Meeting notes from call with Robin Bell, VP at Opportunity International (http://www.opportunity.org/) about how adjustments should be handled in Mifos

Adjusting a Loan Payment

• When doing an adjustment, you want to be able to reverse the entire transaction. Then, as a separate step, enter in the correct (back-dated) payment. The adjustment entry should be tied to a previous transaction. The corrected new payment shouldn't be tied to a prior transaction. Would be nice if there was a memo field where folks could add this info as text.
• There shouldn't be any time restrictions for making an adjustment to an open loan.
• If you reverse the 5th payment of 10 payments:
  • Payments #6, 7, 8, 9, 10 shift "backwards" and become payments #5, 6, 7, 8, 9. Assuming these payments were made monthly, then the loan has been continually in arrears for 30 days and had 5 late payments.
• If you make a reverse the 5th payment of 10 payments and then apply a partial back-dated payment:
  • First, Payments #6, 7, 8, 9, 10 shift "backwards" and become payments #5, 6, 7, 8, 9. Assuming these payments were made monthly, then the loan has been continually in arrears for 30 days and had 5 late payments.
  • Then partial payment for #5 is applied. Payment #6, 7, 8, 9, 10 then partially shift "forward"-- and are allocated across penalties, fees, interest, principal as per Mifos' rules. The loan will have 6 partial payments (payments #5 - 10, inclusive)-- and will have been continually in arrears for 30 days-- albeit the amount in arrears will only be a 'partial' amount.
• Once a loan has been marked "paid in full", can you apply an adjustment?
  • In all her experience, she's never seen a scenario where an adjustment has to be made to a loan that's been closed-- but agrees it can theoretically happen.
  • If the adjustment is to record an overpayment (ie-- the loan has been overpaid)-- thinks there should be no adjustment made to loan. Instead, a refund issued to the client from the accounting system.
  • If the adjustment is to record an underpayment (ie-- loan hasn't been fully paid)-- then loan would move into "in Arrears" and distribution of payments would follow the same logic as above.

Writing Off Loans

• Just because you're written off the loan from your accounting side doesn't mean you've let those clients off the hook. You can still collect payments on written off loans
• You want to keep some record of this loan-- history of client payments, etc-- even though loan has been wiped from your books.
• There are 2 states for written off loans: "Still in collection" and (something like) "negotiated settlement".
• In Columbia, they've introduced credit unions and MFIs are sending their info to these unions. Clients are realizing that they can't get new loans if they had a loan 8 years ago that was "written off". So the client works with the MFI to renegotiate the terms of the loan-- sometimes interest is forgiven, penalties are waived, sometimes a % of principal is forgiven-- basically they negotiate a restructured payment plan with the MFI. Once these terms have been fulfilled, the loan should be marked "Negotiated settlement" (or something like that). It is still a written-off loan, but the client has satisfied their requirements-- and this is communicated to the credit unions.
• All payments made against a written off loan should be recorded against a different GL account-- typically "Extraordinary income"

Recalculating interest due on declining balance loans (general note-- not related to loan adjustments)

• Right now, Mifos DOESN"T adjust interest due if loan payments are early or late. This is typical for all our current MFI partners-- although not typical of banks. In the future, we will have to add this flexibility as MFIs become more bank-like in their approach. When we do-- there will be the additional requirement of recalculating interest due at time of adjustments. Until then, we'll enjoy this lack of complexity for the time being.
• The way it works:
  • The installment amount never changes. Overpayments are applied directly to principal and the duration of the loan reduces (ie, fewer installments). Early payment means less interest so again, fewer installments (or a reduced amount due for the last installment). Underpayments are applied as per the same rules Mifos uses (first to penalties, then fees, then interest, then principal)-- and the number of installments increases.