Turning Off Accrual Processing Is Not Non-Accrual Loan

By

September 30,2013

According to Generally Accepted Accounting Principles (GAAP) in lending, for many loan types, you must stop accruing interest into income when a loan is 90 days past due. This is called Non-Accrual Status. Also, in the Status Code setup, there is an option to turn off the accrual process. For example, if a loan is set to a Status Code where accrual processing is turned off, then that loan will not accrue. On its face, it would seem that this is the feature to be used to put a loan on Non-Accrual Status. IT IS NOT. Let me make a blanket statement and then I will give you the reasons. Here goes:

NEVER USE THE STATUS CODE FEATURE "DISABLE ACCRUAL PROCESSING" TO PUT A LOAN IN NON-ACCRUAL STATUS.

Now, I will explain why and tell you how this feature should be used.

The accrual process includes 17 steps of automation. Only one of these is the accrual of interest. Here are some of the features that you would lose on your loan if you stopped the accrual process:

  • Daily Balances are recorded during the accrual process. The loan would drop off your balance reports as if it did not exist. Non-accrual loans should not do this.
  • Processing of impounds and escrows would stop.
  • Scheduled and Recurring Transactions for the loan are triggered by the accrual process. These would cease.
  • Billing and statements would not be processed. A non-accrual loan should still have billings and statements if you are trying to collect.
  • The loan would stop ageing. The days past due (which is the difference between the due date and the interest accrued thru date) would no longer increase if the interest accrued thru date is no longer moving forward. Therefore, you would be stopping further actions (such as GAAP write-off when 180 days past due).
  • Fees and discounts would no longer be amortized.
  • Lastly, since the loan must be accrued to the present in order to process a transaction, stopping the accrual process effectively stops all transaction processing, making it impossible to bring the loan current.

I assume these things are not what you had in mind for a non-accrual loan.

So, what is it good for? Well, unlike "War" in the song, it is actually good for something. Here's the scenario:

Sometimes stuff doesn’t work the way it should. It happens very rarely, but just in case it does, NLS has safety mechanisms. For example, due to some mal-setting or user error, one of your loans has a piece of corrupt data, and that corruption is causing the system to crash when it tries to run accruals on that loan. You have exported your setup and loan to Nortridge Software Customer Support, and they should have a fix in the next day or two. So, you simply create a Status Code (call it "On Hold") and check the box "Disable Accrual Processing" for that Status Code. Then you assign it to your loan. Run your nightly accrual process, and the loan will be skipped: no crash and the rest of your loans accrue normally.

Once you get the fix from Support, take off the Status Code and the next time you accrue, the loan will be caught up.

And that is what it's for.