Rights When Your Home Mortgage Loan is Sold and Assigned to Another Lender

The practice of selling or transferring the servicing of your loan is very common in the mortgage industry and your mortgage servicing can be transferred more than once during the life of your loan.

Individuals who deal with lenders directly in order to obtain a loan for a home as opposed to using a mortgage broker typically will discover that their lender will soon sell their loan after the close of escrow for the purchase of the home or refinance of the existing loan.  Prior to close, the borrower must receive documentation from the lender advising of many matters including the fact that the loan may be sold or transferred by the lender at any time after the escrow closes. The escrow officer must make sure that the borrower signs and dates such a disclosure at escrow’s close and that all documents are fully explained.

Whether or not a borrower has any rights to object to and perhaps stop an assignment of his loan for servicing or ownership depends entirely upon the written agreement between the borrower and the lender for the loan. Simply put, if the written documents do not prevent the lender from selling the loan to the borrower and its servicing rights, the borrower has no rights to stop the transfer and assignment. On the other hand, if the loan agreement states that the lender will not transfer and assign the loan and its servicing rights with the borrower, the borrower can object to its transfer and bring a legal action to stop.

From a practical point, lenders rarely have any provisions in their loan agreements with the borrower agreement not to transfer and assign the loan.

The real issue concerning many transfers and assignments of loans typically raised by borrowers pertain to the need to know that if they are not paying their monthly mortgage payments to the financial institution that loaned them the money to buy their home they are not being defrauded by some person claiming that they now own the loan when in fact they do not. This is a genuine concern but it pertains to the sale of the servicing rights of the loan rather than the sale of the mortgage. Custom and practice in the lending industry is that when a lender makes a loan, it has two assets to sell. The first is the actual loan while the second is the right to service the loan for a servicing fee. The servicing fee is typically one-quarter percent (1/4%) of the total interest rate paid by the borrower.

The lender may sell the loan and the servicing fee to the same buyer; it may divide up the assets for sale to two different buyers, or the lender may sell the loan and retain the servicing rights to the loan. The keeping of the servicing rights of the loan is typical with large financial institutions. When this happens the borrower makes the payments to the lender that made the loan even if the loan is sold because the original lender is servicing the loan for the new entity that now owns the loan.

The danger of the borrower mailing the monthly payments for the loan comes about from the sale of the service rights as opposed to the sale of the loan. Since servicing rights to a loan are bought and sold routinely in the lending industry, the borrower may find himself or herself asked to send their monthly payments to a new servicing agent.

The other major concern with respect to the sale and transfer of a loan by the initial lender is that the new owner of the loan or servicing rights has less discretion to assist a financially troubled borrower who may have payment problems due to poor health or loss of a job. Servicing providers of loans do not own them and must follow the instructions of the loan’s owner in dealing with borrowers who are having financial problems. Ultimately it is up to the owner of a loan to make the decision to assist a financially troubled borrower. Given these difficult economic times assistance by lenders to borrowers who need loan modifications on their obligations is becoming more and more difficult due to the sheer numbers of people needing assistance.

Understanding Mortgage Loan Transfers: Case Studies

Case Study 1: The Unexpected Loan Assignment

Mr. Anderson obtained a home loan from Lender A to purchase his dream house. Shortly after closing the escrow, Mr. Anderson received a notification that his loan had been sold and assigned to Lender B. Despite feeling uncertain about the sudden change, Mr. Anderson had no grounds to object because his loan agreement did not include any provisions preventing the transfer.

However, he still had concerns about the authenticity of the new lender and the potential for fraud. In this case, the sale and transfer of the loan’s servicing rights were a significant source of unease for Mr. Anderson.

Case Study 2: The Confusing Servicing Agent

Ms. Roberts had been making regular mortgage payments to Lender C, the original lender, for several years. However, she received a letter stating that the servicing rights of her loan had been sold to a new servicing agent, Agent D. Ms. Roberts found herself confused about where to send her monthly payments. She had to navigate the complexities of the loan servicing industry and ensure her payments reached the correct entity. The sale of the servicing rights highlighted the importance of staying informed about changes in loan administration.

Case Study 3: Limited Assistance for Financially Troubled Borrowers

After experiencing a job loss, Mr. Johnson, a borrower with Lender E, found it challenging to make his monthly mortgage payments. However, when he reached out to his loan servicer, he discovered that the new owner of his loan had stringent guidelines for assisting financially troubled borrowers. Lender E, the original lender, no longer had the authority to make decisions regarding loan modifications. As a result, Mr. Johnson faced difficulty in receiving the support he needed during challenging economic times.