Chapter 7

Collection and Distribution of Loan Payments

Loan servicing provides a great service to investors, because it allows a third party servicing officer to collect on a trust deed and a note on behalf of the investor.  Not only is this an efficient means of collecting on a trust deed and a note, but it is more beneficial to the investor when there is a third party involved in the note and deed of trust, because the borrower simply has to make a single payment out to the servicing officer, instead of payments to multiple investors. 

The reason why this is beneficial to the investor is because the borrower is more likely to meet payments and not cause problems.  Thus, when an investor makes the decision to involve a third party that is well established and reputable, the higher the chance that the borrower lives up to their end of the bargain as far as the loan is concerned.

Third Party Benefits

When a third party is involved, it becomes the loan servicing department’s responsibility to bill the borrower for regular monthly payments.  It is also their responsibility to enforce on the borrower the loan agreement terms, so they respond in a proper and timely manner.

There is no question that some borrowers will do everything in their power to try and avoid and delay making payments.  Borrowers that create this type of problem can often be extremely difficult for an investor to deal with, especially if the investor is new to private money lending.   That being the case, it is in the investor’s best interest to loan through a third party that has the experience to deal with problem borrowers.

The third party separates the investor from interaction with the borrower, relieving them of burdens and hassles which helps the investor feel more secure in their investment because the loan process is likely to run smoother.

Borrowers know that when they receive a fast response from the third party in regards to their lack of payment, that the loan servicing department has zero tolerance for such behavior.  Furthermore, in-house counsel will start foreclosure within 24 hours after a default has occurred on the loan.  Therefore, borrowers will do everything they possibly can to avoid foreclosure, as it is extremely costly to them, and has the potential to damage their credit.

A Third Party Produces Excellent Results

It is through strict and constant enforcement that reliable payment and performance is maintained.  It is not uncommon for a borrower to try and convince, or pressure a lender to give some slack in regards to terms and due dates for payments.  With a loan servicing department, a borrower knows that such possibilities won’t happen, and that no other agreement will be tolerated save for the initial one that was created when the loan was issued.

Loan Servicing

The following is how a typical loan service is conducted.

  Each month, the loan servicing officer bills the borrower and collects payment, depositing the funds that are received into the account of the investor.

  Once the payment has been received in full, and the funds are cleared, the loan servicing officer will then begin to issue the appropriate checks to the investor(s) involved in the loan.

  At the same time every month, statements and a check that covers the interest earned throughout the month are mailed to the investor(s).

   The servicing agent maintains the payment records, and for tax purposes, the investor will receive a 1099 form.

  If there is a default on the loan, the loan servicing officer may choose to start foreclosure.

  Should there be problems during the foreclosure, or should necessary negotiations need to take place during the process, in-house legal counsel is waiting to offer assistance to the investor.

  Lastly, should the foreclosure be stalled or halted by a borrower’s bankruptcy petition, the in-house legal counsel will immediately try to relieve the stall or request the bankruptcy court provide sufficient protection.