Servicing is the monthly work of owning a note: collecting the payment, recording it, tracking taxes and insurance, and dealing with the payer. You can do it yourself or hire a servicing company. A third-party servicer earns its fee by producing an independent record and by keeping you at arm’s length from the rules on collecting consumer debt.
Whichever you choose, arrange it before you close, so that the first payment after closing has somewhere to go.
What servicing covers
- Collecting. Receiving the payment, by check or bank draft, and passing it to you.
- Accounting. Splitting each payment into interest and principal, applying late charges under the note’s terms, and keeping the running balance.
- Escrow, if there is one. Holding money the payer sends for property taxes and insurance and paying those bills when due.
- Monitoring. Checking that taxes are paid and insurance is in force, with you named on the policy.
- Statements and year-end figures. Regular statements to you and the payer, and the annual interest totals each of you needs at tax time. A CPA can tell you which tax forms, if any, have to be issued.
- Payer contact. Answering questions, issuing payoff figures and following up on late payments.
- The end. Calculating the final payoff and preparing the release of the lien.
Doing it yourself or hiring it out
| Self-servicing | Third-party servicer | |
|---|---|---|
| Cost | Your time | A setup fee and a monthly fee |
| Payment record | Your own, which a later buyer may question | Independent, which a later buyer will accept more readily |
| Contact with the payer | Direct, including the awkward calls | Handled for you |
| Rules on collection and notices | Yours to learn and follow | The servicer’s job, though you remain the owner |
| Tax reporting | You prepare it | Prepared for you |
| If you are unavailable | Nobody is watching the loan | The work continues |
Self-servicing a single note with a reliable payer is manageable for an organized person. The difficulty is that the rules do not shrink with the size of your portfolio. How you may contact a payer, what notices you must send and whether you need to be licensed or registered all depend on the state and on whether the loan is on someone’s home. Ask an attorney before you decide to collect payments yourself.
Setting up after you buy
Boarding the loan
Setting a loan up on a servicer’s system is called boarding. The servicer needs the note’s terms, the current balance and the date it was calculated, the next due date, the payer’s contact details, and copies of the note and the security instrument, which is the mortgage or deed of trust. Give them the prior payment history as well, so their record starts from a verified balance.
Check the first statement against your own figures, because a wrong starting balance or due date repeats in every statement after it.
Telling the payer
When a note changes hands, or when the party collecting payments changes, the payer has to be told in writing where to pay. On a loan secured by someone’s home there can be rules on who must send that notice and what it must say. Your servicer and attorney will know which apply.
A payer who is not clearly told may keep paying the previous owner, and you then have to recover that money. A notice from the old holder and one from the new servicer, sent close together, heads off that confusion. Have the purchase agreement oblige the seller to forward any payment that reaches them after closing.
Taxes and insurance
Some notes have an escrow account, where the payer sends a monthly amount for property taxes and insurance and the servicer pays the bills. A seller-financed note may have none, with the payer trusted to pay those bills directly.
Without escrow, somebody has to check. Unpaid property taxes generally rank ahead of your lien, and an uninsured property that burns leaves you with a lien on a vacant lot. Ask your servicer whether tax and insurance tracking is included or is an add-on. If it is not offered, put two dates in your own calendar each year and look it up yourself.
When a payment is late
A servicer follows a set routine: a reminder, a late notice once the grace period in the note has passed, and further contact after that. At some point a late loan stops being routine work and becomes default work, and a servicer set up for the first may not take on the second.
Ask at the start what happens when a loan goes seriously past due, since what happens if the borrower stops paying depends partly on who is servicing by then. One company may keep the loan and charge more, while another requires you to move it to a specialty servicer that handles defaults, workouts and the run-up to foreclosure.
Whoever does the work, the decisions are still yours. A servicer will carry out a forbearance, a modification or a referral to an attorney once you have chosen it.
Reports and fees
What you should receive
- A statement each month showing the payment received, the split between interest and principal, fees taken and the balance.
- Notice when a payment is late, without your having to ask.
- Online access to the full payment history.
- Year-end figures for your tax return.
- A payoff statement on request.
Download the payment history from time to time and keep your own copy. As the guide for note investors says of buying, a verified history is part of what the next buyer pays for.
What it costs, and who pays
Ask each servicer for a quote that separates the setup fee, the monthly fee per loan and the charges for extras such as escrow handling, payoff statements and default work. We do not quote amounts because they vary by company and by loan.
The fee is the note owner’s cost, so treat it as a deduction from the payment when you price a note. A flat fee takes a larger share of a small payment than of a large one, which is one reason very small notes price poorly.
Questions to ask a servicer
- Do you service privately held, seller-financed loans, and in which states?
- What are your setup, monthly and extra fees?
- When do you send me my money after a payment clears?
- Do you track taxes and insurance on loans with no escrow?
- What do you do when a loan goes past due, and at what point would I have to move it?
- Can you service a partial, counting payments for two parties and switching the payee at the end?
The answers tell you what a loan servicer does for a note investor at that particular company, and they settle whether note investing is passive in your case: the more of the list a servicer takes on, the less lands on your desk.
The order to do it in
Put the questions above to two or three servicers, choose one and open the account before you bid, so the loan can be boarded in the week you close. On each note you consider, find out who has been collecting and what record exists. The summaries we send when you join the buyer list state both. That record is what your servicer will board from, so a gap in it is something to settle with the seller before closing, while they still have a reason to help.
Related questions
Can I change servicers after I buy a note?
Yes. The note owner chooses the servicer. Moving a loan means transferring the records and telling the payer in writing where to send payments, and on a home loan there can be rules about that notice. Plan the timing so no payment falls between the two companies.
Does the servicer own or hold my note?
No. The servicer works for you and handles the payments and records. You own the note. The original documents stay with you or with a document custodian you choose, unless you arrange for the servicer to hold them.
Will the payer know who I am?
The payer is told who to pay and how to reach the servicer. Whether and how the owner's identity has to be disclosed depends on the loan and on the rules that apply to it. In day-to-day terms the payer deals with the servicer, not with you.