I notice on a Home Term loan all payments (each one nearly $2,000) are going to interest. The AMO schedule shows that some of the payment goes to principal and some to interest. How accurate is an AMO schedule? These customers have been paying since August 2014 and and -0- has gone to principal according to their periodic statements. Is this a problem? The note says "Payments include principal and interest" and goes on to say: Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to unpaid collections costs; and then to any late charges".

Generally, amortization schedules are precise...BUT...they are projections, not guarantees. As soon as the borrower pays more or less than a scheduled payment, the remaining projections are meaningless. Depending on the interest accrual system required by the note (actuarial or U. S. Rule), early or late payments can also render the remaining projections meaningless. The only way to determine if a problem exists is to transfer the payment history (dates and dollar amounts) into a spreadsheet that applies the exact terms of the loan to the amounts and dates experienced.

After spending all day on this, I notice before the first payment was due, the customer made 6 separate payments that went directly to principal. Knowing that the AMO would render meaningless projections because of the immediate reduction to principal, trying to figure out why the customer's accrued interest monthly would cause all of the payment to go to interest. If the AMO was correct to begin with, and showed payments going to interest and principal each month, wouldn't the interest payments be less, or at least some of the money would kick into the principal by now? Every payment from January until now only covers the interest. Doesn't seem logical, but then I'm not a CPA, so...

Before spending more time, have you checked to see if the loan is set up properly on the system, is some setup item causing the interest only?

Have you discussed this loan with the servicing manager responsible for this portfolio? S/he is the person most able to understand what's happening & whether it conforms with the terms of the note.

Yes, s/he wasn't sure which method we use, actuarial or US, so we're trying to work our way through the question.

Also, yes Kathleen--the loan is set up to split out, so it's not interest only from what we can see. But for some reason, the interest is more than the loan payment each month.

Sounds like a calculation error re the payments. Less likely (but possible), it's a servicing set-up error.

Was the payment schedule ever above water?

What happens each month when the scheduled payment is insufficient to cover accrued interest? (If it's being serviced by U. S. Rule, shortfall is added to a running "interest earned but not collected" bucket. If the actuarial method is used, negative amortization occurs.)

If I'm understanding the difference between actuarial and US Rule, the APR on actuarial would be the same as the actual interest rate, is that correct? The payment schedule was only above water for the first payment made--after that it's all gone to interest.

U.S. Rule & actuarial are interest accrual methods. The distinguishing difference is how the accrual system handles negative amortization. Actuarial method allows it and U.S. Rule does not. Your problem still sounds like an error in the calculation of the payment schedule when the loan was documented. An am schedule (following the interest accrual method stated in the note) will tell you if the stated payment schedule (dollars and dates) amortizes the principal amount to $0.00 using the stated simple interest rate. If that checks out, you probably have a servicing error.