Whether you’re thinking about buying a home, refinancing an existing mortgage, or planning your next big investment, it’s important to understand how lenders and servicers fit into the mortgage process. This article will explain the differences between mortgage lenders and servicers so you can better prepare for your homebuying journey.
Written by Attorney Paige Hooper.
Updated November 29, 2021
It’s a familiar story: You find the perfect house, and you spend some time shopping around to choose the best mortgage company for you. A few days after you close on your new house, you get a notice in the mail from your mortgage lender saying that now that the deal has closed, they’re transferring your loan to some other company.
If you’re like most homeowners, you may be wondering, “Why did they want to get rid of my loan so fast?” You might even feel angry. After all, you put some into choosing the right mortgage company, only to be transferred immediately without your consent. This article covers what it means if your loan is transferred to a different servicer, why it happens so often, whether there’s anything you can do about it, and what makes a mortgage servicer different from a mortgage lender.
Mortgage Lenders vs. Mortgage Servicers
Though people often refer to both their mortgage lender and their mortgage servicer under the blanket title of “mortgage company,” the two roles aren’t the same.
Your mortgage lender is the finance company, bank, or credit union that loaned you the money to buy your home. Mortgage lenders:
Work with prospective borrowers to find financing terms the borrowers can afford
Advertise mortgage loans to potential homebuyers
Process loan documents and evaluate creditworthiness
Underwrite mortgage applications to help borrowers qualify
Prepare loan documents
Advance loan funds to borrowers so they can purchase homes
Handle the loan closing and closing paperwork
Nothing prohibits a mortgage lender from also servicing the mortgage loans it originates. In other words, the same company can be your mortgage lender and your mortgage servicer. This is very rarely the case, though. Because mortgage lenders and mortgage servicers typically specialize in performing very different sets of services, it usually makes more sense for a company to stick to one role or the other.
In many cases, the mortgage lender’s role fundamentally ends when the loan closing is complete. Your mortgage servicer, by contrast, usually picks up where the lender left off. After the mortgage loan closes, the mortgage servicer takes over the task of administering your loan. Mortgage servicers:
Receive and process monthly mortgage payments, making sure each payment is properly allocated between principal, interest, and escrow
Keep up with accounting and provide you with a monthly statement (or one for every billing cycle)
Collect and distribute funds for property taxes and hazard insurance and institute force-placed insurance coverage when applicable
Send the borrower any necessary notices and reminders if the borrower misses a mortgage payment
Respond to customer service inquiries and requests for loss mitigation assistance
Produce applicable tax documents and requested payoff amounts
Notify borrowers with adjustable interest rates of upcoming rate changes
Initiate and manage foreclosure proceedings when necessary
Manage credit reporting and insurance requests
Again, your loan servicer and mortgage lender can legally be the same entity, but this is rare. While mortgage lenders are usually banks and financial institutions, mortgage services are often outside companies that focus on administrative and accounting work.
Why Don’t Most Mortgage Lenders Do Their Own Mortgage Servicing?
Evaluating and originating a new mortgage loan involves different tasks and requires a vastly different set of skills and knowledge than servicing an existing loan. From an economic standpoint, companies that specialize in a fixed set of services are generally more profitable than those that offer a wide range of services. Outsourcing loan servicing to a third party allows mortgage lenders to focus more of their attention on loan origination. For most banks and finance companies, originating a new mortgage loan is more profitable than servicing the ongoing loan.
Mortgage lenders also often outsource loan servicing to a third party when the lender isn’t legally authorized to hold deposits under state law. For example, mortgages are frequently purchased and sold, via the secondary mortgage market, to entities such as the Federal National Mortgage Association (Fannie Mae). In the simplest terms, Fannie Mae buys mortgage loans and pools them together to create investment opportunities called mortgage-backed securities.
The trustee of one of these mortgage pools usually doesn’t have the resources or administrative capacity to handle servicing the loans for every mortgage in the pool. As a result, these tasks are typically outsourced to a third-party mortgage servicer.
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Dealing With Your Servicer
Although you may have spent time researching and comparing mortgage lenders, you don’t have any say about which company becomes your mortgage servicer. In some instances, you may not always be sure which company is your loan servicer, especially since your servicer can change several times over the life of your loan.
There are several ways to figure out who your mortgage servicer is. If you have access to your mortgage statements, the servicing company is usually the company that sends you the statements. If you don’t have your statements, you can try contacting your mortgage lender and asking which servicing company your mortgage was transferred to. You can also try searching the Mortgage Electronic Registration System (MERS) using your name and Social Security number or the property address.
Legal Issues You May Face if Your Servicer Is Irresponsible or Untrustworthy
The mortgage crisis of 2007–2010 drew global attention to many immoral or irresponsible practices that were commonplace in the home mortgage servicing industry at the time. As a result, laws were changed and new laws were enacted to protect borrowers against harmful practices. While mortgage servicers’ reputations have improved over the past decade, there are still issues in the industry. That’s partly because there are third-party mortgage servicing agreements, which can lead to mistakes and other problems.
While these problems are no longer commonplace, you should watch for any signs of these practices:
Engaging in robo-signing, where employees sign mass batches of critical documents without knowing what’s contained in them
Delivering inaccurate accounting
Charging unjustified fees
Failing to inform borrowers about loss mitigation options
Telling borrowers mitigation would stop the foreclosure process, then going ahead with foreclosure proceedings
Failing to recognize when borrowers had a pending loss mitigation case that transferred from another loan servicer
Failing to approve loan modifications without a good reason
What To Do if Your Servicer Changes
Though transferring a mortgage from one loan servicer to another has long been commonplace, there haven’t always been good regulations requiring servicers to give their borrowers notice of the transfers. As a result, borrowers continued sending their loan payments to their old servicing company, and the new servicer didn’t properly apply the payments. Luckily, there are now strict notice requirements lenders must follow.
That said, if your loan servicer changes, it’s still a good idea to double-check some things. Make sure your principal balance is listed correctly, your most recent payment was properly applied, and the escrow account balance is accurate. You’ll also want to make sure that any expenses that are paid from your escrow account — such as property taxes — are paid on time.
What To Do if You Have Problems With Your Servicer
If you have a problem with your mortgage servicer, it’s usually best to contact them directly, to try to resolve the matter. You can call them or send a letter. If that doesn’t solve the problem, you can file a complaint with the Consumer Financial Protection Bureau (CFPB). If your loan servicer is a bank, you can also try filing a complaint with the Office of the Comptroller of the Currency (OCC).
There are new CFPB rules that help prevent mortgage servicers from unnecessary foreclosures. Recent amendments to the Real Estate Settlement Procedures Act (RESPA) require mortgage servicing companies to contact borrowers through a live method of communication — like a phone call — to discuss loss mitigation possibilities within 36 days after the account becomes delinquent. Servicers must also provide written notice within 45 days of the first delinquency.
These new rules prevent loan servicers from starting a foreclosure until the loan has been delinquent for more than 120 days. They also outlaw the practice of dual tracking, where a servicing company works with you on loss mitigation options while simultaneously pursuing a foreclosure.
Mortgage lenders and mortgage servicers each serve different roles related to your home loan. While lenders primarily focus on initiating new mortgage loans, servicers primarily focus on administering existing loans. This division of labor is more profitable and practical for lenders and, in theory, more efficient for all parties. Past problems with the mortgage servicing industry have come to light over the last 10–20 years. State and federal lawmakers have since taken actions to help ensure that the mortgage servicing process is safe and reliable for borrowers.