At the most basic level, loan servicing companies collect payments from borrowers and remit funds to everyone with a stake in the loan. These core tasks are generally part of a broader set of activities collectively referred to as “servicing.”

Servicers take on this maintenance for all kinds of loans. For instance, they may manage a personal loan, home loan, private loan, or specialty financing such as a land contract.

Their slate of services also typically includes handling obligations like those listed below related to borrower communications and regulatory compliance.

- Provide borrowers with monthly payment statements
- Respond to and document borrower inquiries
- Generate required annual tax reporting forms
- Produce payoff schedules when requested
- Maintain records of payments and balances

In addition, mortgage servicers manage escrow funds. They not only collect and pay taxes and insurance fees but also help determine how much escrow is needed to start. They also do a year-end analysis and send an annual escrow statement to the borrower.

By staying on top of escrow, servicers help protect your investment from liens due to unpaid real estate taxes or loss from fire damage or other hazards.

You’ll also find delinquent account assistance and help with loss mitigation among the services offered by these companies. For example, servicers track overdue accounts, send out late notices, and pursue the collection of late payments and fees.

If a borrower is struggling to keep up or catch up with payments, the servicer can also present a set of options the lender will consider to avoid foreclosure. Plus, they can be an invaluable resource for referrals for foreclosure coordination.

A note servicing company is usually compensated by receiving fees based on the loan amounts they manage. The amount is most often calculated as a portion (0.25 percent to 0.5 percent) of the unpaid loan balance.

Say, for instance, the balance is $200,000, and the percentage is at the low end. The fee for the next borrower payment would be a little over $41.

Not all companies charge a percentage. Some ask for a fixed fee per note. That cost is all across the board, but there may even be amounts that are as low as $20 per month per note.

In addition to this recurring fee, there’s also typically a one-time charge for setting up a servicing account. For each note, you’ll need to set up an account.

The specific amount you’ll pay for setup and each month will differ based on the rates set by servicers in your location. Here are some other factors that can impact what loan servicing companies charge:

Volume – Most servicers offer volume discounts. For example, if you’re an investor with a sizable portfolio of owner-financed notes, you’ll likely pay a lower fee than you would if you had a one-off or handful of seller-financed loans to be serviced.

Loan Performance – When the debtor routinely pays late or is at risk of missing payments, servicing takes more time and resources. So, the price goes up.

Escrow Management – You can expect to pay nominally more than the standard fee if setup and servicing include an escrow account.

Loan servicers also make money by charging for ancillary services you won’t get with a basic package. These can include things like foreclosure facilitation and research needed to complete the setup for the note.

The servicing component for mortgages falls under federal regulatory authority. Therefore, companies performing these services are subject to applicable federal rules and regulations.

One of them is the Federal Trade Commission (FTC) Act. It bans unfair and deceptive business practices such as charging for mortgage assistance that isn’t provided.

The Consumer Financial Protection Bureau (CFPB) also enforces several applicable laws. These govern aspects that range from general servicing procedures and payment processing, to escrow accounts and error resolution. CFPB also has broad supervisory authority over financial institutions and non-bank mortgage originators and servicers.

In certain instances related to loans in default, the Fair Debt Collection Practices Act (FDCPA) applies. This law prohibits unfair, deceptive, or abusive practices in the collection of a debt.
States also have rules and regulations that apply to professional loan servicing companies.

These typically spell out standards and licensing requirements. So, keep this in mind whether you’re hiring a local servicer or a company in another state. In addition to the company being the best one for your needs, you’ll want them to be fully compliant at both levels, too.