# SFSB-5: Note Servicing Standards **Seller Finance Standards Board | Published: 2026 | Version 1.0** --- ## Purpose These Note Servicing Standards establish the SFSB's minimum best practices for the administration and servicing of seller-financed promissory notes secured by business assets, real property, or both. Consistent, professional servicing protects the note investor's economic interest, maintains enforceable borrower obligations, and reduces the risk of legal challenges arising from improper loan administration. These standards apply equally to institutional servicers, professional note servicers, and note investors who self-service their portfolios. ## Scope These standards apply to any entity that collects payments, maintains records, communicates with borrowers, or manages default and payoff processes on behalf of a note holder (the "Investor"). "Servicer" as used herein refers to any such entity, whether operating under a formal servicing agreement or acting as a self-servicer. These standards do not preempt applicable state or federal servicing regulations, which take precedence in the event of conflict. --- ## SECTION 1 — PAYMENT PROCESSING **1.1 Application of Payments.** All payments received from the borrower shall be applied in the following order of priority, unless the promissory note specifies a different order: (1) outstanding late charges and fees; (2) accrued but unpaid interest; (3) principal reduction. Any deviation from this order must be authorized by the Investor in writing and documented in the loan file. **1.2 Grace Period.** The grace period for each scheduled payment is the period defined in the promissory note, typically between five (5) and fifteen (15) calendar days after the scheduled due date. A payment received on or before the last day of the grace period shall not be treated as a late payment for purposes of assessing late charges or reporting payment performance. **1.3 Crediting Payments.** Payments shall be credited to the loan account on the business day the funds are confirmed as collected (i.e., cleared, not merely received). ACH and wire payments shall be credited on the date of confirmed settlement. Check payments shall be credited upon clearance, not upon receipt. Servicers that hold payments pending clearance for more than three (3) business days must document the reason. **1.4 Partial Payments.** If a borrower remits a payment in an amount less than the full scheduled installment, the Servicer shall apply the partial payment in the manner authorized by the Investor. Unless otherwise directed, the SFSB recommends that the Servicer (a) accept partial payments and hold in a suspense account until sufficient funds are received to constitute a full installment, and (b) notify the borrower promptly of the shortage. The Investor shall be notified of any partial payment received within two (2) business days. **1.5 NSF / Returned Payments.** If a payment is returned for non-sufficient funds or any other reason, the Servicer shall: (a) reverse the credit applied to the loan account; (b) assess any NSF fee permitted by the promissory note or servicing agreement; (c) notify the borrower in writing within two (2) business days; and (d) notify the Investor. Repeated NSF events shall be flagged to the Investor as a potential early warning indicator. **1.6 Overpayments.** Any payment in excess of the full scheduled installment shall be applied first to any outstanding fees or charges, then to principal reduction, unless the Investor provides contrary written instruction. The Servicer shall notify the Investor of any significant overpayment (greater than one full installment) within two (2) business days. --- ## SECTION 2 — PAYMENT RECORDS **2.1 Required Ledger Fields.** The Servicer shall maintain a complete payment ledger for each loan containing, at a minimum, the following fields for every transaction: (a) transaction date; (b) payment due date for the applicable period; (c) scheduled payment amount; (d) actual amount received; (e) amount applied to interest; (f) amount applied to principal; (g) amount applied to escrow (if applicable); (h) amount applied to late charges and fees; (i) running unpaid principal balance after application; (j) next payment due date after application; (k) payment method (check, ACH, wire, other); and (l) any notes regarding special circumstances. **2.2 Reconciliation.** The Servicer shall reconcile the loan ledger against its trust account or collection account records on a monthly basis. Any discrepancy shall be investigated and resolved within ten (10) business days of discovery and documented in the loan file. **2.3 Ledger Integrity.** Payment records shall not be altered retroactively, except to correct a documented posting error. All corrections shall be made as a new entry, with the original entry preserved, a notation of the correction date, and an explanation of the reason for correction. Servicers shall never delete or overwrite historical payment records. --- ## SECTION 3 — BORROWER COMMUNICATIONS **3.1 Monthly Billing Statements.** Unless the borrower has executed a written waiver, the Servicer shall deliver a monthly billing statement to the borrower no fewer than ten (10) business days prior to each scheduled payment due date. The billing statement shall include, at a minimum: (a) the scheduled due date and payment amount; (b) the current unpaid principal balance; (c) the amount of the payment allocated to principal and interest (estimated or actual); (d) any outstanding late charges or fees; (e) the total amount due to bring the account current; (f) Servicer contact information; and (g) payment instructions. **3.2 Annual Statements.** No later than January 31 of each year, the Servicer shall deliver to the borrower an annual year-end statement showing: total principal paid, total interest paid, and ending UPB for the prior calendar year, for use in borrower's tax preparation. **3.3 Payoff Quote.** Upon receipt of a written request from the borrower or a duly authorized party, the Servicer shall deliver a payoff quote within five (5) business days. The payoff quote shall state: (a) the outstanding UPB; (b) accrued and unpaid interest through a specified good-through date; (c) any outstanding late charges or fees; (d) per diem interest for each day beyond the good-through date; (e) the total amount required to pay the loan in full; and (f) wire or delivery instructions. The Servicer shall honor the payoff quote through its good-through date. **3.4 Change of Servicer Notice.** Upon transfer of servicing, the transferor servicer and the transferee servicer shall jointly or individually deliver written notice to the borrower no fewer than fifteen (15) calendar days prior to the effective date of the transfer, as required by applicable law. The notice shall identify the new servicer, provide contact information and payment instructions, and confirm the effective date. --- ## SECTION 4 — LATE PAYMENT HANDLING **4.1 Grace Period.** As defined in Section 1.2, no late charge shall be assessed until the grace period has elapsed. The grace period shall not be shortened by the Servicer without the Investor's written authorization and written notice to the borrower of at least thirty (30) days. **4.2 Late Charge Calculation.** Late charges shall be calculated in strict accordance with the terms of the promissory note. The SFSB standard recommendation for seller-financed business notes is a late charge of five percent (5%) of the scheduled installment, unless a different amount is expressly stated in the note. Late charges shall not be compounded. **4.3 Cure Notice.** If a payment remains unpaid as of five (5) business days after the grace period expiration, the Servicer shall deliver a written cure notice to the borrower (and to any personal guarantor, if applicable) by overnight mail or email with read-receipt confirmation. The cure notice shall: (a) identify the payment(s) missed and the amount(s) due; (b) state the total amount required to cure the delinquency, including all accrued late charges; (c) specify a cure deadline of not fewer than ten (10) business days from the date of the notice; and (d) state that failure to cure by the deadline may result in acceleration and enforcement action. The Investor shall receive a copy of all cure notices simultaneously. **4.4 Late Charge Waivers.** Servicers shall not waive or discount late charges without the express written authorization of the Investor. Any waiver shall be documented in the loan file. --- ## SECTION 5 — DEFAULT AND CURE **5.1 Definition of Default.** A monetary default occurs when a scheduled payment remains unpaid for thirty (30) or more calendar days after its scheduled due date. A non-monetary default includes, without limitation: (a) breach of any affirmative or negative covenant in the promissory note or security documents; (b) material misrepresentation in connection with the loan origination; (c) unauthorized transfer of the collateral; (d) filing of a bankruptcy petition by or against the borrower; or (e) any other event of default as defined in the note. **5.2 Notice of Default.** Upon the occurrence of a monetary or non-monetary default that has not been cured within the applicable cure period, the Servicer shall deliver to the borrower and any guarantor a formal Notice of Default within five (5) business days, in the form required by the promissory note and applicable state law. The Notice of Default shall state the nature of the default, the amount required to cure (if monetary), the cure deadline, and that failure to cure may result in acceleration of the outstanding balance and enforcement of the Servicer's remedies. **5.3 Acceleration.** The Servicer shall not declare the entire outstanding principal balance immediately due and payable without the express written authorization of the Investor. The Investor shall make the acceleration decision based on all available information, including the default history, borrower communications, and collateral status. **5.4 Pre-Foreclosure / Pre-Enforcement Protocol.** Prior to commencing formal foreclosure or UCC enforcement, the Servicer shall: (a) confirm that all required notices have been sent and cure periods have elapsed; (b) prepare a default summary for the Investor documenting the payment history, cure notice history, and any borrower communications; (c) obtain Investor authorization; and (d) retain qualified local counsel in the jurisdiction where the collateral is located. **5.5 Workout Documentation.** If the Investor agrees to a loan workout, modification, or forbearance in response to a default, all terms of such workout shall be documented in a written agreement signed by both the borrower and the Investor (or Servicer on Investor's behalf). Oral workouts are not enforceable and are prohibited under these Standards. --- ## SECTION 6 — PAYOFF AND RECONVEYANCE **6.1 Payoff Quote Timeline.** As provided in Section 3.3, payoff quotes shall be delivered within five (5) business days of written request. **6.2 Per Diem Calculation.** Daily per diem interest shall be calculated as: Outstanding UPB × Annual Interest Rate ÷ 365. The per diem rate shall be stated in every payoff quote. **6.3 Application of Payoff Funds.** Upon receipt of full payoff funds, the Servicer shall apply funds in the following order: (1) accrued and unpaid interest; (2) outstanding principal; (3) any outstanding late charges or fees; and (4) any escrow balance (return to borrower if positive, collect from borrower if negative). The UPB shall be zero after full application. **6.4 Reconveyance / Lien Release.** Within ten (10) business days of receipt of confirmed payoff funds, the Servicer (or the Investor, as appropriate) shall execute and deliver: (a) for real property collateral: a recorded Deed of Reconveyance, Satisfaction of Mortgage, or Release of Deed of Trust, as required by state law; (b) for UCC collateral: a UCC-3 Termination Statement filed with the Secretary of State. Failure to timely release liens upon payoff is a violation of these Standards and may expose the Investor to statutory penalties under applicable state law. --- ## SECTION 7 — INVESTOR REPORTING **7.1 Monthly Servicer Report.** The Servicer shall deliver to the Investor a monthly loan performance report, no later than the fifteenth (15th) day of the following month, containing at a minimum the following fields for each loan: - Loan identifier and borrower name - Reporting period (month/year) - Scheduled payment amount and due date - Actual payment received (date and amount) - Amount applied to principal - Amount applied to interest - Amount applied to escrow (if applicable) - Amount applied to late charges - Beginning unpaid principal balance - Ending unpaid principal balance - Current payment status (current, 1-29 DPD, 30-59 DPD, 60-89 DPD, 90+ DPD) - Next payment due date - Any outstanding late charges or fees - Any material events (cure notices sent, payments returned, borrower communications) **7.2 Delinquency Alerts.** In addition to the monthly report, the Servicer shall notify the Investor within two (2) business days whenever: (a) a payment is not received by the end of the grace period; (b) a payment is returned NSF; (c) a borrower requests a payment deferral or modification; or (d) the Servicer becomes aware of any event that may adversely affect the loan's performance. --- ## SECTION 8 — ESCROW ADMINISTRATION **8.1 When Escrow Is Required.** Escrow accounts for the collection and disbursement of taxes, insurance premiums, or other items shall be established whenever required by the promissory note or security agreement, or when directed in writing by the Investor. **8.2 Escrow Deposits.** Monthly escrow deposits shall be collected simultaneously with the scheduled loan payment and held in a segregated escrow account, separate from the Servicer's operating funds. **8.3 Disbursements.** The Servicer shall disburse escrow funds for their intended purpose (e.g., property taxes, insurance premiums) no later than the due date of the applicable obligation, and shall retain documentation of each disbursement in the loan file. **8.4 Shortage and Surplus Analysis.** No less than annually, the Servicer shall conduct an escrow analysis to determine whether the current monthly escrow deposit is sufficient to cover projected disbursements. If a shortage exists, the Servicer shall notify the borrower and adjust the monthly escrow deposit accordingly. Surpluses in excess of one (1) month's projected disbursement shall be returned to the borrower within thirty (30) days. --- ## SECTION 9 — TRANSFER OF SERVICING **9.1 Borrower Notice.** Upon transfer of servicing to a successor Servicer, both the transferor and transferee shall cooperate to provide the notice required by Section 3.4. The borrower shall not be held responsible for misdirected payments made pursuant to the prior servicer's instructions during the sixty (60) day period immediately following the effective date of transfer. **9.2 Records Delivery.** Within five (5) business days of the transfer effective date, the transferor Servicer shall deliver to the transferee Servicer a complete loan file including: the original note (or certified copy), all collateral documents, the complete payment history ledger, all borrower correspondence, all escrow records, and a current payoff calculation. **9.3 Escrow Transfer.** Any escrow funds held by the transferor Servicer shall be remitted to the transferee Servicer simultaneously with the delivery of records, with a detailed accounting of all deposits and disbursements. --- ## SECTION 10 — RECORD RETENTION **10.1 Minimum Retention Period.** All loan documents, payment records, correspondence, notices, and servicing records shall be retained for a minimum of seven (7) years following the date of payoff, satisfaction, or final disposition of the loan. Records relating to defaulted loans that resulted in litigation shall be retained for the longer of seven (7) years or three (3) years following the final resolution of such litigation. **10.2 Electronic Records.** Electronic records are acceptable and shall be treated as equivalent to paper originals, provided that: (a) they are stored in a format that cannot be altered without detection; (b) they are backed up no less frequently than weekly; and (c) they are retrievable and producible in human-readable format upon request. **10.3 Original Documents.** Wet-ink original promissory notes and recorded collateral documents shall be maintained in secure physical storage (or in a recognized custodian's vault) for the life of the loan and transferred to the Investor or its designee upon transfer of servicing or payoff. --- *This document is published by the Seller Finance Standards Board (SFSB) as a best practice guideline. It does not constitute legal advice. Members and users should consult qualified legal counsel for jurisdiction-specific requirements.* *© 2026 Seller Finance Standards Board. All rights reserved. Members may reproduce for internal use with attribution.*