Standard Waterfall
The default payment allocation method. Payments are applied in a pre-set priority order established by the lender or federal rules: typically (1) fees, (2) accrued interest, (3) principal. Excess funds flow "down the waterfall" to the next loan in sequence once the first is satisfied.
Why it matters in servicing
Most accounts use a standard waterfall by default. Servicers must ensure the waterfall order is correctly configured, as misapplication can cause interest to compound incorrectly and borrowers to be mischarged.