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.
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.