"Odd" loan repays

[pmacduff]

Plan loan policy calls for a "level amortization" and repays made through payroll deduction.

Is the plan required to allow a paticipant to pay extra odd amounts (through payroll) if they choose?

As an example, weekly repays are $88.52 and the participant wants to increase that by $20 and pay $108.52 weekly.

PA is tracking the loans and not the investment vendor, which means the PA would have to keep track of the "extra" repays and where they apply, presumably principal only.

thoughts?

[RatherBeGolfing]

Check the loan policy/procedures for prepayment language.  Some say no prepayment, some say only full prepayment, some say partial prepayment allowed.  

[ESOP Guy]

You might even want to check the note to see how pre-payments (if allowed) are handled. 

You would think it would simply shorten the amortization but there are about as many different ways to handle a pre-payment as there are people writing loan notes.    

[pmacduff]

Here is the only sentence I can find in this particular loan paperwork.  It's in the Promissory Note:

"The BORROWER may prepay the loan without penalty.  Each payment first applies to the payment of accrued interest and the balance of each payment applies to the payment of principal."

Trying mostly to ascertain if the PA MUST allow odd payments or if they can tell the participant that only regular weekly repays (or multiples thereof) and/or a complete payoff are allowed.

 

[RatherBeGolfing]

32 minutes ago, pmacduff said:

Trying mostly to ascertain if the PA MUST allow odd payments

Based on that language an extra $20 a week does not sound unreasonable to me.  

[pmacduff]

So that would mean that the PA must track the loan reamortizing each time there is a repayment?  See - most of our clients are small and simply use the original amortization for tracking.  Participants in these smaller plans never seem to keep a copy of the amortization they are provided with, much less keep track of the loan, so are constantly going to the client to find out how much more they owe. 

I know banks do this on car loans or mortgages for example, but I didn't know if a Plan/Plan Administrator was required to allow for it.

I suppose they could rework the Plan Loan Policy to more specific language if they don't want to be tracking those extra amounts and reworking the loan balance each time a payment is made.

[ESOP Guy]

4 minutes ago, pmacduff said:

So that would mean that the PA must track the loan reamortizing each time there is a repayment?  See - most of our clients are small and simply use the original amortization for tracking. 

It has been a very long time since I did participant loan work but this was the catch back then.  Many payroll systems it seems like the employer just tells the system how many payments of $x to take and unless someone shuts it off early in the case of prepayments being made too much is taken from someone's checks and goes into the 4k plan by mistake.  

I agree it is a pain but based on what you have shared I am not seeing the ability to say "no".  Maybe someone more current on loans can give you ideas. 

[Bird]

I agree; these would appear to be prepayments based on the loan policy.  We are probably way too generous with our time in this area and would typically plug the new payments into a spreadsheet, effectively re-amortizing the loan.  

[Mike Preston]

Effectively making the date the loan is paid off a bit sooner. There is typically no reamort. 

[david rigby]

Can you consider (effectively) making a new loan, replacing the current one with a faster amortization schedule?  (It just might make your payroll system a little happier.)

[pmacduff]

thank you all for the comments.  the key here was that the PA (client) wanted to keep things as "easy/simple" as possible as they already feel that plan loans take way too much of their time.  I'm thinking that perhaps some reworking of the Loan Policy would allow them to stipulate that repays must be made according to the original amortization only.  They have no issue with allowing complete payoff at any time, just want to avoid allowing odd payments.