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Several occurrences can result in the need to restructure a loan. The borrower may be wanting to increase the loan amount, which can result in new terms. Or a restructure may become part of a negotiated work-out for a delinquent loan; reducing the interest rate or extending terms may help repayment become more likely.
When a loan is restructured, there are two options:
In either case, attention needs to be given to the information in the Loan Master file, and activity may need to be posted to the loans. Your agency will determine which option to use based on negotiations with the borrower and legal documentation of the restructured loan.
Option 1) A New Loan
A Loan Master file will need to be created for the new loan, including the appropriate terms. The status of the previous loan will then be changed to reflect that it has been repaid.
Be certain that all activity has been posted to the loan to be restructured so that an accurate balance can be determined. There may be accrued interest, which can be cleared through an adjusting entry if you decide it is to be forgiven. To forgive the accrued interest, determine the amount to be forgiven then using Adjustments, process a repayment with zero activity total. Enter the accrued interest as a negative number under both the “current interest” and “accrued interest” fields. This should have no impact on the loan balance. Once recorded, this activity will reduce, or zero, the accrued interest within the loan history. Or you may capitalize the interest by including it in the disbursement to the new loan. Again, this decision will be based on your agency’s policies and negotiations with the borrower. Still using the Adjustments screen, a repayment is posted to the old loan to zero the balance.
Once the total amount to be restructured is determined, a disbursement for that amount is posted to the new loan to create an opening balance. If accrued interest will be included as part of the principal balance in the new loan, it can be combined with this disbursement, or recorded as a second disbursement.
Both disbursement and repayment should be posted as of the date the restructure takes place. Since these activities become a part of the Monthly Activity Report, a notation may be required clarifying that it was a non-cash transaction before end-of-month figures are forwarded to accounting.
Using this option and creating a new loan will impact reports. Because there are two separate loans, it will be reflected as such on statistical reports.
Option 2) Altering an Existing Loan
The Loan Master file may be edited to include new terms, such as an extended repayment date, reduced payment amount, reduced interest rate, etc. The status can be changed to Restructured, if you wish to monitor the loan more closely. This is merely an option, not a requirement.
If the interest rate does not change, no activity need be posted until the next activity takes place. However, if the interest rate does change, a zero repayment should be posted to accrue any interest due at the old rate prior to editing the Loan Master file to reflect the revised interest rate. If the loan is established within the Loan Master file as Daily interest, this is accomplished by entering a repayment with the activity date as the restructure date, and activity total as zero.
If the loan has been established as an Amortized loan, and the interest rate changes, additional steps are required to accrue the interest correctly. From the Features menu, select Loan Payoff. Use the date of restructure as the payoff date, and the program will calculate accrued interest through that date. Once the accrued interest amount is determined (the amount in the field titled “Additional Accrued Interest” on the loan payoff screen), that amount is added to the loan history through an adjusting entry. Use the restructure date as the activity date, select activity type Repayment, and enter zero in the “activity total” field. Enter the accrued interest as a positive number under “accrued interest”; the net effect on principal should be zero.
Whether the loan is Daily interest or Amortized, posting accrued interest to the loan will result in the program collecting that accrued interest from future repayments. When posting repayment activity, you can expect to see negative numbers in the “accrued interest” field until all is collected. The program will never automatically post accrued interest below a zero balance.
Once the interest rate is edited within the Loan Master file, any future activity will be calculated at the new interest rate.