Definition and Examples of Loan Servicing
Making sure that borrowers are paid for their loans is the process of loan servicing. For instance, if you have a personal loan, your loan servicing firm is the one that manages your loan records, handles your payments, and gives you monthly billing statements.
Student loan servicers Nelnet, Great Lakes, and Navient are a few well-known loan servicers.
- Alternate name: Mortgage servicer, student loan servicer, payment servicer
How Does Loan Servicing Work?
Your loan’s day-to-day administration and monthly payment collection are handled by your loan servicer.
Additionally, your service provider must abide by extra federal and legal regulations. If you have a mortgage, for instance, your loan servicer is required to:
- The day after you send in your payment, apply it to your loan.
- Tell you how much you owe right now.
- Contact you regarding unpaid invoices
- provide you with specific details regarding your payment history
Your escrow account will be managed by a mortgage servicer, who will utilize it to make escrow payments for annual insurance and tax obligations.
Types of Loan Servicers
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 2008 financial crisis, banks frequently originated and maintained loans, and some of them do so even now. However, because of the lending sector’s explosive growth, banks frequently contract with other businesses to handle the servicing for them.
Non-Bank Lenders
If you obtained a loan from a non-bank lender, such as an online personal loan provider, that business may decide to handle loan servicing in-house.
Third-Party Vendors
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 making sure it conforms with all applicable state and federal laws.
Do I Need a Loan Servicer?
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.
Loan Servicers vs. Lenders
| LOAN SERVICER | LENDER |
|---|---|
| Manages the daily aspects of the loan | Approves, funds, and disburses loans |
| Either the lender or a third-party company the lender hires | Can service the loan, but usually hires a third-party |
| Sends monthly billing statements and collects payments | Receives monthly payments from the servicer |
What Loan Servicers Mean 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.
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 report to the Consumer Financial Protection Bureau (CFPB) or the Federal Student Aid Office if you experience problems with a servicer hiding crucial loan information from the Department of Education (for student loans). If you believe your servicer is committing fraud, you can also file a report with the Federal Trade Commission (FTC).
Notable Happenings
The nation’s attorneys general have taken notice of claims made 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 a cost of about $260 per person.
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