Multiple Interest Rate Structures
The commercial loan system provides a full range of pricing opportunities for commitments, loans, sold loans, shadow loans, and purchased loans. These include Variable Rates, Contract Rates, Default Rates, and Tiered Rates.
Contract and Default Rates
The Contract Rate is the interest rate and/or rate index information established on the loan at time of setup, as well as any changes made to this rate information throughout the life of the loan. This is the expected rate of interest accrual provided the loan does not go into arrears and all of the other covenants in the loan agreement are satisfied. The Contract Rate may be a fixed rate or a variable rate. If the variable rate is chosen, there are many base rate index options and effective date options available to determine the accrual rate for the loan.
The Default Rate is the interest rate and/or rate index information established on the loan via maintenance, which is to be assessed when the loan goes into arrears and/or when covenants of the loan are not met by the borrower. The Default Rate information can be maintained throughout the life of the loan. Default Rates can be automatically activated based upon a user-defined waiting period. This waiting period is the grace period between the payment due date and the system processing date. If covenants other than on-time payments are violated, the Default Rates may be activated by the user. Conversely, when the loan payments are current, the system can automatically reinstate the Contract Rates. If all other covenants are satisfied, the user can deactivate the Default Rate and activate the Contract Rate. Like the Contract Rate, the Default Rate may be a fixed rate or a variable rate. Based upon user options, the Default Rate may or may not be used in conjunction with late charge processing.
Contract Rate and Default Rate information may be set at both the loan and the participation levels.
Tiered-Rates/Multi-Index Variable-Rate Processing
Variations of variable, or floating, rates are possible through the use of tiered rate structures:
- Split-rate is the ability to charge one designated rate on a portion of the note balance and another rate on the remaining portion.
- Balance-spread – this option is similar to the split rate option. Balances and rates may be set up to work in conjunction with the base note balance and rate. Daily accruals are again directly affected by a change in the note balance.
- Multi-Index – this option allows you to set up two or three indexes on a loan and earn on the basis of the lowest, highest, or average of the rates.
Coupled with Multiple Interest Rate Structures and other system pricing features, the commercial system provides many opportunities for creative portfolio pricing.