Definition of Loan Servicing
How Does Loan Servicing Work?
Types of Loan Servicing
Do I Need Loan Servicing?
Loan Servicing vs. Lenders
Loan Servicing and Borrowers
Notable Events
Definition of Loan Servicing
Loan servicing is the process conducted by a company, known as the servicer, to collect payments, interest, and collateral (if applicable) from borrowers of loans.
Loan servicing takes on the responsibility of collecting payments, managing your loan, and providing any important information regarding the loan.
The lender can be the same as the servicer, or it can be another company used by the lender.
How Does Loan Servicing Work?
The servicer takes on the day-to-day management of the loan and collects monthly payments.
The servicer must also comply with additional legal and federal requirements. For example, if you have a mortgage, the servicer must do the following:
- Apply the payment to the loan on the same day it is received
- Notify you of your current payment amount
- Communicate with you regarding any late payments
- Provide you with detailed information about your payment history
The mortgage servicer will also manage your escrow account and use it to pay taxes and insurance when due annually.
Types of Loan Servicing
There are student loan servicing, personal loan servicing, and even mortgage loan servicing. However, all of these may fall under one type of loan servicing, such as banks, online lenders, or even third-party companies.
- Banks: Banks have been establishing and servicing loans since before the 2008 crisis, and some banks still service loans today. However, due to the enormous growth of the loan industry, banks often hire other companies to handle servicing on their behalf.
- Non-bank lenders: If you used a non-bank lender to obtain a loan, such as an online personal loan lender, this company may choose to service the loan in-house.
- Third-party vendors: Due to the work involved in loan servicing, banks and financial institutions often use third-party vendors to service loans. These companies are responsible for maintaining the loan and ensuring it complies with state and federal regulations.
Do I Need Loan Servicing?
If you have taken out a mortgage, personal loan, or student loan, you will need loan servicing. The servicer is responsible for keeping you informed about your payment terms, answering your questions, and providing important information about the loan.
Loan Servicing vs. Lenders
When a borrower takes out a loan, the lender decides who will service that loan. It’s important to know who your loan servicer is because you will be in regular contact with this company.
In addition to making payments on your loan, you can contact the servicer if you are having difficulty making your monthly payments or have questions about the loan.
Sometimes, borrowers face issues with their servicer and wish to switch to another company. This option is only possible if you refinance or consolidate your debt; otherwise, you will not be able to change your loan servicer. If you encounter an issue with a servicer who refuses to provide you with important information about the loan, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) or the Department of Education’s Federal Student Aid office (for student loans). If you believe the servicer is committing fraud, you can also report it to the Federal Trade Commission (FTC).
Notable Events
Claims against loan servicers have not gone unnoticed by the country’s attorney generals. In January 2022, Attorney General Josh Shapiro announced a $1.85 billion settlement with Navient to resolve claims of fraudulent practices in loan servicing. As a result of the settlement, approximately 66,000 borrowers will have their student loan debt canceled, and another 350,000 will receive around $260 as compensation.
Source:
https://www.thebalancemoney.com/what-is-loan-servicing-5188332
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