Definition
The term loan servicer refers to an agency that collects monthly loan payments, provides customer support, and disburses the money collected to various parties. The organization servicing a loan receives a contractually agreed to fee for carrying out these responsibilities.
Explanation
There are a number of government-sponsored entities (GSEs) that purchase loans from traditional lenders. This allows lenders to write additional loans; thereby maintaining a robust marketplace. Private loan investors, as well as GSEs such as Fannie Mae, Freddie Mac or Ginnie Mae, oftentimes do not service the loans they purchase. Instead, the financial institutions that wrote the original loan typically retain the right to service the loan.
The duties performed by the loan service include the collection of monthly payments from borrowers and disbursing the money to a variety of agencies. For example, a portion of a monthly mortgage payment may be sent to the holder of the loan as well as the insurer of the home and local property tax authority. The loan servicer will also provide call center, payment processing, and other customer support functions. In exchange for providing these back office and customer care duties, the loan servicer will collect a fee that is normally a percentage of the loan's unpaid balance.
