I hope I will explain this correctly, this is how it has been explained to me...
Existing loan is up for renewal; during its last term, it was placed on a non-accrual status. Now the loan is no longer a workout and can now be treated as a “regular†transaction but the customer cannot pay off the nonaccrual, or deferred, interest. However, the borrower is willing to establish a repayment plan. To document this repayment plan, we will originate two loans to replace the “old†loan. The first will be for the principal (primary loan), the other will be a 0% interest rate for the nonaccrual, or deferred, interest.
The reason we do this is because in TN we do not have to forgive the interest that is accumulating on a loan when it is in nonaccrual status. If the customer is unable to pay it outright, we will allow monthly payments for payback but will not include it in the primary loan so that we do not earn interest on top of that deferred interest.
Does that help?
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