When you receive a loan of any type, it is typically broken into two components – the loan itself and the servicing of the loan. The loan portion, such as in the case of a mortgage, may be sold off to various investors in the secondary market. The servicing part, on the other hand, may be sold to a different lender or financial services company.
In many cases, the institutions loaning out the money do not also service the loan. This is where loan servicing comes into play. Loan servicing providers administrate and manage the loan in question.
Loan servicers make sure payments are posted correctly, take care of any required paperwork – including statements, conduct correspondence with the indebted party, and see that fees are handled correctly.
In short, it's best to think of loan service providers as the middleman between the lending institution and the individual taking out the loan. It is the job of the loan servicer to make sure everything is handled correctly to ensure smooth handling of the loan until it is repaid.
Types of Loan Servicers and How They Work
Given that we have over $14 trillion in mortgage debt, as of the end of 2016, and $1.3 trillion in student loan debt, it's understandable that loan servicing is a big business. In addition to mortgages and student loans, many auto loans have service providers.
Each loan servicer industry has a unique way of servicing and processing loans. With that in mind, below are three common loan servicers and how they work.
Mortgage loan servicers
With many mortgage loans being sold off in the secondary market, loan servicers have one main responsibility – the day-to-day management of the mortgage. According to the Federal Trade Commission (FTC), this involves managing the following aspects: managing escrow accounts, the transfer of servicing if it's sold to another service provider, posting payments, transfer of loan ownership, management of insurance, fees, managing loans that are in default, and payoff statements. The mortgage loan servicer will be your main point of contact between you and the lending institution, acting as the middleman to make sure all goes smoothly with the loan.
Student loan servicers
Student loan servicers, much like mortgage loan servicers, have one main task – the day-to-day administration and management of student loans. According to the Consumer Financial Protection Bureau (CFPB), this includes management of borrowers' accounts, processing monthly payments, managing enrollment in alternative repayment plans, and communicating directly with borrowers. In short, they help you manage your repayment and make sure you are in the best position to repay the student loan. The most well-known student loan servicers include Navient, Nelnet, SallieMae, and FedLoan Servicing.
Auto loan servicers
Auto loan servicing works much like mortgage or student loan servicing. They work as the middleman between the loan recipient and the lender. They manage the loan to ensure payments are applied correctly and deal directly with the loan recipient.
If you've taken out a loan of any type it's likely you have dealt with a loan servicing provider. The key thing to keep in mind is to make sure they apply payments correctly and that they are handling the loan properly. Make sure to read statements thoroughly and monitor how they apply your payments to ensure they are doing what you request.
How are Loan Servicers Compensated?
Loan servicers make money in one simple way – they receive a small portion of each installment loan payment, usually in the neighborhood of .25 – .50% of the interest payment made each month. The loan servicer may also receive a portion of their compensation from fees, late charges, or special services they offer to the lending institution.
The compensation structure can make the industry sensitive to interest rate fluctuations since they receive a portion of the interest payment of the loan. The compensation structure for loan servicers makes it vital you maintain a good record of your paperwork, not to mention making sure they apply your payment as indicated to ensure timely repayment of your loan.