Back-up servicing checklist for marketplace lending platforms

This checklist is for online lending platforms and loan servicers who wish to establish a back-up servicing arrangement.

“As with any other commercial arrangement, it’s critical that the parties have a common understanding of the key terms. This checklist is designed to speed up the negotiation and documentation process, by focussing the parties’ attention on the issues that matter.”

 

Checklist of Key Commercial Terms

Purpose and scope
Marketplace lending platforms service loans made between a lender and a borrower and they are paid a servicing fee for doing so. They are responsible for, amongst other things:

  • being the main interface between a borrower and a lender
  • collections and the processing of frequent payments
  • customer communication
  • chasing late payments and manage defaults
  • reporting to lenders
  • a variety of other administrative tasks

The performance of the portfolio of loans serviced by a platform is therefore reliant on the satisfactory and consistent servicing of those loans. In case of a failure to perform the servicing of the loans, a back-up servicing arrangement with a third party loan servicer can be put in place. The third party loan servicer would agree to take over the servicing of a portfolio of the loans on the occurrence of certain trigger events, most commonly failure of a platform to perform the loan servicing function or the platform’s insolvency.

This checklist has been made available by LCN Legal Limited to help marketplace lending platforms and loan servicers reach a common understanding on the key terms of the back-up servicing arrangement to be provided. The checklist is written in general terms and its application to specific situations will depend on the particular circumstances involved. While it aims to set out legal terms which are commonly addressed in back-up servicing arrangements, it does not purport to address every issue which parties could or should raise and it is not a substitute for legal advice.

About LCN Legal
LCN Legal Limited is a law firm which is regulated by the Solicitors Regulation Authority in England & Wales. We help our clients in the UK and internationally to put in place corporate and investment structures, including loan portfolio servicing arrangements. We regularly publish articles, interviews and free resources. You can subscribe for our newsletters to keep up to date at www.lcnlegal.com.

Important Notice
The use of this checklist is subject to the licence, terms of use and disclaimer set out at the end of the document. By using the checklist, you confirm that you have read, understood and agree to these terms and, where you’re acting on behalf of a body corporate or partnership, that they agree to these terms and conditions. If you do not agree to these terms, you must stop using the checklist immediately.

To download your free printable PDF version of this report click here.

Need help?
LCN Legal can help you to put in place loan servicing arrangements that work. We work exclusively on the basis of fixed fees, so that you are in control of your budget. To arrange a free introductory consultation with one of our speciaIists, call us on +44 20 3286 8868 or email us at info@lcnlegal.com.

Text Version of the list can be found below:

  • The Parties (select relevant option)
    • The Appointing Party (the “Appointer”)
    • Regulatory Permissions held by the Appointer
    • The Back-up Servicer (the “Servicer”)
    • Regulatory Permissions held by the Servicer
  • Term
    • Anticipated commencement date of back-up servicing (if known)
    • Term of appointment: Years/Months
  • The Loan Portfolio (tick all that apply)
    • Lender base:
      • Individuals: Retail – HNWI – Sophisticated Investors
      • Corporates
      • SIPP
      • SSAS
      • Fund
      • Financial Institutions
      • Public Authorities
    • Borrowers
      • Individuals
      • Businesses
      • Mixed
    • Loan Purpose
      • Mortgage
      • Bridging finance
      • Development finance
      • Consumer loan
      • Business loan
      • Other (please specify) …………………………
    • Regulatory status of the loans (tick all that apply)
      • Regulated P2P contracts (Art 36H activity)
      • Regulated loans
      • Unregulated mortgage contracts
      • Unregulated loans
    • Security
      • Loans secured over residential property in the UK
      • Loans secured over commercial property in the UK
      • Loans secured over assets in the UK
      • Second charge loans
      • Personal guarantees
      • Unsecured loans
      • Other (please specify) …………………………
    • Lending model
      • Market
      • Auction
      • Both
    • Fees Associated with the loan (tick all that apply)
      • Annual product fees
      • Early repayment fees
      • Redemption fees
      • Other (please specify) …………………………
    • Approximate/anticipated size of loan portfolio(s)
    • Minimum loan amount: £[-]
    • Maximum loan amount:£[-]
    • Average loan amount: £[-]
    • Average term of the loans
    • Interest
      • Fixed rate
      • Variable rate
      • Mixed
    • Securitisation/Warehousing
      • Securitised loan portfolio(s)
      • Warehoused loan portfolio(s)
    • Performance of the loans
      • Performing loans
      • Non-performing loans
      • If a combinations, how many loans are non-performing?
    • Estimated bad debts (%)
    • Other features of the loan portfolio(s) (tick all that apply):
      • Interest only
      • Hybrid (interest only and repayment)
      • Tax on interest deducted at source
      • Provision fund for the benefit of the lenders
      • Insurance in place to cover platform failure
      • Other (please specify) …………………………
    • Payment options for the borrower
      • Debit cards
      • BACS
      • CHAPS
      • Direct Debit
      • Paypal
      • Through intermediary
      • Other (please specify) …………………………
    • Technology used to service the loans
      • Outline details …………………….
    • Is the licence to use the technology assignable?
      • Yes with/without notice
      • No
  • Scope of Services
    • Back-up services required on what basis:
      • Cold – A cold appointment of a back-up servicer is generally used where the risk of platform failure is considered to be minimal and the parties do not expect that the servicing will need to be transferred. Underlying loan data is stored by the back-up servicer and uploaded to the back-up servicer’s IT systems periodically but the assets and their performance are not usually monitored continuously. It is not usual to have a cold appointment of a back-up servicer by a platform.
      • Warm – A warm appointment is an increased operational standard of readiness to take over the platform’s servicing function. Under this type of appointment a back-up servicer is in a better position to transition into the role of servicer on reasonably short notice. This may involve the back-up servicer having the loan files on-boarded, the technology in place and routinely monitoring the underlying assets on a periodic basis. The majority of back-up servicing arrangements are warm.
      • Hot – Under a hot appointment there is an imminent or perceived higher risk of a disruption to the servicing capabilities of the platform. The back-up servicer may be required to service the loans on very short notice. It will have to have all the necessary information and systems in place to be able to act quickly to service the loans to the standard required of the platform with minimal disruption.
    • Early Warning signs:
      • Breach of a financial health check (financial covenants to be decided between the parties)
      • Investigation by any relevant regulatory body
      • Others, (please specify) …………………..
    • Trigger Events
      • Change of control
      • Insolvency
      • Failure to maintain required licenses, approvals, authorisations or permissions
      • Servicing becomes unlawful
      • Other, (please specify) …………………..
    • Back-up Services prior to an Early Warning Sign – Initial reviews and [annual/bi-annual/quarterly/monthly] review thereafter of:
      • all relevant documents, policies, portfolio performance data and collection and arrears procedures of the Appointor
      • Appointor’s computer hardware, software, processes and facilities used in the servicing of the portfolio of loans
      • IP rights of the Appointor used in servicing the portfolio of loans
      • Other, (please specify) ………………..
      • Transition services following an Early Warning Sign
        • Data mapping specification to translate data of the Appointor into an agreed format for the Servicer
        • On-boarding to the Servicer’s system in readiness for invocation
        • Other, (please specify) …………………
      • Deadline for the Servicer performing the transition services – from notification of an early warning sign:
        • 30 days
        • 60 days
        • 90 days
        • Other (please specify) …………………
  • Fees for Back-up Services: The fees payable to the Servicer will be negotiated on a deal-by deal basis. It is common to see an initial set up fee and ongoing fee for having the Servicer on standby. If there are signs that the servicing will be transferred imminently then there can be an increase in fees to cover the transitional services required. Once the servicing is taken over there will be a further increase in fees to reflect the direct servicing.
    • Fees for Back-up Servicing
      • Set up fee of £[-] (payable on signing of the back-up servicing agreement)
      • Annual fee equivalent to [-%] of the average of the total outstanding principal balance of all of the loans serviced by the Appointor during the relevant period [subject to a minimum aggregate annual fee of £[-].
    • Fees following an Early Warning Sign:
      • Invocation fee of £[-]
      • Annual fee equivalent to [%] of the average of the total outstanding principal balance of all of the loans serviced by the Appointor during the relevant period [subject to a minimum aggregate annual fee of £[-]]
    • Fees following a Trigger Event
      • Invocation fee of £[-]
      • Annual fee equivalent to [%] of the average of the total outstanding principal balance of all of the loans serviced by the Servicer during the relevant period [subject to a minimum aggregate annual fee of £[-]]
    • Note on fees: All fees usually adjusted on an agreed review date to reflect changes in the Retail Price Index. All fees to be subject to VAT which will be charged in addition
    • Payment of Fees payable to the Servicer
      • Set up fees payable on signing of the Back-up Servicing Agreement
      • Invocation Fees payable on the date the relevant services become the responsibility of the Servicer
      • Ongoing fees for servicing the loan portfolio as back-up servicer or direct servicer
        • Monthly in arrears within [-] days of invoice
        • Quarterly in arrears within [-] days of invoice
        • On the relevant interest payment date if loans are securitised
    • Expenses
      • Servicer’s expenses capped at £[-]
      • Any expenses over the agreed cap to be agreed in writing
  • Termination
    • Termination for cause by Appointor – the Appointor may terminate the back-up servicing agreement if any of the following events occur in relation to the Servicer (subject to materiality and agreed cure periods if applicable):
      • breach of terms of the back-up servicing agreement
      • change of control
      • insolvency
      • failure to maintain required licences, approvals, authorisations or permissions
      • the back-up servicing becomes unlawful
      • cassation of business
      • the outstanding balance of the loans being serviced by the Appointor is zero
      • other, (please specify) …………………
    • Termination for cause by Servicer
      • The Servicer may terminate the back-up servicing agreement if any of the following events occur in relation to the Appointor (subject to materiality and agreed cure periods if applicable):
      • non-payment of the fees due to the Servicer
      • breach of terms of the back-up servicing agreement
      • insolvency
      • change of control
      • others, (please specify):
    • Termination without cause
      • By either party at any time on not less than [-] days’ written notice.
    • Handover of servicing on termination or resignation
      • Servicer’s obligations on a handover to include:
        • the delivery of all documents and, subject to data protection regulation, all borrower information
        • agreement to cooperate with Appointor and/or substitute back-up servicer for a period of [-] months
      • Costs of transition to a substitute back-up servicer or the handover borne by the Servicer or Appointor depending on the circumstances.
  • Representations and warranties – Typical representations and warranties expected of both parties.
    • Additional Back-up Servicer representations and warranties
      • Typical representations and warranties expected of both parties. Additional Back-up Servicer representations and warranties:
        • compliance with DPA, FSMA, CCA and related statutory instruments
        • ownership of intellectual property rights required to perform the services
        • adequate insurance cover
        • others, please specify…………..
  • Liability and indemnities
    • Limitation of liability: Servicer’s liability to be limited to the losses, costs or expenses incurred by the Appointor as a direct consequence of the Servicer’s breach of duty. Limitations:
      • amount of fees received in preceding period
      • absolute cap of £[-]
      • other, please specify …………………
      • N.B. Servicer’s liability to any borrower under a loan agreement excluded
    • Indemnities: Each party to indemnify the other against losses incurred directly by that other party by reason of any material breach or non-performance of its obligations under the servicing agreement or its wilful default or gross negligence.
  • Additional terms
    • Business continuity/Force Majeure: Parties to agree a plan to ensure that the loans continue to be serviced if a significant unplanned event impacts on any of the services
    • Restrictive covenants – Restrictions on Appointor:
      • Non-solicitation of Servicer’s personnel
      • Other, please specify………………..
      • Servicer required to allocate specific individuals to the servicing of the Appointor’s loan portfolio:
        • Yes (Note: if yes, consider “Key Man” termination rights for the Appointor.)
        • No
        • TBC
    • Regulatory Change: Parties to agree who bears the cost of adhering to regulatory change and the process for effecting regulatory change.
    • Confidentiality: Customary confidentiality provisions to apply
    • Governing law: Documentation shall be governed by and construed in accordance with English law. English courts shall have exclusive jurisdiction in relation to any and all disputes.
  • Next Steps
    • Heads of Terms required?
      • Yes
      • No
    • Back-up Servicing Agreement – to be prepared by:
      • Servicer
        • Date for delivery of first draft
      • Appointor
        • Date for delivery of first draft
    • Due diligence and KYC
      • Each party to confirm what is required by way of due diligence and KYC of the other

Need help?
LCN Legal can help you to put in place loan servicing arrangements that work. We work exclusively on the basis of fixed fees, so that you are in control of your budget. To arrange a free introductory consultation with one of our speciaIists, call us on +44 20 3286 8868 or email us at info@lcnlegal.com.

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Subject to the terms set out below, LCN Legal Limited grants users (including corporate bodies and their advisers) a worldwide, royalty-free, non-exclusive, licence (for the duration of the applicable copyright) to use and adapt this checklist solely for the purpose set out on the first page this document.

The licence and terms of use are governed by English law. In the event of any matter or dispute arising out of or in connection with the licence and terms of use, you and we shall submit to the non-exclusive jurisdiction of the English courts.

This checklist is provided on an “as is” basis. Users should take their own professional advice, and this checklist should not be relied upon as a substitute for advice. No responsibility is accepted by LCN Legal Limited or any other contributors, or any of their respective directors, partners, employees, agents or representatives for any cost, loss or liability, however caused, incurred by any person by reliance on it.

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