Key Concepts of a CL Contract

The key concepts of a 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 three types of Interest rates, namely:

• Fixed for the duration of the loan

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

• Alternative Reference Rates that depend on an external calculator,

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.

CL Loan always computes the interest on the outstanding balance of the loan since the Last Accrual Date. So, if a payment is made early the number of days between the last accrual date and the payment date will be less. Hence, the interest in the payment will be less (than the frequency of the loan). Similarly if a payment is late, the number of days between the last accrual date and the payment date will be more so the interest will be more.

Typically on funding, the last accrual date is initialized to the date of the funding and it is updated every time a payment is made with the payment date.

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

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.

Alternative Reference Rate 

When you select Alternative Reference Rates as an Interest Type for your loan, the system gets an external Interest Rate by calling an external calculator through an API. The interest rate and amount calculated by the external calculator are then stored as Interest Amount and Interest Rate respectively within the Q2 Loan Servicing system. 

Alternative Reference Rates are only supported in Interest Only loans.

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 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 roll-up 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.

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.

Repayment schedule

Repayment or amortization schedule displays the schedule for the repayments to be made by the borrower and the payments made by the borrower. For more details refer to Fields Reference Table.

Prerequisites to generate amortization schedule

• The loan is disbursed.

• The Draw Amortization Schedule checkbox under Custom Settings > Org Parameters is selected.

Fields reference table

Payment structures

Payments may be structured to suit the customer’s cash flow needs. They could be of any of the following:

• EMI (Equated Monthly Installments)

• EPI 

• Step up or Step down payments: Having increasing or decreasing EMI/EPI

• Payments with Holiday Periods

• Flexible Payment Plan where user has the ability to give a fixed payment amount for the first n schedules

• Interest only payments for the first few months, followed by interest and principal repayment

This may impact the downstream loan processing for other parameters such as:

• Grace Days

• Pre-bill Days

• Fees associated with the loan

• Penalties applicable on termination

• Accounting

Equal monthly installments

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

Then, the monthly installments will as shown in the table  below:

Balloon payment at term end

Here is an example of a balloon payment made at the end of a loan term:

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

Then, the monthly installments will be as shown in the table below:

Interest only payments for initial term

Here is an example for interest only payments at the beginning of a loan term:

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

Then, the monthly installments will be as shown in the table below:

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 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 loan amount approved. There may be stipulations defined during credit approval requiring the borrower to complete a set of actions or provide a set of documents before the funds are released. The payment may be made to the borrower or a party nominated by the borrower.

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

• One Time Funding
• Funding in Tranches

One time funding

This occurs when the entire loan amount is funded to the borrower, at once.

For example, if the CL Contract details are as follows:                                                                                                    

Then, the funding transaction for the CL Contract will resemble the following details:

Funding in tranches

This occurs when the loan amount is funded in different portions to the borrower.

For example, if the CL Contract details are as follows:

Then, the funding transaction for the CL Contract will resemble the following details:

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.

Delinquency classification

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

• Payment Tolerance Rate

• Delinquency Grace Days

• Delinquency Payment Plan

• Days Past Due

Payment tolerance rate

This defines the permissible rate of the total payment due for an account to clear the dues.

For example, a Payment Tolerance Rate of 20 would mean the following:

• It is acceptable to collect 80% payment from this loan account

• The rest of the 20% of payment will be spread over a period of time, payment remains unpaid therefore the principal is higher.

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:

Lender investor

Protect product

Protect feature is setup on Lending products with an additional options to configure protect fees for automated processing. To enable this feature, lending products configuration needs to be updated or new lending products configured with protect fees.

On contracts, the protect amount needs to be updated. Prepaid fees setup is seeded for enabling protect fees.  Additional tabs display protect details for each investor by contract.

Insure lenders or investors from borrower defaults using the protect feature. Collect premiums from borrower and / or investor for insurance against partial or full default. Premiums may differ for each credit grade, loan amount or term by defining the amount for each contract. Automate processing for borrowers and investors on waiving dues, payoff and renewals.

Investor product

Lenders now have the option to receive and manage deposits from investors with fixed interest rates and term. Deposits may be received from institutions or individuals for varying terms and at pre specified interest rates. Interest may be repaid, rolled over or donated at the end of term or during the life of deposit. These deposits may be called ‘Term Deposits, ‘Fixed Deposits’ or ‘Cumulative Deposits’ in different geographies.

The introduction of ‘Deposits from Investors’ does not impact existing portfolios. To enable this feature, a new contract with record type ‘Investor Product’. Select percent of interest to be repaid, rolled over or donated on the contract. A new batch job has been introduced to process interest for investors.

New objects have been created to store investor payout transactions. Contracts are identified by record type ‘Investor Product’. There is no new category introduced for lending product for investors.

Start Date: Feb 1

Payment frequency: Monthly

Term 4

Interest Only Period: 3

Time Counting Method: Actual Days