Explanation of Additional Interest Payments for Linked Deposits
When is Additional Interest Required for a Linked Deposit?
When a linked deposit is placed, the lending institution receives a below-market interest rate on the deposit. Pursuant to state law, this below-market rate applies only to the amount of that deposit actually loaned to a linked deposit applicant. This is determined on a daily basis. For lines of credit or other types of loans, in which the amount of funds actually lent to the linked deposit loan applicant may be less than the amount of the linked deposit, the lender shall pay the state the usual Market Rate on that portion which is not lent to the linked deposit applicant. Such a situation may arise as the applicant makes principal payments, for instance.
Assuming the borrower has complied with the statements on the application and the outstanding loan amount with the borrower for the associated linked deposit loan is always greater than the amount of the linked deposit placed with the lending institution, then no additional interest will be owed to the State.
At the anniversary date of each Missouri Linked Deposit Program loan, the lender is required to calculate the loan dollar days for each loan by completing a "Deposit Data Summary" report. Any interest due to the state at the usual market rate is then required to be remitted.
How Does a Lending institution Know How Much is Owed?
At the anniversary date of each Missouri Linked Deposit Program loan, the Missouri State Treasurer’s Office provides a "Deposit Data Summary" form which contains information about the linked deposit. This form is used to calculate any amount owed. The lending institution can submit a report showing the time-weighted outstanding loan amount with the linked deposit loan applicant for the period indicated. If the lending institution cannot produce such a report, the State Treasurer’s Office provides a downloadable spreadsheet here, which can be used to track any interest due. Please contact the State Treasurer’s office for the actual interest rate factor.
Is There Anything that a Lending institution Can Do to Avoid an Additional Interest Charge?
There are several options available to lending institutions if they are concerned about paying any additional interest. These options are summarized below.
- Option 1: Balloon Payment
The lender can structure an amortization loan schedule that allows the borrower to submit interest-only payments each month or quarter for the duration of the linked deposit with a balloon payment at the end of the term. At the end of the deposit period, the borrower would submit one payment to the lender which would include the interest due and the amount of principal due for the period of the linked deposit. This type of amortization schedule is common to many agricultural loans.
Lenders are still required to complete a data summary form within three weeks of the linked deposit maturity date, whether or not additional interest is due. - Option 2: Reduction of Linked Deposit Request Below Outstanding Principal Balance
In this scenario, the lending institution would request a linked deposit amount equal to or less than the projected outstanding balance remaining at the end of the deposit period. As an example, if the loan to a borrower is $250,000, but over the next 12 months the borrower is scheduled or expected to make principal payments of $50,000 on that loan, the lending institution would request a linked deposit for $200,000 (or less). In this way, the amount of funds placed with the borrower is always above $200,000, the amount of the linked deposit.
When the linked deposit is renewed for the next year, the lender will request a deposit equal to the borrower’s projected principal balance at the end of that 12-month deposit period (as opposed to requesting the current loan balance).
Lenders are still required to complete a data summary form within three weeks of the linked deposit maturity date, whether or not additional interest is due. Additionally, in the above scenario, we do not recommend that lenders use a blended rate for the linked deposit portion of the loan and non-linked deposit portion. - Option 3: Transfer of Principal Payments to the Missouri State Treasurer’s Office
If a borrower makes a large, unexpected principal payment on a linked deposit loan, the lending institution can wire or ACH these funds back to the State Treasurer’s Office. Our office would then terminate the current linked deposit and place a new linked deposit at the reduced principal amount with the lending institution. - For further information on this topic, please call the Missouri State Treasurer’s Office at (573) 751-2372. The above summary may not cover all circumstances faced by a lending institution when placing and administering a linked deposit loan. We encourage lending institutions to contact our office for any questions they may have on this issue.
