How a Servicing Fee Works

Loan servicing is the administration aspect of a loan from the time the proceeds are dispersed by the mortgage lender until the loan is paid off. In addition to collecting the monthly payments from the borrower, the mortgage loan servicer performs the following duties:

Administration of a loan includes verification of the mortgage
Sending monthly payment statements
Maintaining records of payments and balances
Collecting and paying taxes and insurance (and managing escrow and impound funds)
Remitting funds to the note holder, overnight shipping
Following up on delinquencies

Loan servicers are compensated by collecting a small percentage of each periodic loan payment, known as a servicing fee.
In addition to earning the actual servicing fee, in most cases, mortgage servicers also benefit from being able to invest and earn interest on a borrower's escrow payments as they are collected until they are paid out to taxing authorities, insurance companies, etc. Mortgage servicing rights (MSR) trade in the secondary market much like mortgage-backed securities (MBS).