Interest Adjustments

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Interest Adjustments

Overview

Q2 Loan Servicing provides you the ability to create backdated transactions whose transaction dates are prior to any existing transactions by internally adjusting the interest amounts automatically. It also allows you to manually adjust the interest amount by entering an interest adjustment amount.

When a backdated transaction occurs, internally, the interest amounts are adjusted to arrive at the correct interest amounts. This means that you can make a backdated payment or a perform a backdated payment reversal without reversing and reapplying the older transactions.

Note:

Currently, the system only supports backdated payments, backdated payment reversals, regular payment reversal, and backdated interest waivers.

How do you enable the adjusting of interest within the system?

For the system to be able to adjust the interest internally automatically or manually, ensure that you enable the following flags while creating the Lending Product as highlighted in the following image:

  • Create Summaries

  • Enable Adjustment Entry

If not enabled, the system does not have the ability to accommodate any backdated payments or backdated reversals if there are subsequent transactions after the backdated payment or backdated payment reversal.

For example, if a payment was made on June 10, you cannot make a backdated payment for June 5 unless you reverse the June 10 payment first. Only after reversing the June 10 payment, can you make a payment for June 5. After making a payment for June 5, you then have to reapply the June 10 payment. This process can now be automatically done by the system if the interest adjustment is enabled.

Also, you cannot adjust the interest manually if interest adjustment is disabled.

What are the types of interest adjustments available?

Interest adjustments in Q2 Loan Servicing are of the following two types:

Key Points

  • Interest adjustment is applicable for IPT and non-IPT-enabled Simple Loans only.

  • When an interest adjustment is made, either automatically or manually, the system creates an OLT for this transaction, and the LAD does not change.

  • When a backdated transaction is made in the system, the system stores the difference in the interest before and after the backdated transaction in a field and then adjusts it in the next cycle. This difference gets adjusted against the next interest posting transaction for IPT-enabled loans and against the Interest Remaining for non-IPT-enabled loans.

  • The adjusted interest amount is negative in case of backdated payment and positive in case of a backdated payment reversal.

  • For IPT-enabled loans, any interest adjustments made are reflected only in the next IPT. This means that the borrower does not see any immediate changes to their payment schedule, but the adjustments are reflected in the next payment due. For loans that have capitalization enabled, the capitalized interest adjusted amount is added to the loan balance.

  • In the case of a capitalized loan, two fields are updated for the adjustment of interest:

    • Adjusted Interest Capitalized: This field stores the adjusted amount till the last capitalized date. This is only applicable for IPT-enabled loans.

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

  • 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.

  • In the scenario where a loan is closed and there is some amount that is still left in the Adjusted Interest Capitalized or the Adjusted Interest Non-Capitalized field, then this interest gets adjusted in the Excess field (as there is no next Interest Posting due to the closure of the loan). For example, if the Adjusted Interest Capitalized or the Adjusted Interest Non-Capitalized is -20 and if the loan is then closed, the adjusted interest amount is moved to the Excess field. The Excess field then has a value of +20 and the Adjusted Interest Capitalized or the Adjusted Interest Non-Capitalized has a value of zero. The borrower can then take a refund of 20 from this Excess field.

  • You cannot reverse an Other Loan Transaction (OLT) if the last transaction created in the loan was a backdated transaction. What this means is once a backdated payment is created, the reversal of a last OLT, such as a Rate Change or any other OLT, is not allowed. For example, let us say we did a Rate Change on January 10 and a backdated payment on January 10 for a date in the past. After that, let us say we try to reverse the Rate Change on January 10. In this case, the reversal of the Rate Change on January 10 is not allowed by the system and the system displays the following error message: "You cannot reverse a transaction if the last transaction created in the loan was a backdated transaction."

  • Once a Late Fee is charged for a loan and it is not yet paid (or not yet cleared), you cannot create a backdated transaction.

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