How Efficient Is Your Servicing Process?

One of the most important things lessors can do in their practice is to evaluate the efficiency of the back office.

Once the origination process successfully concludes, and the transactions are booked and activated, servicing personnel are entrusted with lofty objectives:

1) Collect and post payments in a timely manner;

2) At lease maturity, resell leased equipment for the full fair market value;

3) Recover all costs, and ensure the realization of the desired yield.

How do you measure the accomplishment of those objectives? Delinquency

and residual realization are quantifiable, but how are the booking process, transaction maintenance and cash management gauged?

Inadequate follow through can lead to the rapid loss of current and prospective customers, to the unsuspecting loss of necessary funds, and to potentially substantial future losses.

A definitive servicing “benchmark” is provided by Standard and Poor's (S&P), which has ranked servicers since 1989. S&P evaluates the following:

• Ability, efficiency and competence in managing mid-to-large sized, diverse portfolios;
• Management experience and “track record”;
• Internal policies, practices and controls relative to industry and regulatory standards;
• The capability of computer technology;
• Managed portfolio, performance history relative to industry averages.

Consider a sampling of specific criteria:

Management and Organization. “Solid management experience” and “an acceptable track record” are requirements for an “above average” servicer rating. “Depth of knowledge” is required at both the management and staff levels. Senior and middle-level management should have at least 7- to-10 years of industry experience, while the overall staff should average 3- to-5 years of industry experience. It follows logically that S&P also looks for suitable provisions for training.

Automated systems are very important (in fact, for a “strong” rating, systems must be “state of the art”). Primary systems must integrate well with ancillary systems. Disaster recovery processes are to

be documented, tested, and readily accessible. Internal controls must be documented and audited.

New Loan Set Up. New loans/leases should be booked within 48 hours of funding. The funding should be reconciled to the booked data by an individual external to the booking process. All data fields should be checked for accuracy and completeness. “Hello letters” should initiate customer contact, confirm payment due dates and other pertinent data.

Data Tracking. Ensure lien perfection. Cross-check the closing list to the documentation. Cross-check data input to the contract management system. Written procedures must be implemented for ordering/obtaining documents, for updating the contract management system, and to establish signing authorities. Monitor closely all contract modifications.

Customer Service. There should be a dedicated and adequately staffed customer service function.

Payment Processing. Duties must be appropriately segregated, with adequate internal controls for the movement of cash. S&P appears to prefer lockboxes with electronic file uploads for managing higher volume levels. Clearing accounts and the general ledger are to be reconciled daily. Balances held in suspense should not age beyond 90 days.

Collections. “Industry standards” are to be applied to all 30- to-90-day delinquencies. Written notification and phone contact should commence within the first 30 days of delinquency. A default management process should be clearly defined for managing of delinquencies in excess of 30 days through the liquidation of related collateral.

Asset Management. Lease-end remarketing and dispositions of equipment must be managed closely and promptly. Persist in reasonable inventory valuation practices.

Other Criteria. Maintain adequate controls for tracking sales tax, personal property tax, and UCC filings. Actively monitor lessee compliance and credit positions. Closely administer lease modifications.

There is a servicing standard, one that should be effectively communicated to back office personnel. Resulting policies and procedures for servicing should be consistent with corporate goals, objectives, policies and procedures.

One of the most important things lessors can do in their practice is to evaluate the efficiency of the back office.

Once the origination process successfully concludes, and the transactions are booked and activated, servicing personnel are entrusted with lofty objectives:

1) Collect and post payments in a timely manner;

2) At lease maturity, resell leased equipment for the full fair market value;

3) Recover all costs, and ensure the realization of the desired yield.

How do you measure the accomplishment of those objectives? Delinquency

and residual realization are quantifiable, but how are the booking process, transaction maintenance and cash management gauged?

Inadequate follow through can lead to the rapid loss of current and prospective customers, to the unsuspecting loss of necessary funds, and to potentially substantial future losses.

A definitive servicing “benchmark” is provided by Standard and Poor's (S&P), which has ranked servicers since 1989. S&P evaluates the following:

• Ability, efficiency and competence in managing mid-to-large sized, diverse portfolios;
• Management experience and “track record”;
• Internal policies, practices and controls relative to industry and regulatory standards;
• The capability of computer technology;
• Managed portfolio, performance history relative to industry averages.

Consider a sampling of specific criteria:

Management and Organization. “Solid management experience” and “an acceptable track record” are requirements for an “above average” servicer rating. “Depth of knowledge” is required at both the management and staff levels. Senior and middle-level management should have at least 7- to-10 years of industry experience, while the overall staff should average 3- to-5 years of industry experience. It follows logically that S&P also looks for suitable provisions for training.

Automated systems are very important (in fact, for a “strong” rating, systems must be “state of the art”). Primary systems must integrate well with ancillary systems. Disaster recovery processes are to

be documented, tested, and readily accessible. Internal controls must be documented and audited.

New Loan Set Up. New loans/leases should be booked within 48 hours of funding. The funding should be reconciled to the booked data by an individual external to the booking process. All data fields should be checked for accuracy and completeness. “Hello letters” should initiate customer contact, confirm payment due dates and other pertinent data.

Data Tracking. Ensure lien perfection. Cross-check the closing list to the documentation. Cross-check data input to the contract management system. Written procedures must be implemented for ordering/obtaining documents, for updating the contract management system, and to establish signing authorities. Monitor closely all contract modifications.

Customer Service. There should be a dedicated and adequately staffed customer service function.

Payment Processing. Duties must be appropriately segregated, with adequate internal controls for the movement of cash. S&P appears to prefer lockboxes with electronic file uploads for managing higher volume levels. Clearing accounts and the general ledger are to be reconciled daily. Balances held in suspense should not age beyond 90 days.

Collections. “Industry standards” are to be applied to all 30- to-90-day delinquencies. Written notification and phone contact should commence within the first 30 days of delinquency. A default management process should be clearly defined for managing of delinquencies in excess of 30 days through the liquidation of related collateral.

Asset Management. Lease-end remarketing and dispositions of equipment must be managed closely and promptly. Persist in reasonable inventory valuation practices.

Other Criteria. Maintain adequate controls for tracking sales tax, personal property tax, and UCC filings. Actively monitor lessee compliance and credit positions. Closely administer lease modifications.

There is a servicing standard, one that should be effectively communicated to back office personnel. Resulting policies and procedures for servicing should be consistent with corporate goals, objectives, policies and procedures.