Resolution 49 (2003) Standardisation
33-41 Lower Mount StreeT
Dublin 2
Resolution 49 (2003) Standardisation
Functional Specification
Issued: July ‘07
Updated: February 2008, Feburary 2009, April 2009, July 2009
Document Control
Author(s)
Name
/Organization
/Signed and Dated
Joe Timmons
/Irish League of Credit Unions
/July ’07, Feb ’08, Feb ’09, July ‘09
Reviewer(s)
Kathleen Meenan
/ILCU
/Feb 09
Dave Hewson
/ILCU
/Feb 09, July 09
Tom Kiely
/ILCU
/Feb 09, July 09
Approver(s)
Ciaran Bishop
/ILCU
/Feb 09
Tom Kiely
/ILCU
/July 09
Contents
Document Control 2
Contents 3
Introduction 4
Introduction 4
Resolution No 49 of BDM 2003 5
Proposed Standard 6
Single/Lump Sum Payment Loans – Special Treatment 10
Loans Provision Override – Special Treatment 12
Net Loan Calculation 13
Loan Provisioning 14
Loan Interest Rate Changes 15
Reporting 16
Resolution 49 Exceptions Reporting 16
Re-scheduled Loans Report 18
Credit Control Management 18
Staged Drawdown of Credit 19
Pearls A1 Ratio and Delinquency Measurement 19
Arrears and the Credit Reference Bureau 19
Further Information 20
Appendix 1 – Sample Amortization Table 21
Loan Data 21
Sample Loan Amortization Table 22
Appendix 2 - Resolution 49 Report Format 25
Report Header Information 25
Summary Report Format 25
Detailed Report Format 26
Loans for Special Examination 27
Re-Scheduled Loans Report 29
Other Reporting Considerations 31
Introduction
Certain Resolution 49 reporting and reconciliation issues came to light during a number of credit union data migrations to new IT systems. In these cases when Resolution 49 reports from different IT systems were run on the same data they provided different results. A standardised calculation approach is necessary to ensure proper adjudication and satisfactory settlement of such issues.
This led to the set-up of a project team to examine the issues and devise a standardised approach in keeping with the provisions of Resolution 49. Key issues were identified in respect of the processing and treatment of level payment loans and lump sum payment loans.
Since level repayment loans (inclusive) became the norm in credit unions in the mid-late 1990’s this created processing challenges as weekly/monthly repayment amounts included varying components for principal and interest. This meant that the number of weeks in arrears could no longer be calculated accurately simply by dividing the principal arrears by a weekly repayment amount as was typical for traditional repayment loans where the principal repayment amount was constant over the term of the loan.
Amortization of loans over their term overcomes the varying principal repayment amount and also accommodates the correct processing of other issues found which could not be managed correctly by simply modifying or using a variation of the traditional formula.
Resolution No 49 of BDM 2003
“That this Biennial Delegate Meeting resolves that Resolution 11 of The League Annual General Meeting of 1987 and all Subsequent League Annual General Meeting Amendments thereto, be hereby rescinded with effect from 1 October 2004 and replaced by the following:
That this Biennial Delegate Meeting, to conform with best international standards and practices, decides that for the purposes of the Savings Protection Scheme, delinquency shall be measured by reference to the arrears of repayment of principal under the loan agreement.
This Biennial Delegate Meeting further agrees that loan arrears calculated as above shall be categorised and provision made by reference to the net loan balance in respect of each category as follows:
Category / Provision0-9 weeks / 0% of net loan balances
10-18 weeks / 10% of net loan balances
19-26 weeks / 20% of net loan balances
27-39 weeks / 40% of net loan balances
40-52 weeks / 60% of net loan balances
= 53 weeks / 100% of net loan balances
Proposed Standard
The project team did not give serious consideration to the development of an alternative means of bad debt provisioning as this was seen to be a substantial body of work which would likely lead to a review and examination of a number of fundamental processes of the credit union operation such as loan top-ups, rescheduling and arrears calculation etc. The scope of the current project undertaken was limited to devising a practical calculation within the provisions of Resolution 49 (2003) to cater for the operational needs of credit unions today.
In order to ensure that Resolution 49 is being correctly and consistently applied across credit unions the League devised a standard approach to address the processing issues identified and to provide a means to deal with current lending practices in place in credit unions today.
Generally IT systems currently calculate the number of weeks of principal arrears by dividing an arrears balance by the contractual weekly payment to arrive at the “weeks in arrears” value. Each loan would then be assigned to the relevant provision category and a provision is calculated based on the net loan balance. Different IT systems use varying arrears balances and repayment amounts as numerators and denominators in these calculations.
One of the major disadvantages of this calculation is that repayment amounts generally include a component of interest. This repayment type is known as an “inclusive” repayment or a “level” repayment. In the case of inclusive or level repayment loans an inaccurate value of the number of weeks in arrears results as the principal amount in arrears is divided by the weekly payment which includes a component of interest.
A loan can be amortised over its agreed life in order to allow the borrower to know what the regular weekly or monthly payment will be over the term of the loan. An example of this is shown in Appendix 1 and may be summarised as follows:
Req 1.0 Loan Amortisation Calculation
Resolution 49 weeks in arrears and provisioning calculations must be done in accordance with loan amortization calculations as detailed in the embedded workbook in Appendix 1 and in the following example:
Eg. A member borrows €10,000 over 4 years at 9%. The total amount repayable over the 4 years is €11,916 made up of €10,000 principal and €1,196 interest. The total amount of €11,916 is divided by 208 (52 weeks x 4 years) to give a €57.29 repayment every week. See Appendix 1 for detailed calculations and full amortization schedule.
Loan amortization means that borrowers know what payment is due each period and the amount of principal and interest due for each scheduled payment over the term of the loan.
Req 1.1 Loan Amortization Schedule Build
A loan amortization table must be built at loan issue for each loan issued based on contractual repayment schedules as specified in members’ signed loan agreements.
Req 1.2 Rebuilding Amortization Schedule
If a loan is topped-up, rescheduled, re-financed, written-off or the loan interest rate changes, the loan amortization table must be rebuilt from that date forward based on the new contractual repayment schedule and terms as specified in the new signed loan agreement
Req 1.3 Weeks in Arrears Calculation
The system must calculate the “Resolution 49” number of weeks in arrears from the loan amortization schedule by subtracting the period number representing the actual balance from the period number representing the scheduled balance.
Under the current system, if a loan goes into arrears, the period of arrears is typically calculated by dividing the principal amount in arrears (or a variant) by the weekly repayment amount or an average principal repayment amount.
So, in the example above, if the principal amount in arrears was, say €1,145.80, the number of weeks in arrears would be calculated as €1,145.80/€57.29, which gives 20 weeks. As the repayment amount includes interest this calculation is inaccurate and does not conform to Resolution 49 provisions.
If an average principal repayment amount was used instead this would also provide inaccurate weeks in arrears results over the majority of the term for all level payment loans issued as the actual principal repayment amounts will vary from the average principal repayment amount used for each loan on a period by period basis. In order to calculate the true Resolution 49 weeks in arrears position it is necessary to look at the amortisation table for the loan. A sample amortization table is shown in Appendix 1.
This proposed standardisation and calculation basis applies equally to credit unions in Northern Ireland as to those in the Republic of Ireland.
Appendix 1 shows an amortization table for repayment of a €10,000 loan for 4 years at 9%. As can be seen the weekly payment is constant at €57.29 but the principal and interest portions differ every week. The interest payment portion decreases every week as the loan balance reduces and the principal payment portion increases to make up the difference and provide for a constant or level repayment amount for the full term of the loan. Since the principal amount is different for each repayment amount due, in order to calculate the “weeks of principal in arrears” value for each loan, it is necessary to look at two values:
· Scheduled Loan Balance
· Actual Loan Balance
Let’s look at the above example and amortization schedule shown in Appendix 1.
Assume that this loan is in arrears and the “Actual Loan Balance” is €7,251.84 (Week 66 in the amortisation table). Also assume Week 91 is the current week and the expected or “Scheduled Loan Balance” is €6,109.83. This gives arrears of €1,142.01 which under current calculations could round down to arrears of 19 weeks (€1,142.01/€57.29=19.93 weeks). However, the loan is now 25 weeks in arrears as shown from the amortization schedule ie Wk91-Wk66=25 weeks.
As can be seen from the above example the number of weeks this loan is in arrears has increased from 19 to 25 by moving from the current method of calculating Resolution 49 to the new standardised method. The proposed standardised approach is in keeping with Resolution 49 and provides a more accurate reflection of the situation since the principal arrears must be calculated by reference to the principal sum borrowed and the principal amount repaid. Interest is an income and expenditure account item and is not relevant to the calculation of loan principal arrears or Resolution 49.
For monthly repayable loans an amortisation table will also be prepared showing the monthly repayment schedule period by period over the term of the loan in accordance with the contractual terms of the loan agreement. The number of periods in arrears, in this case months, will again be calculated by subtracting the period number representing the actual balance from the period number representing the scheduled balance as above. In this case the number of periods in arrears must be converted to weeks by multiplying by the factor (52/12). The Resolution 49 “weeks in arrears” calculation for other repayment frequency loans are processed in the same way.
Req 1.3.1 Repayment Period Factors
The system must convert Periods In Arrears into Resolution 49 Weeks in Arrears using the following multiplication factors for the different loan repayment periods:
Period / FactorWeekly / (52/52)
Fortnightly / (52/26)
Monthly / (52/12)
Quarterly / (52/4)
Half Yearly / (52/2)
Req 1.4 Commencment of Loan Period
The first repayment period of a loan must commence on the date of loan issue.
Req 1.5 Expected Loan Term
The system must use the number and duration of repayment periods to calculate the expected loan term.
Single/Lump Sum Payment Loans – Special Treatment
Single/lump sum payment loans are defined here as loans with principal repayment periods greater than monthly or where at least one lump sum payment is due over the term of the loan.
Due to the nature of lump sum payment loans requiring less frequent larger sums to be paid on certain dates, the risk of loan default associated with missing a payment is typically higher than that that would apply for a weekly or monthly repayment loan. For this and other reasons such loans may require special treatment and regular review.
This standard demands that all loans are amortized over their contractual loan term. Lump sum loans will also be amortised however the number of scheduled repayments is likely to be smaller and the scheduled repayment amount could be larger for typical lump sum loans. The repayment period may be annual or once over the loan term. The Resolution 49 number of “Weeks in Arrears” is calculated as before.
Req 1.6 Lump Sum Loans Functionality
The system must be capable of calculating bad debt provisions for loans containing Single/Lump sum payments.
It is proposed to manage lump sum payments missed through a series of system flags and data fields as follows:
Req 1.6.1 Lump Sums Management Flags
The system must be able to indicate and report on the following for each loan:-
Description / ValuesLoan (Fully) Secured / Y/N
Lump Sum Included / Y/N
Lump Sum Payment Missed / Y/N
Lump Sum Amounts Include Interest / Y/N
Req 1.6.2 Payments Missed Recording
The system must verify and update accordingly if a Lump Sum Payment was missed on a loan with a lump sum payment due to ensure that such payments missed are indicated on the date due and afterwards on the account, until the full lump sum payment due is received and no principal arrears exist on the loan account.
Req 1.6.3 Single/Lump Sum Loans Reporting
The system must list Single/lump sum payment loans, as distinguished by the Lump Sum Included flag, in detail in a sub-section of the Resolution 49 Report. The specific details required for such loan types are specified in Appendix 2.
Adequate provision for any Lump Sum Payment Loans which have passed their due payment date should be made unless there are extenuating circumstances.
Loans Provision Override – Special Treatment
Certain loans, following examination, may require provisions to be made which differ to those calculated by the system in accordance with the proposed standardization rules. In these cases provision amounts may be altered in line with the risk of loan default. Such override provisions may be put on any loan and removed at any time by authorised credit union personnel. All such adjustments will be recorded and traceable through audit reports. The use of the override function avoids repeated provisioning adjustments being made on loans whose system calculated provisions are regularly inappropriate and require adjustment.