Back when I spent most of my time doing trainings and implementations for new customers, I had an interesting conundrum come up: A lender using an old servicing system was in the process of converting loans into their shiny new Nortridge Loan System. One of the requirements was to match the amortization schedules from the old system.
Blackboard_ACT_360.jpgNo problem. An analysis of the numbers on that amortization schedule, and a small bit of trial and error, and we were able to generate an amortization schedule identical to the one from the old system. The analysis of the math from the old system indicated that it would be necessary to set up an interest year setting on the loans of ACT/360 (Actual, 360 Days), and that setting would result in loans hitting the amortization target numbers dead on.
Then, a curveball. In looking at the loan docs, an item on page two jumps out at me. It says: “Interest is to be accrued on a daily basis by taking the current outstanding principal balance, multiplied by the annual interest rate, and then dividing that result by the number of actual days in the current calendar year.”
Houston, we have a problem...or at least an issue.
The legal description of the method of interest accrual is consistent with the interest year calculation that we call ACT/ACT (Actual/Actual), instead of ACT/360. We could have easily set up the loan as ACT/ACT but it would have been detached from the amortization schedules in the old system.
Truth be told, the lender had this issue long before they went shopping for a new loan servicing system, but we were about to solve it. Ironically, the solving of the problem (i.e. setting the loans up correctly for the first time ever) would alert borrows of a problem they didn’t know existed. In other words, the client desired a seamless conversion but as a result of the conversion process, a lack of contractual compliance had surfaced. A conundrum, indeed. Thus, the very act of fixing that problem was about to shed a spotlight on the problem.
Without disclosing exactly how the client handled this situation, I can say generally that a conversation with legal counsel is usually a good next step in cases like this.
The bottom line: It’s good for a servicer to have a software platform that has the flexibility to match current lending and servicing protocols. It’s also good to ensure that your system matches contractual obligations. We hope – and you should hope too – that these are the same thing. If they’re not, some sort of reconciliation needs to be addressed.