Understanding the Three Fee Types and How They Are Applied

Cindy Fisher | January 23, 2020

Not all fees applied on a loan are the same. In fact, fees can vary widely in how they are applied, how they are paid, and how they affect the loan. Knowing the basic terminology and understanding of how fees work may help clear up some confusion when you read the term “fee.”

1. Amortizing Fees

Amortizing fees, also known as deferred fees, are applied when the loan is originally opened. These are fees that are part of the total of the loan, and a portion of the fee is taken into income automatically each monthend during the amortization cycle. These fees must be disclosed to the borrower during the document signing process of opening a loan. If the loan is paid off early, any unearned amount of the fee is returned to the borrower during the payoff.

How the fee is earned for your institution during amortization is determined by each institution and usually local, state, or federal regulations. We currently have 17 amortization methods that have been specifically set up for our institutions. Our system can be easily adjusted to any amortization method you use.

Examples of amortizing fees could be an origination fee, a documents fee, or a processing fee.

Scenario:

A loan has an amortizing fee called “Origination Fee.” The total fee amount is for $100. Each month, amortization of that fee takes place, and $8.33 of the $100 moves from unearned to earned. After seven months, that origination fee has $58.31 of earned fees and $41.69 of unearned fees.

If the customer were to pay off the loan in that seventh month, the $41.69 of unearned fees would be rebated back to the customer at payoff.

2. Miscellaneous Fees

Miscellaneous fees are applied after a loan is opened when certain actions take place on the account. For example, if a loan payment is returned due to non-sufficient funds, you could apply an NSF fee to the account. Miscellaneous fees are applied manually to each account. If you are a current GOLDPoint Systems customer, you can read how to apply miscellaneous fees in the Miscellaneous Fee Processing topic.

Once miscellaneous fees are applied to the account, they can be paid via a loan payment as long as the Payment Application includes fees, as shown below:

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Further reading: See the Payment Application blog post on why the payment application is a crucial part of how funds from a payment are distributed.

Or if a customer wants to make a payment specifically to pay off any miscellaneous fees, you can do that by running a special fee-only transaction from either the EZPay screen or in CIM GOLDTeller. (See Fees topic on DocsOnWeb.)

 

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Miscellaneous fees do not earn interest and are not part of the Principal Balance of the loan. They are usually applied as a type of penalty on the loan for inadequate payment, bankruptcy costs, or other reprisal.

Examples of miscellaneous fees are non-sufficient funds fee, legal fee, credit limit exceeded fee, towing and storage fee, repo fee, and court cost fee.

3. Maintenance Fees (P/I Fee)

Maintenance fees are not allowed in all states. And they only apply to daily simple interest loans (or interest-bearing loans). Maintenance fees are a way to charge borrowers a fee every month just for maintaining the loan. As you are well aware, there is a lot to maintaining a loan. Payments, interest variances, statements—always work to be done.

States also regulate the maximum amount allowed for a monthly maintenance fee, with most states only allowing between $1.00 and $3.50 for maintenance fees.

We also refer to maintenance fees as “PI Fees.” When a maintenance fee is required on a loan, maintenance fees are paid very first before any funds go to principal and interest, miscellaneous fees, or late charges.

The system handles the collection of maintenance fees differently for each institution. This is based on the Maintenance Fee Code. Some institutions earn and collect the maintenance fee when a payment is made. Other institutions earn the fee at a regular day each month and account for it in the General Ledger, but when the actual payment is made, another G/L accounting is made (cash income with offsetting G/L). On payoff, the General Ledger trues itself with proper income receivables and offsetting balances.

Maintenance fees are disclosed to the borrower when the loan is originated. If you are a GOLDPoint Systems customer, you can read more about maintenance fees on DocsOnWeb using the following links:

Maintenance Fee field group

Setting Up Maintenance Fees

Maintenance Fee Codes

 

Tags: Fees

Cindy Fisher | January 23, 2020

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