What is Loan Servicing?

Alexis W.

Loan servicing is performed by both banks and third-party firms that specialize in the process of collecting timely payments on the principal and interest accrued on a mortgage loan. Generally, these firms specialize in handling at-risk loans, meaning loans that show the borrower to be at risk of defaulting on the terms of the contract. The loan servicer generally is assigned the loan before the loan falls into a state of default.

Mortgage loans are the standard way that many people buy real estate.
Mortgage loans are the standard way that many people buy real estate.

The company servicing the loan usually takes a percentage of the total balance due on the loan when it completes the process of servicing the loan and collecting the balance due for the lender at each payment period. This percentage is how the service generates income. Since the different types of loans have different interest rates and principals but generally are all mortgages, loan servicing can be a relatively lucrative business. The more interaction required between the loan servicer and the borrower, the higher the percentage the loan servicer accrues.

Some loan servicing firms do the bulk of their business on loans that have already been established as being in a state of default due to chronic late payments by the borrower or for failure to pay as a precursor to foreclosure. This process is called Specialized Loan Servicing. It takes more intensive tactics in these cases to recover the balance of the existing loan.

For specialized jobs, the loan servicers often attain a higher percentage of the total balance due on the loan. This type of servicing is actually more popular, because most specialized loan servicers are willing to work with borrowers to obtain the monthly payments. Plans may be imposed to get mortgages back to current before a payment plan is created between the original borrower and lender.

Borrowers who have been contacted by a firm that specializes in loan servicing often don’t realize the severity of the situation they are in, so loan servicing companies have been granted the full authority belonging to most lending organizations that hire them. These servicers can thus handle the entirety of the collection process, right up to the act of foreclosing on the property. Most loan servicing firms are happy to do this, because the intensive methods needed to satisfy the terms of the loan means the company obtains a higher percentage of the total balance due.

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