Change the Interest Rate

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Change the Interest Rate

Overview

Q2 Loan Servicing offers lenders the option to modify the interest rate for a loan. For amortization based loans and LOC loans with Interest type as Floating and billing method as Flexible Repayment,  the change in interest rate results in recalculation of schedules and increase or decrease in the installment amount or tenure of the loan, depending on the interest rate change action defined for the lending product or contract.

For example, a contract for 10000 is created for 24 terms with a 12% interest rate. The installment amount calculated is $4614.49. After 6 months, the interest rate on the loan is changed to 18%. If the lender requires that the installment amount be recalculated, then the calculated amount would be $4902.53 for the remaining 18 months. If, however, the tenure is to be recalculated keeping the same payment amount, then the number of remaining installments would increase by 2, with the last installment amount being $1396.26.

Note:

For more information, see the Reschedule Options on Interest Rate Change section of the Q2 Loan Servicing Administration Guide.

The new interest rate value must lie within the minimum and maximum interest rate values specified at the lending product level. For a floating rate of interest, if the new rate falls beyond the maximum rate specified for the lending product, then the maximum interest rate value is applied. Similarly, if the new rate falls below the minimum rate specified, then the minimum rate is applied. For example,

Minimum interest rate = 5

Maximum Interest rate = 15

Changed floating rate of interest after applying margin rate and floating rate index = 18, then the rate of 15 and not 18 is applied to the contract.

When a floating interest rate change action happens on an LOC loan, a new record gets created which has a lookup to the parent floating interest rate change record. Consider a scenario where the floating rate index on Jan 5 is 5%.  The floating interest rate change record is defined in the rate schedule table as: 

Sequence

Effective Date

Floating Rate Index

Margin

Interest Rate

Parent Rate Schedule Sequence

1

 5-Jan-2016   

LIBOR                  

2

Suppose on Jan 5, 2016, the interest is resolved to 7% (5% + Margin 2). A new row (Row 2) gets added to the rate schedule as:

Sequence

Effective Date

Floating Rate Index

Margin

Interest Rate

Parent Rate Schedule Sequence

1

 5-Jan-2016   

LIBOR                  

2

2

 5-Jan-2016   

LIBOR                 

2

7

       1 

Now again on Feb 5, the rate revision change action and interest happens with a new resolved value of 9%. One more row gets added to the rate schedule table with a lookup to the parent rate schedule record:

Sequence

Effective Date

Floating Rate Index

Margin

Interest Rate

Parent Rate Schedule Sequence

1

 5-Jan-2016   

LIBOR                  

2

2

 5-Jan-2016   

LIBOR                 

2

7

1

3

 5-Feb-2016   

LIBOR                 

2

9

1

Backdated Interest Rate Change

By providing a Transaction Date of the past, you can perform a backdated rate change as on that date of the past. You can perform a backdated interest rate change for both the loan interest and additional interest components.

On performing a backdated rate change, the following actions take place in the system:

  • The system checks whether there is any LAD event recorded on or after the intended backdated transaction date. This ensures that you do not perform a backdated rate change prior to the LAD date.

  • If Interest posting is enabled in the loan, unpaid IPTs are reversed.

  • Bills are reversed and unpaid bills are changed to non-primary.

  • A new amortization schedule is generated.

  • New bills, charges, and IPTs are generated on the next due date.

  • Interest Remaining, LAD, and Interest accrued are calculated.

UI Enhancement

This section lists the user interface enhancements made in various releases.

The Transaction Date field is made editable on the Rate Change page.

Change the Interest Rate

Prerequisites

Before changing the interest rate, ensure that the following prerequisites are met:

  • The loan is active. 

  • For a new schedule to be generated on interest rate change: 

    • An active amortization schedule is available for the loan contract. Else, the interest rate is changed without a new schedule being generated irrespective of the Interest Rate Change Method selected. 

    • The financial calculator version is 3.0 or higher.

Steps

To change the Interest Rate:

  1. Log in to your Salesforce account.

  2. Click CL Contracts.

  3. Select the required CL Contract ID.

  4. Go to Loan Quick Menu > Loan Actions > Rate Change. 

    Rate Change

  5. Provide the details as described in the following table, and then click Save:

    Note:

    You can refer to the <image name(linked)> image as an example.

    FieldAction and Description
    Rate Change Type

    Select one of the following options:

    • Main Interest: Select this option to change the interest of the loan.

    • Additional Interest: Select this option to change the interest of the additional interest component.

    CL Contract IDThis is the loan account ID of the loan for which you want to change the interest rate.
    Current Interest RateThis is the current interest rate of the Rate Change Type selected.
    New Interest RateSpecify the new interest rate that you want for the Rate Change Type selected.
    Interest Rate Change Method

    This method is selected while creating the loan contract.

    When the interest rate is changed, the repayment schedule of the loans will be generated either by changing the payment amount or keeping the payment amount same based on this setup option selected in the loan.

    Transaction Date

    This is the date on which the interest rate of the Rate Change Type selected is to be changed. You can perform a backdated interest rate change by changing the Transaction Date to a date in the past.

    Note:

    For more information on the backdated rate change, see the Backdated Interest Rate Change section of this page.

    On changing the interest rate, an OLT of the type Rate Change is created.

Reverse an Interest Rate Change Action

There may be situations where a lender may want to revert to the original interest rate. In that case, the lender can reverse the interest rate using the Reverse Rate Change feature. In Q2 Loan Servicing releases prior to 2.4008, the interest rate can be reversed only if no action like payment or reschedule was done on the loan since the rate was changed.

In Q2 Loan Servicing 2.4008 and later, any rescheduling of the loan done after the interest rate change is also reversed on rate change reversal and the previous payment schedule is re-applied. Q2 Loan Servicing maintains snapshots of the bills, LPTs, schedules, RSS, previous rate schedule, and any holiday or step up schedules on the contract. Any IPTs created after reschedule are discarded and new IPTs are created again as on the original reschedule action date. Similarly, any generated bills are discarded and new bills are generated for the new schedule after reversal.

Prerequisites

Before reversing an interest rate change, ensure that the following prerequisite is met:

  • Rate change transaction is present in the Other Transactions tab of the CL contract.

Steps

To reverse the interest rate change:

  1. Log in to your Salesforce account.

  2. Click CL Contracts.

  3. Select the required CL Contract ID.

  4. Go to Transactions > Other(s).

  5. Click the required Other Transaction ID for the Rate Change transaction type.

  6. On the page that appears, click the dropdown arrow and then click Reverse Rate Change. 

  7. Click Confirm.

    A Rate Change Reversal transaction is created in the OLT.

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