Can a Participant who has previously defaulted on a participant loan be denied a new loan?

[Guest Jerry]

Can a participant who has previously defaulted on a participant loan be denied a new loan? Based upon past experience, the participant would not seem to be credit wothy. At the least, the new loan does not seem to be a good investment.

[Belgarath]

Yes. But there are so many potential "facts and circumstances" situations that the permutations are nearly endless. First, depending upon the type of plan and whether it is group or individual accounts or segregated assets, there is potential fiduciary liability if a loan is made where objective standards indicate a poor credit risk. Beyond that, there are document and SPD issues, fair and consistent application of all standards, etc. etc...

In an ideal world, the document and SPD would clearly state that no additional loans will be permitted to anybody with an unpaid loan in default status. If you don't have that, then you get into some judgement areas. I'd strongly recommend the client consult ERISA counsel.

[FundeK]

Does the plan allow for more than one loan? If it only allows one outstanding loan then the participant can not take a new loan, the defaulted loan is considered an outstanding loan until it is repaid.