What is Servicing Strip?
The servicing strip (or servicing fee) is the portion of a loan's gross interest rate retained by the entity that services the loan, collecting payments, managing escrows, handling delinquencies, and providing investor reporting. When a whole loan is sold, the buyer receives the net rate (note rate minus servicing strip). Typical servicing strips range from 25bp (0.25%) for standard residential to 50bp or more for complex commercial or government-guaranteed loans. The servicing strip is a recurring fee paid from the loan's interest income, not a one-time charge.
Formula
Net Rate = Note Rate - Servicing Strip Servicing Income = Servicing Strip x Outstanding Balance / 12 (monthly)
How LoanBook Uses Servicing Strip
LoanBook uses servicing as a standard field in all analytics calculations. Loans amortize at the gross note rate, and servicing is modeled as its own monthly cost line (servicing rate / 12 times the prior month balance) deducted from the interest the investor receives; it is never netted out of the coupon before amortization. This gross-rate treatment flows through cashflow projection, BEY, and OAS pricing. Servicing is entered as a decimal (0.0025 = 25bp) and validated at the data boundary.
Frequently Asked Questions
Who gets the servicing strip?
The servicer, typically the loan originator or a specialized servicing company. When a loan is sold, the seller often retains servicing rights (and the fee). The buyer receives the net coupon. In participations, the lead lender retains servicing.
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