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#32868 - 09/16/02 02:26 PM Capitalization of Interest???
SouthoftheBorder Offline
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The South
Our Home Equity LOC plans can be accessed via checks or via ATM/Visa cards....our disclosure states that the monthly payment will be automatically debited from the associated checking account..BUT...if there is insufficient funds in the checking account the loan department wants to create a loan advance to make the auto payment.....I'm feeling uneasy about this....would 226.12(d) "offsets by card issuer prohited" come into play here?.....capitalization of interest? ....Help!

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#32869 - 09/16/02 02:35 PM Re: Capitalization of Interest???
rlcarey Online
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rlcarey
Joined: Jul 2001
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Galveston, TX
Many open-end credit lines already capitalize interest, i.e., finance charges are added to principal balance at the beginning of the next statement cylce. The real issue here is a safety and soundness issue. The bank can't automatically allow payments to the credit line be made out of the credit line. The line would never be past due until the credit line was exceeded. While I don't think that you will find a regulation prohibiting it, I think that this presents a very false picture of past-due activity and I would think that you would be criticized for it by the safety and soundness examiners.
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#32870 - 09/16/02 05:20 PM Re: Capitalization of Interest???
SouthoftheBorder Offline
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Posts: 335
The South
Since we allow advances through an ATM/VISA card, would 226.12(d) come into play since the checking account is used as a deposit account also?

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#32871 - 09/16/02 05:43 PM Re: Capitalization of Interest???
rlcarey Online
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rlcarey
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Posts: 79,293
Galveston, TX
Yes, 226.12(d) would apply and would prohibit you from excercising your right of offset against the checking account. However, I don't think that this provision applies to the scenerio that you described, since there are no funds in the checking account.
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#32872 - 09/16/02 06:29 PM Re: Capitalization of Interest???
SouthoftheBorder Offline
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Joined: Feb 2002
Posts: 335
The South
HMMMMM...so you're saying....since there are insufficient funds in the checking account whereby we cannot automatically debit for regular payment.. we can access the account by way of advancing a loan to make the minimum payment as long as we do not take funds that were intended for deposit (226.12(d)(2) ???

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#32873 - 09/16/02 06:49 PM Re: Capitalization of Interest???
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 79,293
Galveston, TX
While in theory, I don't think that it would violate the offset provisions, since you are not performing an offset against an asset account, I would encourage you to examine the fact that this process is going to have the effect of re-aging these accounts on a monthly basis and it is not in the spirit of the FFIEC Uniform Retail Credit Classification and Account Management Policy.
Last edited by rlcarey; 09/16/02 06:52 PM.
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#32874 - 09/16/02 07:53 PM Re: Capitalization of Interest???
Richard Insley Offline
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Richard Insley
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Toano, VA
As a once-upon-a-time S&S examiner, I'll echo rlcarey's warning about asset quality criticism. Your S&S examiners will NOT like this practice because it makes all loans appear to be paid as agreed, when in fact this group may already represent losses.
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