Electronic Processing of Principal Residence Loan ApplicationsSubstantiation Required?

[Guest Fourohonekay]

An exception to the 5-year repayment rule exists for loans used to acquire a principal residence.

First, are there requirements that a plan require substantiation -- at the time of the loan -- from the participant re: the use of the loan proceeds? If so, what needs to be obtained by the plan?

Second, if a plan wanted to move its loan application/approval process to its web-based administrative platform, would an electronic certification by the participant that the loan proceeds being applied for were going to be used for the acquisition of a PR be okay?

Any specific cites for this?

Thanks!

[Guest NiceGuyMike]

I don't have any cites, but wanted to advise you of a caution. I worked for a while with a record-keeping firm that provided paperless loans. In one case, a participant's wife got his PIN (and already of course had his SSN) and took out a fairly substantial loan, which she then bought clothes with. The participant reportedly had no knowledge of this until he got his monthly statement and called to ask what the decrease in funds was about (and, later, he was upset about the fairly substantial after-tax loan repayments in his paycheck).

We obviously can't prove that his wife did this without his knowledge. Certainly she managed to obtain his PIN, and he can't be given a free ride on the amount taken out anyway. However, if you decide to do paperless loans, you've got to ensure that you're covered in the event someone obtains a PIN and uses it to obtain access to someone else's money.

The substantiation this firm did for principal residence loans was, when the participant asked for a loan which exceeded five years, they were required to provide their on-site benefits administrator with substantiation prior to the date the loan was to be processed. We never saw anything.

Michael