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What is a Loan Servicing Agreement?

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  • Written By: Staci A. Terry
  • Edited By: Angela B.
  • Last Modified Date: 19 November 2016
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A loan servicing agreement is a written contract between a lender and a loan servicer that gives the loan servicer the authority to manage most aspects of a particular loan. Although the lender or financial institution remains a party to the original loan agreement, the loan servicer handles the day-to-day administration of the loan. As a result, the borrower typically deals directly with the loan servicer — not the lender — regarding repayment of the loan and other contractual requirements. For instance, a loan servicer may accept payments on behalf of the lender, and may ensure that the loan remains compliant with all applicable laws and regulations.

A loan servicer is not a party to the original loan. Rather, a loan servicer becomes involved with administration of the loan after the parties have executed all loan documents and closed on the loan. At that point, the lender enters into a loan servicing agreement with the loan servicer, who is then responsible for administering the terms of the loan on behalf of the lender.

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Some lenders choose to enter into a loan servicing agreement to avoid the hassle of managing the practical aspects of the loan. Lenders often pool a certain type or class of loans and contract with a loan servicer to handle those loans. In other circumstances, the law requires a lender to enter into a loan servicing agreement with a licensed loan servicer. When a loan transaction involves multiple lenders or parties, for example, the law typically requires a loan servicing agreement. Likewise, many government loan programs require the use of a loan servicing agreement by participating lenders.

A loan servicer’s authority pursuant to a loan servicing agreement tends to be fairly expansive. So long as the loan servicer complies with all relevant laws, the loan servicer can accept payments, monitor the borrower’s compliance with the loan terms and, ultimately, take loan payment collection action when a borrower has defaulted on his or her loan obligations. A loan servicer will deal with a borrower’s failure to make loan payments as agreed, a borrower’s failure to obtain the requisite insurance for collateral or property items that secure the loan, and any other failing of the borrower to adhere to the original loan terms. The exact scope of the loan servicer’s authority, of course, is limited not only by law, but primarily by the terms of the loan servicing agreement itself.

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nony
Post 3

@SkyWhisperer - My first loan was an FHA loan. These loans are ideal for first time home buyers but there is a lot of extra fine print and red tape.

So by law it is mandated that loan servicing companies help in managing these types of loans. The bank doesn’t want to get bogged down in the paperwork, and I can certainly understand that. Government regulations change so often that it’s better to have a dedicated loan servicing company that can stay on top of the current rules.

SkyWhisperer
Post 2

@David09 - Well, I think they don’t want to mess with the potential pitfalls of loan management. For example, what happens if the borrower defaults? This is the ugly side to mortgage management and I think that they would rather have loan servicing companies do that stuff.

They’re kind of like collection agencies in that sense. I suppose a fee is collected by the loan servicing companies to render the service. I certainly don’t think it’s done for free.

David09
Post 1

Sometimes you get a letter in the mail saying that a new servicing company will handle the mortgage servicing of your company. This can happen very fast, actually.

Shortly after I got the loan on my second house I got a letter in the mail saying that a new company would handle the servicing for me. The letter made it clear that there would be no changes to the terms of my loan; only that someone else would be handling the collection of payments and so forth.

I was given contact information and stuff if I had any questions. I had always found this practice a little weird until I read this article, and understood that mortgage companies don’t want the hassle of collecting payments. It makes sense I think.

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