Private real estate lender USA Commercial Mortgage Co. placed $550 million in loans last year — creating more than half of its existing $962 million loan portfolio — and cranked out another $125 million in deals in the first quarter of 2006. Then it filed for bankruptcy.

At a time when pressure to place investment capital is driving record mortgage origination volume — $345 billion in 2005, up 49.9% from the previous year, according to the Mortgage Bankers Association — the unfolding drama at Las Vegas-based USA Commercial Mortgage may serve as a warning of what can happen when lending volume gets ahead of servicing.

“The company at one point was pretty diligent about staying current with its borrowers, but it’s definitely a case of a company that grew too big, too fast,” says Mark Olson, chief operating officer at USA Commercial Mortgage. “The in-house servicing simply could not keep up.”

The lender, which does business as USA Capital, collects money from investors to originate, underwrite and service mostly short-term, high-interest loans to developers and other borrowers that provide real estate as collateral. Because it holds high-interest loans, USA Capital could promise investors double-digit returns.

When USA Capital filed for Chapter 11 reorganization in early April, some 60% of the 115 loans in its portfolio were non-performing. Most non-performing loans had fallen behind on interest payments. The company continued to make regular payments to its investors, however. In the first three months of this year, the lender collected interest payments of approximately $5.3 million a month but paid roughly $9.7 million a month to investors, according to an affidavit by Tom Allison, the chief restructuring officer at USA Capital.

In some instances, principal proceeds that should have been returned to specific investors when a loan was paid off were instead used to maintain interest payments to all USA Capital investors, according to Mark Olson, chief operating officer. “That means those original investors were no longer secured,” Olson says.

USA Capital is owed about $50 million in back interest from its borrowers. Since it filed for Chapter 11 reorganization, the company has collected about 25% of that amount. Allison, a senior managing director at Mesirow Financial Interim Management and the new CEO brought in at USA Capital, plans to recover much of the delinquent interest owed to the company, improve servicing and other procedures, and get the company back on its feet while minimizing investor losses.

Is USA Capital an anomaly in the overheated real estate lending market, or are there other companies at risk of losing control of their in-house loan servicing? There may be others in the freestanding mortgage banking business —companies that, like USA Capital, don’t syndicate or securitize their loans.

Such a scenario, in which so many loans were allowed to become non-performing, is unlikely in the securitized sector, says Tad Philipp, managing director of the CMBS group at Moody’s Investors Service. That’s because collateralized mortgage-backed securities (CMBS) and collateralized debt obligations (CDOs) are subject to rating agency monitoring and structural controls.

“In the securitized market, the master servicers are typically investment-grade, and they’re backstopped by investment-grade trustees,” he says “There hasn’t been, and is unlikely to be, a significant disruption.”

But the disruption does illustrate the critical role loan servicers fill in ensuring loan performance. That’s why agencies consider the servicer’s capabilities, track record and backing in evaluating the credit quality of CDOs, which may contain loans that don’t carry an agency rating.

“Many of the real estate CDOs we’re seeing now include highly leveraged assets, so the ability of the [servicer] to work out the loans is significant,” Philipp says. “We assign collateral-manager quality adjustments, because some funds are better managed and capitalized than others, and at the end of the day that will make a difference on deal performance, especially in the high-yield space.”