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#200347 - 06/15/04 03:26 PM Order of application of a payment
Gregk Offline
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Are there any regulations that cover how a loan payment on a consumer loan is applied? We generally apply first to principal then to interest and late charges. There is a move afoot to now begin taking late charges first. Is this legal and proper?
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#200348 - 06/15/04 03:35 PM Re: Order of application of a payment
Lestie G Offline

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You may not pyramid late charges (charge late charges on late charges) - so most banks post interest first, then principal, then late charges. That usually ensures that the payment due date is advanced, keeping your system from charging another late charge on the portion not paid.

Have you checked your system to see how it will handle situations where the borrower pays the whole payment amount, but not the amount of the late charges?
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#200349 - 06/15/04 03:48 PM Re: Order of application of a payment
Gregk Offline
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Under our current system, if a payment is not sufficient to cover the late fee, the late fee is just accrued until a payment larger than a regular installment is paid. The idea behind the change is to increase fee income in the short-term. If a payment was not sufficient to cover the late charge addition, the change would result in partial payments still being due and late fees being assessed on those as well.
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#200350 - 06/15/04 03:56 PM Re: Order of application of a payment
Lestie G Offline

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Quote:

If a payment was not sufficient to cover the late charge addition, the change would result in partial payments still being due and late fees being assessed on those as well.




I think that would be viewed as pyramiding. Other opinions?
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#200351 - 06/15/04 03:59 PM Re: Order of application of a payment
Dan Persfull Offline
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Quote:

the change would result in partial payments still being due and late fees being assessed on those as well.





Then you have a problem. IMO this would be pyramiding the late charges that Lestie referred to. You also will want to check your state laws, they may have specific requirements for payment application.
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#200352 - 06/15/04 04:02 PM Re: Order of application of a payment
Gregk Offline
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I may have misspoke: A late fee is accessed only once and only against the regular installment payment-not against other unpaid installments that may be due.
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#200353 - 06/15/04 04:09 PM Re: Order of application of a payment
Andy_Z Offline
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Check your note forms. It should be disclosed there how you apply funds. As noted above it may well say, interest, principal and fees, in that order. If so, that is your contractual agreement to date.
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#200354 - 06/15/04 05:19 PM Re: Order of application of a payment
Sinatra Fan Offline
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Quote:

Check your note forms. It should be disclosed there how you apply funds. As noted above it may well say, interest, principal and fees, in that order. If so, that is your contractual agreement to date.




Exactly. And then check your computer system to make sure the payment processing logic agrees with the terms of the note.
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#200355 - 06/16/04 12:05 AM Re: Order of application of a payment
Andy_Z Offline
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Steve, you insinuate there could be a difference. Well, how could that happen? That would be akin to not adjusting ARMs on schedule.
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#200356 - 06/16/04 12:48 PM Re: Order of application of a payment
Sinatra Fan Offline
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Andy, I learned this one the hard way. When I first began working at one job, I discovered that some of the ARMs were not correctly coded on the computer system. Eventually, I had to pull every single ARM loan file from the vault, match the note to the computer, and make any necessary changes. And I couldn't even yell at the people who made the mistakes, because they had left before I got to the job.
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#200357 - 06/16/04 02:02 PM Re: Order of application of a payment
Andy_Z Offline
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Experience is a wonderful tool.

I recall hearing too about banks that changed interest accrual methods to increase earnings. It is easy on the systems, but hard when you realize they were stated in the contract, and you can't just do a unilateral change on that.
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