Loan Servicing

What is Loan Servicing?

Loan Servicing is a process in which entities known as loan servicers, perform various administrative tasks related to loan repayments such as a collection of interest and principal, payment of insurance and taxes, posting statements on regular basis to the loan borrower on behalf of the lender or loan originator (banks or other financial institutions) in consideration for a predetermined fee (generally denoted as a percentage of the contractual payment).

Why Did Loan Servicing Comes in Picture?

Initially, the loan servicing part used to be handled by the organization, which has provided the loan in the first place. But, over the years, it has changed since the advent of securitization. In the past two decades, entities have started to get into the niche activities or their area of specializations, such as client acquisition rather than using its resources to manage administrative works, for clocking the earning at a higher pace.

Nowadays, lending entities after providing the initial funding, sell these assets (loan books) to other companies or third-parties, known as Loan Processors. After partaking with the mortgage-backed loans or the other ones like student loans, personal loans, etc., the originator transfers all the administrative tasks such including handling the defaults.

Duties of Loan Servicers

A loan receiver takes care of the administrative part of the financial organization when it comes to the collection of principal and interest. These are not the sole responsibilities of the processing agencies, but it needs to carry out other ancillary activities too.

Following activities are being carried out by a loan servicer:

Loan Servicing

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  • Collection of interest and principal from the borrowers at the regular intervals.
  • Transfer the remaining amount to the primary/secondary lender after deducting its charges from the received amount.
  • Maintenance of required documents such as loan schedules, balance payments, etc.
  • Conducting communication with both parties on an intermittent basis.
  • Taking care of taxes and insurances, if applicable.
  • Managing impound and escrow accounts.
  • Keeping a tab on the customer if it went delinquent.

How Does Loan Servicing Companies Get Paid?

  • Entities involved in this business receives the remuneration in the form of retention fees. It is a small percentage of the repayment received from the customer. The terms and conditions are pre-decided between the agency and the loan originators, and that is widely known as servicing fees or servicing strip.
  • Typically it falls in the range of 0.25% to 0.50% of the contracted payments. Apart from that, the loan servicers would also be entitled to the late fees and other related charges as applicable, on case to case basis.
  • For example: let’s say, the total outstanding balance of the borrower is $600,000, and the tenure for the repayment is for 12 months. The applicable service fee is 0.50% of the repayment amount. So, the entity would receive $50,000 a month. This transaction would provide the loan servicing company earnings of $250 for each payment. The loan servicer would take its share and tender the remaining balance to the loan originator or primary lender.

Advantages of Loan Servicing

Some of the advantages of loan servicing are as follows:

Conclusion

Loan Servicers has turned out to be a boon for the banking industry as it takes away a major chunk of administrative work from the loan originator or the primary lender, and execute it with an ease which has been developed over the years by servicing multitude of clients and developing their core competencies in this area. It is beneficial to all the parties because when we give someone their best efforts at their core competencies or specialization, the best results tend to happen.

This has been a guide to what is loan servicing and its definition. Here we discuss how does loan servicing companies get paid along with its duties and advantages. You can more about finance from the following articles –

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