Loan Servicing

The process of collecting principal, interest, and escrow payments that are due or overdue

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What is Loan Servicing?

Loan servicing is the way a finance company (a lender) goes about collecting principal, interest, and escrow payments that are due or overdue. The practice deals with all types of loans; however, mortgages are the most common.

Mortgages are frequently backed by the government or an affiliated agency (a government-sponsored entity or GSE). A private lender or GSE won’t usually service loans they purchase. The responsibility generally falls onto the bank that originated the mortgage to do it, although the bank may outsource the servicing as well.

Loan Servicing


  • Loan servicing is the process of collecting payments on a loan and passing along distributions to the parties involved.
  • The servicer collections a portion of each payment as payment for servicing the loan.
  • Banks were traditionally responsible for creating and servicing loans until changes in the industry made it less profitable to engage in the business. 

Where Service Payments Go

The person or company responsible for servicing a loan – the servicer – distributes payments to a variety of different parties that may be attached to the loan:

  • Principal/interest payments go to the mortgage holder or to investors that hold mortgage-backed securities (MBS)
  • Mortgage trustees and guarantors get remitting fees
  • Insurance and taxes on escrowed funds must be paid

Other potential areas where payments may go (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 duties performed in servicing the loan, including making sure that payments are disbursed to the correct parties in a timely way. Failure to make payments or making late payments on a loan usually results in a late fee that the servicer collects. (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).

The Business of Servicing Loans

Loan servicing is now considered a business unto itself. Once a fundamental part of the banking industry, after securitization changed the face of finance in general, servicing overdue loans grew less profitable for banks. Today, most banks create new loans and then pass off the servicing duties to a different financial institution or a company that specializes 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.


More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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