Quick overview

Loan assignment and novation are common in mortgages, auto loans, business financing, and commercial loans. They change who you pay or who is responsible under a loan agreement, but they do so in different legal ways. Assignment moves the lender’s interest; novation replaces a party and forms a new contract. Understanding the difference protects borrowers from payment errors, surprise fees, and potential tax consequences.

Why this matters

In my practice advising borrowers and small businesses, the most frequent concern I see is confusion when a lender changes. People worry their loan terms will change, their payments will be misapplied, or their credit will be harmed. Those outcomes are possible but avoidable with the right steps and documentation.

Key legal differences (plain language)

  • Assignment

  • What happens: The original lender (assignor) transfers its rights and often the right to collect payments to a new lender or servicer (assignee).

  • Borrower’s position: The borrower remains liable under the original loan contract; the terms usually do not change just because the loan is assigned.

  • Consent: Most assignments do not require borrower consent unless the loan agreement or state law says otherwise.

  • Common use: Secondary-market trades, servicing transfers, portfolio sales.

  • Novation

  • What happens: The original contract is extinguished and replaced with a new contract that substitutes one party for another (for example, replacing Lender A with Lender B, or replacing Borrower X with Borrower Y).

  • Borrower’s position: If the original borrower is released by novation, they are no longer liable under the replaced contract; the new party takes on the obligation.

  • Consent: Requires agreement from all parties (original parties plus the new party).

  • Common use: Formal refinancings, assumption with lender approval, some debt restructurings.

Real-world examples (short)

  • Assignment example: Bank A sells a portfolio of mortgages to Bank B. Borrowers receive notice and begin sending payments to Bank B; their loan interest rate and payment schedule remain the same. This is a typical servicing transfer (see CFPB guidance on servicer changes) (https://www.consumerfinance.gov).

  • Novation example: A business owner negotiates to replace an original borrower on a business loan with a new guarantor and the lender agrees. All three parties sign a novation agreement that releases the original borrower and establishes a new contractual obligation with the lender.

What borrowers should watch for (practical checklist)

  1. Get written notice. Federal and state rules often require the new servicer to send a written notice before a transfer of servicing or assignment. The Consumer Financial Protection Bureau provides guidance on servicer changes (https://www.consumerfinance.gov/ask-cfpb/what-happens-if-my-mortgage-is-sold-or-transferred-en-858/).
  2. Verify account details. Confirm the new loan account number, mailing address for payments, and electronic payment routing information. Mistakes here cause missed payments and fees.
  3. Confirm loan terms. Assignment should not change interest rate, schedule, or payoff amount. If you see different terms, ask for a written explanation; that may indicate a novation or modification.
  4. Watch escrow/impound accounts. When mortgages transfer, escrow accounts for taxes and insurance must be handled correctly. Ask for an escrow balance statement and timing for transfers.
  5. Keep proof of payments. Maintain copies of bank statements, cancelled checks, or electronic payment confirmations until your loan is confirmed in the new lender’s system.
  6. Ask for a novation or release if you are being replaced. If you’re being released from a loan obligation (for example, an assumption by a new borrower), insist on a written novation agreement that explicitly releases you.
  7. Check credit reporting. If servicing or ownership changes, check your credit report to ensure payments are being reported correctly.
  8. Consult a tax advisor if you were released or debt was altered. A release of debt can be treated as cancellation of debt (COD) income under IRS rules and may have tax consequences (see IRS Topic No. 431 on cancellation of debt) (https://www.irs.gov/taxtopics/tc431).

How long does each process take?

  • Assignment: Often quick — lenders commonly process assignments in days to a few weeks. Servicing transfers usually come with a required notice period so borrowers can prepare.
  • Novation: Can take longer because it requires negotiation and signatures from all parties; timelines vary from days to several weeks depending on documentation and underwriting.

Who needs to consent?

  • Assignment: Usually only the assigning lender and the assignee. Borrower consent is not typically required unless the contract has an anti-assignment clause or state law requires it.
  • Novation: Must be agreed to by all parties — the original parties and the incoming party. A novation without the required consents won’t validly release the original party.

Common misconceptions

  • “My loan sale changes my interest rate.” Not automatically. The rate and payment schedule stay the same on assignments unless there’s an agreement to modify the loan.
  • “Assignment is the same as a novation.” Not the same. Assignment transfers rights; novation replaces a party and the contract.
  • “I don’t have to pay during a servicing transfer.” False. Continue making payments on schedule. If you don’t receive reliable instructions, get a payoff quote from your previous lender, document attempts to pay, and follow CFPB guidance (https://www.consumerfinance.gov).

When novation can create tax or legal issues

  • Release of liability: If a borrower is released via novation, the released borrower should receive a written release. The lender’s acceptance of a substitute borrower may create tax consequences for the released borrower if there is debt forgiveness.
  • Debt modification vs. novation: A loan modification (change to terms) can sometimes create taxable cancellation of debt consequences if the lender forgives principal. For tax questions, refer to the IRS on cancellation of debt (https://www.irs.gov/taxtopics/tc431) and consult a tax professional.

Sample language: What to ask for in writing

  • For assignment (servicing transfer): “Please confirm the effective date of transfer, the new account number, escrow balance treatment, and the contact for billing disputes.”
  • For novation (release): “Please provide a signed novation agreement that releases [Original Borrower] from all obligations under the [Loan Agreement dated ____], effective [date].”

Negotiation tips (from practice)

  • If you’re seeking a novation to secure better terms, present a complete financial package to the prospective lender. I’ve helped clients get novation-style releases when the incoming lender wanted to refinance the debt and the old lender accepted a payoff.
  • Use escrow and pay-off timing to prevent double payments. If a loan is sold mid-month, agree to a short grace period and get the pay-off amount in writing.

Related resources on FinHelp

When to get help

  • Contact an attorney if you’re being asked to sign a novation that releases your liability or if you suspect an unlawful assignment that violates the loan contract.
  • Call a HUD-approved housing counselor or CFPB if you have mortgage servicing transfer problems (https://www.consumerfinance.gov).
  • Consult a CPA for tax questions about debt forgiveness or releases (see IRS Topic No. 431) (https://www.irs.gov/taxtopics/tc431).

Professional disclaimer

This article is educational and reflects general principles as of 2025. It is not legal, tax, or financial advice for your specific situation. In my practice advising borrowers and small businesses, I recommend reviewing any assignment or novation document with a qualified attorney or tax advisor before signing.

Bottom line

Assignment and novation both change who’s on the hook for a loan, but in legally distinct ways. Assignment transfers the lender’s rights while leaving the borrower’s contract intact; novation substitutes parties and requires agreement from everyone involved. Clear written notices, careful verification of account details, and professional review are the best protections for borrowers during these transitions.