Banks don’t like to place loans on Non-Accrual (NA) or Charge-Off (CO) unless there is an absolute need to. To complicate the process more, customers must not be tipped off that this has been done, especially if they are still trying to make payments. More often than not, examiners and auditors are pushing towards erring on the side of immediate recognition of loss when the loan to collateral value is in question or if the borrower isn’t showing stable on time payments consistently. These factors cause a predicament. How can active collection occur on a loan that has been set to NA or CO without letting the borrower know that their normal interest and principal payments are being applied only to principal on the books? What if the time comes to return the loan to an active repayment status? What does a bank do with the interest that was previously charged-off?
NA and CO loans are typically handled by what is commonly known as shadow accounting. At first glance, this type of dual record keeping can appear daunting. Collected payments are applied to loan on the books much differently than how they are presented tot he borrower. Per the FDIC Bankers Outreach account recommendations, “If collectability of remaining recorded investment in a non-accrual asset is in doubt, any payments received (including those designated as interest) must be applied to reduce recorded investment to the extent necessary to eliminate this doubt. If remaining recorded investment (after charge-off of any identified losses) is deemed fully collectible, some or all cash interest payments may be treated as interest income on a cash basis.” Essentially, all payments must apply to principal until the principal asset is paid.
This is where the Book view feature within Insite really shines. It makes the entire process easy and doesn’t require any additional training of staff at the bank who collect these payments. With the current Book view design, a standard principal and interest payment can be posted to a NA or CO loan. The payment, on the customer side of the loan, displays the proper split to both principal and interest; however, the actual book accounts takes the interest portion posted and processes it directly to the outstanding loan principal balance, along with the posted principal portion. The total amount of interest paid to principal is accumulated for review and bank balancing purposes. Both sides of the loan retain their own history, so it is easy to research and compare what the borrower is seeing and what was actually processed on the bank’s books.
The Book view accounting also retains the amount of interest originally charged off while allowing the loan to continue to accrue without booking it to income. This value is the NA or CO variance interest, which is the lost income amount that can be used in a variety of reports for projecting upcoming years as well as reviewing calculations on losses in prior years. This stored variance interest amount also comes in handy if a loan moves back to a repayment status. According to the FDIC Bankers Outreach Accounting Recommendations, “If interest payments were applied to reduce asset’s recorded investment while in non-accrual status, do not reverse these entries and credit interest income. After asset has been returned to accrual status, interest income can be recognized based on the effective yield to maturity on the loan, which will result in interest applied to principal being accreted over asset’s remaining life.”
The “RP – Repay” Book Status within the Book view feature properly allows the payments to apply to the active interest (accrued on the loan after set to “RP – Repay”) first, followed by collecting on the repay accrual and posting that value straight to income. The fields managed by Book view accounting while in “RP – Repay” Book Status, include: the total amount of repay interest currently amortized, the original amount, the repay schedule with a payment amount, the number of months left to pay, and the total that has been collected. The borrower is still not privy to the current Book Status of the loan nor how payments are being handled on the bank’s books, all while simultaneously maintaining proper bookkeeping for the bank.
All of the options, fields, and functions listed in this article were developed to factor in how banks actually balance their books each day with reports to display proper amounts for each group of totals. This streamlines the daily balancing process while also quickly presenting issues to bank staff if something had been posted incorrectly and needs attention.
If you are a current Insite customer and would like to convert existing NA or CO loans to utilize the Book view, contact Insite Support and we can help! If you want to learn more about this feature or about our Core solution in general, reach out to one of our amazing Relationship Team Members.
About Automated Systems, Inc.
Since 1981, Automated Systems, Inc. has been a leader in providing innovative core banking, digital banking, and data processing solutions to community banks nationwide. An array of integrated applications provide partnered banks with tailored, cost-effective, competitive choices. ASI delivers industry-leading technology backed by unparalleled in-house conversion, training and support teams; paving the way for progressive, top-notch customer service. ASI corporate headquarters are located at 1201 Libra Drive, Lincoln, NE 68512, 1.800.279.7312. For more information about banking solutions from ASI, visit www.asiweb.com.
About Insite Data Services
IDS data application hosting services combines secure and cost-effective core banking applications, enterprise-class servers and storage, and proven virtualization technology. IDS hosts all of the bank’s servers in secure data centers that use state of the art security systems including identity verification and biometric scanning. Insite Data Services also offers IDS On-Time, a full-service solution dedicated to back-office bank processing. These operations experts allow partnered banks to focus on their most important asset, their customers. For more information visit www.insitedataservices.com.