Temenos Transact
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Working with Loan Charge-off

Key Features

Charge-off is different from writing off the arrangement. The key features of charge-off are:

  • A full or multiple partial charge-off transaction is possible.
  • The interest on the charge-off balance should accrue, but is not passed to income.
  • Reversal of charge-off transactions is possible
  • Removal from charge-off or partial removal from charge-off (that is, a lessening of the charge-off amount) is possible as well.
  • Dual accounting –that is, having two sets of books, the customer record vs. the bank record and applying payments independently to the two records.

The charge-off feature is available for the Lending Product Line. The Charge-off Property has to be included in the product for charging off an account.

Multiple Interest Accruals

For a full charge-off, the system accrues interest for charge-off and the customer balances namely CO and CUST balances. There is no bank balance to accrue interest for the BNK balances.

For a partial charge-off (charge-off in parts), the system accrues interest for bank balance (for example, CUR<ACCOUNT>), charge-off and the customer balances. The system also accrues interest for the chargeoff and customer balances namely CO and CUST balances.

It is necessary to accrue both charge-off and customer interest on the corresponding balances separately.

Product Setup and Charge-off Balances

When a Lending Product with Charge-off Property is proofed and published, the system automatically creates the below balance type records to maintain customer, bank and charge-off balances. Except bank balances, other balance type records which are created by system are contingent in nature.

Bank Balances Charge-off Balances Customer Balances
CUR<ACCOUNT> CUR<ACCOUNT>CO CUR<ACCOUNT>CUST
DUE<ACCOUNT>   DUE<ACCOUNT>CUST
<AGE><ACCOUNT>   <AGE><ACCOUNT>CUST
UNC<ACCOUNT>   UNC<ACCOUNT>CUST
ACC<INTEREST>

ACC<INTEREST>CO

ACC<INTEREST>CUST
DUE<INTEREST>   DUE<INTEREST>CUST
<AGE><INTEREST>   <AGE><INTEREST>CUST
  • CUR<ACCOUNT>CO balance type holds the cumulative amount that’s been charged-off against an account.
  • ACC<INTEREST>CO balance type is used for posting the accrued interest on charged-off balances namely CUR<ACCOUNT>CO.

Dual Billing

In the case where a loan is in Charge-Off status, AA.BILL.DETAILS is updated with both the customer and the bank due amounts.

  • For a complete charge-off, the reflection of the charge-off billing is found in the billed balances. The bank amount is zero
  • For a partial charge-off, two sets of figures (the customer and bank amounts) are calculated and stored on the bill. The customer and the bank amounts differ due to the effect of the charged-off principal as well as the alternate way of applying credits to the arrangement.

Illustration of Partial Charge-off

The changes that happen in an arrangement when a charge-off is performed is illustrated with the help of the below example.
The arrangement is in delinquent status and is being charged off using the LENDING-CHARGEOFF-ACCOUNT Activity giving the transaction amount as 80,000 USD. This means 80,000 USD of principal is charged off.

The Loan Arrangement Overview is displayed below.

The Charge-off Activity is shown below.

The Loan Arrangement Overview After Charge-off is shown below.

Key Features of Full/Complete Charge-off

A complete charge-off is done using the LENDING-CHARGEOFF-ARRANGEMENT activity. After a complete charge-off is made in the arrangement, the Full Chargeoff field in the AA.ACCOUNT.DETAILS application displays Yes.

During charge-off, the loan principal is charged off to the PL Category assigned to the Account property class. The interest is charged off to the PL Category assigned to the Interest property class. Any tax is charged-off to the PL Category assigned to the Tax property class.

Handling Charge-off under FASB Regulations

In order to provision loan under FASB, the user can trigger the LENDING-CHARGEOFF-REPORTING activity and specify the required charge-off amount or percentage.

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Published on :
Tuesday, May 28, 2024 7:17:08 PM IST