Rationale

On Jan. 24, 2022, S&P Global Ratings lowered its overall rankings on Target Servicing Ltd. (TS) to AVERAGE from ABOVE AVERAGE as a residential mortgage loans primary servicer and as a consumer finance loans and credits primary servicer in the U.K. We also affirmed the overall ranking on TS as AVERAGE as a residential mortgage special servicer in the U.K. As part of these ranking actions, we lowered our management and organization subrankings to AVERAGE from ABOVE AVERAGE for all rankings. We also affirmed our loan administration subranking as ABOVE AVERAGE for both primary servicer rankings and as AVERAGE for the special servicer ranking. We revised the ranking outlook on the primary servicer rankings to stable from negative, the special servicer ranking outlook is stable (see "Target Servicing Primary Servicer Rankings Lowered To AVERAGE And Special Servicer Ranking Affirmed; Outlooks Revised").

Our rankings reflect TS':

• Completion of the integration of Target Group Ltd (TGL) and TS servicing operations with Tech Mahindra (TM), with TGL and TS gaining extensive expertise, support, and cost savings following this integration;
• The appointment of several new executive members over the past 18 months, including the chief executive officer (CEO) with a long tenure with TM, the chief financial officer (CFO), the chief risk officer (CRO), the HR director, and recently the TS chief operating officer (COO);
• Continuous efforts to reduce the persistently high turnover rates for primary and early arrears staff, resulting in the lowest staff tenure among TS' peers;
• Enhanced induction program and solid training activity that somewhat counterbalances the potential risk associated with the high staff turnover rates;
• Adequate internal control environment, notwithstanding a less frequent internal audit surveillance cycle of servicing operations (greater than two years) compared with peers and several high-risk findings identified over several audit review cycles;
• Continuous IT investments and a reliable servicing platform;
• Steady growth for the residential mortgage loans portfolio since 2015, with performance across primary and special servicing activities in line with the company's key performance indicators (KPIs) and targets; and
• Decreasing consumer finance portfolio showing a high single client concentration.

Since our prior review, TGL and TS have made the following changes (see "Servicer Evaluation: Target Servicing Ltd.," published on July 4 2018):

• Finalized the integration with TM;
• Appointed a CEO who was previously part of TM, a new CRO from outside the company, and appointed a new CFO and HR director through internal promotions and the new TS COO;
• Launched a new lending platform and signed first engagements, which is expected to be a source of future servicing business;
• Revamped the competency policy and induction training program;
• Restructured the risk management function to better define the responsibility and accountability of the first- and second-line of defense functions and the risk committee at the executive level; and
• Continued the company's transformation, which has resulted in improved productivity, automation, and scalability.

TS is an established servicer of residential mortgage loans and consumer finance loans and credits in the U.K. Since our previous review, TS has focused on performance consistent with its service level agreements with its clients as noted by well-managed payment holidays during the pandemic. It has also launched several projects that are expected to enhance the efficiency of its operations once finalized. Consequently, we affirmed all of the loan administration subrankings as ABOVE AVERAGE for both primary servicer rankings and as AVERAGE for the special servicer ranking.

We have lowered all of the management and organization subrankings to AVERAGE from ABOVE AVERAGE due to continued changes in the executive team, persistently high turnover rates, and the high number of audit findings, including those of high-risk nature, which are not consistent with ABOVE-AVERAGE ranked peers. The prior negative outlook for the primary servicer rankings also reflected these factors. TS' management confirms that it has taken certain steps to attract and retain a more stable servicing staff, which it believes will be supported by the recently added executive members and enhanced integration with TM. Similarly, the internal audit register shows that the company is actively working to address the issues flagged by the most recent audit review. We will continue to monitor these audit action plans and assess whether management can stabilize its operations further, including reducing turnover and attaining greater stability at both the executive and staff levels.

We revised the outlooks on the primary servicer rankings to stable from negative following our recent ranking updates, the outlook on the special servicer ranking is stable.

The financial position is SUFFICIENT.

Profile

TS is an FCA-regulated U.K.-based servicer established in 2006, offering end-to-end loan management services tailored to third-party clients' needs. The overall portfolio that is part of our ranking assessment has grown almost 60% by gross book value (GBV) since year-end 2018. The residential mortgage loans in primary servicing, which represent almost 93% of the ranked servicing portfolio, led the growth as this portfolio increased by 77% over the same period. The top residential mortgage loans client has significantly contributed toward the growth of the residential mortgage loans in primary servicing as it accounts for 70% of this portfolio. There were slight decreases in both the residential mortgage loans in special servicing and consumer finance loans and credits in primary servicing over this same period. The consumer finance loans and credits portfolio is also dependent on a different client that accounts for approximately 80% of that portfolio's volume and the contract has recently been renewed for five years.

TS is a subsidiary of TGL, a supplier of lending and mortgage software and service solutions to the U.K. mortgage and financial services industries. TS benefits from access to TGL's executive members, business strategies, and industry recognized brand name.

Since May 2016, TGL and TS have been part of TM, a multinational technology company that specialises in IT services and digital transformation. TM is listed on the Bombay Stock Exchange (BSE), operating across 90 countries with approximately 125,000 employees. Over the last two years, TGL and TS completed the integration with TM; consequently, the servicer can now fully leverage the synergies and opportunities of this global platform.

Table 1

The servicer forecasts the primary servicing of residential mortgage loans to continue to grow through a combination of new loans originated by existing clients and boarding new clients who may be attracted to TS' newly launched lending platform. Clients typically sign end-to-end mandates and TGL management consider that the Target group, and TS as part of it, is better positioned to offer competitive pricing because of their increased automation. Alternatively, the consumer finance loans and credits portfolio is not expected to grow until the U.K. economy fully recovers from the COVID-19 pandemic.

Management And Organization

The management and organization subranking is AVERAGE for all rankings.

Organizational, structure, staff, and turnover

• At TGL level, there are three main functional areas reporting directly to the CEO:Supporting functions including finance, risk management, and HR;
• Business development, including the origination of new business overseen by the chief commercial officer (CCO) and the management of existing clients led by the client services director; and
• Operations, including IT/software development and TS, which represents the servicing operations, overseen by the change management director and the director of client operations, respectively.

While the above TGL structure remained generally stable, the executive team reported several adjustments because the former CEO, CFO, and CRO departed the company over the last 18 months, continuing an extended trend of organizational and management changes. Following these latest appointments, management believes the current leadership team shows an appropriate mix of managers with fresh perspectives and a better understanding of the company's culture. Although the senior management team that oversees the day-to-day servicing operations has remained mostly unchanged since our last review, we'll continue to monitor the continuity of the executive team and its potential impact on their servicing operations.

The TGL board is made up of two non-executive directors, former TGL CEO, and a non-executive member from TM who chairs it. The board is responsible for setting the business strategy for TGL and TS. Moreover, the executive team regularly meets over a number of governance committees to discuss other topics such as risk, regulatory development, business opportunity, customer experience, and performance.

TGL staff accounted for 1,260 employees as of June 2021, up from 1093 by the end of 2019. The TS servicing workforce increased to 610 from 528 over the same period, in line with the portfolio's overall growth.

TS continues to report the highest primary servicing staff turnover rates among its peers. By the end of 2020, the primary and early arrears groups recorded approximately 50% and 70% of annual turnover rates, respectively. Over the first half of 2021, the same functions experienced 40% of staff leaving voluntarily or due to a company's decision. The late arrears and assets sales staff turnover remained within more reasonable levels at 10% in 2020, peaking at 27% during the first six months of 2021.

The staff working in primary and early arrears average over five and seven years of experience, respectively, although average tenure of less than three years reflects the high turnover rates over an extended period of time. Average staff experience and tenure are reasonable for senior and middle managers and special servicing staff.

Table 2

TS turnover rates remain above rates reported by peers. The pandemic has posed new challenges to identify, attract, and train talent from a distance. Following exit interviews and root cause analysis, management concluded that higher competition for staff and less than optimal recruitment activity were part of the problem. Consequently, since March 2021, they internalized the recruitment activity and made some salary adjustments to make them more competitive with peers. Additionally, there are currently two retention working groups: one group consists of staff that are focused on more tactical solutions, while senior leaders are looking at strategic changes. We will continue to monitor the turnover rates and TS' ability to manage them to a reduced level.

Training

TGL and TS have an appropriate people management and well-structured training function. TS reinforced the induction training program during the last two years and has been proactive in managing the staff through the pandemic.

The servicer relaunched its competency policy that defines TGL's approach for building and maintaining competence across servicing staff of all levels. As a result, upon joining TS, all staff attend:

• A two to four-week induction training program, depending on the department, providing an overview of the company, an introduction to general and specific policies, regulatory requirements, and I.T. systems. The new resources have to pass a competency assessment before working in operational departments;
• A second on-the-job formal training program lasts up to four more weeks and provides a learning opportunity in a live environment. New hires benefit from additional coaching sessions, weekly meetings, and continuous feedback and support during this period;
• Performance review meetings occur at Weeks 12, 24, and 25 to 28, formally concluding the induction.

In 2020, the average induction period lasted almost seven weeks. We believe the depth and length of TS' current training for new servicing employees is one factor that may reduce turnover rates as these new hires may feel more comfortable with their responsibilities.

Table 3

All staff receive continuous training over their tenure, and while TS doesn't have a training hours goal, the staff have attended an average of over 60 hours of training courses since 2018. The learning and development team includes the mandatory, regulatory risk and compliance learning activities in the annual training plan along with other targeted courses, as approved by the HR Director and the head of compliance. A thorough system of checks and alerts monitors that new and existing staff complete required training.

Before the pandemic, TS facilitated training either in a classroom or through a self-served Learning Management System. During the pandemic, it quickly expanded the e-learning packages and the online courses. Since March 2020, a third party provider has been running a bi-monthly survey to monitor staff's wellbeing through this critical period. Furthermore, the HR director attends periodic external focus groups to keep up with best practices.

Employees have regular one-on-one meetings with their line manager and receive feedback on the quality of their activity against guidelines, including call monitoring if they are part of the call center function. Performance reviews occur every six months to discuss the next steps in their career progression and learning needs. The company publishes available positions on the intranet, fostering transparency and career development.

Finally, since the new HR director took over this responsibility, TGL, and TS as part of it, launched a new diversity and inclusion strategy that, among other initiatives, aims to enable TGL and TS to be employers of choice by creating a great place to work.

Systems and technology

TGL is a software supplier to the lending and financial services industry, and it provides the servicing systems that TS uses. IT staff sit within TGL's business change area, split into various teams such as design, development, testing, and project management. The IT function delivers IT systems development and maintenance, collaborating alongside other business units and leveraging a dedicated TM developers team working offshore from Chennai, India.

Servicing system applications

TGL offers a cloud hosted servicing platform to the market, which can support the origination and management of a wide range of secured and unsecured asset classes through different configurations.

Various fully integrated elements make up the platform:

• The account management module (Centrac) supports the customer from funds disbursement through redemption and is the primary source of information with all other components linking back to it;
• The specialist collections module (Result) supports arrears recovery and can be configured to deliver preferred contact strategies, presenting the agent with solutions tailored to the borrowers' circumstances; and
• The two above modules interconnect with the client relationship management (CRM) tool and business process management (BPM) components and both modules feed a Microsoft data warehouse.

TGL's servicing platform is entirely virtualized, enabling rapid scaling with the different components interfacing in real-time or through batches. It obtained ISO27001 certification, which verifies that company meet the information security international standard, and ISO22301 certification, which covers business continuity standards; while Grant Thornton runs IT audits as established in the audit plan.

TS also uses external third-party service providers and other systems, including:

• Credit reference agencies, including Experian and Equifax;
• NPSO (New Payment System Operator) for validation of customer bank details and generation of disbursements;
• Post office address file for address retrieval and validation;
• Depending on the sector, information from Glass' Guide, House Price Indices, and Automated Valuation Models, to supplement customer information;
• Third-party print houses for document production;
• Avaya telephone switch system with Carina Call recording hosted at TSL's Newport and Chester sites and 4net telephone support; and
• Automated dialer and interactive voice response (IVR) technology.

In 2021, TGL launched a new lending platform. TGL aims to offer a highly digitized and automated end-to-end process by seamlessly integrating loan origination on to the TS servicing platform. We will continue to monitor how this will influence the servicing business growth.

At the start of the COVID-19 pandemic in Q1 2020, it began the transition to full remote working that was completed within six weeks. Leveraging TM's ability to obtain full-disk encrypted laptops quickly from its providers, it delivered all technical and other necessary equipment to each staff member. Each laptop has fingerprint recognition or a personal identification number, and the staff cannot use personal computers for work purposes.

The TGL Data Center in Cardiff hosts the production servers within a secure area. Data is backed up every 24 hours, and it encrypts and stores them offsite daily at a third-party facility provider, Crown Records Management. It also replicates data in real-time from the host servers in Cardiff to Newport. Incoming and outgoing data are processed automatically and sent through secure file transfer protocol (SFTP).

Business continuity and disaster recovery

TGL has a dedicated resilience and business continuity (BC) manager to maintain the BC and disaster recovery (DR) plan(s). The resilience and BC team collaborates with BC champions designated in every operational team to ensure their departmental BC plan fits the purpose.

TGL tests the plan annually, covering various potential scenarios. Target most recently tested the business continuity and disaster recovery plans in September and December 2020, respectively. TGL restored the data within two hours and 45 minutes which was within the four-hour recovery time objective and switched to the business continuity site in 30 minutes, flagging no issues.

TGL has also engaged Virgin Media to provide a high availability inbound call platform if it would not be possible to access the telecommunication systems in an emergency.

While TGL retains a warm recovery site with 290 seats in Bristol, approximately 40 kilometers (24.9 miles) from Newport, as of today, all staff can access the systems remotely except for the post office team.

Finally, certain members of the servicing staff or their nominated deputies have to notify clients if there is a disaster and inform them of the situation as it develops.

Cybersecurity

TGL has an IT security policy in place with supporting procedures. IT continues to address cybersecurity through certification in Cyber Essentials Plus, a government-backed scheme to protect organizations from threats. The group uses a Checkpoint Intrusion Prevention System, and it updated its checkpoint firewalls in 2019.

TGL does not run intrusion tests because it applies instead a security operations center (SOC) provided by Alert Logic, which detects and responds to cyber threats in real-time. The group also has information security policy training and awareness programs implemented enterprise-wide that are mandatory for all staff annually. Phishing exercises occur periodically to test employees' knowledge and awareness.

Antivirus software is automatically updated using Symantec System Center. There is an access control system, and users must update passwords periodically.

Internal controls

The servicer has a sufficient internal controls framework that is managed by TGL. It operates a 'three lines of defense' model in line with industry standards, and the internal control functions are independent of the business units.

Policies and procedures

All policies and procedure (P&P) manuals are available on the intranet and are version-controlled. TGL communicates updates to staff and reinforces their adherence to the P&P requirements through training, online communication, and team meetings.

There is a central register of all P&P and the associated review dates. The head of each function reviews them at least annually and approves new ones or updates them earlier, if necessary. The compliance function verifies any updates before submitting them to the servicing risk committee for final approval.

Quality assurance

TGL and TS apply a dual model to ensure quality assurance (QA) and quality control (QC), as follows:

• The second-line assurance team, responsible for designing the assurance framework, reports to the head of compliance;
• The first-line assurance team sitting within TS monitors three calls per month per agent to assess servicing standards. This team produces agent scorecards to assess their client skills and sends a weekly report to the operational teams with a summary of their assessment. Finally, a monthly call quality forum is also held with all department heads to review QA monitoring results and listen to sample calls.

Compliance and risk management

A new executive director joined in 2021 to lead TGL's risk and compliance area, which delivers the risk management, compliance, anti-money laundering, data protection, and BC management functions.

In late 2020, the group restructured the risk governance model to define risk management related responsibility better as follows:

• A first-line risk and controls servicing team, part of the servicing operations, is responsible for identifying and assessing the risks within the daily operations of the servicing business;
• The risk management team, part of the second-line defense, oversees the risk assessment activity and reports to the executive managers;
• The TGL risk committee oversees the development, implementation, and maintenance of the company's overall risk management framework.

Since our last review, Target has also been reassessing periodically the risks and threats the business faces and scores each of them from 1 to 4, to accurately capture the state of TGL's risk landscape. The company does not use a governance, risk, and compliance (GRC) system to track this information as companies of similar size typically do to improve reporting and oversight.

Finally, TGL continues to run a Risk Control Self-Assessment program throughout the business.

The Compliance function comprises three teams:

• The advisory team, which provides advice and guidance to the business via service desk requests and support to projects to ensure compliance and fair outcomes for consumers;
• The regulatory development team, which continually monitors developments within the industry; and
• The assurance team, which reviews operational level customer outcomes.

TGL also has a dedicated person to prevent and detect financial crime and fraud, the management stated that TS is compliant with General Data Protection Regulation (GDPR).

Internal and external audits

The TGL internal audit (IA) team of three auditors, including the head of internal audit, administratively reports to the CEO but functionally to the audit committee chair to ensure its independence from the operations.

The group applies a co-sourced approach. The head of internal audit is responsible for delivering the whole audit plan and allocating audits between the in-house team and an external partner. The external provider typically offers specialized audit resources for corporate governance, risk management, business planning, and IT. The internal team prepares the annual internal audit plan based on the relevant business area's overall risk assessment score. Most areas in the servicing operations are deemed low-risk and receive an audit every two to four years, which is less frequent than we see across its peers.

TGL tracks audit findings, required follow-ups, action plans, and updates using an Excel-based log, which is less than optimal compared to market best practice. Moreover, the IA team prepares a monthly summary report that feeds into the MI reports for the divisional risk committees, management risk committee, and the audit committee.

TGL's number of high- and medium/high- risk findings remain above the average of Target's peers, which we also observed in our prior review. We reviewed the IA tracker and observed that some high risk findings refer to servicing functions and cyber security. TGL continues to monitor the development of each finding and IA confirmed they are actively working to close them though some resolutions are overdue.

Complaint management

Ninety complaints managers, part of the servicing operations, record complaints and the status of resolutions using an in-house developed complaints management system. The average time to handle a complaint was 28 and 46 days for residential mortgage loans and consumer finance loans and credits, respectively, in 2020; and 30 and 31 days in the first six months of 2021. A quarter of the complaints are unrelated to the servicer's loan administration and find roots within TS clients' related issues.

The servicer sends monthly reports to its clients, including volumes of complaints received and resolved and the time taken to resolve complaints. It also produces bi-annual FCA reports for each servicing client that enable clients to report regulatory complaints to the appropriate regulator accurately.

Vendor management

The servicer does not subcontract any primary servicing functions while it outsources certain special servicing activities such as asset management, valuation, and legal services. TS applies the TGL supplier governance framework and a procurement policy to manage these commercial relationships. The servicer can work with vendors that are part of a pre-selected panel, and it can replace them if they do not perform to the level required.

Insurance and legal proceedings

The company has represented that its directors and officers, as well as its errors and omissions insurance coverages are in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing-related pending litigation items.

Loan Administration

The loan administration subranking is ABOVE AVERAGE as primary servicer of residential mortgage loans and consumer finance rankings and AVERAGE as special servicer of residential mortgage loans.

New-loan boarding

TS maintains reliable procedures to onboard loans and has been extensively testing them over an extended period. Last year it boarded 64,000 accounts with no issues reported.

The data migration team, part of the project delivery department, collects each client's data from an SFTP server and uploads it into the Centrac system. Subsequently, the transition team, part of the change area, manages the rest of the boarding activity.

Highlights and controls of this process include the following:

• TS boards all loans electronically and the data integrity team investigates any discrepancies identified by the software;
• The percentage of loans reviewed against loan documentation depends on client instruction;
• TS aims to board most new clients within three to four months of gathering the requirements, but it can take up to six months, based on volume and complexity;
• TS segregates client data by applying access controls available on the servicing application; and
• After boarding according to client instructions, the company contacts all borrowers and generally sends a welcome letter within a week.

TS can run a skip tracing exercise over the entire portfolio during boarding, if requested by any client. Also, case managers can ask to get updated information ad hoc at a later stage. The new information is updated only after data validation checks.

TS uses a document management system to scan all incoming post and loan documentation. Upon client request, barcodes can be applied to most documents so they can be automatically associated to the relevant case. Otherwise, the mail team adds the documents manually to the workflow.

As of the end of 2020, TS has been responsible for archiving original documents for two clients. Files and deeds are stored at an offsite vendor based in Cardiff. The service level agreement (SLA) states that files should be delivered to Newport within two hours of an authorized staff member's email request. However, as files are imaged, the volume of requests for physical files is low and mainly only for litigation purposes.

Payment processing

Almost 95% of the residential mortgage loans and consumer finance loans and credits are performing and paid via direct debit or other automated methods. TS allows customers to change their payment date online as long as it doesn't fall into a different payment period. They can also download statements online. TS facilitates online payment and sends reminders via text, including the link to the online payment page, so that the borrower can pay directly from their mobile phone.

TS has dedicated staff responsible for processing payments for TS lending clients that it services while a different team is responsible for servicing loans for clients that don't offer lending. Most clients give TS access to their bank accounts so TS can transfer funds from each client's collections accounts, which it administers, to each client's standard bank accounts. Each account is reconciled daily and different methods are used to investigate suspense items, starting with consultation of Target Centrac--which the company uses as a general ledger system.

On average, TS receives 10 cheques a day and an external company picks them up to deposit them at the bank. In addition, TS processes outgoing payments using New Payment System Operator (NPSO) and Clearing House Automated Payment System (CHAPS).

Customers can make debt card payments online whenever they are in arrears. To this end, Target has obtained the Payment Card Industry Data Security Standard (PCI-DSS) certification since 2016 which is an information security standard designed to reduce payment card fraud by increasing security controls around cardholder data.

Client management and investor reporting

Account Viewer is an application that provides TS clients with secure access to their portfolio information. TS creates bespoke reports tailored to requirements outlined in their servicing level agreement.

TGL uses a single platform for all data, analytics, and reporting, and there are four teams within the chief information officer's remit:

• Business Intelligence (BI) (12 FTEs)--responsible for transforming raw data into meaningful content for clients, regulatory purposes, and internal stakeholders;
• Operational Intelligence and Insight Analytics (5.6 FTEs)--responsible for assessing operational performance;
• Root Cause Analysis (4 FTEs)--responsible for analyzing complaints information; and
• Securitization and Investor Reporting (4 FTEs)--specialized in securitization reporting and cash management calculations.

A dedicated client relationship team reports to the head of client operations and is responsible for managing all client communications and requests. The team prepares and shares the above-mentioned periodic reports and collects the requests that client can have to transfer them internally. Every quarter, the team gathers a survey from a selection of TS clients to verify their satisfaction with the servicer. Management said that TS has performed in line with the established SLA targets since our last review, and the results of the client satisfaction survey improved in 2020.

Primary servicing (residential mortgage loans and consumer finance loans and credits)

The TGL client operations strategic business unit is responsible for servicing residential mortgage loans and consumer finance loans and credits. The servicing operations are split into primary and special servicing functions while receiving support from three other departments within the same unit:

• Contact Strategy and Workflow Management;
• Finance Advisory and Remediation Center; and
• First Line Risk and Controls.

TS' primary servicing function under review comprises:

• The TS call center team which handles an average of 20,000 calls per month; and
• The administrative team which deals with written inquiries.

Some typical borrower requests include processing prepayments, providing financial statement copies, changing addresses, and updating payment dates.

The company applies a blended operative model, so staff are cross-trained to handle different asset classes (residential mortgage loans and consumer finance loans and credits) and activities (front and back office tasks). TS applies some level of specialization for the staff working on buy-to-let (BTL) residential mortgage loans because of the complexity of this asset class.

Historically, TS' residential mortgage portfolio has shown a greater exposure to second charge mortgages and BTL than its peers. At the end of June 2021, these categories represented approximately 77% and 19% of the entire residential mortgage portfolio by AUM, respectively. Management considers TS' ability to manage BTL loans, typically more complex, a competitive advantage.

While the performing residential mortgages portfolio has grown steadily since our last review, the performing consumer finance loans portfolio decreased by almost 50% between the end of 2018 and the end of Jun 2021. TS renewed the servicing agreement with its top consumer finance client, representing 78% of the related portfolio, for five more years and has plans to attract new customers.

TS administers consumer finance loans following applicable regulations, including the Consumer Credit sourcebook (CONC) and the Consumer Credit Act. It administers residential mortgage loans under the FCA Mortgage Conduct of Business rules. The servicer has reported having consistently met its primary servicing SLA targets for both asset classes.

The Target Centrac system supports the primary servicing activity for both types of loans. The main system features include:

• The flexibility to accommodate different processes for different clients and asset types;
• Workflow embedded in the system and automated work allocation that ensure efficient task management;
• Automatic interest rate changes, application of payments, and borrower notifications; and
• Automated production of the final confirmation letters at closing.

TGL and TS have continued the transformation program started in 2018 to increase productivity, automation, and scalability. This project is in line with the market best practice of investing in continuous improvements. Since March 2020, customers can apply for payment deferrals, report their income and expenditure, and re-instate direct debits online. The servicer also uses SMS to ask customers questions necessary to grant payment deferrals. The current objectives of the program are service enhancement and cost optimization. To this end, TGL is working to create a more user-friendly customer interface so the borrowers can fulfill a broader range of standard requests online. TS is assessing if any servicing activity could be fulfilled offshore and transferred to TM's operations in India, such as back-office tasks. Outsourcing some servicing functions offshore is common among US servicers, while it will represent an innovation among the servicers we rank in the U.K.

Special servicing (residential mortgage loans)

Special servicing staff are responsible either for collections of early arrears, recoveries of late arrears, litigation, vulnerable customer management, asset sales, or back-office duties. The special servicing staff use the Result system that has the following features:

• The organization of cases into specific work queues;
• Embedded workflows which push the cases forward based on predefined processes; and
• Automated letter strategies.

The Centrac system can detect missed payments and moves each of these cases into the arrears workflow embedded in the Result system. TS applies a blended approach to collect arrears with the collection center's attempts to call the customer (using a dialer) running alongside other communication channels. The standard procedure includes sending three letters and three SMS a month, however, each client can tailor their collections strategy that they instruct TS to follow. TS details the client-specific process as part of the relevant documentation maintained for each portfolio.

The servicer also relies on a proprietary roll-rate projection model for residential mortgage loans, which simulates potential outcomes to market and economic changes and estimates the population's probability in a particular bucket of arrears to move into the next bucket based on historical data. The outputs coming from the model define the prioritization of outbound contact strategies/dialer campaigns.

Upon engaging with a delinquent customer, the collector's goal is to understand the underlying problem and tailor a long-term solution to mitigate the potential for default. To this end, TS has developed a proprietary forbearance model which helps the collector identify the optimal approach.

Alternatively, the collector can offer varying solutions including a new payment plan. Once a resolution is agreed upon, the case is removed from the automated strategy.

Also, TS can automatically check the insurance policies supplied by the borrower. The system monitors renewal dates and tracks the receipt of renewed policies from borrowers. If renewal information is not received, TS will request the clients to place the property on their block contingency property insurance arrangement.

TS has specific controls to oversee the progress of any asset sales including KPIs to verify its success, although the cases are limited.

Since 2020, asset managers receive a monthly report on every portfolio, including cash collection results and a comparison with prior months. The analysis can help to determine an appropriate future collection strategy. The servicer confirmed that collections remain in line with targets.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Target Servicing Primary Servicer Rankings Lowered To AVERAGE And Special Servicer Ranking Affirmed; Outlooks Revised, Jan. 24, 2022
• Analytical Approach: Global Servicer Evaluations Rankings, Jan 7, 2019
• Select Servicer List, Oct. 13, 2021
• Servicer Evaluation: Target Servicing Ltd., July 4, 2018