In the finance industry, being able to collect on accounts and keep delinquency down is crucial to maintaining a good line of credit with your financing bank and curbing the number of individuals inclined to charging off. One method in assisting with individuals in the early stages of delinquency or experiencing a hardship in life due to circumstances they may not have control over is offering a deferment or due date extension.
A deferment or due date extension allows the finance company to advance the due date forward to the benefit of their customer. There are two parts to a deferment:
- The amount of deferment charges allowable
- The Institutional policies that control the eligibility for a deferment
Deferment Charge
Deferment charges help institutions who offer a deferment to obtain some monetary benefit in return for advancing the due date. The amount of the charge is dictated by the state, institutional policy, or a combination of the two. It is important to note that in certain states under certain regulated products, it is illegal to process a deferment and collect a fee. Please check your state regulations to ensure you can offer this service and determine whether there is a defined amount you can legally charge. Some of the variations in deferment calculations we have seen over the years are as follows:
- No fee
- Flat fee
- Percentage of the current loan balance
- Percentage of the monthly payment amount
- Installment periods’ finance charge (using Federal APR or State Contract Rate)
It is recommended for the institution to have documentation on hand how each deferment method they offer is calculated.
Institutional Policies
Institutional policies are put into place to control the circumstances in which a deferment can be run. For example, if no policy was in place to determine the number of deferments allowed, and the deferment charge was 0.00, the CSR would make every delinquent account in their queue current by running a deferment. Institutions should have written policies distributed among employees defining the conditions for a deferment to be run and how many deferments can be charged in a year and over the life of the loan. If possible, systems should be in place to help enforce the institution’s policies. Keep in mind that those systems may need exceptions built in for hardship circumstances. Here are just a few of the deferment rules we have seen:
- Deferments allowed in a given year and when the year rolls to the next
- Deferments allowed over the life of the loan
- Deferment is not allowed if the account is “X” number of days past due
- Deferment is not allowed if the account is Bankrupt, Charged-Off, Repossessed, or in a Judgment status
- “X” number of contractual payments required before the first deferment is allowed
Things to be Aware of
Before you believe that deferments will completely solve your delinquency woes, there are some cautions you need to be aware of.
- Cash: Cash is key when it relates to operating your business. Without cash, you will not be able to fund your operations, pay your employees, repay your LOC, etc. Since deferments usually collect only a portion of the monthly payment amount (if you charge a fee), your cash collections could be reduced by those customers who could have otherwise made a full payment. On the reverse side, having a lesser amount to collect for certain customers based on a short-term hardship may be the difference between bringing them current and potentially having them stop paying altogether. The policy you put in place is crucial for finding that needed balance that does not cripple your cash collections but improves your delinquency.
- Refundable Charges: Some states (i.e., Tennessee, Missouri, Mississippi) require the deferment to be refunded if the loan pays off during the deferment period. The deferment period usually extends to the new maturity date at the time the deferment was run. If the customer pays off the loan during the deferment period, they would be entitled to a rebated portion of the original deferment charge, usually calculated using a prorated method.
- PC Interest Refunds: In certain states where a deferment charge was made on a precomputed account (i.e., Missouri), the remaining term of the loan is extended by the number of deferments posted. For example, if the loan had five months of PC interest remaining on the day a deferment was going to post, the account on that same day would now have six months remaining of precomputed interest after the deferment was run. The amount of fee you would potentially collect would be negated by the extended payoff rebate if the customer pays off the loan soon after the deferment was collected.
- Amortization Schedule: If your current system follows an amortization schedule for earnings, deferments can disrupt how those amortization schedules work. This can potentially impact your earnings on accounts due to the system not being designed to handle the extended period calculation.
Conclusion
Most institutions we work with offer their customers the ability to advance their due dates using a deferment transaction. This is an important tool for them to help their customers who may be going through a hardship and assist in reducing their delinquency. We recommend each institution which currently offers a deferment to have a written document showing how the method calculates the deferment charges as well as the policies that govern their deferments.