Not sure where to post my question or if it has been answered before...

How should banks apply payments received on charged off loans?

ALL to interest, or divided between interest and principal?

Thanks!

Charging off the loan does not change how you process loan payments from the borrower's standpoint. Payments are applied according to the legal obligation. That may differ as to how the payment is treated for loan loss reserve accounting.

Thank you for responding to my question, would you mind elaborating on your last sentence...

That may differ as to how the payment is treated for loan loss reserve accounting.


Thanks!

if you have accrued a loan loss reserve for said account, and that amount is substantial (let's say a loan of $10,000,000 charged off) and suddenly the client sends in a payment of $5,000,000, you would look to reduce your loan loss reserve by that large amount. if we're talking small dollars, not worth the effort.

Well, the borrower's legal obligation does not change when you charge off the loan until the loan is paid off or forgiven. Any payments will be applied to the loan based on the legal obligation as found in the note.

(Unless this has changed) When the loan was charged off, any accrued interest and other fees would be stripped from the loan and backed out of income and the remaining principal would be charged off against the bank loan loss reserve account. Any payments received would then first be applied to recoveries until the amount of the charge off is satisfied and then any additional payments made could be taken into income.

Thank you!

Thank you!