What is a servicing agreement?

A servicing agreement is a contract between a servicer and a special purpose vehicle (SPV) or an assignee under which the servicer is responsible for administering a lease and acting as a conduit for all payments over the lease term in return for a periodic servicing fee.  The duties and authority delegated to the servicer and the servicing fee are subject to negotiation and commonly include customer service, lease payment collection and processing, collection actions, lease default management and collateral liquidation.  Pursuant to the servicing agreement, the servicer is typically authorized to:

1. Inspect the leased asset;
2. Review the financial statements and other information of the lessee and any guarantor on a periodic basis;
3. Bill the lessee for and collect the amounts due under the lease agreement; and
4. Enforce the lessor’s default rights and remedies with respect to the lease documents and leased asset in the event of lessee default.

Where leases are securitized, the special purpose vehicle (SPV) typically enters into a servicing agreement with the lessor as servicer.  The lessor remains responsible for the continued collection of interest and principal payments from the leases originated by the lessor (i.e., lease receivables) and for their remittance to the account maintained on behalf of the SPV.  Because it controls the collection policy, the servicer can significantly affect the cash flows in a transaction.  For asset securitization, a back-up servicer may be appointed to act as the servicer in the event of the original servicer’s failure to perform or insolvency in order to mitigate the risk of disruption in the servicing of the underlying assets.

The Servicer in a Lease Titling Trust Structure

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