I am thinking too hard about this I am sure, but I need someone to set me straight.

Scenario is an interest only loan. Payment due on 7/11 paid on 7/08. Since this was three days early, does the three days interest still apply to interest or should it be applied against the principal. The note says that payments are applied first to accrued and unpaid interest and other charges, and then to payment of the unpaid principal balance.

Thanks!

The note says what to do- apply it to principal. That being said, you have to make sure the system does it that way.

Does the system overpay the billing bucket (paying part of the next bill in advance) or does the system do what the note says to do?


Al

Thanks for the post, Al.

The system is not applying to principal, but showing interest due as a negative number.

I was thinking it has to do what the note says, but then I started thinking that the customer, although paying three days early is probably expecting that they are paying the interest through the 11th. I am just not sure how to approach management about this. I need to be clear on my stance before I bring it up.

For nominal amounts, it probably does not matter, but the system has to match the note (or future notes have to be modified if the system limits what can be done). If you don't make "large" loans (whatever that means), maybe you can live with the discrepancy.

I would start with the system. A billing bucket is created and when most is paid, the interest paid-to date is advanced accordingly. I say most as you probably have a de minimus built in so if the customer forgets to include the .¢¢ on their payment, the whole loan won't show as past due.

Do you have the option of changing the payment posting method to match the note? The early payment will still satisfy the billing bucket to advance the interest paid-to date, but will an early payment only advance the paid-to date to the date paid, or to the due date?

If the system won't do what the note says, then you have to change future notes to match what it will do.

Al

It looks like the system is advancing the paid to date to the payment due date for early payments.

Al, you have been really helpful, because you have given me some perspective. This is part of an audit I am working on. I think that I will try to find an instance where there are more significant amounts in question so that I can demostrate my concerns to management. My recommendation to them may just be that they need to determine whether the system and note are posting by the same method.

Just to add to Al's reply.
If you can get your system changed ( I suspect you can ) THEN
1. Make sure all types of notes have this same wording - Consumer / Commercial RE / Commercial non-RE / Residential / HELOCS / ETC.
2. Don't miss the fact that the note wording indicates, first to accrued Int then to unpaid other charges (late fees, annual fees, etc...) and lastly to principal balance

Just out of curiousity, what sort of language would I expect to see on a note that was consistent with what the system is presently doing, which is apply payments first to accrued interest and unaccrued interest to the next payment due date, then to fees, and then to principal?

How about first to interest billed, then to ..

Billed interest anticipates the accrual to the due date based on "today's" balance and interest rate. If the balance or rate changes between billing date and due date, the bill will not exactly pay interest to the due date. If either or both go up, you will be short, but not want to report the loan delinquent.

Al