Servicing: Overview, definition, and example
What is servicing?
Servicing refers to the management, administration, and maintenance of a financial product, such as a loan, mortgage, or lease, throughout its life cycle. This includes tasks such as collecting payments, managing records, handling customer inquiries, processing changes to the agreement, and ensuring compliance with relevant terms and conditions. Servicing can apply to various industries, but it is most commonly used in the context of loans and mortgages, where a third-party servicer may be responsible for managing the day-to-day operations of the loan.
Why is servicing important?
Servicing is important because it ensures that financial products or agreements are properly managed and that both parties (such as lenders and borrowers) fulfill their obligations. For lenders or financial institutions, proper servicing helps ensure the smooth functioning of the product, including timely payments, accurate records, and compliance with contractual terms. For borrowers, servicing provides necessary support, such as assistance with payment schedules or resolving issues related to their accounts. Efficient servicing also helps prevent defaults or misunderstandings, ensuring that the terms of the contract are followed correctly throughout its duration.
Understanding servicing through an example
Imagine a homeowner who takes out a mortgage loan to buy a house. A mortgage servicing company is responsible for servicing the loan. This includes collecting monthly mortgage payments from the homeowner, ensuring payments are applied correctly to principal and interest, managing escrow accounts for property taxes and insurance, and providing the homeowner with statements or reminders. If the homeowner experiences financial difficulties, the servicing company may also offer support, such as loan modification options or forbearance.
In another example, a company that provides a car loan may outsource the servicing of the loan to a third-party company. This third-party servicer will handle collecting monthly payments from the borrower, applying those payments, and ensuring that all necessary legal or regulatory documents are filed correctly.
An example of servicing clause
Here’s how a servicing clause might appear in a contract:
“The Borrower agrees that the Servicer shall be responsible for the collection and processing of all payments due under this Agreement. The Servicer shall also manage the account, including tracking outstanding balances, addressing payment inquiries, and handling any issues related to the Borrower's account.”
Conclusion
Servicing is a critical function in the management of financial products, ensuring that both the lender and borrower adhere to the terms of the agreement. It involves a variety of tasks aimed at keeping the product or agreement in good standing, from payment collection and record maintenance to customer support and issue resolution. Proper servicing helps prevent defaults and ensures that the financial product operates smoothly over its life cycle.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.