When a payment is applied for less than the interest due, the unpaid interest has to be carried somehow. NoteHarbor supports three payment rules, chosen per loan beside the payment order (the wizard's Advanced section, or Payment Application in Edit Loan):
- Installment carry (the default): the unpaid interest stays on the still-due installment. It remains the next payment's target and is collected through that installment's remaining amounts, in the loan's payment waterfall order. This is exactly how NoteHarbor has always worked.
- US Rule (no interest-on-interest): the classic United States Rule, the unpaid interest is carried as a separate interest deficiency that future payments satisfy first. Interest is promoted to the front of the loan's waterfall, the carried deficiency shows on the loan header whenever it's non-zero, and payoff quotes/letters and the borrower portal include it: paying off the note settles it.
- Catch-up (late fees, then escrow, then all past-due interest, then principal): a regular payment on a behind loan pays outstanding late fees first (when you choose Apply), then the escrow of every past-due installment oldest first, then the interest on every past-due installment oldest first, then principal. Escrow comes before interest because it pays property taxes and, on some loans, insurance; keeping those current protects the property that secures the loan. An installment stays past due until it is paid in full; the loan's payment order is not used, and unpaid interest is tracked and collected at payoff like the US Rule deficiency.
The earlier catch-up order, and rebuilding a loan
Before October 2026 the catch-up rule paid escrow last (late fees, then interest, then principal, then escrow). A loan that already had payments recorded under that order keeps it, because changing it would rewrite how those recorded payments were split; its payment order line says so. Every new catch-up loan, and every catch-up loan with no payments yet, uses the new order.
An owner or admin can move an older loan to the new order with Rebuild with the new catch-up order on the loan page. It creates a new copy of the loan and re-applies every payment, in date order, under the new order. Before anything is saved you see each payment's old and new split, the balances before and after, the escrow balance, and the interest received in each calendar year. If interest in a closed tax year changes, the preview says so: check with your tax professional before reissuing a Form 1098 (nothing is reissued automatically). When you confirm, the original is archived and kept as a read-only record (no payments, charges or edits), and you land on the new loan.
The original is archived. Archiving turns off the emailed borrower portal link for it, so your borrower can no longer open the original from that link; a borrower who is signed in to the borrower portal may still see the original listed there. Your team still sees its full history read-only in the app. Like every copy, the new loan starts with no borrower or lender linked and nothing set up to reach anyone (no portal access, statements, reminders or emails). Link the parties and set up portal access and statements on the new loan yourself; nothing is linked or turned on for you. Credit reporting starts held and automatic payment cascades are off until you turn them on. (Keeping a borrower's portal access to the original's history is not offered today.) Loans in bankruptcy or foreclosure, closed or archived loans, shared or synced loans, linked or cascading loans, and loans with daily interest after a missed payment can't be rebuilt.
What the US Rule guarantees
The deficiency is never added to principal and never accrues interest itself. The schedule's future interest is computed exactly as if the shortfall had never happened. The borrower can be behind on interest; they are never charged interest on interest.
Changing it on an existing loan
It's a real term of the note, so changing it is an audited edit. On a loan with recorded payments, NoteHarbor re-applies every surviving payment under the new treatment (the same whole-loan recalculation a payment-order change runs) and re-derives the deficiency from the actual payments. Make the change in its own save; balloon notes, rate riders, modified/extended loans, and synced investor copies are refused with a clear message because their history can't be faithfully re-applied.
The treatment affects how interest is applied and reported for taxes (1098 figures follow the interest actually collected). Confirm the correct treatment for this note with your CPA. See also Partial payments & suspense.