From the time a loan is approved until it is fully repaid, all of the administrative facets of that loan are collectively referred to as “loan servicing.” It involves a variety of different actions and legal/financial issues, and it can go on for a very long time because it lasts until the debt is completely repaid.
“Loan origination” refers to all phases of a loan transaction that take place before loan servicing. The process of originating a loan involves:
The same business occasionally handles origination and servicing, but more frequently than not, they are handled by different businesses.
The mortgage servicer distributes the funds it has collected to a number of parties, paying taxes and insurance from escrowed funds, sending principal and interest payments to holders of mortgage-backed securities (or other financial instruments backed by pools of mortgage loans), and paying fees to trustees, mortgage guarantors, and other service providers.
Depending on the type of loan and the terms agreed upon by the servicer and the investor seeking their services, the degree of service may also involve monitoring delinquencies, carrying out workouts and restructurings, and carrying out foreclosures.
The servicer typically receives contractually stipulated servicing fees in return for completing these tasks, in addition to various supplemental income streams, including float and late fees. During the housing boom, mortgage servicing became “much more profitable,” and some servicers targeted customers who were “less likely to make regular payments” in order to increase their collection of late fees.
In most cases, servicers (servicing businesses) are paid a proportion of the loans’ outstanding balances. Depending on the size of the loan, whether it is secured by residential or commercial real estate, and the degree of service needed, the charge rate might range from one to forty-four basis points. These services may consist of tax reporting, statements, impounds, collections, and other obligations, but they are not restricted to those.
When ownership of those rights is contractually segregated from ownership of the underlying loan, companies recognize those rights as separate assets or liabilities. The net present value of the anticipated cash flows from servicing, less the sum necessary to fully compensate a servicer, is used to determine the value recognized for servicing rights (this incorporates an expected cost of service plus a profit margin required by market participants).
Due to the correlation between interest rates and anticipated prepayments, the value of assets or obligations that require servicing is extremely sensitive to interest rates (i.e., loan refinancing). This is due to the fact that when a loan is refinanced, the service costs and other perks end, causing the value of these assets to fluctuate greatly. Because of this, businesses that own significant servicing rights often use interest rate-sensitive derivative instruments like interest rate swaps and swaptions to hedge the value of their servicing rights.
What Is Covered by Loan Servicing?
Loan servicing includes facets like:
- Sending statements for client payments on a monthly basis
- Getting paid on time each month
- Keeping track of payments
- Checking debt amounts and payment balances
- Addressing allied concerns like taxes and insurance
- Controlling escrow money
- Transferring extra money to the payer
- Monitoring past-due payments
Thus, monthly invoices and regular bill statements that are associated with repaying a loan are frequently part of loan servicing.
Who Manages the Loan Servicing?
Sometimes the business that supplied the loan also takes care of the loan servicing. As previously indicated, a single organization frequently handles both loan origination and servicing. For instance, larger mortgage loan organizations may experience this. This isn’t always the case, though. In some cases, a secondary business that only does debt servicing is given the authority to contract out the task.
You should be notified if the organization that originated the loan for you first handled loan servicing before handing that responsibility off to another organization. Both the first and new loan servicer should provide the notice. Private civil lawsuits are frequently brought about by breaches in loan servicing, particularly when those breaches result in financial losses for the borrower.
Loan Servicer Types
There are companies that manage personal loans, student loans, and even mortgages. But each of these could be a specific kind of loan servicer, such as a bank, an online lender, or even a third-party business.
- Banks: Prior to the financial crisis of 2008, banks frequently provided loan origination and servicing, and some do so even now. However, because of the lending industry’s explosive development, banks frequently employ other businesses to manage the servicing on their behalf.
- Other Lenders: If you obtained a loan from a non-bank lender, such as an online personal loan provider, that business might decide to handle loan servicing in-house.
- Independent Contractors: Due to the labor-intensive nature of loan servicing, banks and other financial institutions frequently hire outside suppliers. These businesses are in charge of keeping the loan in good standing and ensuring it conforms to all applicable state and federal laws.
Is a Loan Servicer Necessary?
You will require a loan servicer if you have taken out a mortgage, a personal loan, or a student loan. Your servicer is accountable for informing you of your payment conditions, responding to your inquiries, and disseminating critical loan information.
The Importance of Loan Servicers for Borrowers
The lender chooses who will handle loan servicing when a borrower takes out a loan. You will communicate with your loan servicer frequently, so it’s crucial to know who they are.
Contact the lender you used to get the loan to see who your loan servicer is. On your annual or monthly statement, the name of the loan servicer could also be mentioned.
In addition to making loan payments, you can get in touch with your servicer if you’re having issues paying your bills or have inquiries about your loan.
Sometimes borrowers experience problems with their loan servicer and wish to change to a different one. Since you cannot change your loan servicer unless you refinance or consolidate your debt, this is truly only a possibility if you do so.
You can submit a complaint with the Consumer Financial Protection Bureau (CFPB) or the Federal Student Aid Office of the Department of Education if you experience issues with a servicer hiding crucial loan information (for student loans). You can also report your servicer to the Federal Trade Commission if you think they are defrauding you (FTC).
The nation’s attorneys general have noticed claims against loan servicers. Attorney General Josh Shapiro announced a $1.85 billion agreement with Navient in January 2022 to address allegations of unfair loan servicing practices. The settlement will result in the cancellation of student loan debt for around 66,000 borrowers and the payment of restitution to 350,000 more borrowers at the cost of about $260 per person.
Do I Require Legal Counsel to Handle My Loan Servicing Issues?
A lengthy amount of time, perhaps several months or even years, might be involved in loan servicing. This indicates that there is a high likelihood that complications or legal challenges will occur in relation to debt servicing. If you need assistance bringing a lawsuit due to problems with loan servicing, you might need to hire a financial attorney.
Your lawyer can offer you legal counsel, representation, and assistance throughout the lawsuit process. Additionally, if you have any special legal questions, your lawyer can conduct the appropriate research to address them.