Revision date: July 15, 2024
For an updated copy of this booklet, check out the Reference Materials page of our website:
https://www.cuanswers.com/resources/doc/cubase-reference/
CU*BASE
®
is a registered trademark of CU*Answers, Inc.
Interest Payment Only
Loans
CU*BASE Mortgage Products
INTRODUCTION
This booklet describes how to configure and service loan products where
members are required only to make interest payments, such as construction
loans, home equity loans, and the like.
It is very important that you read this entire document carefully and
understand the nuances of how payments are calculated and posted,
prior to starting your interest-only program and communicating your
repayment plan to members and credit union staff. Member and staff
education on the specific ways payments should be made will be critical
to the success of your program.
CONTENTS
OVERVIEW 3
HOW CU*BASE CALCULATES THE MONTHLY PAYMENT AMOUNT 3
S
WITCHING FROM INTEREST-ONLY TO A P&I PAYMENT CALC 5
THE STEPDOWN INTEREST-ONLY LOC 7
RULES FOR INTEREST PAYMENT ONLY LOANS 9
SAMPLE CALCULATION SCHEDULE 10
H
ANDLING OVERLINE SITUATIONS 12
CONFIGURING INTEREST PAYMENT ONLY LOAN PRODUCTS 14
SETTING UP THE PAYMENT MATRIX 18
C
REATING INTEREST PAYMENT ONLY LOANS 19
SERVICING INTEREST PAYMENT ONLY LOANS 21
POSTING PAYMENTS: EXTRA FUNDS TO PRINCIPAL 21
POSTING PAYMENTS: ALL FUNDS TO PRINCIPAL 21
OVERRIDING THE PAYMENT MATRIX 23
AUTOMATED PAYMENTS 24
2
Interest Payment Only Loans
POSTING EARLY PAYMENTS 25
RECOMMENDATION FOR LOAN PAPERWORK AND DISCLOSURES 25
DAILY PAYMENT CHANGES REPORT 25
U
NDERSTANDING DELINQUENCY 26
A WORD ABOUT PARTIAL PAY 27
ADVANCING THE DUE DATE 27
PAYMENT CHANGE HISTORY 28
C
OMMUNICATING PAYMENT CHANGES TO MEMBERS 30
SPECIAL NOTE: 360 MORTGAGES AS
I
NTEREST-PAYMENT ONLY LOANS
To read more about the special nature of interest-payment only loans that
are also set up with the 360-day mortgage interest calculation type, be sure
to refer to the separate “CU*BASE Mortgage Products: 360-Day Interest
Calculation” booklet.
That booklet describes special messaging and additional rules that are in
place for loan products set up to be compatible with industry standards for
mortgages sold in the secondary market.
Interest Payment Only Loans
3
OVERVIEW
CU*BASE Interest Payment Only loans let members make payments only
toward the loan’s interest for specified period of time, and are often marketed
as a way to help the member get the lowest possible payment on the funds
borrowed. Interest-only loans are commonly used for construction loans,
mortgages, and home equity lines of credit (HELOCs).
In the case of a HELOC, this plan lowers the monthly payment and the
actual appreciation of the home offsets the ultimate principal repayment. In
the case of a construction loan, an interest payment only plan helps keep the
payments down until the member actually moves into the house, offsetting
the cost of alternative housing.
If interest-only payments are required only for a short period, CU*BASE lets
you automate the switch from an interest-payment only payment calculation
to a standard principal & interest calculation, without the loan having to be
moved to a different loan category. This is helpful for construction loans
where the member pays interest only for the first 12 months, after which the
member begins making normal principal & interest payments through the
rest of the loan term. See Page 5 for more details on switch interest-only
LOCs.
IMPORTANT: Careful member and staff education is critical. These loans do
not behave the same as other loans, and factors such as the timing of when
payments are made, how much is being paid, whether escrows are attached,
whether multiple payments are paid during the same month, and whether
the member is past due or not (even one day!) will all have an impact on how
payments can be applied in an automated fashion.
HOW CU*BASE CALCULATES THE MONTHLY PAYMENT AMOUNT
Simply put, once a month on a specific day configured in the loan category,
during beginning-of-day processing CU*BASE takes the total amount of
interest due on the loan and moves that amount into the Regular Scheduled
Payment field on the member loan record. In effect, the interest due becomes
that member’s payment amount on that day.
If interest is calculated using the 365-day method, interest continues to
accrue as usual every day, and on the configured day of the month,
CU*BASE just looks at how much is owed as of that day to determine the
new payment amount.
For 360-day products, the loan category would be configured so that the new
payment is calculated just after the interest is calculated for the month
(interest for 360-day products is calculated once a month, typically between
the 15
th
and the 31st).
Will payments be consistent over time?
At first glance, it may seem that because no principal is being paid on an
interest payment only loan, the payment amount should be the same every
month. In reality, however, there are several factors that could result in
fluctuations in the payment amount each month:
4
Interest Payment Only Loans
• If interest is being computed using the 365-day calculation method, the
difference in the number of days for each month would affect the
payment amount.
• Members may request to make an occasional or regular payment to
principal, changing the balance on which the interest due is based.
• Overline situations such as insurance premiums or a stepdown product
could result in an overline amount being added to the payment for a
particular month (see Page 12 for more details).
• If the loan account is tied to a variable interest rate, rate changes would
have a major effect on the amount of interest being calculated each day.
Interest Payment Only Loans
5
SWITCHING FROM INTEREST-ONLY TO A
P&I PAYMENT CALC
Your credit union might want to offer an interest-only loan product where
the member makes interest-only payments for a set number of months, then
begins making normal principal & interest payments from that point on.
This might be useful for a construction loan that requires interest-only
payments for 12 months, then requires regular payments of principal &
interest from that point on.
This can be done automatically on a CU*BASE interest-only product by
activating the Switch to principal & interest pmt calc type setting in the loan
category:
You will specify the time frame for the switch to occur, measured from the
month when the account was opened, as well as a term to be used for
calculating a new maturity date for the loan account.
At the time of the switch, CU*BASE will automatically re-amortize the loan
and change the following:
• The payment calc type on the loan account record will change from
interest-only to principal & interest.
• The payment maturity date will be advanced according to this
configuration.
• A new payment amount will be calculated using a standard P&I
calculation with that new term.
All loans that are switched remain MEMBER6 loans, and are tied to the
same loan category, but will be driven by different settings on the account
record for servicing. Monthly payment changes would no longer be
calculated as before.
Features
• The switch process happens on the same day as the payment is
calculated, controlled by the Update payment on day setting from the
loan category. This means the system calculates regular interest-only
payment changes on that day of the month, month after month, for a
period of time. After the specified period has passed, the system makes
the change to the loan terms on the same day as a payment change
would normally have happened, allowing the member to be notified of the
new payment amount via their statement as usual.
• The loan’s new maturity date will be based on the next payment due date
as of when the switch is happening. So if on 12/31/2021 when payment
changes and switches are processed a loan’s payment due date is
1/25/2022, then the new maturity date will be xx months from
1/25/2022, not from 12/31/2021.
6
Interest Payment Only Loans
• The switch process changes only one date on the MEMBER6 record: the
maturity date. Due date and other dates are unaffected.
• If a loan is past due (even one day) or has a zero balance on the
switch/payment calc day, the account is not switched and instead gets
written to the daily exception report. If that occurs, you could:
o Manually perform the switch by maintaining the fields (payment calc
type, payment amount, and maturity date) on the MEMBER6 record
for that loan, or
o Leave the account alone and once the member caught up, the switch
will happen during the next month’s regular payment change
process.
In this case, the loan term would essentially be extended by however
many months it took for the member to catch up. For example, a loan in
good standing on 1/xx/2022 would be switched and given a new
maturity date of 1/xx/2024, while another loan that was delinquent
when the switches were done in January and didn’t get caught up until
the March payment would get a new maturity date of 3/xx/2024 instead.
Therefore, if you choose not to watch these exception reports and
manually adjust past-due loans, understand that the amortization will
push the date out further than you might have imagined when the loan
was originally set up.
Daily Switch Reports to Review
Once you activate this feature, two new daily reports (PLNI2P) will be
generated. The first report shows loan accounts that have been switched
from interest-only to P&I:
This second report shows loans that were unable to switch, usually due to
delinquency or a zero balance:
As already described, you can leave these accounts alone and they will
switch once the conditions change (member catches up a past-due loan,
takes a distribution, etc.), or you can manually switch the loan by updating
the maturity date, calc type, and payment amount via account information
update.
Interest Payment Only Loans
7
THE STEPDOWN INTEREST-ONLY LOC
A special feature available for interest-only line-of-credit loans is the
Stepdown LOC, which combines the benefits of a term loan with the
flexibility of a revolving line of credit. This type of loan product allows you to
extend an interest-payment only line of credit and then shrink (lower) the
disbursement limit incrementally each month, reducing the amount
available for additional disbursements.
For example, you might extend $10,000 for a construction project and then
lower the available balance and loan payment by an incremental portion of
the initial loan amount each month.
As the disbursement limit is reduced, the system automatically calculates
any amount between the current balance and the new disbursement limit as
“overline” and applies it to the payment amount being calculated for that
month. The member is then required to pay both the interest due as well as
that overline amount.
Assuming the member takes a full draw on the loan, over time as the
disbursement limit is reduced they will start paying down principal and
therefore their monthly payment amount will also go down.
Features
• The monthly stepdown amount is calculated by CU*BASE by dividing the
original disbursement limit by the number of loan payments.
For this calculation the system uses the # of payments
(NOPAY) in MEMBER6, or the amortization term
(BALLNTRM) for balloon loans.
• The calculated stepdown limit for an account will appear on the account
inquiry screen for the loan account:
• When the payment is calculated each month, the system will also
calculate the new disbursement limit. This happens during beginning-of-
day processing on the Update payment on day in the loan category,
which must be set to 31 (last day of the month) for stepdown loans.
• Since the stepdown calculation is done at the same time as the payment
calculation, this means the payment amount will include the overline
amount, and will be written to the EOM files and therefore available to be
printed on the member’s monthly statement.
• The monthly payment will include interest only unless the loan balance
is greater than the disbursement limit. In that case, principal will also be
TIP: This is the loan’s
current
disbursement limit. The
original
disbursement limit is stored
and used to calculate the
stepdown amount, but is not
displayed on this screen.
(In
this sample it happens to
match the original limit, so the
stepdown is $75,000 divided by
360 months, or $208.33.)
TIP: The stepdown amount
is not stored on the account
but rather calculated on the
fly for this screen and
during the monthly
payment change routine.
8
Interest Payment Only Loans
due with the payment. This means that the member’s payment wouldn’t
include any principal amount unless they take a full disbursement on
the loan.
Example
Suppose a stepdown LOC has a 36-month term, and the original distribution
limit on the loan was $18,000, making the monthly stepdown amount $500.
The member takes the full $18,000 when the loan is created. The following
simplified example shows the effect of a $500/month stepdown on how the
payment is calculated:
New disbursement
limit Loan balance Payment is calculated as
Month 1 $18,000 $18,000 Interest due + $0
Month 2 $17,500 $18,000 Interest due + $500
Month 3 $17,000 $17,500 Interest due + $500
Member makes $7,500 principal
payment
$10,000
Month 4 $16,500 $10,000 Interest due + $0
If the member didn’t take a full draw, the payment would only include
interest due until such time as the disbursement limit was reduced to an
amount below the current balance on the account.
Configuring a Step-down LOC
When configuring an interest-only loan category (see Page 14), you’ll check
the Apply stepdown flag to activate the stepdown functionality:
Other settings on the loan category must be set as follows:
• Must be Process type L (LOC).
• Payment calculation type must be Interest only.
• Add overline to payment must be checked.
• Update payment on day must be set to 31 (last day of the month).
Interest Payment Only Loans
9
RULES FOR INTEREST PAYMENT ONLY
LOANS
For interest-only products, careful member and staff education is critical.
These loans do not behave the same as other loans, and things such as the
timing of when payments are made, whether they are full payments or
partial, whether escrows are attached, whether multiple payments are paid
during the same month, and whether the member is past due or not (even
one day!) will all have an impact on how payments can be applied in an
automated fashion.
• Configure the loan category using a Payment Calculation Type of “I”
(interest only) and a Delinquency Control setting of “P” (single payment
per period). A payment update day must be specified, along with a
minimum payment amount. See Page 14 for details.
• Interest payment only loans can be used with both 365 and 360-day
interest calculation types, including both closed- and open-end loans
and lines of credit. Payments are changed once a month on the day
configured in the loan category. See Page 14 for details.
For details about the special configuration required for the
360-day interest calculation type, be sure to review the
separate “CU*BASE Mortgage Products: 360-Day
Interest Calculation” booklet.
• The payment matrix must be set up so that interest is paid first, before
fines, to avoid interest being carried over into the next period. See Page
18 for details.
• Create loan requests as usual, calculating the first interest payment
manually and using the Override feature to enter the initial payment
amount. Payment frequency must be Monthly. See Page 19 for details.
• Because payment amounts are set once a month, early payments
(meaning before the payment change date) should not be allowed. See
Page 25 for details.
• Remember this is an interest-payment only loan, not a principal-optional
loan. The system is designed to assume that the member will pay the
exact designated payment each month, and that as a general rule they
will not make payments to principal. If a member wishes to make a
principal-only payment (principal curtailment), special steps must be
taken when posting to ensure that the payment is booked properly and
does not affect the next pay date or get posted all to interest due based
on the payment matrix. This can be done several places in CU*BASE, as
well as by the member in online banking, if you wish. See Page 21 for
details.
• If a member makes a current payment that is higher than usual,
assuming they are paying after the payment calc date but on or before
their due date (remember that even one day past the due date is
considered past due!) the system will apply the extra amount toward
10
Interest Payment Only Loans
principal automatically. See page 21 for details about payments that
are not current.
NOTE: Member education is critical here. Because of the
timing nuances, the most reliable way to make a regular
payment and pay extra on principal at the same time is to
post two separate transactions – one for the regular
payment amount and then a separate one to principal only.
• The normal payment change features used by other open-end and LOC
loans, where payments are changed upon disbursements, payments, or
variable rate changes, will not apply to interest payment only loans.
Payments are only adjusted as part of the monthly payment change process
unique to interest-only loans.
• Payments made via Auto Funds Transfer (AFT) must be set up with the
Amount field left blank on the AFT record. Automated payments made via
Payroll and ACH will require an estimate of the payment amount and a
thorough understanding of the ramifications of the timing of payments
being posted. See Page 24 for details.
• The system uses the Payment Change History file to handle payments on
delinquent interest-only loan accounts. This means that even if a loan is
more than one month delinquent, the system will be smart enough to
keep track of which payment is being made, and advance the due date
correctly. See Page 26 for details.
• A maximum of 15 loan categories can share the same payment calc date.
You can create additional categories if you wish, but they must use a
different payment calc date.
SAMPLE CALCULATION SCHEDULE
The following schedule shows how the system will calculate the payment
amount on a typical interest payment only loan using a 365-day interest
calculation:
Interest Payment Only Loans
11
Event Accrued Interest Payment Amount on Loan Account
1
9/1 Loan Created
First payment due on 10/20
$0 Payment amount set manually using Loan
Override
2
9/1 through 9/30
Interest per diem: $1
Increasing daily by $1 Minimum
3
9/30 $29.00 System updates payment to be $29.00
4
10/20 - Payment due $49.00 $29.00
5
10/22 - Member makes
$29.00 payment
$51.00 - $29.00 = $22.00 $29.00
6
10/27 $28.00 $29.00 (still from previous month)
(NOTE: If member wanted to make an early
payment for 11/20 now, the system would have
to use prior month payment total because
recalculation hasn’t been done yet this month.)
7
10/31 $31.00 System updates payment to be $31.00
8
11/20 - Payment due $51.00 $31.00
9
11/20 - Member makes
$31.00 payment
$51.00 - $31.00 = $20.00 $31.00
For non-delinquent loans, the scheduled payment will always reflect one
monthly interest amount calculated from one calculation date to the next
calculation date, plus any overline amounts added to the payment, if
applicable (see Pages 7 and 12).
For delinquent loans, interest will keep accruing as usual. The next month
when the new payment amounts are calculated, the member’s payment will
be updated to reflect the total amount of interest due (previous interest due
plus the new interest accrued).
Example: 1st Month payment = $30.00, 2nd month
payment = $60.00. Member makes a partial payment of
$25.00, then the system begins adding interest to the
remaining $35.00, and on the specified calculation day, the
system will update payment to the total interest accrued as
of that date ($35.00 plus interest accrued for all additional
days).
12
Interest Payment Only Loans
HANDLING OVERLINE SITUATIONS
A special situation occurs when credit life and/or disability insurance
premiums are added to normal interest-only loans. Assuming the member
isn’t applying payments directly to principal, the loan balance on these loans
usually remains at the original disbursement limit.
When an insurance premium is added to the loan account, it causes the
account balance to go above the disbursement limit, making it appear as
though the account is overline, and the amount never gets caught up until
the note comes due.
To prevent this, you can activate the optional Add overline to pmt flag on the
Loan Category configuration (see Page 14).
If this flag is checked, when the system calculates payments it will add any
amount owed above the disbursement limit to the payment amount for that
month. (Although the intent was primarily to handle insurance premiums,
the calculation would apply in any situation where the member’s balance is
over the disbursement limit.)
For example, say a $75 life and disability insurance premium is added to
a loan with a disbursement limit of $12,000, bringing it to a principal
balance of $12,075. The next time a payment is calculated, it will include
the normal accrued interest amount, plus the $75 overline amount.
If a member makes a principal curtailment payment anywhere along the
way, bringing the balance far enough below the disbursement to leave a
“buffer” for future insurance premiums, the payment will no longer need to
include the overline amount and may actually go down significantly.
For example, if the member makes a $1,000 principal curtailment payment
on his $12,000 loan, bringing the principal balance down to $11,000,
when future premiums are added they will no longer bring the balance
above the disbursement limit, and will therefore not need to be added to
the payment amount.
When calculating the payment amount on these loans, the system first
determines the overline amount, if any, using this formula:
Disbursement limit - Current balance = Overline amount
If the result of the calculation is negative, the account is considered overline,
and the difference should be added to the interest amount due to calculate
that month’s payment.
Example 1: New interest-only loan, or a loan where the member has been
making interest payments but no payments towards the principal balance:
Disbursement limit $12,000
Monthly life insurance premium added to loan
balance
$60/month
Monthly disability insurance premium added to
loan balance
$10/month
Interest Payment Only Loans
13
Balance on loan as of the time the payment is
being calculated (per loan category configuration)
$12,070
Accrued interest due at time the payment is
being calculated
$100
Calculated overline amount $12,000 - 12,070 = (70)
New payment amount $100 + $70 = $170
Example 2: If at some point the member makes a principal payment on the
loan, bringing the balance far enough below the disbursement limit that any
insurance premiums are not enough to put the loan overline, then the payment
would be calculated as just the amount of accrued interest:
Disbursement limit $12,000
Monthly life insurance premium added to loan
balance
$60/month
Monthly disability insurance premium added to
loan balance
$10/month
Balance on loan as of the time the payment is
being calculated (per loan category configuration)
$5,070
Accrued interest due at time the payment is
being calculated
$60
Calculated overline amount $12,000 - 5,070 = 6,930
(positive result = NOT overline)
New payment amount $60 + $0 = $60
This concept should be explained to member service staff so that they can
answer member questions about changing payment amounts on these types
of loans.
14
Interest Payment Only Loans
CONFIGURING INTEREST PAYMENT
ONLY LOAN PRODUCTS
The first step in setting up an interest payment only loan product is to
configure the loan category itself. Most open- and closed-end loan are
supported, using any process type and calculation method.
• Important note: Credit card loan categories with interest-only
calculation type are NOT supported.
Loan Category Configuration
(Tool #458) > Screen 1
This delinquency
control must be set to
Single payment per
period.
Payment calculation
type must be set to
interest only.
Inquiry screens do not
display the payment
calculation type setting,
so be sure to indicate
“interest payment only”
somewhere in the
category description.
Interest Payment Only Loans
15
Screen 2
The section outlined above is used to specify when payment changes should
happen for these loans, as well as a minimum payment amount. See below
for a description of these and other settings related to interest-only loans.
NOTE: For details about other fields on this screen, refer to
online help. There will be no third configuration screen
(Payment Changes) for these loan types.
Key Field Descriptions
Field Name Description
Interest Payment Only Settings
Update payment on
day
This is the day on which a new payment amount is
calculated each month (also referred to as the payment calc
date). Can be set to any valid day of the month. If “31” is
entered, the system will always use the last day of the
month, automatically compensating for months with less
than 31 days.
SPECIAL NOTE FOR 360-DAY CALCULATION
TYPES: If you are setting up an interest-payment-
only loan that uses the 360-day calculation type, be
sure to enter the day after you are using as the Day
to calculate interest (on the first loan category
configuration screen) so that payment amounts are
changed after interest is calculated. (Payments for
these types of loans change during beginning-of-day
processing whereas interest accrues at end-of-day
processing.)
NOTE: A maximum of 15 loan categories can share the same
payment calc date. You can create additional categories if
you wish, but they must use a different payment calc date.
A step-down loan
automatically reduces the
disbursement limit each
month based on the
amortization term. See
page
7 for more details.
This option lets you add
any overline amount
(current balance over the
disbursement limit) to the
monthly payment. Designed
primarily to handle the
addition of insurance
premiums to the loan
balance. Also see Page
12.
To avoid carryover of interest to the
next period, the payment matrix must
be set up so that interest is paid first,
then fines (see Page 18
).
16
Interest Payment Only Loans
Field Name Description
Minimum payment
amount
If the total amount of interest due on the update day is less
than this amount, CU*BASE will use this amount as the new
payment. A minimum payment is required; this field
cannot be set to zero.
Next payment
calculation
This field tells the system when new payments should be
calculated next for these loans (month and year). This field is
required when setting up a new interest payment only loan
category. This will automatically increment forward when the
new payments are calculated each month.
CAUTION: This generally should NOT be changed on an
existing category. Contact a CSR for assistance.
Print payment change
notices
Check this box if you wish to generate a notice showing the
new payment amount each time the new payment
calculation is performed. Leave it unchecked if you do not
want notices.
IMPORTANT: If this box is checked, be sure to
include notice event PAYCHG in one of your laser
notice forms so that the notices can be printed. This
is the same notice event that is used for notices
for regular LOC payment changes, so you may
need to adjust the text of that notice so that it is
clear no matter which type of loan account is being
referenced. (See the “Member Notices” booklet for
details about setting up text for notice events.)
Switch to principal &
interest pmt calc type
Check this flag to automate the switch from an interest-only
loan to a loan where the member pays off both the balance
(principal) and interest.
BE CAREFUL: If activating this feature on an
existing category, all existing loans associated with
this category, including previously-created loans,
will begin obeying these settings the next time
payments are calculated.
See Page 5 for more details on this feature.
Switch x months after
month opened
If the Switch to principal & interest pmt calc type flag is
checked, use this to specify the period during which interest-
only payments should be calculated. Once this period has
passed (compared to the month the loan was opened), the
system will automatically re-amortize the loan and calculate
a new payment to include both principal & interest.
Term for calculating
new maturity date x
months
If the Switch to principal & interest pmt calc type flag is
checked, use this to specify the loan term that should be
used when re-amortizing the loan and calculating the new
P&I payment amount that will be used from that point on.
Principal
curtailments made
prior to due date on
non-delinquent loans
Non-input capable, informational only.
This shows how the system handles payments that contain
additional funds above the scheduled payment amount, if
the payment is received by the due date on an otherwise
current loan.
• For example, say the member owes a payment of
$150 on the 20th, and the loan isn’t delinquent. If
they pay $200 prior to or on the 20th, the system
will automatically process the additional $50 as a
principal curtailment.
Interest Payment Only Loans
17
Field Name Description
Principal
curtailments after
due date until next
calc date
This controls what happens if a loan payment is made that
contains additional funds above the normal payment, but is
received after its due date.
Allowed/processed automatically (A) – Compare # of days
delinquent to # of days between the due date and the next
I/O calc date in the loan category (minus one); if # of days
delq is less than or equal to that value (or if it’s 0 days or
less, meaning not delinquent), then process extra funds as a
principal curtailment. Otherwise follow the payment matrix.
Not allowed/follow matrix (M) (Default) – If the loan is
even one day delinquent, post any additional funds
according to the payment matrix.
• For example, say the member owes a payment of
$150 on the 20th, and the normal day on which
payments are calculated (the “cycle date”) is the
28th. The member makes a payment of $200 just a
couple of days late, on the 23rd. Since there are 7
days* between the due date and the next cycle date,
and the member is only 3 days delinquent, if this
flag is set to “Allowed” then the extra $50 will be put
toward principal. If this flag is set to “Not allowed”
then the system will follow the payment matrix
instead (putting the extra toward interest due, for
example).
*Not counting the cycle date itself, since changes are done in
beginning-of-day processing
Miscellaneous Related Settings
Add overline to
payment
Check this flag if you want to add any amount owed over the
loan disbursement limit to the monthly payment, when
payment changes are calculated. For example, if the
disbursement limit is $5,000 but the member’s current balance
is $5,030, then when calculating that month’s payment an
extra $30 would be added to the interest due amount.
IMPORTANT: This means the overline amount must
be paid in order to advance the due date on the loan.
This flag must be checked if the Apply stepdown flag is
checked.
See Page 12 for complete details on how this should be
used for insurance premiums.
Apply stepdown
This allows you to configure a line-of-credit category as a
step-down loan, which allows you to reduce the
disbursement limit each month based on the amortization
term. If this is checked, the Add overline to payment flag
must also be checked.
See Page 7 for details about this special type of LOC.
18
Interest Payment Only Loans
SETTING UP THE PAYMENT MATRIX
To ensure that interest is paid in full each month, with no carryover of
interest due into the following month (which could cause the payment to
fluctuate more than expected), the payment matrix should be set up as
follows:
Interest = 1
Escrow (only if applicable) = 2
Fines = 3
Principal = 4
Example:
The payment for John Smith’s construction loan is calculated using the
interest due on the last day of each month. On May 31, the system
calculates John’s payment as $125.00. John does not make his normal
payment on June 15 and the loan becomes delinquent, and by June 20 a
fine of $25 has been added and the interest due on the loan, which has been
accruing daily, is now at $185.00 ($125 from the previous month, and $60
accrued from the current month). John finally makes his $125.00 payment
on June 20.
If fines were first in the payment matrix, the system would make a payment
of $100 to interest due and $25 to the fine. The leftover $25 would remain in
the interest due bucket and carried over into the payment amount the next
time the payment was updated on June 30.
But if fines are af
ter interest in the payment matrix, the entire $125 would
go toward interest due, and the fine would be paid only if the member paid
the full amount including the fine ($150.00).
Remember that because of this unique matrix setup, payments that aren’t
made according to the standard rules for timing and payment amount may
not be applied as the member expects, and may cause amounts to be posted
against interest due when not intended. Member and staff education about
the best way to post payments, especially principal curtailments, is
important. See page 21 for more details.
Interest Payment Only Loans
19
CREATING INTEREST PAYMENT ONLY
LOANS
Once the loan category has been set up, you may begin creating loan
requests using the new loan category.
• Payment frequency must be set to Monthly when the loan request is
created.
• When setting up the payment due date, keep in mind the payment
update day configured in the loan category, as well as how you plan to
communicate payment changes to the member. Be sure to allow
sufficient time for notification to be given and received before the new
payment is due. See Page 30 for a list of options for communicating
payment changes to members.
CU*BASE will calculate a payment amount using the same amortization
routine as all other loans. Therefore, before creating the loan you must
manually calculate the first interest payment and use Override (F13) on the
Loan Recap screen to record the payment amount:
Loan Recap
Use Override
(F13) to
manually enter
the first interest
payment.
20
Interest Payment Only Loans
“Override” (F13)
Calculate the first
month’s interest
manually and enter
the first payment
amount here.
Interest Payment Only Loans
21
SERVICING INTEREST PAYMENT ONLY
LOANS
Once an interest payment only loan has been created, payments can be
made through the normal channels as usual. Teller and Inquiry screens will
show the member’s payment due as of the last time it was calculated, and a
full payment must be made to satisfy the loan for delinquency monitoring.
POSTING PAYMENTS: EXTRA FUNDS TO PRINCIPAL
For interest-only payment calc type loans, when a payment is applied, the
system does a comparison
1
of the next payment due date on the loan to the
next interest-only payment calculation date
2
(the “calc date”) on the loan
category. Based on this comparison, assuming the loan is NOT past due, the
payment will be applied according to the configuration in your loan category.
See fields Principal curtailments made prior to the date on non-delinquent
loans and Principal curtailments after due date until next calc date on page
15.
NOTE: Member education is critical here. In most cases the safest way to
ensure the payment is applied the way the member expects is to post two
separate transactions – one for the regular payment amount and then a
separate one to principal only.
1
The point of the comparison is to determine which payment period we’re in, so
we can determine if a payment is intended to be satisfying the next payment
or if it’s really intended to be extra on top of that period’s normal payment.
2
Since payment calculations are done during beginning-of-day, that means if
it’s October 27, 2021, and the day in the category is 28, then the next interest-
only payment calc date is 10/28/2021. If it’s October 28, 2021, then the next
calc date would be November 28, 2021.
POSTING PAYMENTS: ALL FUNDS TO PRINCIPAL
In situations where a member wishes to make an extra payment just on the
loan principal, use one of the following techniques to post a principal-only
payment (also referred to as a principal curtailment). Principal curtailments
posted this way will not affect the partial pay nor advance the next payment
date on the loan.
For mortgages with the 360-day interest calc type you can post a payment
and extra to principal all in one step, but for interest-payment only LOCs or
other types of loans that use a 365-daily accrual calculation, use the steps
described below to handle principal-only payments.
Method 1: Principal-only Payments via Teller Posting
In standard teller processing enter “L” in the Proc Code field next to the loan
deposit. The total amount will automatically be posted directly to principal
when Post (F5) is used:
22
Interest Payment Only Loans
TIP: If the member is also making a regular payment and
you wish to use this method for posting the additional
principal funds, first post only the regular payment amount
to the loan. Use the Bal Fwd/This Mbr (F11) feature to
carry the remaining funds over, then perform a second
transaction on this same account using Proc Code L to post
just the principal amount to the loan.
Method 2: Principal-only Payments via Xpress Teller
In Xpress Teller you’ll check the box at the right edge of the screen next to
the loan deposit:
Method 3: Principal-only Payments via Transfers
In the Member Transfers feature (Tool #516) you can check the Principal-
only box when making a transfer payment:
Interest Payment Only Loans
23
Method 4: Principal-only Payments via Online Banking
If you wish, members can choose the option to put the entire amount
towards principal when transferring funds to the loan via an online banking
transfer. (This option will not appear if the member’s payment is past due.)
NOTE: This feature must be activated via the via the
Audio/PC Bank feature on the first screen of loan category
configuration. If you do not wish members to make principal
curtailments this way, make sure that flag is turned off for
your interest-only loan categories.
OVERRIDING THE PAYMENT MATRIX
The Override Payment Matrix feature in standard teller and member
transfers posting lets a teller override the normal payment matrix on a loan
account and post the payment according to the situation. The system
displays how the payment is going to be credited (principal, interest due,
fines, etc.), and adjustments can be made to all of the bucket totals
according to the situation and credit union policy.
24
Interest Payment Only Loans
IMPORTANT: Remember that this technique will affect the amount in the
Partial Pay field, and therefore, depending on the amount being paid, may
affect the next due date on the loan. If you wish to make a payment toward
principal that does not affect the next payment date, use Proc Code “L” or
the other principal-only techniques already described instead.
The following window appears when you use the Override Payment Matrix
processing code (“X”) on the “Deposits/Withdrawals” screen in standard
teller posting, or the Pmt Matrix Override button on the Member Transfers
screen:
When the window first appears, it will show how the funds will automatically
be distributed among the matrix components. Enter the override amounts,
making sure that the total equals the payment being deposited (use Enter to
recalculate.)
Use the Amount field to enter the appropriate amounts to be distributed (the
items listed will vary depending on the loan’s payment matrix). The total
funds distributed must equal the amount of the payment being made. Use
Enter to record the payment matrix and exit the window.
For example, if the member wishes to make a principal
payment over and above the normal interest payment
(assuming no fines or escrow), enter the normal payment
amount in the Interest field and the remaining funds in
Principal.
AUTOMATED PAYMENTS
Via AFT
The current Auto Funds Transfer software will work well with this loan type,
as long as the AFT record is set up with the Amount field left blank
(assumes the payment amount on the loan record). AFTs can also be set up
with an amount that is higher than the expected normal payment, but to
ensure the extra funds are applied to principal, make the AFT transfer date
happen on or slightly before the payment due date. (If the payment arrives
even one day late, the extra would go toward accrued interest.)
Interest Payment Only Loans
25
ACH and Payroll
Systems such as ACH and payroll, where dollar amounts are required, will
not work as well, due to the fluctuating payment amount. ACH deposits can
sometimes be delayed based on federal holidays, as well. Members may still
request to make fixed payments via these systems; if so, estimate the fixed
payment so that it is larger than the expected interest payment required to
satisfy delinquency.
Be aware, however, that depending on the timing and status of the loan,
extra funds above the regular payment amount may be applied to principal
(if paid on time) or against interest accrued (if paid late, by even one day).
POSTING EARLY PAYMENTS
If a member wishes to make next month’s payment before the system has
recalculated the payment due for that month, Teller and Inquiry screens will
still show the previous month’s scheduled payment amount. Therefore, it is
not recommended to allow early payments prior to the recalculation
date.
RECOMMENDATION FOR LOAN PAPERWORK AND DISCLOSURES
When putting together the loan paperwork and disclosures for the member’s
signature, be sure that the materials clearly explain how principal payments
can be made according to your credit union’s internal policies and
procedures. In particular, make sure that it is clear how you recommend
members handle principal curtailments, to help ensure payments are
posted as the member wishes. Careful coordination of due dates, payment
update dates, and notification dates will be important to make sure members
understand how their payment will be handled.
DAILY PAYMENT CHANGES REPORT
A daily report (PIPOPY) will be generated to show the payment changes that
have been calculated and put in place on member loans. Following is a
sample of the report:
5/18/99 CU*BASE TEST CREDIT UNION PIPOPY PAGE 1
9:05.40 Interest Payment Only Loans: Applied Payment Changes
Loan --- Payment Amount --- Next Payment
Category Account No. Balance Old New Due Date
-------- ------------- --------- -------- --------- ------------
01 12-700 6,837.12 224.85 118.50 6/15/99
01 12-702 990.90 39.10 30.00 6/14/99
01 38-700 987.61 260.32 28.21 6/13/99
01 46-700 4,962.34 143.64 88.48 6/15/99
01 70-700 3,988.22 156.68 51.33 6/12/99
01 74-700 5,574.25 349.25 104.00 6/15/99
26
Interest Payment Only Loans
UNDERSTANDING DELINQUENCY
Even if a member does not make a payment during any given month,
interest will keep accruing as usual. The next month when the new payment
amounts are calculated, the member’s payment will be updated to reflect the
total amount of interest due (previous interest due plus the new interest
accrued), plus any overline amounts added to the payment, if applicable (see
Pages 7 and 12).
Therefore, loans with the “I” payment calculation type will simply use the
current scheduled payment as the total amount delinquent.
Loan Account Inquiry, “Delq/Cr Rpt Hist” (F23) or the Lookup next to
“Delinquency”
Since the system “stacks” the interest (i.e., it updates the scheduled
payment to match the total interest due on the configured day each month),
this method ensures that the amount delinquent will match the total
amount due correctly. For example:
Member John Doe
April Payment Amount = $63
May Payment Amount = $110
John misses his payment for April and is now 3 days into the payment
due for May. Because this is an interest payment only loan, John owes
$110 to bring the loan current, which is the total interest due (not $63 +
$110, as would be true for other types of loans where the payment amount
changed from one month to the next).
In other words, the calculated payment is based on the cumulative
interest for each month not paid. This calculation provides a valid figure
for the amount delinquent displayed in Teller, Inquiry and Phone Inquiry
systems. Just remember that a member is considered late even one day after
the loan’s due date, regardless of any grace period you might have for
applying fines or performing collections activities. The new payment will not
be calculated until later in the month on the usual calc date.
Use this to display
the Payment
Change History
inquiry screen
(shown on Page 28)
Interest Payment Only Loans
27
A WORD ABOUT PARTIAL PAY
For a delinquent interest-only loan, the Partial pay field means: of the total
interest due (plus any overline amounts, if applicable), here’s how much of it
has already been paid. This amount, in combination with the payment
change history, allows CU*BASE to determine how far to advance the due
date when a payment is made.
EXCEPTION: 360 Mortgages do NOT use the Partial Pay
field in any way to determine whether or not to advance a
due date. Refer to the “CU*BASE Mortgage Products:
360-Day Interest Calculation” booklet for more details.
Once a member satisfies the entire amount due on a delinquent loan and is
caught up, the system will clear the Partial pay field.
ADVANCING THE DUE DATE
If a delinquent member makes a payment on an interest-only loan, CU*BASE
will use the history of payment changes (see the inquiry screen shown below)
to determine how far to advance the due date.
In our earlier example, if John Doe made a $63 payment, CU*BASE would
know from the payment change history that that amount represents his
April payment, and would then be able to advance the due date forward to
May. If he paid $110 instead, CU*BASE would advance the due date to
June and the member would be caught up.
NOTE: CU*BASE will never advance the due date more than one month
ahead of the current month. This is because of the delinquency control
setting of “P” (single payment per period) on the loan category configuration,
which is required for interest-only loans because the payment can’t be
calculated until interest has actually been accrued.
28
Interest Payment Only Loans
PAYMENT CHANGE HISTORY
Loan Account Inquiry, “History” (F9)
Screen 1
This screen displays a history of each time the regular payment amount was
changed on this loan account.
NOTE: This history file began being populated after the Fall
2006 release, with some additional changes made in the
Fall 2007 release. Payment changes made prior to those
changes will not be included in the history.
Select an item in the list and click Detail to see more information about what
was recorded at the time the payment change occurred:
Interest Payment Only Loans
29
Screen 2
This screen shows a snapshot of the loan account status at the time the
payment amount was changed. Notice that this detail screen shows the
amount before the change, and the amount after the change, as well as
information about where the loan is sitting at the current time.
CU*BASE uses the payment change history whenever a payment is made on
a delinquent loan, to determine which payment is actually being made, and
therefore how far ahead the next payment due date should be moved. This is
true for interest-only loans as well as for regular loans where the payment
amount changes on occasion (variable rates, LOC disbursements, etc.). Just
remember that for an interest-only loan, the only time a payment amount
changes is on your configured date, once a month (unless you change it
manually, of course).
If for any reason a payment change history record does not
exist, the system will use the last record it can find and
assume that the payment was the same for any prior
months.
30
Interest Payment Only Loans
COMMUNICATING PAYMENT CHANGES
TO MEMBERS
As described on Page 3, there are many factors that could result in
fluctuations in the payment amount each month, including whether interest
is accrued daily, whether principal-only payments are made, if there are
overline situations caused by things such as credit insurance premiums,
and whether the loan has a variable rate.
Therefore, how you communicate the payment to the member will be key to a
successful program. CU*BASE offers a variety of methods:
Custom Payment Change Notices
Somewhat like sending an invoice for the monthly payment, this method
involves printing payment change notices using a custom CU*BASE tool
each month and mailing them to members. Costs associated with this
method include printing, handling and mailing the notices each month.
NOTE: This is a custom form and is subject to normal
custom programming fees and lead times. Contact a
CU*Answers representative for details.
Timing Issues: When setting payment due dates on the loan accounts and a
payment update day on the loan category, be sure to coordinate the dates to
allow ample time for the notices to be printed and mailed prior to the new
payments being due. For example, if payments are due on the 1st, and you
wanted to give 10 days’ notice plus allow time for processing, the update day
could be set to the 18th or earlier.
Printing the Payment on Member Statements
An easy and cost-effective method, your credit union can simply change your
member statement configuration so that the member’s payment amount
prints right on the monthly statement. NOTE: Payments amounts would be
reported for all member loan accounts.
Online Clients: Contact a CU*BASE representative for
assistance in setting up this statement configuration
parameter.
Timing Issues: The payment amount will be reported as it appears on the
member account at the end of the month when statements are generated.
Therefore, the day on which the payment is updated (configured in the loan
category) is usually set to that same time frame.
In addition, the loan payment due dates should allow ample time for
statements to be generated, printed, and mailed to the member in advance of
the new payment being due. We recommend using due dates no earlier than
the 15th of the month, with a payment update day on the last day of the
month (day = 31 in the config) or just before.
Interest Payment Only Loans
31
Notification via Audio Response and Online Banking
Whether or not you choose to notify members in writing via notices or
statements, if your credit union uses audio response or online/mobile
banking, members can find out their current payment at any time through
either system.
• In CU*Talk, choose the Account Inquiries option (1), then Status of
Loan Accounts (5).
• In It’s Me 247, click the ... next to the account and choose Account
Details, then More Account Details
Timing Issues: Advise your members to log in and check the new payment
any time after the published payment update day.
