Servicing Transfer After You Buy a Note: Hello and Goodbye Letters

After you buy a note, the borrower has to be told in writing who now holds the loan and where to send payments. The trade does this with two letters: a goodbye letter from the seller or the old servicer, and a hello letter from you or your new servicer. On a residential mortgage loan, federal rules under RESPA set the timing and contents of those notices, and TILA can require a third notice from you as the new owner. Notice is not the same as consent, a point covered in borrower approval when a note is sold.

This page is the buyer’s checklist for the handover. The seller’s side of it, and what does and does not change for the payer, is in what happens to your payer after you sell.

Three notices, not one

“Hello and goodbye letters” gets used loosely. On a home loan there can be three separate notices, set off by different events.

If you buy a note and keep the existing servicer, servicing has not changed hands, so the hello and goodbye letters may not be needed, though the new-owner notice still can be. If the seller collected the payments and you hire a servicer, ownership and servicing change together, and the letters should be drafted as a set so the borrower hears one consistent story.

Whether these federal rules reach a particular private note turns on the type of loan and the parties, and there are exceptions. The wider picture is in the servicing rules note owners must follow. Ask your servicer or attorney which notices your purchase requires. Where none is strictly required, send the letters anyway, because a borrower who does not know where to pay is the commonest cause of a missed first payment.

Timing under RESPA

For loans covered by Regulation X, the general timing runs like this:

• The goodbye notice goes out at least 15 days before the effective date of the transfer.
• The hello notice goes out no more than 15 days after the effective date.
• The two can be combined into one notice, sent at least 15 days before the effective date.

The regulation allows different timing in a few situations, such as a transfer that follows a servicer being terminated or failing. The new-owner notice under Regulation Z runs on its own clock: within 30 days of the date you acquire the loan.

The 60-day protection for the borrower

A borrower who sends a payment to the old servicer just after a transfer is protected. For the 60 days that begin on the effective date, a payment that reaches the old servicer by its due date, instead of the new one, cannot be treated as late for any purpose: no late fee and no late report. The old servicer has to pass it on to the new servicer or return it to the borrower with the correct address.

Build the same protection into a private purchase even where the rule does not apply. Have the note sale agreement oblige the seller to forward any payment that reaches them after closing within a stated number of days, and do not charge the borrower for a mix-up the handover caused.

What each letter should say

The goodbye letter

• The date the transfer takes effect, and the last date the old party will accept payments.
• The new servicer’s name, address and a toll-free or collect-call phone number.
• A contact at the old party who can answer questions about the transfer.
• A statement that the transfer does not change the terms of the loan, apart from servicing matters such as where to pay.
• Whether any optional insurance paid through the loan is affected, and what the borrower must do to keep it.

The hello letter

• The same effective date, and the first date the new servicer will accept payments.
• The new payment address, the ways to pay, and the amount and due date of the next payment.
• A phone number and contact for questions.
• The same statement that the loan terms are unchanged.
• What happens to an automatic bank draft the borrower had set up with the old party.

The notice of new owner

This one identifies you as the owner: your name, address and phone number, the date of transfer, an agent who can act for you on payment questions (usually your servicer), and where the transfer of ownership is recorded or may be recorded. Regulation Z lists further items, and a servicer’s standard template should already cover them. Check it against the current rule before your first purchase.

A worked timeline

Illustrative dates and round figures. You agree to buy a note with a $60,000 balance and a $575 monthly payment due on the 1st, with a 10-day grace period. The seller has collected every payment personally. Closing is set for March 10, and the transfer takes effect April 1, the start of a payment cycle.

Choosing an effective date at the start of a payment cycle, as here, keeps the split clean. A mid-cycle date is where payments go missing and balances stop agreeing. If you are lining up the servicer for a note you found through the buyer list, start this calendar the day your offer is accepted.

Mistakes that cost a buyer money

• Letters that disagree. Different effective dates or payment amounts in the two letters invite the borrower to ignore both. Have one party draft the pair.
• Letters that look like a scam. A borrower who has paid a neighbor for ten years may take a letter from an unknown company for fraud. A call from the seller before the letters arrive settles most of that.
• A wrong starting balance. Check the boarded balance and next due date against the payment history before the first statement goes out, because an error repeats in every statement after it.
• Forgotten escrow money. If the seller held funds for taxes or insurance, they have to be accounted for and moved at closing, and the borrower told who now pays those bills.
• The insurance policy. Have the insurer show you, or your servicer for you, as mortgagee or loss payee on the hazard policy, or a claim check may name the seller.

Most of this is the boarding work in what a loan servicer does for a note investor, so pick the servicer before you bid. Ask the seller early who has been collecting, because that answer tells you who has to sign the goodbye letter.

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