Subsidized Interest Receivable
Transaction Code 40 - Subsidized Interest Receivable is used to settle up interest between the subsidizing participant and the subsidized participant on a participation loan with an interest buy-down. This transaction code is executed on the subsidizing participant and transaction code 42 - Subsidized Interest Payable is executed on the subsidized participant. These transactions occur automatically when the following conditions are met:
- The loan is a participation loan.
- One of the participants is set up with an interest rate higher than the interest rate of the loan (this is the Subsidized participant).
- One of the participants is set up with an interest buy-down for the amount of the difference between the rate of the Subsidized participant and the rate of the loan (this is the Subsidizing participant).
- A recurring transaction is set up on the Subsidizing participant with a transaction type of Subsidization Settlement.
- In the configuration of the Subsidization Settlement recurring transaction, the Subsidized participant is designated as the participant to settle with.
The Subsidized Interest Receivable transaction affects the GL with a Debit to Accrued Interest and a Credit to Accounts Receivable. In addition, the transaction increases the interest balance on the participant on which it is run (which, due to its buy-down, has accrued negative interest).
Note
NLS defaults to DR Accounts Receivable and CR Accrued Interest when setting up Transaction Code 40 and it is recommended that each use case is evaluated and any adjustments made accordingly for the desired outcome.Example: A loan with a balance of $10,000 accrues interest at 10%. The interest is periodic, so the total monthly accrual is $83.33. The Subsidized participant has an interest rate of 12% for a total monthly accrual of $100. The subsidizing participant has a 2% buy-down for a total monthly negative accrual of ($16.67). The General Ledger Accounts involved are:
| Subsidized Participant’s Accrued Interest |
| Subsidizing Participant’s Accrued Interest |
| Subsidized Participant’s Interest Income |
| Subsidizing Participant’s Interest Expense |
| Accounts Receivable |
| Accounts Payable |
| Trust - Undisbursed Funds |
After one month’s accrual of interest, the balances of these accounts would be as follows:
| Account | Debit Balance | Credit Balance |
|---|---|---|
| Subsidized Participant’s Accrued Interest | 100.00 | 0.00 |
| Subsidizing Participant’s Accrued Interest | 0.00 | 16.67 |
| Subsidized Participant’s Interest Income | 0.00 | 100.00 |
| Subsidizing Participant’s Interest Expense | 16.67 | 0.00 |
| Accounts Receivable | 0.00 | 0.00 |
| Accounts Payable | 0.00 | 0.00 |
| Trust - Undisbursed Funds | 0.00 | 0.00 |
The recurring transaction is configured to do the Subsidization settlement at the end of the month. Transaction Code 40 runs for $16.67 on the subsidizing participant, increasing the interest balance on that participant upward toward zero. On the GL, the subsidizing participant’s accrued interest is debited and accounts receivable is credited, corresponding to a negative voucher which will either deduct from the amounts due to be paid out to the vendor account of the subsidizing participant, or will require a billing to receive the interest subsidy from the subsidizing participant.
Trans code 42 is run on the participant who has been designated as the subsidized participant. This decreases the interest balance on that participant in the same way that a payment would. If effect, a portion of the interest is being paid by the subsidizer and is therefore not due from the borrower. On the GL, there is a debit to Trust - Undisbursed Funds and a credit to Accounts payable. This is identical to the GL setup of the trust disbursement transaction (TC 20) which will occur when the borrower pays their portion of the interest payment, and will create a similar voucher.
At this point, the borrower still has yet to make their interest payment, and the balances of the GL accounts are as follows:
| Account | Debit Balance | Credit Balance |
|---|---|---|
| Subsidized Participant’s Accrued Interest | 100.00 | 0.00 |
| Subsidizing Participant’s Accrued Interest | 16.67 | 16.67 |
| Subsidized Participant’s Interest Income | 0.00 | 100.00 |
| Subsidizing Participant’s Interest Expense | 16.67 | 0.00 |
| Accounts Receivable | 0.00 | 16.67 |
| Accounts Payable | 0.00 | 16.67 |
| Trust - Undisbursed Funds | 16.67 | 0.00 |
For information on the other trust transaction code involved, see Subsidized Interest Payable.
subsidized interest receivable buydown buy-down participant participation
