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What is loan servicing? (2023)

Your loan might be managed by a third party

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You may not be aware of it as you’re shopping for a lender, but many mortgages and personal loans are managed by companies other than the originating lender. In fact, it’s not uncommon to receive a letter stating your loan is transferring to a loan servicing company.

While this may seem confusing, 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 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.

Loan servicers can be banks, credit unions, online lenders or other 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.

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.

Lenders don’t always transfer loans to new servicers; some are also the servicer and 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.

“The only opportunity to get a new loan servicer is by getting a new loan via another mortgage lender. Even so, the consumer will have no say in who processes the monthly payments,” explained Gary Yeoman, the CEO of Voxtur, a real estate technology company.

“The most important thing to remember is to go with the mortgage lender that is giving you the best deal. Mortgage servicing is a very important element of the mortgage lending process, but it's not more important than getting the right mortgage for the right price.”

How loan servicing works

Once you close on your loan, you should receive information on who is servicing your loan. Your loan servicer takes care of the day-to-day management of your loan and collects your monthly payments. Loan servicing is most commonly seen with mortgages.

Mortgage servicing is a very important element of the mortgage lending process, but it's not more important than getting the right mortgage for the right price.”
— Gary Yeoman, Voxtur CEO

The loan servicer is responsible for:

  • Applying your payment the day it’s received
  • Communicating your loan balance to you
  • Contacting you regarding any missed payments
  • Providing any detailed information you need regarding your past payments

With mortgages, another important task of the loan servicer is managing your escrow account and making applicable payments on your behalf (escrow is an account that holds funds intended to pay property taxes, insurance premiums and other related expenses). It’s the loan servicer’s responsibility to make the payments each year by the annual due date.

A servicer can also begin the foreclosure process if you’re delinquent on a mortgage.

» MORE: What is a mortgage statement?

What to do if your loan servicer changes

If your loan servicer changes at some point during your loan term, 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, 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

If this happens, your basic loan terms (like the monthly payment amount, annual percentage rate (APR) and loan term) won’t change, but it will likely 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.

Once the loan transfer occurs, you do have a 60-day grace period. There is no charge for a late fee if you send your payments to your old servicer during this time.

» MORE: Best personal loan companies

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    Can I pick my loan servicer?

    Lenders do not allow you to pick the loan servicer. The only way to change a loan service company is through refinancing. While you have control over which lender you work with, you don’t have a choice for loan servicing.

    Is a loan servicer the same as a debt collector?

    A loan servicer is not considered a debt collector under most legal definitions. Debt collectors only come into play when you are sufficiently past due on a debt, whereas a servicer manages the loan while you are still paying it (although it can start the foreclosure process if you default on a mortgage).

    This is an important distinction, as consumers have rights under the Fair Debt Collection Practices Act (FDCPA), which defines how debt collectors can act when trying to collect a debt from you.

    How do I find out who my loan servicer is?

    You can find your loan servicer information on your monthly mortgage statement or coupon book. If for any reason you can’t find this information, you can contact the lender you secured your loan through or visit the MERS ServicerID. MERS is a private company that keeps track of mortgage loans and servicers and may have your servicer’s information.

    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 transferring to a new servicer.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, “What's the difference between a mortgage lender and a servicer?” Accessed July 15, 2023.
    2. Federal Trade Commission, “Your Rights When Paying Your Mortgage.” Accessed July 15, 2023.
    3. Consumer Financial Protection Bureau, “What happens if the company that I send my mortgage payments to changes?” Accessed July 15, 2023.
    4. For the Defense, “By Definition…. Are Mortgage Servicers Debt Collectors Under the FDCPA?” Accessed July 15, 2023.
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