What Happens If My Mortgage Lender Goes Out of Business?
Your mortgage is safe if your lender or servicer closes. Discover how loans transfer, your terms are protected, and what you need to do.
If your mortgage lender or servicer ceases operations, your mortgage obligation does not disappear. Your home loan is typically transferred to a new servicer, ensuring the continuity of your payments and the terms of your loan. Various consumer protections are in place to safeguard your rights as a borrower.
The Role of Mortgage Servicing
To understand what happens when a mortgage company goes out of business, it is helpful to distinguish between a mortgage lender and a mortgage servicer. A mortgage lender is the financial institution that originally provides the funds for your home loan, originating the debt. This entity helps you choose a loan, processes your application, and underwrites the loan.
Conversely, a mortgage servicer is the company responsible for the day-to-day management of your loan after it closes. This includes collecting monthly payments, managing any escrow accounts for property taxes and insurance, and handling customer service inquiries. While sometimes the lender and servicer are the same entity, these roles are often separate.
Mortgage loans are frequently sold on the secondary market to investors, meaning the original lender may no longer own your loan. When a loan is sold, it is usually the servicing rights that are transferred to a new company, not necessarily the ownership of the loan itself. This is a routine practice in the mortgage industry.
How Your Loan is Affected
Should your mortgage lender or servicer go out of business, your loan terms remain legally binding and unchanged. Your original interest rate, principal balance, and repayment schedule are unaffected by the change in servicer. The primary adjustment for the borrower is simply where future payments will be directed.
The most common outcome in such a scenario is the transfer of servicing rights to a new company. Federal regulations require that borrowers receive written notification of any servicing transfer. This notice typically comes from your current servicer at least 15 days before the effective date of the transfer, and from the new servicer no more than 15 days after the effective date.
Funds held in escrow accounts for property taxes and insurance premiums are also transferred to the new servicer. These funds are protected and must be used for their intended purpose. During the initial 60-day period after a servicing transfer, payments mistakenly sent to the old servicer cannot be treated as late, preventing any penalties to the borrower.
Steps for Borrowers
When notified of a servicing transfer, borrowers should first verify the legitimacy of the new servicer’s claims. You can often confirm your current servicer by checking your monthly mortgage statement or by using systems like the Mortgage Electronic Registration Systems (MERS®) ServicerID, which tracks servicing rights. MERS assigns a unique Mortgage Identification Number (MIN) to each registered loan, which remains constant even if the loan is sold multiple times.
Maintain thorough records of all mortgage payments, statements, and correspondence. This documentation can be helpful if any discrepancies arise during or after the transfer. Retain copies of all notices regarding the transfer, along with proof of payment.
If you have automatic payments set up, you will need to cancel them with your previous servicer and establish new payment methods with the new company. The notification letters from both servicers should provide clear instructions on how to update your payment arrangements. Promptly setting up new payment methods ensures your payments continue on time.
Borrowers should also monitor their escrow account activity with the new servicer. This helps ensure that property taxes and insurance premiums are paid on time and that there are no unexpected changes to your escrow balance. Communicate promptly with the new servicer regarding any questions or concerns about your account.
Consumer Protections
Federal regulations protect borrowers during mortgage servicing transfers and when a lender ceases operations. The Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) are two laws that govern how mortgage servicers must handle your loan. These laws mandate specific disclosures and procedures for transfers.
These regulations require servicers to provide advanced notice of a transfer. The notice must include the new servicer’s name, address, and telephone number, along with the effective date of the transfer.
If issues or disputes arise during a transfer, borrowers have avenues for recourse. You can file a complaint with the Consumer Financial Protection Bureau (CFPB), a federal agency dedicated to protecting consumers in the financial marketplace. State banking or housing authorities also accept complaints and can provide assistance. Borrowers have a right to dispute errors with their servicer, and the servicer is required to investigate and respond to such disputes within a specified timeframe.