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First of all, it’s important to understand what “capitalizing” accrued interest means.
Basically it is determining how much interest has accrued on a loan, and then adding that interest to the loan principal to create a new, higher balance. Once added to the principal balance, future interest will be calculated on the original loan balance plus any capitalized interest.
This process can be especially useful when a loan has become delinquent and a work-out is being negotiated. It can also be an option when a loan is being restructured, or a loan is being purchased by a second borrower. Before editing loan documents or GMS-RLSS records to capitalize interest, we recommend you discuss this process with your auditor or attorney. GMS can help you with the steps needed to proceed, but only your agency can determine if it is a viable option for your lending program.
Once it has been decided to capitalize the interest, take the following steps:
1) Determine the amount of interest to be capitalized:
Accrued interest will be a combination of any accrued interest currently in the loan history, plus any interest that has accrued since the last activity was posted. Review the loan history and the “loan totals” on that history to see if there is any accrued interest already in the history.
Loan Payoff, found on the Features menu, is a quick and easy way to determine interest due. Enter the date of the new loan agreement as the payoff date. The amount reflected in “Past Due Accrued Interest” should match the accrued interest from the Loan Activity Report, and “Additional Accrued Interest” will show any interest that has accrued between the last activity and the payoff date. Adding the two figures together will tell you how much interest is due on the loan as of the payoff, or new loan agreement date.
2) Posting accrued interest to the loan history:
If the Loan Master file indicates Daily Interest, use Loan Activity to enter a zero repayment. Enter the date of the new agreement as the activity date and new paid-thru date. Use activity type repayment, and enter zero in activity total. You will see a positive number appear in “accrued interest” which is the amount of interest that has accrued since the last activity. If you used the same date for “payoff date” in the above step and “activity date” in this step, the calculated interest on screen should match the “Additional Accrued Interest” listed on the Loan Payoff.
If the Loan Master file indicates Amortized Interest, use Loan Activity, Adjustments, to enter a zero repayment. Use the date of the new agreement for the activity date and new paid-thru date. Activity type should be repayment, and enter zero under activity total. Under “accrued interest” enter the amount to be capitalized. In most cases, it will match the figure on the Loan Payoff under “Additional Accrued Interest”.
In either case, review the activity carefully before recording. If you use escrow accounts or penalties, and numbers appear automatically in these fields, edit them to zero before recording the activity. The activity calculations should have no impact on “principal” or “new balance”. Recording the activity will add the accrued interest as entered to any accrued interest already in the loan history.
If for any reason the amount of interest to be capitalized is less than the accrued interest determined in step #1 (possibly a negotiation point with the borrower) you can follow step #2 Amortized loans and enter the appropriate amount in “accrued interest” field. In either situation, the activity should have no impact on the loan balance.
3) Capitalizing the accrued interest:
Review the loan history after the above activity to determine the amount in “accrued interest” matches the amount you wish to capitalize. Use Loan Activity, Adjustments, to again enter a zero repayment. Use the date of the new agreement for both the activity date and the new paid-thru date. Enter the activity type as repayment, and activity total as zero. Enter the total accrued interest to be capitalized as a negative number under “accrued interest”. When you tap enter, this number should also appear under “principal”, effectively increasing the loan balance. Use the “notes” section to document why the activity is being posted.
From this point forward, interest will be calculated based on the revised balance. If all three steps were done correctly, reviewing the loan history again should verify a zero balance in “accrued interest.”
Edit the Loan Master file, if necessary, with any revised terms, such as payment amount or maturity date. If the loan is Amortized, you may want to print a new amortization schedule based on the revised loan balance and any altered payment terms.