Note servicing companies play an integral role in asset management. Despite this fact, many investors have a love-hate relationship with servicers. A bad one can make life miserable. A good servicer can make owning a note a breeze.
What Do Note Servicers Do?
Basically, servicers are a bridge between lenders and borrowers, servicing both performing and non-performing notes. They provide invaluable assistance to lenders by communicating with borrowers on behalf of the lender.
Because of this, servicers must be licensed to operate and have keep updated licensing in specific states. Different servicers operate in specific states. Some will not deal with specific states due to licensing and state regulatory limitations.
Servicers also handle the financial aspect of note management. They send out monthly payment statements to borrowers. Servicers also collect escrow payments with disbursements, generate late payment notices, and track borrower payment history.
Most note servicing companies report to credit bureaus – unless the borrower is an entity. They handle tax recordation and issue IRS 1099 forms to lenders and 1098 forms to borrowers annually.
From the borrower standpoint, loan servicing companies are the main communication conduit to their lender. Servicers log communication to borrower on behalf of the lender.
If a borrower stops paying on a note, servicers can generate late notices, send a door knocker (a person who visits a property and asks why the borrower is not paying), perform occupancy checks, and assign asset managers to provide direct assistance to lenders.
Who Are Asset Managers?
An asset manager is an individual assigned by the loan servicing company to handle communication between borrower and lender. They know the ins and outs of specific day to day happenings with a note.
Asset managers can provide suggestions about what to do with non-performing loans, answer questions about loan status, and review call logs between them and the borrower. Keep in mind, with performing loans, where the borrower is paying on time – there may not be much communication with the asset manager.
Once you have a note with a specific asset manager, it’s a good idea to reach out to them monthly. Schedule a five or minute conversation to check in on the status of your note. This is a great way to build a good rapport and develop a solid working relationship.
Most servicers have online portals which allow to you see their communication with borrowers and review statements and letters. You can set up a one-on-one session with your asset manager or loan servicing representative to show you how to use the portal.
Familiarize yourself with the servicer’s portal. We recommend visiting the servicer portal weekly to check in on the status of your note.
Do Servicers Make Decisions About Notes?
Ultimately, lenders are responsible for the proper management of their note. Note servicers only completed activities that the lender requests.
Servicers can assist with drafting loan modifications, forbearances, demand letters, payment plans, managing borrower bankruptcies relevant to note repayment. However, these activities are only initiated with lender approval.
Can You Service Your Own Note?
Yes, you can. But, self-servicing can be risky. To succeed at this, you must understand the regulatory aspect of the note industry and be able to handle the legal aspects of note management. If not, we highly suggest that you use one of the many licensed note servicing companies.
Setting Up With A Servicer
The generalized forms needed for set up may vary by servicer. However, most require the following: a signed servicing agreement, W9 IRS Form, ACH form for electronic funds transfer, a signed power of attorney, and loan set up forms – which include basic information about the loans to be serviced.
It’s better to set up with a servicer before you have a note. Yes, even if you have no notes yet, get set up with a servicer prior to buying your first asset (especially in state where you intend to buy). Most servicers have no-fees to set up an account and you can hit the ground running when you finally do purchase a note.
Boarding A Note
Boarding is the process of transferring a note to a new servicer. This process can take 30-40 days and may up to 60 days. The seller’s servicer and new lender’s servicer must communicate with each other. Most servicers will not talk to a new lender without release from the note seller. Any break in this process can increase the time it takes to board.
The Boarding Process
(1) The note seller must notify their servicer of the note transfer to a new servicer
(2) The new note servicer requests digital copies of collateral files
(3) The new servicer issues a borrower Hello Letter acknowledging the transfer
(4) The old servicer issues a Goodbye Letter notifying the borrower of the transfer
(5) The new servicer assigns an asset manager to the new lender
Servicing Fees
There are boarding fees to facilitate servicer transfers. Fees will vary servicer to servicer.
Usually, borrowers do not pay servicing fees. However, lenders can write in the note itself or amendment the note and make the borrower responsible for servicing fees. In order to do this, the borrower must sign and acknowledge that they are paying the fee a lender cannot force them to pay.
The Best Note Servicing Companies
There are many servicers to choose from. No matter what company you choose, communication is key. Look for a servicer that has great customer service and responsiveness.
Understand developing a relationship with servicer is important. You want to be able to reach someone on the phone and talk to a professional who can provide instruction. Find a company you can be comfortable enough to ask questions and know you will able to get good answers.
Think about the size of your note portfolio. Some servicers require lenders to have multiple notes just to use their services. Other will allow smaller portfolios. Locate servicers that will work at your level.
As a reminder, there are state specific licensing requirements for servicers. Contact companies to see if they are available in the state in which you want to purchase notes.
