Automatic Interest Adjustment in IPT-enabled loans

How does the system adjust interest after a backdated transaction in IPT-enabled loans?

Let us see how the system adjusts interest when there is a backdated transaction in the following IPT-enabled loans:

• In IPT-enabled, capitalized loans

• In IPT-enabled, non-capitalized loans

In IPT-enabled, capitalized loans

In the case of IPT-enabled, capitalized loans, the difference in the IPTs and the interest accruals before and after a backdated transaction are stored as adjusted interests in the following fields respectively:

Example: Automatic interest adjustment for an IPT-enabled, capitalized loan after a backdated payment

Let us say a loan is created with the following terms and conditions, and it is disbursed on May 1, 2022:

Scenario: Before a backdated payment

Let us see the following initial scenario of this loan when no payment is made on June 6:

Loan Transaction Statement before a backdated payment

The Loan Transaction Statement as on June 6, 2022, before a backdated payment is as follows:

Scenario: If a payment was actually made on May 20, 2022

Now let us see what happens when a payment was actually made on May 20.

Scenario: After a backdated payment on June 6, 2022, for May 20, 2022

Now let us see what happens when a backdated payment for May 20 is made on June 6.

As observed, there is a difference in the interest amounts due to a backdated payment for May 20 made on June 6.

LPT, IPTs, and OLT

The following images display the Loan Payment Transaction (LPT), the Interest Posting Transactions (IPTs), and the Other Loan Transaction (OLT) that occurred on June 6, 2022:

LPT:

IPT:

OLT:

Adjusted Interest Calculations

• Adjusted Interest Capitalized field stores the adjusted amount till the last capitalized date, which, in this example, is June 1.

  Thus, Adjusted Interest Capitalized = Interest that would have been posted till June 1 if a payment was actually made on May 20 - Interest that is actually posted on June 1 before a backdated payment for May 20 = 222.50 - 250 = -27.50.

• Adjusted Interest Non-Capitalized stores the value from the last capitalized date till the LAD date, which is June 6.

  Thus, Adjusted Interest Non-Capitalized = Interest that would have been accrued from June 1 to June 6 if a backdated payment was actually made on May 20 - Interest that is actually accrued from June 1 to June 6 before a backdated payment for May 20 = 29.63 = 29.63 = 0

• We see that the adjusted interest amount is negative in case of a backdated payment.

We can see the calculated values reflected in the loan contract Details tab as highlighted in the following image:

Loan Transaction Statement after a backdated payment

Scenarios

Let us understand how the system behaves in the following different scenarios:

• Scenario 1: Regular payment satisfying Adjusted Interest first

• Scenario 2: Interest posting after a payment reversal

• Scenario 3: Loan Transaction Summary (LTS) after a backdated reversal

• Scenario 4: Bill generation and Reserve Amount for Next Due in the case of backdated reversals

• Scenario 5: Impact on charges in the case of backdated reversals

• Scenario 6: Payoff and loan closure when loan has a positive adjusted interest in it

• Scenario 7: Payoff and loan closure when loan has a negative adjusted interest in it

• Scenario 8: Payoff and loan closure when loan has too much negative adjusted interest in it

• Scenario 9: Backdated interest waiver

Scenario 1: Regular payment satisfying Adjusted Interest first

How does a regular payment satisfy the dues using a payment spread when there is some adjusted interest within the loan?

When a payment is made, in the Payment Spread, after satisfying any fees, as part of the interest component, the system first checks if there is any value in the Adjusted Interest Capitalized field. If there is, then the system first satisfies this value and then satisfies the Interest Posted. Thus, as soon as a payment is made, the Adjusted Interest Capitalized field has the highest priority to be satisfied (as part of the interest component of the Payment Spread) so that the system does not have to wait till the next posting to satisfy it. The Adjusted Interest Capitalized value, if completely satisfied, then becomes zero.

If the Adjusted Interest Capitalized is a negative value and when a payment is made, the system cannot satisfy this negative value and so the value remains as is.

Example: Regular payment when there is some Adjusted Interest Capitalized value within the loan

Let us say we have a loan with the following values:

• Adjusted Interest Capitalized = $10

• Principal Remaining = $1,000

• Interest Posted = $100

When a payment of $150 is made within this loan, the system spreads the payment amount to satisfy the components in the following order:

As seen in the preceding table, the regular payment first satisfies the Adjusted Interest Capitalized and then the Interest Posted and then the Principal with the remaining amount.

This updates the loan with the following values:

• Adjusted Interest Capitalized = $0

• Principal Remaining = $1000 - $40 = $960

• Interest Posted = $0

Now let us say this payment is reversed, then the loan is updated with the following values:

• Adjusted Interest Capitalized = $110

• Principal Remaining = $1000

• Interest Posted = $0

After the reversal, if another payment of $200 is made, then the system spreads the payment amount to satisfy the components in the following order:

Back

Scenario 2: Interest posting after a payment reversal

How is the next Interest Posted field value updated after a payment is reversed in a loan with interest adjustment enabled in it?

When a payment which paid the interest portion is reversed, the reversed interest portion gets added to the existing value of the Adjusted Interest Capitalized.

Thus, Adjusted Interest Capitalized not yet posted = interest posted, paid, and reversed + difference between the interest posted after backdated transaction and interest posted before it.

(Basically, the Interest Posted of the next cycle after reversal of a payment must not consider the previous cycle's already posted and paid but to be reversed Interest Posted value in it.)

Look at the following example to understand this better.

Example: Interest Posting after a payment reversal in a loan with interest adjustment enabled in it

Let us understand how the system calculates the Interest Posted value after a payment is reversed in a loan with interest adjustment enabled in it.

Let us say there is a loan of $10,000 created on January 2, 2020, with an interest rate of 10%, and Time Counting Method is Month and Days.

Then the following table represents the occurrence of events on the due dates:

Download the preceding sample excel to view the internal computations

The preceding calculations are also explained date-wise in the following table:

Back

Scenario 3: Loan Transaction Summary (LTS) after a backdated reversal

How does the Loan Transaction Statement look after the system adjusts interest in case of a backdated reversal?

To understand how the Loan Transaction Statement is updated when there is a interest adjustment due to a backdated payment reversal, look at the following example:

Example

Let us say there are the following events occurring in the system for a loan contract:

In this scenario, let us see how the values in a Loan Transaction Statement (LTS) would look like:

This is explained in the following excel:

Adjusted Interest field of the Loan Payment Transaction

When the payment of $200 is made at the end on March 15, 2020, it first satisfies the Adjusted Interest and then the remaining interest and principal amounts as per the payment spread. The Loan Payment Transaction (LPT) with the satisfied Adjusted Interest component is depicted in the following image:

As observed from the preceding LPT image, we see that the Adjusted Interest and the Interest are both of the same value of $87.50. This means that from the payment of $200, the system has satisfied the Adjusted Interest of amount $87.50 and this is part of the Interest amount in the spread, but as there is no other interest due, the Interest displays $87.50. Let us say that there was an additional interest due of $50, then the Interest field in the preceding image would have displayed $50 + $87.50 = $137.50.

Back

Scenario 4: Bill generation and Reserve Amount for Next Due in the case of backdated reversals

How is the bill generation impacted due to backdated reversals?

When a backdated reversal is made, the system generates new bills for the pending reversed amounts in the descending order beginning with the most recent bill generation date back and ending with the bill generation date immediately following the payment. To understand how the bill generation gets impacted due to a backdated payment reversal, look at the following example:

Example

Let us refer to the following image for the events occurring in the system for a loan contract:

As seen in the following image, in Transactions > Bill(s) of the contract, the bills after the reversal are regenerated with the pending due amount:

Back

Scenario 5: Impact on charges in the case of backdated reversals

How does a paid charge get impacted when a backdated reversal is performed in the system?

When a backdated reversal is done for a loan that has a defined charge, the charge that was paid by the payment gets updated as not satisfied when that payment is reversed. As the charges are capitalized, the unpaid charges get added to the loan balance.

Back

Scenario 6: Payoff and loan closure when loan has a positive adjusted interest in it

How does the loan get closed after a payoff when there is a positive adjusted interest value in the loan?

To understand this, let us look at the an example as follows.

Let us say the current parameter values in a loan contract are:

• Prinicipal Remaining (PR) = $1,000

• Interest Remaining (IR) = $300

• Interest Posted (IP)/Interest Capitalized (IC) = $500

• Last Accrual Date (LAD) = February 15

• Adjusted Interest Capitalized = 10

  Adjusted Interest Capitalized is the additional value of the interest that should have got posted in the loan contract as part of the Interest Posting Transaction (IPT) after a backdated transaction. This means that after the backdated transaction, instead of $500, the IP should have changed to $510, but as you cannot change what is already posted, the difference gets stored in the system as Adjusted Interest Capitalized.

• Adjusted Interest Non-Capitalized = 5

  Let us say, that until February 15, the Interest Accrued (IA) was $300, and because of an LAD-change event on February 15, Interest Remaining (IR) = IA = $300. Now, due to, say, a payment reversal, the IR should have got updated to $305, but as the system cannot update that value which is in a past date, it stores the difference in the values in the Adjusted Interest Non-Capitalized field as $305 - $300 = 5.

Now, let us generate a Future Dated Payoff Quote for a future date such as February 18 on the current system date, which is February 15, which is the LAD.

Then, the system computes the values on this quote as follows:

• PR = $1,000

• IR = IR + Adjusted Interest Non-Capitalized = $305

• IP/IC = IP/IC + Adjusted Interest Capitalized = $510

• IA = $28 (from February 15 to February 18)

Therefore, the total payoff amount is calculated as the sum of the preceding:

Total payoff amount = P + IR + IP + IA = 1000 + 305 + 510 + 28 = $1,843.

Now let us say the system date is February 18 and you make a pay off on this date.

Then the Payoff LPT amount = $1,843.

This amount is spread as per the default payment spread order, which is Fees, Interest, and then Principal. As Fees is zero, the payment would first satisfy the interest due posted which is $500 and then the principal remaining which is $1,000. However, to account for the remaining accrued interests such as the IR, IA, and the adjusted interests, the system creates an IPT of the type Excess PayOff.

So, the Excess PayOff IPT amount = IR + Adjusted Interest Non-Capitalized + Adjusted Interest Capitalized + IA = 300 + 5 + 10 + 28 = $343.

Thus, the total interest part that is satisfied would be Excess Payoff IPT amount + IP = 343 + 500 = $843.

After all the interest and the principal components get satisfied, the status of the loan then changes to Closed - Obligations met.

Back

Scenario 7: Payoff and loan closure when loan has a negative adjusted interest in it

How does the loan get closed after a payoff when there is a negative adjusted interest value in the loan?

To understand this, let us look at the an example as follows.

Let us say that a loan is created with the following terms and conditions:

Add a deposit to this loan with the following details:

Now let us perform the following steps:

1. Disburse this loan.

2. Move the Current System Date to March 1, 2013.

   Note:

   For IPT-enabled deposit loans, the interest is posted in the contract and in the deposit.

   Interest posted on the contract takes into account the interest posted by the deposit too, and hence, its value is the difference between the interest posted for the loan and the interest posted for the deposit.

   Interest Posted = Interest Posted on Loan - Interest Posted on Deposit.

   This updates today's payoff of the loan contract as follows:

   • Today's Payoff = $10,000 - $4,000 = $6,000.

     As the borrower has added $4,000 to deposit, the total payoff reduces.

3. Move the Current System Date to April 1, 2013.

   IPT-1 and Bill-1 get generated.

4. Move the Current System Date to April 15, 2013.

5. Create an LPT-1 with the bill due amount, which is of $1,046.40.

6. Move the Current System Date to May 1, 2013.

   IPT-2 and Bill-2 get generated.

7. Move the Current System Date to May 20, 2013.

   This updates the values on loan contract as follows:

   

   As observed,

   • Bills are generated with the following values:

     

   • Interest Posting Transactions are generated with the following values:

     

   • Loan Payment Transactions are generated with the following values:

     

8. Create a backdated LPT of $500 with Transaction Date as April 20, 2013.

   This updates the values on loan contract as follows:

   

   

   As observed,

   • Bills are generated with the following values:

     

   • Interest Posting Transactions are generated with the following values:

     

   • Loan Payment Transactions are generated with the following values:

     

9. Now do a Deposit to Loan Transfer of $4,000 with Transaction Date as May 20, 2013.

   • Loan Payment Transactions are generated with the following values:

     

   • Bills are generated with the following values:

     

   • The system updates the loan contract values as follows:

     

10. Now create an LPT of the payoff amount, which is $4,571.83 with Transaction Date as May 20, 2013.

    Due to this payoff, an Excess IPT gets created in the system and then the loan status changes to Closed-Obligations met. The parameters of the loan contract get updated as follows:

    

    • Loan Payment Transactions are generated with the following values:

      

    • Interest Posting Transactions are generated with the following values:

      

      Here, the Excess PayOff IPT is generated to account for the remaining interest that is not posted to be able to close the loan because the payoff amount has already included this amount in it.

      Thus,

      

    • Bills are generated as follows:

      

Back

Scenario 8: Payoff and loan closure when the total interest collected from the borrower is a very negative (or loan has too much negative adjusted interest in it)

How does the loan get closed after a payoff when when the total interest collected from the borrower is a very negative (loan has too much negative adjusted interest value in the loan)?

This scenario is usually because the borrower made a backdated payment that has resulted in a negative adjusted amount to be calculated in the system. When this negative amount is more than the accrued amount from the last transaction date till the payoff date, the net interest to be collected from the borrower would be negative.

To understand this, let us look at an example as follows:

Let us say the borrower makes a backdated payment of $200, then:

• Backdated LPT amount = $200

• PR = $800

• IA = $0

Let us say the total of Adjusted Interest Capitalized and Adjusted Interest Non-Capitalized is -50, then

• Adjusted Interest Capitalized + Adjusted Interest Non-Capitalized = -50

Let us say that we pay off the loan with the amount $750, so:

• Total Payoff Amount = $750

• PR = $800 - $750 = $50

• Adjusted Interest Capitalized + Adjusted Interest Non-Capitalized = -50

Then the loan gets marked for closure as the due amount (of IA + PR = 0+50 = 50) is negated by the total adjusted interest (-50), which means that the system knows that the loan is good to be closed as the due amount can be satisfied by the total adjusted interest.

Thus,

• Status = Active - Marked for Closure

Now let us ensure that the Loan Closure Job (in DAG) is run.

After the Loan Closure Job runs, a closure LPT of $50 gets created out of which $50 satisfies PR. This closure LPT is created to account for this amount as it is internally getting satisfied by the total adjusted interest. Then the value of the total adjusted interest also becomes zero.

Once this LPT gets created by the system, the loan gets closed with the following status:

• Status = Closed - Obligations met

• PR = 0

Back

Scenario 9: Backdated interest waiver

How does the system compute backdated interest waiver when there is adjusted interest amount present in it?

When you do a backdated waiver, the system computes a maximum interest waiver amount as the sum of the current interest posted and the current adjusted interest capitalized. You cannot waive an amount more that what the system computes because you can only waive an interest amount and an adjusted interest amount that is posted or due, and not more than that.

Thus, while waiving interest, the adjusted interest is also considered as part of the waive-able amount.

You can also reverse the waiving of interest by going to the Other Loan Transaction (OLT) page and then selecting to reverse the waiver, which then triggers the adjusted interest calculations with the system.

If the adjusted interest amount is negative, then while processing a backdated interest waiver, the system computes the maximum waive-able amount by excluding the negative adjusted interest amount. Thus, while waiving interest, if the adjusted interest is a negative value, it is not considered as part of the waive-able amount.

Back

IPT-enabled, non-capitalized loans

In the case of a non-capitalized loan, the following field is updated for the adjustment of interest:

Example: Automatic interest adjustment for an IPT-enabled, non-capitalized loan in the case of a backdated payment

Let us understand how the system adjusts the interest automatically with the help of an example.

Let us say there is a loan with the following terms and conditions:

Events and calculations in a chronological sequence

Let us now look at the following tables to see how the system calculates interest and other parameters in chronological order of dates:

Scenario: After a backdated payment on May 11 for May 6

Scenario: If the payment of $1,000 was actually made on May 6

As observed from the preceding table, when a backdated payment is made on May 11 for May 6, internally, the system begins recalculating from May 6 as depicted by the rows in green color. It then finds out the difference between the current interest amount after the backdated payment and interest amount prior to the backdated payment and stores it in the Adjusted Interest Non-Capitalized field. This amount then gets adjusted in the interest of the next Interest Posting cycle.

Contract details on May 11 after a backdated payment for May 6

Loan Transaction Statements on May 11 before a backdated payment

Loan Transaction Statement on May 11 after a backdated payment for May 6

OLT Type: Adjusted Interest

Adjusted Interest Calculations

In the case of a non-capitalized loan, the following field is updated for the adjustment of interest:

• Adjusted Interest Non-Capitalized: This field stores the value from the backdated payment date till the LAD date.

  Thus, Adjusted Interest Non-Capitalized = 11.10 - 11.91= -$0.81.

  This interest is adjusted or added to the next Interest Posting amount. In other words, since there is an extra amount already paid after a backdated payment, it is reduced from the next Interest Posting amount.