Loan servicing can be accomplished by the bank, lending company that issued the loans, or a non-bank entity specializing in loan servicing, or a third-party vendor for the lending institution. Loan servicing may also refer to the borrower’s obligation to make payments on time of principal and interest on a loan as a way to maintain dependable with lenders and credit-rating agencies.
Loan servicing can be accomplished by the bank, lending company that issued the loans, or a non-bank entity specializing in loan servicing, or a third-party vendor for the lending institution. Loan servicing may also refer to the borrower’s obligation to make payments on time of principal and interest on a loan as a way to maintain dependable with lenders and credit-rating agencies.
Loan servicing was seen commonly as a base purpose held within banks. Banks issue the original loan, therefore it is reasonable that they would be responsible for handling the loan process. That was, of course, before the extensive securitization of loans modified the nature of banking and finance in general. Once loans—and mortgages in particular—were repackaged into securities and sold off a bank’s books, the servicing of the loans proved to be a less profitable business line than the origination of new loans.
Therefore, the loan servicing part cycle was separated from beginning and opened up to the market. Stated in the record-keeping load of loan servicing and the shifting habits and expectations of borrowers, the lending industry has become dependent on technology and software.
Mortgages represent the volume of the loan servicing market, which amounts to trillions of dollar-worth of home loans, although student-loan servicing is also big business.
In the meantime, several loan servicers have welcomed the modern technology to try to reducing the compliance costs, and there has also been a refocus by some banks on servicing their own loan index to keep the connection with their retail clients.
The person or company responsible for servicing a loan – the servicer – dispense the payments to a variety of different parties that may be connected to the loan:
There are more possible areas where payments may proceed (depending on the loan, its terms, and the investors involved) include foreclosure executors, delinquency monitors, and loan/term restructuring centers.
The servicer gets fees for the work involved in loan servicing, including that the payments are guaranteed are to be distributed to the correct parties on time. Failure to make payments or making late payments on a loan, normally leads to a late fee that the servicer accumulates. (During the housing market boom and the subsequent crash, less-than-reputable servicers targeted individuals who were likely to be late on payments, so as to collect additional late fees).
Today, loan servicing is considered a business unto itself. Once a basic component of the banking industry, after securitization shifted the face of finance in general, servicing overdue loans grew less profitable for banks. Most banks today make up to date loans, and then take place of the servicing duties to a different financial institution or a company that concentrated in servicing such loans.
The compensation for servicing loans is similar to interest. The servicer takes a minimal percentage of the regular loan payments that the borrower pays. They typically take anywhere from 0.25% to 0.50% of each payment.