What is loan servicing?

Many mortgages and personal loans today are managed by companies other than the originating lender. This may be confusing to borrowers, but it’s not uncommon to receive a letter stating that your loan is being transferred to a loan servicing company. There’s no need to panic if your loan is being transferred. Your original loan terms won’t change — but you should pay close attention to check for other details that could.

Key insights

• A lender might transfer your loan to a new servicer that handles day-to-day loan management.
• You should get a notice of any servicer transfer, which will explain where to send payments.
• Even if your servicer changes, your basic loan terms, like your monthly payment and rate, won’t.

Loan servicing definition

Loan servicing is when a third party manages your loan on behalf of the lender. It’s common today for a lender to transfer servicing rights to a loan servicer to issue statements, collect monthly payments and answer borrowers’ questions regarding their loans. Servicing also includes distributing funds to the owner(s) of the loan and keeping track of your payment history and your remaining principal balance.

What is a loan servicer?

Loan servicers can be banks, credit unions, online lenders or third parties. Loan servicers are responsible for the day-to-day administrative tasks associated with the loan. The servicer may also be responsible for reporting your payments to the credit bureaus, which impacts your credit score. If you have questions regarding your loan, you can contact your loan servicer for these details.

If you have a mortgage, the loan servicer may also collect and distribute payments from your escrow account (an account that holds funds intended to pay property taxes, homeowners insurance premiums and other related expenses). A servicer can also begin the foreclosure process if you’re delinquent on a loan.

How loan servicing works

After you take out a loan, you may receive a notice stating that your loan has been transferred to a loan servicer, which will handle the daily management of your loan. You may receive two notices — one from the transferring servicer and one from the new servicer — or a single notice. The notice, which must occur at least 15 days before the transfer of a mortgage loan, should tell you:

• The date when your old servicer stops accepting payments
• The date when your new servicer begins accepting payments
• The name and contact information of the new servicer
• The specific date of the transfer

Keep in mind that the transfer may change how you make your monthly payments. For instance, you may need to set up new automatic payments to the servicer. If you send in payments by mail, you need to address the payments differently.

If your mortgage loan has been transferred, you do have a 60-day grace period. You won't be charged a late fee if you send your payments to your old servicer during this time.

Loan servicer vs. lender

A lender reviews your application for a loan, approves or denies the loan and issues the funds. Afterward, the lender may transfer the servicing to a loan servicer, which processes monthly payments, sends statements and manages the loan.

You should receive a notice of a mortgage loan transfer at least 15 days before it’s sent to a new servicer.

At least 15 days before a mortgage loan is transferred, the current servicer must send you a notice. Your basic loan terms won’t change (like monthly payment amount, APR, loan term) with your new servicer. However, you may need to change how you make your monthly payments.

In some cases, you might receive a different level of customer service — better or worse — with your new servicer. One of our reviewers from California, for example, had a bad experience when their mortgage servicer changed.

Lenders don’t always transfer loans to new servicers; some service their loans from origination through the maturity date. If you don’t like the idea of working with a different servicer in the future, search for lenders that don’t transfer servicing of loans once they fund them.

Bottom line

Loan servicers are responsible for the day-to-day management of a loan, including accepting and processing payments, sending account statements and answering questions from borrowers. A loan servicer is not always the same as the lender, which funds the loan, or the investor, which owns the loan.

Once you take out a loan, it’s important to pay attention to any correspondence from your lender so you know if your loan is transferred to a new servicer.