When you take out a mortgage, your lender provides the funds but may sell your loan to investors in the secondary mortgage market to free up capital for new loans. However, they can retain the servicing rights, meaning they keep managing your loan even after selling it. This practice is called “retention of servicing.”
Your loan has two separate components: the loan itself (the debt owed) and the servicing rights (the administrative tasks, such as collecting payments and managing escrow accounts). In a servicing-retained scenario, while ownership of the loan transfers to an investor like Fannie Mae or Freddie Mac, your original lender continues to handle your payment processing and customer support.
This arrangement benefits both lenders and borrowers. Lenders earn ongoing servicing fees, and borrowers experience continuity, avoiding the confusion and inconvenience of transferring to a new servicer. For example, if Neighborhood Bank sells your loan but retains servicing rights, you would keep making payments and contacting the bank as before, even though a different company owns your loan.
It’s important to understand the difference between servicing-retained and servicing-released loans:
- With servicing-retained loans, you pay your original lender, maintain your existing customer service contacts, and usually experience no changes in your payment process.
- With servicing-released loans, servicing rights are sold to a new company, meaning you must update your payment information and may face different customer service policies.
Federal law protects consumers during any servicing transfer. According to the Real Estate Settlement Procedures Act (RESPA), your current servicer must notify you at least 15 days before the transfer, and the new servicer must follow up within 15 days after assuming service. Additionally, there is a 60-day grace period where payments sent to the old servicer will be forwarded without penalty.
Your loan terms, such as interest rate and monthly payment, cannot be changed due to loan sales or servicing transfers.
For detailed explanations of mortgage servicing and related terms, you can refer to our comprehensive Mortgage Servicing guide and learn about escrow account management in Escrow Account Mismanagement in Liens.
In summary, retention of servicing simplifies your mortgage experience by keeping the same loan servicer even if the loan’s ownership changes, offering stability and convenience throughout your loan term.
For more guidance, see the Consumer Financial Protection Bureau’s resources on mortgage servicing and the Real Estate Settlement Procedures Act (RESPA).