Subservicer: Overview, definition, and example
What is a subservicer?
A subservicer is a third-party entity or company hired by a primary service provider, often referred to as the "master servicer," to carry out specific servicing tasks related to loans, mortgages, or other financial services. The subservicer operates under the direction and guidelines of the master servicer and is responsible for handling particular aspects of the servicing process, such as managing payments, collections, account maintenance, and customer service. Although the subservicer performs these duties, the master servicer retains overall responsibility for the service relationship with the borrower or client.
For example, in the mortgage industry, a subservicer might be employed to handle the day-to-day collection of payments, while the master servicer oversees the larger administrative tasks, such as managing the loan portfolio.
Why is a subservicer important?
A subservicer is important because it allows the master servicer to delegate specific, often time-consuming tasks to a specialized company, allowing both parties to focus on their core functions. For the master servicer, hiring a subservicer can lead to greater efficiency, cost savings, and access to specialized expertise in areas such as payment processing or collections. For the client or borrower, subservicers ensure that their day-to-day interactions with the service provider, such as making payments or inquiring about account details, are handled efficiently.
Subservicers also help organizations scale their operations by managing a larger volume of accounts without the need to hire additional in-house staff.
Understanding a subservicer through an example
Imagine a company that originates and services mortgage loans. This company, as the master servicer, hires a subservicer to handle the monthly billing and payment collection process for a large portfolio of loans. The subservicer is responsible for ensuring that borrowers receive their monthly statements, collecting payments, and handling customer inquiries. Meanwhile, the master servicer is still responsible for overseeing the loan portfolio, managing defaults or delinquencies, and making high-level decisions related to the loans.
In another example, a financial institution that provides credit card services may use a subservicer to handle credit card account management, including processing payments and providing customer service, while the primary company manages the broader aspects of customer relationships and credit issuance.
An example of a subservicer clause
Here’s how a clause about a subservicer might appear in a contract or agreement:
“The Master Servicer may, at its discretion, engage a Subservicer to perform certain servicing functions related to the accounts under this Agreement. The Subservicer shall act under the direction and authority of the Master Servicer and shall adhere to all applicable guidelines and policies set forth by the Master Servicer.”
Conclusion
A subservicer plays a crucial role in delegating specific service functions to specialized third parties, improving efficiency and scalability for businesses involved in servicing loans, mortgages, or other financial products. By using subservicers, organizations can better manage operations, reduce costs, and ensure that certain tasks are handled with expertise. The relationship between the master servicer and the subservicer is vital for providing smooth and effective service to clients while allowing the master servicer to focus on higher-level management and strategy.
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.