servicer insolvency	None (automatic)	Definition of insolvency
Portfolio performance triggers	None (automatic)	Trigger calibration
Change of control of servicer	Consent right	Automatic termination

Negotiating cure periods

Every servicer termination event should require:

Written notice specifying the breach
Reasonable cure period (30 days minimum for most breaches)
Opportunity to demonstrate cure or provide remediation plan

Push for “multiple failure” thresholds: A single late report (by even one day) should not constitute a Servicer Default. Negotiate for “failure to deliver [X] report more than [2-3] times in any 12-month period.”

Performance triggers

Automatic termination upon hitting delinquency or loss triggers is problematic because:

Performance may reflect economic conditions, not servicing quality
Termination disrupts workout efforts at the worst time
Successor servicer must ramp up during stress

Better structure: Performance triggers result in enhanced reporting, capital provider consultation rights, or backup servicer hot-standby activation, not automatic termination.

Successor servicer mechanics

The agreement should specify what happens when a new servicer takes over:

Transition timeline (30-90 days)
Data and file transfer requirements
Terminated servicer cooperation obligations
Transition costs (who pays)
Successor servicer fee (often higher than original)

status: draft

Backup servicer

Most facilities require a backup servicer to be identified (and sometimes engaged on a hot-standby basis).

Backup servicer engagement levels

Level	Description	Cost
Named backup	Backup identified but not engaged	No ongoing cost
Cold standby	Backup has agreed to step in; receives periodic data	$5K-$20K annually
Warm standby	Backup receives monthly data; maintains system mapping	$20K-$50K annually
Hot standby	Backup actively processes data; ready for immediate transition	$50K-$100K+ annually

Trigger ambiguity

A common pitfall: the agreement says the backup servicer “may” step in upon a Servicer Default, but does not specify who decides or what process applies.

Required clarity:

Who determines a Servicer Default has occurred?
What notice is required to terminated servicer?
What is the transition timeline?
What are the backup servicer’s obligations during transition?
What happens if the backup servicer declines to serve?

status: draft

Servicing fees

The servicing fee is typically a percentage of the outstanding pool balance or collections.

Common structures

Structure	Range	Notes
Percentage of UPB	0.25-1.00% annually	Lower for prime, higher for subprime
Percentage of collections	3-8%	More common for shorter-duration assets
Flat fee per loan	$5-$25 per loan per month	More common for auto and consumer
Performance-based	Base + incentive	Tied to delinquency or recovery rates

Fee priority

The servicing fee should be senior in the waterfall (paid before principal and interest to noteholders). This protects your economics even if the facility underperforms.

Watch out for: Servicing fee subordination upon certain triggers. If the servicing fee is subordinated after an Event of Default, you may be servicing for free during the workout period.

Fee adjustment

If servicing burden increases (due to defaults, modifications, or regulatory changes), the servicing fee should be adjustable.

Typical provision: Annual review of servicing fee; if servicing costs increase by more than X% due to [specified factors], parties will negotiate in good faith to adjust the fee.

status: draft

Common pitfalls

Hair-trigger termination

If a single late report (by even one day) constitutes a Servicer Default, you are one missed deadline away from losing servicing.

Fix: “Failure to deliver [X] report by the required date more than [2-3] times in any 12-month period.”

Inadequate modification authority

You negotiated 10% modification limits, but your asset class experiences 25% delinquency in a stress scenario. You cannot modify enough loans to manage through, and the portfolio performs worse than it would have with appropriate modifications.

Fix: Negotiate modification authority for stress scenarios. Either higher percentage limits (20%+) or a mechanism to expand limits upon certain triggers.

Servicing standard mismatch

The servicing procedures exhibit was drafted by the capital provider’s counsel and does not match your actual operations. You are in technical breach from day one.

Fix: Review the exhibit against your servicing manual before signing. Mark up the exhibit to match your actual practices.

Unclear successor servicer economics

The backup servicer fee in stress may be significantly higher than your current fee. If the facility cannot support the higher fee, servicing transfer becomes impractical.

Fix: Confirm backup servicer fee before closing. Ensure the facility structure can support the backup fee while still covering capital provider returns.

status: draft

Review checklist

Before signing, verify: