Servicers in Securitization Transactions: Risk Profiles and Supervisory Guidelines

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DEPARTMENT OF BANKING AND FINANCIAL SUPERVISION FINANCIAL INTERMEDIARIES SUPERVISION SERVICE MACROPRUDENTIAL REGULATION AND ANALYSIS SERVICE

Servicers in Securitization Transactions. Risk Profiles and Supervisory Guidelines

The growth of non-performing loans in bank balance sheets and the active derisking initiatives launched by intermediaries, also under the impetus of Supervision, have increased business opportunities in recent years for companies operating in the market for the management and recovery of non-performing loans.

This has led to an increase in the number and total amount of securitization transactions; these latter have also involved assets other than banking assets (commercial credits, healthcare credits, etc.), contributing to the development of a diversified market involving multiple actors subject to different regulatory regimes (originators, investors, and operators involved in various capacities in the recovery activity).

In this context, the Bank of Italy has intensified its action towards supervised entities active in servicing activities in credit securitization transactions (so-called servicers), with the objective of acquiring a comprehensive and comparative view of operators, evaluating their operational capacity and the adequacy of their organizational structures, and analyzing the current regulatory framework.

As is well known, servicing activities in securitization transactions are regulated at the national level by Law No. 130/99, which reserves to banks and financial intermediaries registered in the roll under Article 106 of the TUB the collection of assigned credits and cash and payment services (Article 2, paragraph 3), as well as compliance checks of transactions with the law and information prospectuses (Article 2, paragraph 6 bis). With the Supervisory Provisions for Financial Intermediaries (Circular 288/2015, Title III, Chapter 1, Section VII, paragraph 5), Supervision has proceeded to delineate more precisely the prerogatives and risks associated with this activity.

The choice to entrust servicing tasks in credit securitization transactions to banks and financial intermediaries responds to the need to ensure effective compliance oversight on these transactions, through the direct involvement of supervised subjects specialized in credit management and payment flows. However, inspections carried out in recent years have highlighted the spread of market practices not fully consistent with the described regulatory framework, potentially hindering the achievement of the aforementioned objectives.

In particular, against a regulatory framework based on the centrality of the servicer as a subject subject to prudential supervision, practices have emerged characterized by a clear distinction between the so-called "master servicer," a supervised subject responsible only for non-delegable guarantee tasks provided for by Law No. 130/99, and the "special servicer," an operator in charge of recovery activities, holding a license under Article 115 of the TULPS but not supervised by this Institute.

The entrustment of the recovery role to the "special" often occurs through complex contractual schemes, revolving around the figure of the investor (also in the choice of the special itself) and relegating the role of the supervised servicer to a merely formal level, with uncertainties in identifying the perimeter of responsibilities, especially in the management of the portfolio in cases of underperformance of recoveries. This has resulted in opacity in identifying the subjects actually involved in credit recovery activities and limitations on the powers of the Supervisory Body, despite a regulatory framework that, through oversight on the outsourcing of important operational functions (IOF), aims to ensure that servicers are able to monitor and manage risks associated with activities entrusted to third parties, remaining responsible for them.

From an organizational standpoint, the structures of supervised servicers have not always been adequate to the increased operational complexity, resulting in intermediaries being exposed to operational and reputational risks. Deficiencies in control systems and operational risk oversight have often been found, as well as weaknesses in managing relationships with special servicers, both in the initial evaluation of entrusted subjects and in the continuous monitoring of their recovery performance. This latter activity has sometimes resulted, especially in smaller intermediaries, lacking in-depth analysis of the magnitude and relevance of deviations from business plans, and therefore lacking critical insights to be presented to governing bodies within periodic information on the progress of managed transactions.

These areas of attention also concern sectors of activity where, in addition to the protection needs identified by the aforementioned Law No. 130/99, there are needs to safeguard public interests, such as those underlying securitization transactions of non-performing loans assisted by State guarantee (GACS).

Regarding this, given the market dynamics that favored the spread of the described practices, it is emphasized that any solution adopted cannot, in any case, lead to phenomena of weakening the role of the servicer and consequent minimal approaches in the definition of internal structures and procedures. Supervised servicers are therefore invited to pay the utmost attention to evaluating the consequences that these operational schemes determine on their profiles of responsibility and risk, and in general, on the transparency and reliability of the securitization market.

Regardless of the content of agreements between subjects involved in transactions, left to the contractual autonomy of the parties, under the current regulatory framework, the servicer remains the subject from which Supervision expects a unified view of the managed transactions. It is therefore emphasized the need for servicers to immediately ensure organizational and control structures consistent with the role assigned by the legislator, promoting a model of activity that guarantees conscious and continuous participation in all dynamics related to the management of securitized credits, for example by promptly acting towards special servicers in the presence of anomalous situations and negative trends in recovery flows compared to business plan forecasts.

The company bodies of the servicer must become active promoters of a renewed and strengthened perception of the company's role and responsibilities, ensuring an adequate degree of enforcement at all levels of the organization involved in monitoring securitization transactions managed and in overseeing the underlying risks.

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The current and prospective development of the securitization market also makes it appropriate to integrate the periodic information set on managed securitization transactions, in order to make updated and comparable data available to Supervision on the progress of individual transactions.

To this end, two ad hoc templates have been prepared, one for securitization transactions assisted by public guarantee and one for other managed transactions, which will be made available on the INFOSTAT platform by the end of the current month, along with their operational instructions.

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The templates must be sent by banking and financial servicers on a semi-annual basis, within the 20th day following the reference date. The first collection must refer to the date of 31.12.2021.

It is specified that the templates, containing general information on individual transactions and specific data on collections and the progress of recoveries, integrate and do not replace the information flow already transmitted through ordinary supervisory reports.

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