Financial institutions sell loans (debt) all the time. In fact, over the life of a long-term loan—like a 30-year mortgage—it might be sold half a dozen or more times! For borrowers like you, this mostly means a little more paperwork to keep track of; however, if you’re not paying close attention to this transition, it can cost you in late payment fees and a mark on your credit report.
Read on to learn all you need to know about what happens when your loan is purchased by another lender or company, or changes servicers.
How it works
Selling a loan to another financial institution, company, or group of investors is a business move for lenders. Selling loans provides a lender money, called liquidity, to make new loans to other people. They usually receive the principal balance of the loan (the amount they original lent out to the borrower), plus a premium based on a portion of the future profits derived from the loan over its life (i.e. the interest it earns for lenders).
When a loan is sold, the lender, or owner, changes, although the servicer of the loan may remain the same. Or the loan servicer may change even if the lender does not.
The lender is the financial institution or company that approves, funds, and owns the loan. They assume the risk if a borrower defaults and they make a profit from the paid interest. The servicer is the company that manages the loan: collecting and processing the borrower’s payment, handling communications with the borrower, paying taxes and insurance from escrows for mortgages, and calculating monthly payment amounts. At first, the same entity will be both the lender and servicer, but that can later change as the loan is sold or when the owner no longer wants the responsibility of managing the loan day in and day out.
Once a loan servicer, and possibly the owner too, has changed, where does that leave lenders like you? What changes? What stays the same?
How it affects you
Lucky for borrowers, a change in servicer or lender won’t change the general terms of your loan. The interest rate, current repayment plan, and any postponement in use will stay the same. If you were still in the middle of applying for a loan postponement, discharge, or forgiveness for student loans, you might need to apply again through your new servicer.
Your monthly payment amount may change, but only slightly, as your new loan holder calculates your payoff time frame.
It may take up to 60 days for the transfer to take place following a change in your loan servicer. By law, you must receive two letters notifying you of this change: one from the old loan servicer and one from the new. Your old servicer should send their notice at least 15 days before the loan’s servicing rights are transferred, and your new servicer should send their notice to you within 15 days after the servicing rights are transferred, unless of course it was combined with the first notice.
The letter from your older servicer will include information about the new servicer: telephone and contact numbers, effective date of the loan’s assignment or transfer, date your current servicer will stop accepting payments, and date new servicer will start accepting payments. The letter from your new lender should include information on how to create an account and make payments.
Review these letters carefully. If there are any errors, notify the sender as soon as possible. There is a period of 60 days after the date of transfer when your new servicer cannot charge you a late fee or treat a payment as late if you sent it to your previous servicer on time.
If you receive a notice from a new servicer without notification from your current servicer, don’t send them any money. Contact your current servicer and ask about the transfer status of your loan. It’s possible the notice was fraudulent, and your loan has not changed hands.
If you’re using any type of automatic payment system, your payments won’t be automatically transferred. You will need to create an account and re-enroll with the new servicer to make payments through them.