Most people take loans to finance a real estate project, buy a vehicle, plan a vacation, or purchase personal goods. Preparing your application is vital to increase your chances of getting a loan.
Thanks to online banking, you can apply for a loan seamlessly on the go, provided you complete the documentation. Your lender appraises your loan application in terms of income, your ability to pay, and a good credit score.
In most cases, the lender will pass over your credit file to a loan servicer immediately after disbursing funds into your account. In this discussion, we explore the differences between a lender and a loan servicer. Keep reading.
Who is a Lender?
In the traditional sense, a lender is any person or institution that makes money available to a borrower to be repaid later with interest. Lenders can be banks or credit organizations granting credit to borrowers.
Who is a Loan Servicer?
As per the Consumer Financial Protection Bureau (CFPB) regulations, a loan servicer is an institution that takes over the administrative aspect of your loan facility after the disbursal. Also, your lender can be the loan servicer if they don't enlist a third party to manage your loan account.
A non-financial institution can also carry out the loan servicing task to ensure you don't delay your loan payments which can affect your credit rating.
Duties of a Loan Servicer
Typically, a loan service handles the following duties:
●Manages your loan account by monitoring and alerting you when payments are due.
●Process your installment by balancing your loan account and ensuring everything is updated.
●Send your monthly statements to your postal address or email address so that you stay on top of everything as far as loan payments are concerned.
You can also send statement requests any time of the month, though it may come at a fee depending on the company.
●Ready to answer any questions regarding your loan. Usually, such companies have a support system to respond to client concerns via chat, email, or phone.
●Collect and pay taxes and insurance charges due on the loan facility. It mainly applies to mortgage facilities.
●Manage your escrow account. However, under CFPB rules, if they make any modifications to your escrow account that increase or decrease your monthly payments, they must send you the initial statement within sixty days.
●Accept any changes in the repayment plans, forbearances, and deferments.
●Ensure compliance with the US federal requirements and all legal issues about loan servicing.
Why Lenders Prefer Enlisting The Services Of A Loan Servicer
Traditionally, your lender could advance a loan facility and manage all administrative functions such as collections, follow-up, and customer services.
However, over time, such activities are time-consuming and may affect the bank's provision of core services to its clients. Under loan servicing, a lender's role is to appraise the loan application, handle the collateral aspect and release the money to your account.
After that, the loan servicer takes over the loan administration processes. Under this agreement, the lender can cut down on costs by having a lean credit department consisting of a few liaison officers.
Case Studies of Loan Servicing
A perfect example of loan servicing is the administration of federal student loans, which currently stands at $1.75 trillion, spread across 46 million borrowers.
Currently, there are six independent loan servicers who manage the student loan. Examples include, OSLA servicing, Nelnet, Eldfinancial and MOHELA.
These institutions also process payments, and maintain all loan records on behalf of the federal government and private institutions.
For example, if you have a $600 loan, the loan servicer will track all payments up to the time you complete paying.
Another example is the mortgage debts or home loans, currently valued at over $16 trillion. Most lenders engage loan services to manage the huge portfolio and ensure a smooth loan process for the borrower.
There's no loan servicer without a lender. Both parties work together to ensure proper loan administration, processing, and overall management compliance with the law. In your loan contract, your lender should notify you that a third party will handle the administrative functions of the loan.