Servicing Transfers: The Good, the Bad, and the Ugly

The recent Tricolor situation has shed light on an area of asset-based finance (ABF) that is often overlooked: asset servicing. Most ABF investors love to talk about origination and structure but pay far less attention to the servicing that keeps portfolios performing. That blind spot is understandable — investors are typically several steps removed from a servicer’s day-to-day operations, making it easy to underestimate the significant role those activities play in driving performance and risk.

Frequently, an investor’s first real exposure to a servicer’s operations comes during a servicing transfer – when responsibility for managing loans moves to a new operator. I will admit, this was me. It was not until I experienced a transfer that I saw firsthand how much value a servicer can create. I’ve been through both planned and unplanned transfers, and each time, those three degrees of separation from the servicer’s daily activities disappeared, giving me a front-row seat to how loans are serviced, who does the work, the systems they rely on, and the many functions that ultimately drive portfolio performance.

Servicing is the blind spot in ABF investing — and transfers are where that blindness gets exposed.

Transfers are not rare, but they are rarely discussed. For novices, they can feel like a baptism-by-fire. Transfers carry real risks — borrower confusion, data errors, performance deterioration — and can be messy and disruptive. But in the right circumstances and when managed by an experienced team, transfers can breathe new life into a stagnant portfolio that needs a fresh approach to collections.

I am an amateur in servicing transfers, so to provide some expert insight, I spoke with Dhruv Vakharia, CEO of Concord Servicing, for his perspective on the process, drawing on his 23+ years of senior leadership experience in the industry. Concord Servicing delivers end-to-end loan servicing and fund administration solutions that give credit managers confidence in their operations and reporting. “Servicing transfers are often underappreciated and overlooked by investors,” said Vakharia. “Those who take the time to thoroughly diligence the chosen servicer and really understand the operational nuances involved gain a real advantage in preserving asset performance—especially during a transfer.”

What Is a Servicing Transfer?

At its simplest, a servicing transfer is the handoff of responsibility for administering a loan portfolio from one provider (the “primary” servicer, often the originator) to another (the “successor” servicer). This is distinct from sub-servicing, where a servicer outsources some duties to a third party but retains overall control. Transfers are usually investor-driven and involve shifting not only responsibilities but also the infrastructure that supports them.

To discuss servicing transfers in detail, it helps to describe – in the simplest terms (and I am oversimplifying a complex business) – the six specific servicing functions:

• Customer service – answering borrower inquiries
• Collections – contacting delinquent borrowers and implementing collection strategies
• Loan Processing – calculating loan balances and payments, acting as the official “system of record”
• Payment Processing – receiving and applying payments, reconciling accounts, managing payment processes, lockboxes and online payment portals
• Loan Administration – holding collateral documents, such as titles, mortgages, promissory notes
• Special Servicing – handling late-stage delinquencies: repossessions, settlements, skip tracing, charge-offs
• Industry-specific Duties – e.g., arranging/managing equipment repairs

A transfer means shifting the infrastructure that supports these functions to a new operator. The four key pieces of servicing infrastructure are:

• Data – data files with borrower information, loan tapes, payment histories, collector notes and in-progress processes
• Payment Information – ACH files, website and phone payment processing, ownership of bank accounts and lock-boxes
• Servicer Resources – website/app, dialer and other borrower-facing tools
• Collateral – physical and/or digital custody of titles, mortgage documents, loan notes
• Knowledge – training materials, familiarity with portfolio characteristics, and past borrower behaviors

Taken together, these functions and infrastructure illustrate how many moving parts are bound up in servicing — and why transferring them is never a simple exercise.

From Lift-Outs to Lights-Out…and Everything In Between

On the spectrum of complexity and disruption, transfer scenarios range from team lift-outs at one end to complete shutdowns at the other – with everything in between. Experienced servicers know that every transfer, regardless of the circumstances, requires preparation and diligence. “Transfers are about managing the ‘controllable’ and triangulating the ‘uncontrollable’,” says Dhruv Vakharia. A servicer with a strong track record can identify the known elements of the process and draw on experience to work through the unknown. “Every transfer is unique, so we go in expecting the more complex side of the spectrum,” he adds, allowing the Concord team to pivot as the situation evolves. “We have an operational and financial plan, try to understand the systems and figure out where the people sit.”

Understanding the nuances of different scenarios enables investors to spot pitfalls, minimize disruptions and maintain performance throughout the transition. With Dhruv’s help, I have made some observations about various scenarios.

Lift-out

A “lift-out” transfer occurs when the entire servicing operation – people, systems and all – is extracted from its existing platform and either rebranded or merged into another. Lift-outs are frequently associated with an M&A transaction or an originator’s exit from a business. “Everyone is on board to make a lift-out happen,” says Vakharia. “There’s no human element risk because all of the people are going with the transfer.”

Lift-outs are the easiest type of transfer. Beyond legal ownership, the only immediate change may be the letterhead name. In theory, performance should remain unaffected, although borrowers may be confused in the short term by the new name or customer-facing tools. While relatively seamless, lift-outs still highlight sensitivities around borrower communication and brand continuity.

Servicing-Released Asset Sales

When a portfolio is sold “servicing-released”, the seller sheds both assets and servicing. All infrastructure – including data and processes – is ported to the new service provider who assumes primary responsibilities. In this scenario, everything goes – but the people remain.

Servicing-released transfers are typically bound by a deadline, with the original servicer required to provide assistance. However, if the sold portfolio represents a sizable portion of its operations, cooperation may be minimal. “People who are aware of the situation are more focused on finding their next job than assisting with the transfer,” says Vakharia. This human element is less pronounced if the servicer continues operations after transfer, although employees may still fear downsizing.

Minimal cooperation, combined with tight deadlines, makes this one of the more challenging scenarios. Ideally, the data transfer can be tested before going live, but if not, the successor servicer is fixing issues in real time. Borrower confusion will likely be high, impacting performance in the short- to medium-term. If the ceding servicer agrees to key procedures such as directing their inbound customer dialer to the new servicer and forwarding payments and borrower communications, the performance impact should subside more quickly.

This scenario underscores how much a transfer depends not only on systems and data, but also on people.

Back-up Transfer

A back-up servicer is tapped to take over when a trigger event occurs in the underlying investment. Investors often expect a back-up to go live within weeks, only to be surprised by the actual timeline. After all, if the back-up agreement was negotiated at closing, and the back-up has been receiving data files, why can’t it start right away? Because a backup is an “if…then” arrangement – and no one wants to plan for something that hopefully will not happen. As a result, several issues arise during the transfer process that cause delays:

• Back-Servicer financial health: “While it may seem intuitive, it is critical to ensure that the contracted servicer has the financial strength to continue performing over the full life of the asset,” says Vakharia. “In several recent cases, when a trigger event required a servicing transfer, the named backup servicer was unable to sustain operations due to its own financial or liquidity constraints—creating additional risk for investors.”
• Ability and capacity constraints: “Many back-up servicers are transition managers and are not equipped to service the loans,” says Vakharia, leaving them to look for a functional servicer to out-source their duties. Even when they do have the servicing capabilities, they may still need staff, trained collectors, office space and systems capacity to take on additional loan volumes. Without built-in slack resources, the back-up servicer must first acquire and mobilize the necessary resources to be fully functional. “Moreover, several named backup servicers were installed as ‘check-the-box’ solutions during the zero-interest-rate, high-growth period,” adds Vakharia. “While today’s investors have become more discerning, they should also re-examine their legacy exposures from older deals through this lens and make adjustments where appropriate.”
• Incomplete infrastructure: In its back-up file transfers, the successor servicer may not receive the complete infrastructure. In this situation, the successor servicer cannot actively manage the portfolio, and gaining access to the existing servicer’s infrastructure is challenging even in the best of times.
• Contractual ambiguity: The back-up agreement is just that – an agreement detailing the stand-by services and not any primary servicing activities. Either a new operating agreement must be negotiated – rarely ideal under pressure – or the back-up will step into the exiting servicer’s agreement, often leaving gaps in obligations and protections.
• Cost: Transfers carry significant fees, and the back-up may also charge a higher servicing fee. These additional costs are rarely modeled in any downside scenario, resulting in unexpected impacts on returns.
• Data freshness: Unless the data files are updated within the last 24 hours, the information is stale – useful for reference but insufficient for active servicing.
• Different practices: Even once operational, performance differences often surface. Back-ups may employ different collection strategies, such as calling borrowers at a later stage of delinquency. These differences typically arise only after the transfer is complete, sometimes requiring revised performance expectations.

Together, these hurdles illustrate how quickly assumptions about back-up servicing can unravel once theory meets practice.

Primary Servicer Unavailable

In the most extreme case, the servicer shuts down abruptly – literally, the lights are off. In this unfortunate situation, investors are left to figure things out on their own. They lack access to the servicer’s infrastructure and will spend the early days simply trying to locate payments and data.

When servicing goes dark, no one is contacting delinquent borrowers or responding to inquiries. Many borrowers may stop paying altogether, assuming their obligation has vanished. Once servicing is back online, they must be convinced to resume payments, and it can take several billing cycles to stabilize performance. This process is even more complex if borrowers have been making in-person payments at branches that have closed.

At this extreme, the very basics of servicing — payments, records, borrower contact — are at risk, exposing just how vulnerable investors can be.

From Avoidance to Oversight: How Managers Navigate Servicing Risk

When it comes to servicing transfers, ABF investors tend to fall into three camps:

• Avoid at all costs. “Some don’t want to take on the extra risk,” says Dhruv Vakharia, so they either avoid “servicing-released” asset sales or sell a portfolio when the back-up is triggered. This can be commendable if the investor knows they lack the expertise or risk tolerance to manage a transfer efficiently.
• ‘Goal-seek’ exercise. “For many, transfers are a means to an end, which is what people focus on,” says Vakharia. These investors assume the process will run itself, with the pieces falling into place automatically. However, transfers are not an Excel shortcut – pressing a button does not complete the process, and these investors are often caught off guard by delays, a lack of cooperation and performance deterioration.
• Smart servicer oversight. Some investors have built teams with deep servicing expertise and experience across multiple transfer scenarios. “More asset managers nowadays have someone who oversees servicers,” says Vakharia. “They understand the business is complex, but if they know about servicing, they are comfortable taking on the additional risk.”

Preparation and partnership matter: with the proper groundwork and the right servicing partner, risks can be managed and even turned into opportunities.

For this last group, oversight is part of their overall ABF strategy. Prior transfers may have burned some, and the added expertise is a risk management tool. Others view this experience as a competitive edge. “If ten funds are going after the same deal, and one can manage their servicing costs through expert oversight, then they are in a more competitive position,” says Vakharia. Additionally, the ability to efficiently execute transfers unlocks a large secondary asset market. “If funds cannot gain access to assets directly with an originator, the secondary market can be attractive,” he notes – though buyers must be willing to purchase on a “servicing-released” basis.

Conclusion

“No one wants to be forced into a servicing transfer given their complexity and uncertainty,” says Dhruv Vakharia. Still, when they do occur, transfers can do more than test an investor’s risk management – they can build fluency in servicing, sharpen oversight, and even open doors to new markets. That is why preparation and partnership matter: with the proper groundwork and the right servicing partner, risks can be managed and even turned into opportunities. For investors willing to lean in, transfers are less about disruption and more about sharpening oversight and building servicing fluency. With foresight and the right partner, servicing transfers can transform a blind spot into a competitive edge.