Fact Checked

What is Commercial Loan Servicing?

Osmand Vitez
Osmand Vitez

Commercial loan servicing is the process a company goes through when it collects payments from loans. All loans will have some type of servicing, although mortgages and car loans are typically the most common when it comes to personal debt instruments. Mortgages will include the additional activities of sending out payments for homeowner’s insurance premiums and tax payments to local municipalities. These additional services ensure the homeowner remains compliant with applicable laws or requirements and will not endanger the mortgage holder’s ability to collect the full payments on the loan.

In the financial services industry, holding onto long-term debt instruments is not very common. For example, many financial institutions will sell mortgages to investors or other groups for a discounted price. A $200,000 US Dollar (USD) mortgage may result in the bank selling it to an investment group for 90 percent of its face value, i.e. $180,000 USD. The bank receives this cash up front, and the investor makes profit on the interest paid by the borrower. Commercial loan servicing may require the original bank to continue collecting payments from the borrower. However, these payments will ultimately forward to the investor.

Businessman with a briefcase
Businessman with a briefcase

Banks will continue to service loans because they have the facilities and manpower to complete these tasks. This helps the investor avoid having to completely restructure their operations by opening up a customer service department to handle customer inquiries, or a collections department for contacting borrowers.

Commercial loan servicing is a common process in the business environment. Financial institutions may offer several different types as part of their lending process. Master servicing involves the management of several portfolios that consist of a variety of investments. For example, several types of mortgages included in a portfolio sold to an investment group may need commercial loan servicing. Primary servicing provides delinquency or investor reporting services for traditional loans. Special servicing is an asset management activity commonly found with business loans that involve collateral.

A special type of commercial loan servicing is for government-sponsored entities. These companies are quasi-private, indicating the public sector of a nation is heavily involved in the governance of the entity. Private financial institutions will offer mortgages to individuals that meet specific guidelines from these government-sponsored agency. Upon completing the loan process, the financial institution will sell the mortgage to this agency, similar to the investor. Sales to the government-sponsored agency is often more reliable, as this agency has the funds to pay for the mortgage as they receive their money from the government.

You might also Like

Discussion Comments

Paul Puodziukas

This sentence says: "Primary servicing provides delinquency or investor reporting services for traditional loans", Can you please explain more about what "Primary servicing" means?

Post your comments
Forgot password?
    • Businessman with a briefcase
      Businessman with a briefcase