how loan servicing works
loan servicing can be carried out by the bank or financial institution that issued the loans 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 timely payments of principal and interest on a loan as a way to maintain creditworthiness with lenders and credit rating agencies loan servicing was traditionally seen as a core function held within banks banks issued the original loan so it made sense that they would be responsible for handling the administration of the loan that was of course before widespread securitization of loans changed 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 so the loan servicing part of the loan life cycle was separated from origination and opened up to the market given the record keeping burden of loan servicing and the changing habits and expectations of borrowers the industry has become especially dependent on technology and software loan servicing exampleloan servicing is now an industry in and of itself loan servicers are compensated by retaining a relatively small percentage of the outstanding balance known as the servicing fee or servicing strip this fee usually amounts to 0 25 to 0 5 percentage points of each periodic loan payment for example if the monthly mortgage payments are 2 000 and the servicing fee is 0 25 the servicer is entitled to retain 5 or 0 0025 x 2 000 of each payment before passing the remaining amount to the note holder special considerationsmortgages represent the bulk of the loan servicing market which amounts to trillions of dollars worth of home loans though student loan servicing is also big business as of 2018 just three companies were responsible for collecting payments on 93 of outstanding government owned student loans amounting to 950 billion from about 30 million borrowers meanwhile the trend among big mortgage loan servicers is to slowly back away from the marketplace in response to growing regulatory concerns in their place smaller regional banks and non bank servicers are moving into the space loan servicing has traditionally been performed by lenders big banks but smaller regional players and non bank service providers are moving into the space the mortgage meltdown during the 2007 2008 financial crisis brought increased scrutiny on the practice of securitization and the transfer of loan servicing obligations as a result the cost of loan servicing has increased compared to the levels seen before the crisis and there is always the potential for more regulation meanwhile some loan servicers have embraced technology to try to reduce compliance costs and there has also been a refocus by some banks on servicing their own loan portfolio to keep the connection with their retail clients 