Retention of servicer: Overview, definition, and example
What is retention of servicer?
Retention of servicer refers to the practice of keeping or continuing to use a third-party service provider or company (the "servicer") to manage or oversee certain ongoing tasks or functions after an initial agreement or contract has been established. In various industries, such as finance, real estate, or construction, a servicer may be retained to perform specific roles like loan servicing, property management, or project administration. The retention clause in a contract ensures that the servicer continues their duties for a specified period, under agreed-upon terms, to ensure continuity and efficiency in the execution of services.
For example, in the case of a mortgage loan, a lender may retain a servicer to handle day-to-day operations such as processing payments, managing escrow accounts, and handling customer service, even after the loan agreement has been signed.
Why is retention of servicer important?
The retention of servicer is important because it ensures that specialized tasks are continuously managed by an experienced and reliable third party. Retaining a servicer can be particularly beneficial when the company or principal lacks the expertise or resources to manage these tasks internally. It also provides stability and continuity, as the servicer is familiar with the ongoing needs of the project or contract, helping to avoid disruptions or delays.
Additionally, retaining a servicer ensures that services are consistently delivered in accordance with contractual terms, which helps in maintaining operational efficiency, reducing risks, and ensuring that the client’s needs are met over time.
Understanding retention of servicer through an example
Imagine a real estate investment firm that hires a property management company to oversee several rental properties. The firm may include a retention clause in the contract to ensure that the property management company continues to handle the day-to-day operations of the properties, such as collecting rent, maintaining the buildings, and addressing tenant concerns. This clause helps ensure that the property management company remains engaged for an agreed-upon period, which could be essential for the long-term success and profitability of the investment.
In another example, a bank may retain a loan servicer to manage the ongoing servicing of its mortgage portfolio. Even after the mortgages are issued, the servicer continues to collect payments, manage escrow accounts, and handle customer inquiries, ensuring smooth operations and consistent service for borrowers.
An example of a retention of servicer clause
Here’s how a retention of servicer clause might appear in a contract:
“The Company agrees to retain the Servicer for the purpose of managing the loan portfolio under the terms of this Agreement. The Servicer shall continue to perform its duties for a period of [X] years from the Effective Date, unless terminated earlier in accordance with the terms outlined in Section [Y].”
Conclusion
Retention of servicer is an essential component in contracts where ongoing third-party services are required. It ensures that the servicer maintains responsibility for specific tasks over an agreed period, helping to maintain continuity and efficiency. By establishing clear terms for retention, businesses can ensure the reliable delivery of services, reduce operational risks, and optimize the long-term management of their projects, portfolios, or agreements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.