What is loan servicing? (2023)

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.

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

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.