Refinancing a loan in default

[Guest lforesz]

Hi,

We have some loans in default for failure to remit loan payments. The grace period for deeming the loans has not yet occurred.

One question asked was could we just refinance the loan to increase the payments so that it is still paid off by the original due date and ignore the fact that 2-3 payments were missed. I'm a bit concerned about whether this truly cures the default on the loan especially if the payments under the reamortized loan for the quarter are less than what the payments under the original loan should have been for the quarter in which the original loan defaulted.

Do other practioners allow refinancings to cure defaults? Just curious. Any input is greatly appreciated as, of course, I cannot find guidance in the regs.

Thanks

[Mike Preston]

I think the guidance in the regs is provided by the history of the regs. I think Q&A 20 talks about multiple loans. The original proposal of Q&A 20 indicated that anything in excess of 2 loans per year would result in a deemed distribution. The 2 loan maximum was eliminated from Q&A 20 when it was finalized.

The purpose of eliminating the 2 loan maximum in a given year was, in part, to deal with the situation you have here.

if the numbers work out according to the reg, I see no reason why a plan sponsor would want to insist on defaulting a loan when an alternative is available to the participant.

OK, maybe I see at least one reason: administrative costs.

[Kirk Maldonado]

I think you have a potential fiduciary issue here. You need to know why the person (technically) defaulted before you renegotiate the loan. If it appears that the person will not be able to make the new loan payments, it doesn't seem to make sense for the fiduciary to enter into the agreement.