Sometimes people with student loans, mortgages, and auto loans get a letter in the mail that their loan has been transferred to a new lender. This can be a surprising letter to receive in the mail, but it happens for important reasons and should not be a major stress to you or your finances.
Why Loans Move
Whenever a bank accepts a deposit from you, whether in a checking account, savings account, certificate of deposit (CD), or otherwise, the bank records the deposit as a liability on its balance sheet. Federal banking regulations allow the bank to loan out the majority of those balances in the form of student loans, business loans, personal loans, auto loans, or just about any other type of loan you can think of. However, a portion of those balances must be held to return to their customers when they want to make a withdrawal. This cash balance that the bank must maintain is called the reserve requirement.
When banks want to make more loans than their reserve requirement allows, they can sell those loans to other banks, financial institutions, or investors to free up capital. This also offloads the risk of defaults from the bank, so some banks sell loans to reduce risks such as those from the Great Recession.
When a bank sells a loan, it gets a payment for the outstanding loan balance. In some cases, they also get a premium for future interest payments. If the loan is particularly risky, the bank might sell at a discount to avoid future loan losses. All of these are completely normal and standard banking activities used by bank executives to manage their balance sheet and risk.
Student Loan Transfers
I am no stranger to student loans, and have made many student loan payments. I graduated with roughly $40,000 in student loan debt, and all of that debt started its journey through Citibank. Citibank is one of the many government approved processors for federal student aid, in my case Stafford Loans.
For each of my loans, four in total, the loans were initially serviced and issued by Citibank, though like all federal loans were government backed. At one point or another each of my loans was sold to the United States Department of Education and servicing moved to Great Lakes Student Loans. In this case, I stopped making payments to Citibank and started making payments to Great Lakes, the loan servicer.
If your loans have been sold or moved, it likely has nothing to do with you personally. The government regularly buys large numbers of student loans at a time from major banks and loan issuers to help increase bank liquidity. As the government was already backing the loan, there is no risk to the bank in the event of default, but managing student loan portfolios takes a lot of resources, so many banks are happy to unload them when the opportunity arises.
Mortgage Loan Transfers
I have had three mortgages in my life, and two of them were sold to another entity. Banks commonly sell loans to one of the major regulated mortgage agencies, Fannie Mae and Freddie Mac. Fannie and Freddie were created by congress to help manage mortgage interest rates and to help as many Americans own a home as possible.
Mortgage loans are usually in the hundreds of thousands of dollars, and it takes a lot of savings and checking accounts to cover the cash the bank has to outlay for each loan. Under pressure from reserve requirements, many banks and credit unions sell all loans to Fannie or Freddie, which is where my loans ended up. My current loan is still held by the credit union who issued the loan, but they have the right to sell if they choose.
In these cases, my original bank still serviced the loan, so my payment went to the same place as before. Nothing changed for me other than a letter in the mail. However, it is not uncommon to have to make your payments to a different servicer after the loan is sold.
What To Know About Your Loan Transfers
- Your loan terms are the same. You owe the same amount each month and you are legally bound by the same promissory note that you signed to start your loan.
- If you are set up for auto-pay, you may need to set up your payments again for the new servicer. If the loan is still serviced by the same bank, you do not need to make any changes.
- If you are making payments through your bank’s bill pay, you will need to add the new servicer so your payments are received by the right institution if your servicer changed.
It is critically important for your credit that you update all of your information and set up payments for the new lender if your payments are going to someone else. A late payment because your auto pay sent your payment to the wrong bank is not a good enough excuse to keep it off of your credit report.
Have you had to deal with loans moving in the past? Was it a mortgage, student loan, car loan, or something else all together? Please share in the comments.
Originally posted September 27, 2010. Refreshed June 1, 2015.
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