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Charge Interest on Interest Balance of Charge-Off?

We have a customer with whom we charged off a loan and interest accrued. The principal balance is now paid and the customer is paying the interest. Can we charge interest on the interest balance of a charge-off loan?

by Richard Insley:

This sounds like a state law question which should be directed to the bank's attorney.


by Randy Carey:

Actually, all payments made to the loan have to be applied to the loan according to the legal loan contract in effect when the payment is made. The fact that the bank charged off the loan due to accounting regulations and the bank has specific accounting methods they have to use to account for any charged off recovery has absolutely no impact on the legal obligation of the borrower or the bank as it relates to the borrower's loan. All payments received should have been applied as contracted to the borrower's loan per the contract, which would then tell you what they still owe you. This is why banks have shadow accounting systems for charged off loans to account for both processes.

First published on 01/27/2019

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