Key concepts of a CL contract

The key concepts of CL Contract are as follows:

Interest calculation

Interest rate is the amount charged on the principal, by a lender to a borrower, for the use of assets. Once the lender sets a maximum interest rate on a loan product, then it cannot be decreased.  The functional validation prevents decreasing the maximum interest rate for maintaining the system integrity.  However, it can be increased if required.

CL Loan has two types of Interest rates, namely:

• Fixed for the duration of the loan.

• Floating that may change during the lifetime of the loan.

The method of charging interest on a loan amount is defined in the CL contract.

Fixed interest calculation

CL Loan offers three types of fixed interest calculation methods:

• Declining Balance

• Flat Rate

• Flexible Repayment

Declining balance

This is based on the outstanding loan balance.  It is the balance of the money that remains in the borrower’s hands as the loan is repaid during the loan term. As the borrower repays installments, the remaining loan balance declines over time. The Interest is then charged only on the loan amount that the borrower still holds.

For example, if the CL Contract details are as shown in the table below:

Then, on March 6, 2015

The payment is divided as follows:

Then, on March 11, 2015, the interest accrued on the principal of 9,000 is 14.79 (Five days of interest).

Flat rate

In this rate calculation method, the Interest is computed on the original loan amount every month.

For example, if the CL Contract details are as shown in the table below:

Then, on March 6, 2015

The payment is divided as follows:

Then, on March 11, 2015

The payment is divided as follows:

Flexible repayment

This is a method in which the Interest is calculated on the reduced Principal balance, with the change in Interest rate.

For example, if the CL Contract details are as shown in the table below:

With the following Rate Schedule:

Then, the interest accrued for this CL Contract will be at

Floating rate interest

You can select the Floating Rate Index and Margin Rate percentages to be applied. When the interest rate changes, the contract needs to specify whether

• The payment amount will change

• The payment amount remains the same

The Term remains the same in either scenario.

For example, if a CL Contract has the following details as shown in the table below:

Therefore, with

The interest rate will work as follows from January 01, 2013 till a new rate is created:

• Interest Rate: 12% (Floating Rate Index + Margin Rate).

• Interest accrued from January 15, 2013 will be at the rate of 12% on the Principal remaining.

And, with the

The interest rate will work as follows from March 01, 2013 till a new rate is created:

Interest Rate: 17% (Floating Rate Index + Margin Rate)

Interest accrued from March 01, 2013 will be at the rate of 17% on the principal remaining.

Minimum interest rate and maximum interest rate

The interest rate for this contract must fall within this range.

Interest remaining

This is the interest on the CL Contract that is unpaid and accrued till the Last Accrual Date.

Interest Remaining on the CL Contract is updated when any of the following events occurs:

• A payment is made by the borrower, but the interest component of the payment is less than the total interest due on the account.

  In this case, the difference between the outstanding interest and paid interest is stored in Interest Remaining and the Last Accrual Date is set to the date of the payment.

• Any loan action that updates the Last Accrual Date. This includes actions such as Principal Adjustment, Reschedule, and Change Payment Amount. In this case, the interest accrued till the date of the action is stored in Interest Remaining and the Last Accrual Date is changed to date of the action.

Interest Remaining is not indicative, but an actual measure of the outstanding interest; which means every time the system needs to know the total outstanding interest on the account, it simply adds this value to the interest accrued.

Interest accrued

This is the interest that has accrued on the account since the Last Accrual Date. This is updated daily as part of the daily start of day job. Note that this field is indicative; which means every time the system needs to know the interest accrued it computes it and does not rely on this field, making the system fault tolerant in case of start of day failure.

Interest paid

This is a rollup field that stores the total interest paid by the borrower till the current system date.

Actual Interest

Each payment in the interest only payment is equal to the exact interest for the installment duration.

For instance, for the following loan the interest only payments will be different:

For this loan the payment in February, March and April should be different because the number of days in these months are different.

Different bills with different interest only amounts will be generated.

While creating a Contract, Actual Interest Only Payments must be selected to activate this feature.

Time counting method

There are four types of time counting methods, based on which the interest is calculated:

• Month and Days indicates 360 days per year. Each month is assumed to be of 30 days.

• Actual Days indicates 365 days per year. When counting days between two dates, for example, system counts 31 days for January and 28 days for February.

• Actual Days 366 indicates 366 days per year. This option uses 366 days for leap years and 365 for non-leap years. The repayment schedules for semi-monthly loans continue with the repayment date as 15th of every month after February 29 in case of a leap year.

• Actual/360 indicates actual number of days in a month, but the year is assumed to have 360 days.

For more information on the interest calculation methods, refer to section Defining Org Parameters in the CL Loan Administration Guide.

In instances where the CL Loan application uses Financial Calculator version 2.0, the system ignores February 29 and considers only 365 days as the actual number of days in a year.

Configuring billing cycle

A configurable billing cycle option is available for both, existing and future loans. Lenders need to reconfigure the ACHs if, they modify the billing cycle for existing loans. The options which are configurable for billing cycle are Daily, Weekly, and Monthly.

Prerequisites

The following are the prerequisites to configure the billing cycle:

• Under the org parameters, Financial Calculator Version field has to be updated to 3.

• The lender has to consult the CLI team before changing the financial calculator versions.

Example:

Based on the above example, the repayment schedule is impacted, and, under the repayment schedule tab, you can view 5 terms created with 7 weeks gap for each payment.

Types of payment

The following types of payments are available in CL Loan:

ACH (Automatic Clearing House) payment

This is a nationwide EFT (Electronic Funds Transfer) system that:

• Provides for the inter-bank clearing of credit and debit transactions

• Provides for the exchange of information among participating financial institutions

Manual payments

Your customers can make manual payments using the following modes of payment:

• Cash

• Check

• Wire

• Excess

• ACH

You can record all such payments manually in CL Loan.

Payment spread

Payment Spread defines the balance types or components to which a borrower payment is applied, and the order for applying it. The default payment spread in CL Loan is defined as Fees, Interest, and Principal. This means, when a borrower payment is received, the fee, if any, is paid up first, followed by the interest accrued, and then the outstanding principal. You can override the payment spread set up at the org level with a custom payment spread defined at the lending product or contract level.

While defining a custom spread, you can select any balance type for which a charge can be created in CL Loan. For example, you may define a custom spread as: Late Fee, Protect Fee, Interest, Maintenance Fee, Principal.

You must include Principal as the last component in a payment spread. This is because the system applies the borrower payment to the total outstanding principal and not the principal component of the current bill. Therefore, if Principal is the first component in the spread, the system continues to apply the payment to the outstanding principal on the loan till it becomes 0, and no amount is allocated towards the next component of the spread till then. This may cause the remaining components of the spread to remain unpaid till the entire principal is paid up.

For example, Principal outstanding = 5000. Bill Amount = 500 where Principal = 150, and Interest = 350, and Fee applicable is 50. Payment Amount = 550.

If Payment Spread = Fee, Interest and Principal, the payment is applied as 550 = 50 (fee) +350 (interest) +150 (amount remaining is paid up against outstanding principal of 5000), and the bill is satisfied. The principal outstanding is now 4850.

If Payment Spread = Fee, Principal and Interest, the payment is applied as: 50+500+0. Since the principal outstanding is 5000, the entire 500 is paid to attempt to clear it and interest remains unpaid. However, the bill is considered satisfied in this case too, since the bill amount was 500 and this amount is received against it. The principal outstanding is now 4500.

You also have an option to set up conditions at the contract level, based on which a specific spread must be applied. For example, you may collect fees first when a loan is in Active-Good Standing status, but may collect Interest first, if loan is in Active-Bad Standing status.

For more information on defining payment spreads and conditions, refer to section Setting Up Payment Spreads in the CL Loan Administration Guide.

When you create a loan payment transaction to record a borrower payment, you have two options to spread the amount under the different balance types:

• Manual

• Automatic

The following examples illustrate scenarios for each spread option:

Example

Payment Spread = Interest, Fee, Principal, Excess.

A bill is generated for 1400 (900+500), and the amounts payable are:

The borrower makes a payment of 1200.

Spread manually

Lender chooses to distribute the amounts as follows:

In this case, the interest remains partially paid at 700 out of the 900 that was due.

Automatic spread

The system spreads the payment amount based on the spread order defined:

In this case, the order of the spread is maintained and the principal remains partially paid at 200 out of the 500 due.

For information on creating a loan payment transaction, refer to section Payments.

Funding a loan

Funding is the payment of a part or the whole line of credit that is approved. Funding occurs through disbursal transactions.

The funding of the loan amount may be done using any of the following two methods:

• One Time Funding

• Partial disbursals

The available funds in an LOC keep increasing or decreasing, within the maximum credit limit, based on disbursements till date and the payments made by the borrower.

For example:

Available credit limit = 5000

Disbursed amount = 3000

Amount repaid by the customer = 1000

Then, available funds again become 5000 - 3000 + 1000 = 3000.

A borrower can keep drawing funds till the Draw Period specified on the contract, through multiple disbursements. Usually, the draw period is the same as the contract term of the LOC. Lenders can specify various factors to apply for the draw term and the remaining contract term, such as:

• Billing Method

• Interest Calculation method

• Payment %

Regenerating repayment schedule

Regenerate repayment schedule for a loan with funding in tranches (FIT) at any time before loan is fully funded. This typically occurs when a borrower pays interest only during the draw period. The borrower can specify the date from when they are ready to repay principal and interest. Schedules get automatically regenerated for an FIT loan when payment or disbursement happens. Principal repayment may be calculated on total loan amount or disbursed amount, in case loan is not fully disbursed, repayment schedule generated on total loan amount may result in a shorter repayment term than loan term.

For more information on Regenerating Repayment Schedule, see here.

Delinquency classification

The following features of CL Loan allow you to manage and control the delinquent status of loan contracts:

• Delinquency Grace Days

• Delinquency Payment Plan

• Days Past Due

Delinquency grace days

This is the number of days CL Loan waits before categorizing an account as delinquent.

For example, if

• The Payment Due Date was July 15, 2015 and

• The Delinquency Grace Days were set to 7,

Then, CL Loan sets the account delinquent on July 23, 2015.

Delinquency payment plan

The payments collected from delinquent accounts need not necessarily be complete, always,

Therefore, the Delinquency Payment Plan allows you to spread the remainder of the reinstatement amount in the following ways:

• Over the remainder of the loan with the date of maturity remaining unchanged

• Attach it to the end of the term, thus, moving the maturity date

Days past due

The days past due is the number of days since the last bill that has not been fully paid.

Late charge grace days

This is the number of days for which the system waits before applying late charges on the CL Contract.

Contract statuses

Following are the possible CL Contract statuses: