Apply Prepayment Penalty Fee
Overview
Prepayment Penalty Fee is a fee that a lender may assess when a borrower repays the loan before the scheduled maturity date or repays more than the due at that point in time.
Q2 Loan servicing system can define and configure prepayment penalties at the product level so that the system applies the defined charge on partial and complete payoff as per slabs defined at the product level based on the completed tenure of the deal.
For the lenders who charge a penalty (fee) to their borrowers when they do a pre-payment or a pre-closure of the loan, Q2 Loan Servicing lets you define a Prepayment Penalty Fee with a slab-based capability. You can define the Prepayment Penalty Type fee on the product as well as contract and define the calculation logic that needs to be applied to the loan whenever there is a pre-payment done on the loan by the borrower. You can create time-based slabs for which you want to charge the borrower for any early payments and the amount of charge that must be paid by the borrower in that case. You can also create amount-based slabs.
The calculation logic can be both flat and the percentage and the reference amount for the calculation can be selected from a number of values like Prepayment Amount, Payoff Amount, and more.
For example, in the following example depicted, the scenario is basically when the borrower tries to make an early payoff on the loan. The time slab has been defined with 0 as the Lower Limit and 3 as the Upper Limit, and a Value of 20. The calculation type is Percentage and the Calculation Amount Reference is the Payoff Amount. What that means is that if a borrower tries to do a prepaid payoff within 0 to 3 years of opening the contract, the system would create a charge equal to 20% of the payoff amount at that point in time. And in case the payoff is done after 3 years, there would be no charge levied on the borrower. The lender can also add more slabs for subsequent periods with different rates as well. Also, the period is calculated from the disbursement date. The Lower Limit is inclusive and Upper Limit is exclusive. So, in this example, it is just less than 3 years.
When is a Prepayment Penalty Fee charged or applied?
Prepayment Penalty Fee is charged in the following scenarios:
When you try to record a payment transaction that is more than what is due at that point in time,
When you record a future-dated payoff transaction on a loan.
Prepayment penalty calculation at the time of normal pre-payment
When there is a prepayment fee defined on the loan contract, and if you try to record a payment transaction that is more than what is due at that point in time, the system would immediately calculate the pre-payment charge that would be applied to that contract. As soon as the payment transaction is cleared, the system would create charges of the prepayment penalty type on the loan, leaving it in an unpaid state, which can be paid separately, included with the next bill, or waived off.
Prepayment penalty calculation during an early payoff
If you try to record an early payoff transaction on a loan, on which the prepayment penalty is defined, the system will show you the calculated prepayment penalty amount on the screen, which would have to be paid off along with the payoff amount. As soon as the payment transaction is cleared, the system creates prepayment charges in the paid state.
Prepayment penalty calculation during a future-dated payoff
If you try to record a future-dated payoff transaction on a loan, on which the prepayment penalty is defined, the system will show you the calculated prepayment penalty charge amount on the screen, which would have to be paid off along with the payoff amount.
Define a Prepayment Penalty Fee
You can create a Prepayment Penalty Fee in the Servicing Configuration > Fee and Tax Setup... > Manage Fees.
For more information on defining a fee, see Fees Management > Define a Fee section of this guide.
Add or Update Prepayment Penalty Details: Configuration and Slabs
You can add a new Payment Penalty Configuration or update an existing Prepayment Penalty Configuration after creating a Lending Product by editing the Prepayment Penalty Details section of the Lending Product.
Prerequisites
- A Prepayment Penalty Fee is included in the attached fee set.
Steps
Log in to your Salesforce account.
In the Lending Product, scroll down to the Prepayment Penalty Details section, and then click Edit.
Click Create Configuration.
Alternatively, if the details are already existing, you can start editing the existing details.
Note:You can have only one Prepayment Penalty Configuration for each Prepayment Penalty Fee in the Fee Set.
In the Prepayment Penalty Fees subsection, select the required Fee Name if there are multiple Prepayment Penalty Fees. If there is only one fee, then it will be used by default.
In the Prepayment Penalty Configuration subsection, provide the details as described in the following table and you can also refer to the image following it as an example:
Field Name Action Calculation Type
Select the calculation type that you want to use to calculate the Prepayment Penalty Fee.
The types available are:
- Fixed: Selecting this type decides that your Prepayment Penalty Slab Value is Fixed.
- Percentage: Selecting this type decides that your Prepayment Penalty Slab Value is calculated as a Percentage of the Calculation Amount Reference selected in the next field.
- Custom: Selecting this type decides that your Prepayment Penalty value is calculated using a custom class.
Calculation Amount Reference
Select the type of amount on which the percentage is to be calculated to arrive at the Prepayment Penalty Fee amount when the Calculation Type is selected as Percentage.
The types of amounts available are:
- Prepayment Amount
- Payoff Amount
- Loan Amount
- Principal Balance
Tenor Slab Type Select the type of Tenor to be used in the Prepayment Penalty Slab.
The types available are:
- Term Based
- Time Based: It is based on time rather than term.
Note:This field is applicable for the fees with Prepayment Penalty Type selected as Tenor Based Slabs.
Tenor Slab Frequency Select the frequency of tenor to be used in the Prepayment Penalty Slab for a Time Based Tenor Slab Type.
Note:You do not need to select the frequency if the Tenor Slab Type is Term Based.
The frequencies available are:
- Days
- Weeks
- Months
- Years
Note:This field is applicable for the fees with Prepayment Penalty Type selected as Tenor Based Slabs.
To add a Prepayment Penalty Slab, click Add.
Provide the details as explained in the following table:
Field Name Action Lower Limit Specify a lower limit of the slab type selected. For example, if the Slab Type is Term Based, then if you specify a Lower Limit of 2, it means that the Prepayment Penalty Fee will be charged from the second term onward. If the slab type selected is Time Based and if the Tenor Slab Frequency is Months, then if you specify a Lower Limit of 2, it means that the Prepayment Penalty Fee will be charged from the second month onward. The Lower Limit is inclusive and Upper Limit is exclusive. Upper Limit Specify an upper limit of the slab type selected. For example, if the Slab Type is Term Based, then if you specify an Upper Limit of 5, it means that the Prepayment Penalty Fee will be charged till the fifth term of the loan. If the slab type selected is Time Based and if the Tenor Slab Frequency is Months, then if you specify an Upper Limit of 5, it means that the Prepayment Penalty Fee will be charged till the fifth month into the loan. The Lower Limit is inclusive and Upper Limit is exclusive. Value Specify the amount that you would like to charge as a Prepayment Penalty Fee. For example, if the Value is specified as 500, then the Prepayment Penalty Fee of 500 will be charged on the loan for a Calculation Type that is Fixed. If the Calculation Type is Percentage, Value specified is 5, and the Calculation Amount Reference is Loan Amount, then the Prepayment Penalty Fee is calculated as 5% of the Loan Amount. Remove To delete this Prepayment Penalty Slab, click
.Click Save.
This creates the Prepayment Penalty Configuration for the lending product as highlighted in the following image:
Update Prepayment Penalty Details in a created contract
You can update the Prepayment Penalty Configurations in a Contract.
Steps
Log in to your Salesforce account.
In the Lending Product, scroll down to the Prepayment Penalty Details, and then click Edit.
Provide the details and perform the steps as explained from Step 4 onward in the preceding steps of the Lending Product.
This will update the Prepayment Penalty Configuration details in a contract.
Waive Prepayment Penalty Charge
In case you want to waive the charge that got created due to prepayment, you can always use the waive fee feature to do the same.
We support Prepayment Penalty in Payment Transactions created through UI, File, and ACH and Transaction Approval Configuration too.
For detailed information on Transaction Approval Configuration, see the Define Transaction Approval Configuration section of the Q2 Loan Servicing Administration Guide.
Example: Perform a payoff when Calculation type = Fixed and Tenor Slab Type = Time Based
Let us look at an example by performing the following steps:
- Create a Fee.
- Create a Fee Set.
- Create a Lending Product with Prepayment Penalty Config and Slabs.
- Create a Contract from the preceding Lending Product.
- Perform a Payoff on the Payment Start Date.
On making a payoff on the Payment Start Date:
- The loan Status changes to Closed-Obligations met.
- A charge of type Prepayment Penalty Fee is created.
- Payoff LPT including the Prepayment Penalty Fee gets cleared.
Fee Details
| SOD | 7/5/2013 | |
| Servicing Configuration | Prepayment Penalty Fees | |
| Fee Name | Prepayment Penalty | |
| Time of charge | Prepayment Penalty | |
| Fee Calculation Method | Fixed | |
| Amount | 500 | |
| Prepayment Penalty Type | Tenor Based Slabs | |
Fee Set Details
| Servicing Configuration | Prepayment Penalty Fee Set | |
| Fee Set Name | Prepayment Penalty Fee Set | |
| Fee Name | Prepayment Penalty | |
Lending Product Details
| Simple Loan Lending Product | ||
| FIT | True | |
| Fee Set | Prepayment Penalty Fee Set | |
| Default Interest Rate | 10% | |
| Prepayment Penalty Config | ||
| Calculation Type | Fixed | |
| Tenor Slab Type | Time Based | |
| Tenor Slab Frequency | Months | |
| Fee | Prepayment Penalty | |
| Prepayment Penalty Slab 1 | ||
| Lower Limit | 1 | |
| Upper Limit | 5 | |
| Value | 500 | |
| Prepayment Penalty Slab 2 | ||
| Lower Limit | 5 | |
| Upper Limit | 10 | |
| Value | 1000 | |
Simple Loan Contract Details
| Simple Loan Contract | ||
| Contract Date | 7/5/2013 | |
| Loan Amount | $10,000 | |
| Payment Term | 10 | |
| Payment Frequency | Monthly | |
| Payment Start Date | 8/5/2013 | |
| FIT | True | |
| Fee Set | Prepayment Penalty Fees | |
| Prepayment Penalty Config | ||
| Calculation type | Fixed | |
| Tenor Slab Type | Time Based | |
| Tenor Slab Frequency | Months | |
| Fee | Pre-Payment Penalty | |
| Calculation Amount Reference | Loan Amount | |
| Prepayment Penalty Slab 1 | ||
| Lower Limit | 1 | |
| Upper Limit | 5 | |
| Value | 500 | |
| Prepayment Penalty Slab 2 | ||
| Lower Limit | 5 | |
| Upper Limit | 10 | |
| Value | 1000 | |
Approve and disburse $10,000.
Payoff on the Payment Start Date (Lower Limit =1, Tenor Slab Frequency = Months) of the contract
Move SOD to 8/5/2013.
Perform a Payoff with Transaction amount = 10,583.33, Transaction date = 8/5/2013, as depicted in the following image:
As the payoff was done within the 1st and 5th month (Lower Limit =1, Upper Limit = 5, Tenor Slab Frequency = Months) as defined in the Prepayment Penalty Slab in the preceding steps, the system charges $500 as a Prepayment Penalty Fee, and includes it in the Payoff amount, thus displaying the Transaction Amount on the Record a Pay-Off page as $10,583.33. Hence, the Transaction Amount for the Payoff includes a Prepayment Penalty amount of $500 too.
On making a payoff
Loan Status
On making a payoff of the preceding amount, the loan Status changes to Closed-Obligations met as depicted in the following image:
Prepayment Penalty Fee Charge
As depicted in the following image:
- A charge gets created consisting of the Fee name, Prepayment Penalty, with the Paid flag marked as True.
- The fees remaining or the Total Amount Due on the charge becomes zero,
- The Paid Amount for the charge becomes $500.
Payoff LPT details with Prepayment Penalty Fees
Payoff LPT including the charge gets cleared.
A fee payment entry gets created on Payoff LPT.
More on Prepayment Penalty Fees
- You can define the Prepayment Penalty Type fee on the Lending Product as well as on the contract too.
- The Prepayment Penalty Configuration created in the Lending Product is automatically added to the contract created from it.
- You can edit the details of the configuration in the Lending Product or the Contract. On changing the details of the configuration in the Lending Product, the Contracts created after the change will be reflecting the newly updated configuration. On changing the details of the configuration in the contract, the contract will reflect the newly updated details from that time onward.
- You can have only one Prepayment Penalty Configuration for each Prepayment Penalty Fee in the Fee Set.
Validations
Following are some of the messages that the system displays when it validates certain scenarios:
| Scenario | Validation Message |
|---|---|
| While creating Prepayment Penalty Slabs, if the new Lower Limit is lower than the previous Upper Limit | The Lower Limit should be a positive value greater than or equal to the previous Upper Limit |
| While creating Prepayment Penalty Configuration, if Prepayment Penalty Type is blank on the fee | Please update the Prepayment Penalty Type on the Fee and then add the configuration |
| When an LPT of more than the due amount at that point in time is being created | You are trying to record a repayment in advance, hence Prepayment Penalty Charge(s) for <fee amount> will be created after the transaction. Please confirm and save |
On upgrade to Summer'22 release
Upon upgrading to the Summer'22 release, you need to perform the upgrade steps to migrate the old structure and behavior of the Prepayment fees to the new one.
For details on the upgrade steps, see the Spring'22 (3.8004) to Summer'22 (3.9001) section of the Q2 Product Upgrade Guide for Q2 Loan Servicing.
After performing the upgrade steps including the running of the migration scripts, the Prepayment penalty configurations and slabs are created. Also, after running the migration for the Time of Charge picklist, the picklist value of the Time of Charge field for the Prepayment Penalty Fee is updated from Pay-Off Fees to Prepayment Penalty as highlighted in the following image:
