What is 'Loan Servicing'

Loan servicing is the administration aspect of a loan from the time the proceeds are dispersed until the loan is paid off. This includes sending monthly payment statements and collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, and following up on delinquencies.

BREAKING DOWN 'Loan Servicing'

Loan servicers are compensated by retaining a relatively small percentage of each periodic loan payment known as the servicing fee or servicing strip. This is usually 0.25% to 0.5% of the periodic interest payment. For example, if the outstanding balance on a mortgage is $100,000 and the servicing fee is 0.25%, the servicer is entitled to retain ((.0025 / 12) x 100,000) = $20 of the next period payment before passing the remaining amount to the note holder.

Loan servicing trades in the secondary market much like mortgage-backed securities (MBS). The valuation of mortgage servicing is similar to the valuation of MBS IO strips. Servicing strips are subject to a great deal of prepayment risk and tend to show negative convexity.

RELATED TERMS
  1. Servicing Fee

    A percentage of each mortgage payment made by a borrower to a ...
  2. Cash Basis Loan

    A loan where interest is recorded as earned when payment is collected. ...
  3. Amortized Loan

    A loan with scheduled periodic payments of both principal and ...
  4. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  5. Non-Amortizing Loan

    A type of loan in which payments on the principal are not made, ...
  6. Delinquency Rate

    The percentage of loans within a loan portfolio that have delinquent ...
Related Articles
  1. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  2. Personal Finance

    Understanding Mortgage Impound Accounts

    Home buyers with low down payments may get stuck with higher mortgage payments. Find out what you get for the extra money.
  3. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  4. Personal Finance

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  5. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  6. Personal Finance

    Interest-Only Mortgages: Home Free Or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  7. Personal Finance

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
  8. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
RELATED FAQS
  1. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
  2. What is the difference between a PMI (primary mortgage insurance) loan and a Federal ...

    Understand the difference between a conventional mortgage that requires primary mortgage insurance and a Federal Housing ... Read Answer >>
  3. Are student loans amortized?

    Student loans typically get paid back over time on a fixed payment, or amortized, schedule. Read Answer >>
  4. What are the long-term effects of delinquent accounts?

    Find out more about loan delinquency, loan defaults and the long-term consequences of borrowers who are delinquent on their ... Read Answer >>
  5. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  6. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center