What Happens When a Servicer Fails? Key Takeaways from the Opal ABS & Fintech Conference

The Opal Group's ABS & Fintech Specialty Finance Forum brought together investors, originators, and service providers in Dana Point earlier this month to address critical questions facing structured finance markets. Vervent CEO David Johnson joined the panel “From Backup to Primary: Navigating Servicing Transfers & Preventing Portfolio Disruption” to discuss one of the industry's most pressing operational concerns: servicer transitions and portfolio disruption.

The Volume of Transitions Has Changed Dramatically

The data tells a clear story. Before COVID, Vervent typically handled one to two servicer transitions annually. During COVID, that number dropped to nearly zero as forbearance programs and stimulus money kept companies and consumers afloat. Since COVID ended, Vervent has managed more than 20 separate backup conversions.

This surge reflects more than cyclical stress. The current credit cycle has stretched past 15 years, well beyond historical averages. As the cycle extended, lenders loosened controls to remain competitive. Backup servicing requirements, verification protocols, and other protective measures were often negotiated away. That approach is now being reconsidered.

Backup Servicing Has Become Standard

Seven years ago, roughly one in five structured finance deals required a backup servicer. Today, that ratio has flipped to four in five. The shift means more trigger events are inevitable simply because more deals have triggers built into their structures.

This evolution has also compressed expected transition timelines. What was once an acceptable 45-day conversion window is now often 30 days or fewer. That compression demands different preparation from backup servicers and different diligence from investors.

The Critical Question Investors Should Ask

Panelists agreed on one question that deserves more attention during diligence: Does your backup servicer actually provide primary servicing in the relevant asset class?

A backup servicer functioning purely as a data repository or transition manager presents different risk than one with active primary servicing operations. When a trigger event occurs, the difference between theoretical capability and operational experience becomes significant. Investors and originators should understand whether their backup servicer has real infrastructure, trained personnel, and current expertise in the specific asset class.

Not All Transitions Are Equal

The complexity of a servicer transition depends heavily on the circumstances that triggered it. A lender that simply ran out of capital presents a straightforward conversion. Fraud changes everything. Fraud perpetrated against consumers represents the most challenging scenario, requiring daily contact with regulators and investigative agencies while simultaneously managing a borrower population that has genuine grievances.

The first 72 hours after a trigger event demand immediate action: personnel on the ground at the originator's location, assessment of loan management system status and accessibility, control of payment streams and third-party payment processors, location of custodial documents and titles, and direct communication with borrowers. Waiting 45 days to contact consumers after a disruption means losing payment momentum that may never recover.

The Path Forward

The panel's consensus pointed toward more rigorous standards becoming market expectations. More frequent data exchanges between primary and backup servicers. Shorter maximum transition windows. Active verification and collateral checks rather than passive data receipt. These measures exist and are available today. The question is whether market participants will adopt them proactively or wait for the next disruption to force the issue.