GENERAL LEDGER OVERVIEW

GENERAL LEDGER OVERVIEW Mortgage Computer Ogden, Utah

Preface Accounting is an essential segment of Having It All Together mortgage lending software. MC Software incorporates the necessary accounting features for accounting principles to be in compliance with investor requirements. To maximize automation and make for an efficient work flow, it is essential to understand and properly set up the General Ledger sections. The most dangerous phrase in language is, We ve always done it this way. Grace Hopper Automation will and does require changes in many areas. What is currently a manual function or using a software system that does not offer all accounting features will require a change in organization when moving to. MC realizes there is seldom only one way to perform a task. Custodial Accounts There is no right way to do a wrong thing! There is a good way, A better way, And the best way to accomplish the end result desired. Originating and servicing real estate loans requires Custodial Checking Accounts set up for each department. Investor or borrower funds should never be co-mingled with lender funds. The lender is holding investor and borrower funds as a trustee, in a fiduciary capacity. It is therefore mandatory to set up Custodial Checking Accounts and administer them properly. Loan Origination Department In the origination department there will be one Custodial Checking Account for combined borrower and loan funds. Application fees, funds required from the borrower at closing, and proceeds from the signed note will be deposited into this account. (Suggested name: Undisbursed Loan Funds.) When funds are received from the borrower, cash or check together with a deposit slip (credit to the Undisbursed Loans Funds Custodial Checking Account) is handed to a teller. All disbursements will be from this account either by check, wire transfer, or a credit to an in-house General Ledger account. The real estate department using the Funding program is responsible for receiving and disbursing funds, not the accounting department.

Construction Department The Construction Software accounts for receipt and disbursement of all construction funds. The department handling construction loans will set up a Custodial Checking Account (not a GL account). Funds from the borrower and proceeds from the note will be deposited into this account. (Suggested name for the Custodial Checking Account: Undisbursed Construction Proceeds.) All disbursements will be from the Custodial Checking Account by check to a vendor/supplier. Interest deducted for Undisbursed Construction Proceeds can be processed to the Interest Income GL Account. Servicing Department The Servicing Department will have several Custodial Checking Accounts. Payments of principal and interest received from a borrower on portfolio loans requires no custodial account. There are only six possible entries at the end of the day to the GL: Debit: Unposted Real Estate Loans Credit: RE Notes Receivables Accrued RE Interest Late Fees Partial Funds RE Suspense Escrow Custodial Checking Account If the lender is offering escrow accounts for payment of taxes, insurance, and other items, these funds have to be deposited into a Custodial Checking Account. (Suggested name: RE Escrow Account.) Payment will only be by check from this account. If the lender is servicing loans for an investor, there are additional required custodial accounts. There will be a custodial account for principal and interest (P&I) received and a custodial account for escrow funds (T&I). Depending on the investor s requirements, there could be additional custodial accounts for the various types of loans being serviced. Each investor will have separate P&I and T&I custodial accounts. Debit: Unposted Real Estate Loans Credit: P&I Custodial Checking Account T&I Custodial Checking Account To facilitate the disbursement of escrow funds, checks should be written fromone Custodial Checking Account. When escrow accounts are approved for payment and the transaction update is performed, funds will be transferred from each of the various escrow accounts to one escrow clearing account. (Suggested account called: Escrow Clearing Account.)

There is only one checking account, one set of checks, and one account to balance each month. Disbursing funds should be done by the real estate department and not the accounting department. The real estate department has all the information and can be audited by the accounting department. How does information get to the accounting department to prepare a check and who audits the accounting department? Loan Payments Payments on real estate loans can be received various ways. There are some precautions that must be considered when organizing to receive and post real estate loan payments. Who should receive payments, enter the payment, and which Transaction Code to use are considerations that must be addressed. Payment Methods Accounting Entries 1. Payment coupon mailed in } 2. Payment made to teller } Debit - Credit 3. Funds from a DDA account } Cash Unposted RE Payments 4. ACH payments received } Tellers should only receive standard payments. Problems are created when odd type payments, reversals, loan payoff, etc., are handled by a teller. The teller may not know or understand which Transaction Code to use, e.g., can the payment be for more or less than the amount shown on the coupon, or if the account is frozen. Will a teller know if a curtailment (extra principal) can be accepted or what to do with partial payments on collection workouts, etc. It is asking a great deal of a teller to understand all the ins-and-outs of servicing real estate loans. Payments mailed in should be opened and posted to the loan servicing system by the real estate department. The real estate staff understands which Transaction Codes to use and can balance and enter the payment in one step. Funds received can be passed to a teller window or picked up directly from the real estate department. Funds from DDA and ACH accounts originate and are updated by the real estate department staff.

MC Servicing Update Transactions can be entered in groups (a group being a number of payments) and groups updated several times during the day. Updating means to spread the payment (segregate escrow funds, compute the amount of interest, and apply the remaining amount toward principal). After each transaction update, totals for interest, principal and escrow funds are accumulated. On the last Transaction Register for the day, the following entries would be indicated: Debit - Credit Unposted RE Payments RE Notes Receivables Accrued RE Interest Late Fees Partial Funds RE Suspense Escrow Custodial Account Investor P&I Investor T&I Unposted RE Payments must zero out daily. There must never be a balance in this account. Batch Update or Online Receiving monthly loan payments in the real estate department is a one-way street. In checking and savings, funds are coming in and going out. Checking and savings transactions must be updated immediately. Some of the funds received from the borrower could be escrow funds. These funds are paid out at specific times: Hazard insurance and taxes are usually paid once or a few times a year. The disbursement of funds is controlled and accounted for. Tellers can receive a loan payment and issue receipt of funds at the window using the MC Mailbox program that passes the information to the core provider. Please encourage your core provider to accommodate MC s many Mailbox files being sent. There are many reasons why it is best to not post real estate payments directly at the time of receipt. Accounts can be frozen. Loans could be in foreclosure. Loan is in process of being sold to an investor. Delinquent payments must be collected, late charges have to be collected, and how to apply partial payments on collection work outs. MC updates transactions in batches. Month End It is mandatory that reports and accruals be run prior to any payments being updated for the new month. All accounts are frozen until reports are processed. Interest accruals, month end reports for investors, credit bureau files, and others have to be run before payments can be updated. Real estate loans are not processed like car loans. Servicing loans is not difficult. It is a simple process repeated each month. There are strict requirements from the investor. Specific reports have to be run and there are requirements and laws, both state and federal, governing real property.

Accruals MC software system is based on the Accrual Method of Accounting. The system is not designed to function for a company using a hybrid method of accruing interest. Hybrid method is cash accounting for payments received during the month and accrual accounting for payments not made by the end of the month. Hybrid method requires many extra steps in accruing, reversing and reposting. MC does not train or support hybrid method of accrual. Interest Due Accrual Accruals are processed the first of each month (not the last day of the month). Loan payments can continue to be received and entered into the system but cannot be updated until the accruals and all month end reports are processed. When the monthly accrual due is processed, the entry is: Debit: Accrued RE Interest (IA Transaction Code) Credit: RE Interest Income (II Transaction Code) When loan payments are received, the entry is: Debit: Unposted RE Loans Credit: Accrued RE Interest RE Notes Receivable Late Fees Partial Funds RE Suspense Escrow Custodial Account Interest Payable Accrual If paying interest on escrow funds, you have to accrue on the balance specified by state law (another reason why you do not post payments prior to accruals processed). Debit: Escrow Interest Expense Credit: Accrued Escrow Interest Payable Escrow interest is paid to the borrower according to state law. When paid, the transaction is: Debit: Accrued Escrow Interest Payable Credit: Escrow Custodial Account

Compute Interest Payments on real estate loans are scheduled to be the first day of each month. Servicing loans for any investor requires payments due on the first day of the month. Interest is computed on 360 days per year. The exception is biweekly loans. A biweekly payment is always the same day of the week every 14 days and interest computed on 365-day interest. For some larger commercial loans, interest is computed on 360 and applied on 365 days. Odd Days Interest Odd days interest, outside of amortization, before payment commences and odd days at payoff, is always computed on 365-day interest. This has no affect on accruals. At closing of the loan, odd days interest should be passed directly to RE Interest Income. At time of payoff, MC s program considers the odd days interest collected in interest accrual. Vendor File When checks are disbursed from Loan Processing or Construction using, the information is written to a Vendor File. A ScrolEx Vendor File should be set up for each appraiser, inspector, vendor, or supplier. The date of the check, check number, and amount are stored in this file for reporting to vendors and/or to IRS. Even though you do not report to IRS for corporations, having a record to research checks issued and to send to vendors at year end leaves an impression on how well organized the company is. General Ledger is enhanced that when the Transaction Register update is processed, the dollar amount will be posted to General Ledger account in MC GL program. The General Ledger can be viewed or printed. The same data is transferred to a third party using the interface. This is dual posting and a quick method for balancing if any discrepancies. A company could go one step further and consolidate the data at month end and reduce time in accounting. If there is any balancing problem on the core system, compare to the GL account on the MC side. This figure is always 100% correct. Cashbook Reconciliation Mortgage Computer has a program called Cashbook Reconciliation. Deposits made and checks written are entered automatically to each checking account check register. At checking account statement date, the Monthly Reconciliation program is to balance the statement balance to the checking account register.

General Ledger The General Ledger program was created for those companies needing an Accounting package. Benefit 1. Now you have something to balance to. 2. Monthly Interface Summary is no longer needed. 3. You could skip the Interface and update once a month. 4. No more wasted time trying to balance. 5. No need to process the Trial Balance.