Fee Accrual for Non-Prepaid Fees

Overview

Fee accrual is an accounting term that refers to a fee recognized on the accounting books before it is paid. This is used to track and record fees that are accumulated over a period of time but not received. This in turn helps the financial institutions to have clarity of the financial situation as the fee accrual records not only the current finances but also future transactions.

For example, if a financial institution wants to collect a fee of $120 on a contract for 12 months, an accounting entry is created every month.

So far, the fee accrual was being done only for the Pre-Paid fees. But with the Hydrogen release, it can also be done for other fees, such as Late Fees and Time of Disbursement. The fee accrued is calculated by running the Fee Accrual Job. The job either runs daily or month-end, depending on the value of the Accrual Frequency field. On running this job, the following actions take place on a contract:

• The fee accrued on that date is calculated.
• The Accrual Terms, Next Accrual Date, and Remaining Amount For Accrual fields are updated.

• An accrual entry of the type Fees is created on the Transactions tab for the difference amount of the fee accrued on that day and the sum of all the previous accrual amounts.

  Accrual Amount (on a day) = Fee Accrued (on that day) - the sum of all previous accrual amounts.

When Accrual Frequency is 
Daily, Accrual Terms = days between fee accrual start date and fee accrual end date + 1.
Monthly, Accrual Terms = months between fee accrual start date and fee accrual end date + 1.

For Daily Accrual Frequency, the Next Accrual Date = Current System Date + 1 if it is not a holiday.
For Month-end Accrual Frequency, the Next Accrual Date is the last date of the month if it is not a holiday.

Remaining Amount For Accrual = Fee Amount - Fee Accrued.

In CL Loan, you can define the manner in which the fee that applies to a contract should be accrued. You can opt for either of the following fee accrual methods:

• Straight Line
• Income Basis

Straight Line Method

In the Straight Line method of fee accrual, the fee amount is equally spread over the tenor from the fee calculation start date to the fee calculation end date of the contract. The accrued fee is calculated by using the following formula:

Example

The example explains the Straight Line method of calculating the fee accrual.

Scenario 1: The Accrual Frequency is Month-end

Consider a contract with the following details:

Scenario 2: The Accrual Frequency is Daily

The Daily Straight Line is calculated based on the number of days between the fee calculation start date and the fee calculation end date of the contract.

Consider a contract with the following details:

Income Basis Method

In the Income Basis method of fee accrual, the fee accrued over the terms is not equal, and depends on the interest accrued per term. The accrued fee is calculated by using the following formula:

Example

The example explains the Income Basis method of calculating the fee accrual.

Scenario 1: The Accrual Frequency is Month-end

Consider a contract with the following details:

Scenario 2: The Accrual Frequency is Daily

Consider a contract with the following details:

Fee Accrual Configuration

To collect and accrue a fee for a contract, you need to configure the fee by defining certain attributes such as Amount, Accrual Frequency, Accrual Method, and Accrual Required.

Prerequisites

None.

Steps

Perform the following steps to configure fee accrual for a contract:

1. Log in to your Salesforce account.
2. Click theApp Launcher.
3. Search for CL Loan, and then click it.

4. Go to Servicing Configuration > Manage Fees.

   

5. Click Define New Fee.

   

6. In the New Fee window, perform the following actions, and then click Save:

   Field Name	Action and Information
   Fee Name	Specify a name for the fee. For example, Late Charge or Time of Disbursement.
   Time of charge	Select the Time of charge either as Late Fees or Time of Disbursement.
   State	Select the State as either Active or Inactive to specify the status of the fee. A fee must be active to be applied to a contract.
   Fee Calculation Method	Select the Fee Calculation Method. This defines how the fee amount is calculated.
   Amount	Specify the fee amount or percentage to be charged. For example, if the Fee Calculation Method is Amount calculated as a percentage of the loan amount, and you want to charge 10% of the loan amount, then specify 10 in the Amount field.
   Accrual Frequency	Select the accrual frequency either as Daily or Month-end. This is the frequency at which the fee is accrued.
   Accrual Method	Select the Accrual Method either as Straight Line or Income Basis. This is the manner in which the fee applied to a contract is accrued.
   Accrual Required	Select this checkbox to accrue the fee.

Calculate Fee Accrued

After defining a fee, you need to link the fee to a product in CL Loan. You can then calculate the fee accrued for a contract associated with the linked product. This section discusses the calculation of the fee accrued for a contract.

Prerequisites

The following are the prerequisites to calculate the fee accrued for a contract:

• A fee is created and associated with a fee set.

• A lending product is created with the mentioned fee set.

• A contract is created for the mentioned lending product and the funds are disbursed.

• The Accrual Terms, Next Accrual Date, and Remaining Amount For Accrual fields are added to the Charge layout.

About this Scenario

For better understanding, the concept is being explained with the help of an example and a set of instructions on how to go about it.

• A Late Fee is created with the following terms and conditions:

  Fee Name	Late Fees
  Time of Charge	Late Fees
  Fee Calculation Method	Fixed
  Amount	$2,000
  Accrual Frequency	Month-end
  Accrual Method	Straight Line
  Accrual Required	Yes

• A Time of Disbursement fee is created with the following terms and conditions:

  Fee Name	Time of Disbursement
  Time of Charge	Time of Disbursement
  Fee Calculation Method	Amount calculated as a percentage of loan amount
  Amount	10
  Accrual Frequency	Daily
  Accrual Method	Income Basis
  Accrual Required	Yes

• A contract is created with the following terms and conditions for a lending product associated with a fee set that has the preceding two fees added to it:

  Loan Amount	$10,000
  Interest Rate	15
  Term	10
  Expected Disbursal Date	3/1/2013
  Payment Start Date	4/1/2013
  Payment Frequency	Monthly

• On March 1, 2013, the contract is approved and the funds are disbursed. On disbursal, a time of disbursement fee is created for an amount of $1,000. 

• Bill is not paid on April 1, 2013.
• On May 1, 2013, a late fee is charged to the borrower for an amount of $2,000.
• The Current System Date is May 31, 2013.

Steps

Perform the following steps to calculate the fee accrued for a contract:

1. Log in to your Salesforce account.
2. Click the App Launcher.
3. Search for CL Loan, and then click it.

4. Go to Servicing Configuration > Run Batch Jobs.

5. In the Select Job for Process section, select Fee Accrual Job, and then click Next.
6. To run the job, click Run. On running the job,
   • The fee accrued is calculated for the time of disbursement fee and the late fees.
   • Two accrual transactions are also created of the amount same as the accrued fee.
   • The Accrual Terms, Next Accrual Date, and Remaining Amount For Accrual fields are updated.

7. To view the accrued fee, Accrual Terms, Next Accrual Date, and Remaining Amount For Accrual, on the CL Contracts tab, select the required CL Contract ID.

8. Go to Transactions > Charges, select the required CHARGE ID.

   Charge Created for Time of Disbursement	Charge Created for Late Fees
   Accrual Frequency is Daily and the Term of the contract is 10, then the Accrual Terms is (305+1) = 306. As the Accrual Frequency is Daily, and the Current System Date is 5/31/2013, the Next Accrual Date is the next date of the current system date that is 6/1/2013. Charge Accrued = (Fee Amount * Interest Accrued)/Estimated Interest =$1,000 * $370.83/$700.31 = $529.53. Remaining Amount For Accrual = $1,000 - $529.53 = $470.47.	Accrual Frequency is Month-end, First Payment Date is 4/1/2013, the Term of the contract is 10, and the borrower has missed the first payment, then the late fee is accrued from the month of May and the Accrual Terms becomes 11 - 2 = 9. As the Accrual Frequency is Month-end, and the current system date is 5/31/2013, the Next Accrual Date is the last date of the month that is  6/30/2013. Charge Accrued = Fee Amount/Term = $2,000/9 = $222.22. Remaining Amount For Accrual = $2,000 - $222.22 = $1,777.78.

9. To view the accrual transaction, go to Transactions > Accruals. Two accrual entries of type, Fees are created.