Loan "Commercially Available Rate"

[Guest stevena1]

Document loan policy says loans will be given at a "commercially available rate". I always thought this meant that the loan would be given at the same rate as a fixed, secured rate (similar to a loan secured with a CD or savings account.) The loan at that rate would be around 6%.

I am hearing that the rate should be "Prime" or "Prime Plus" something and that I am wrong about what rate should be used. The prime rate is much higher.

Can anyone comment? Much appreciated.

[Slider]

According to the DOL regs (2550.408b-1(e)), the loan must bear a reasonable rate of interest; a loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by commercial lenders for loans made under similar circumstances.

For a while, many of our plans were charging prime plus one or two. Apparently, on audit, the DOL was saying that a rate based on prime wasn't good enough and that the plan administrator had to call up three local banks to find out what they were charging for similar type loans.

[Guest stevena1]

Thats what we did at our old firm, every few weeks we would call a few local banks to get the fixed, secured loan rate.

But I am getting resistance here at my new firm who is telling me prime is the correct rate. I am not sure where to look for a definitive answer.

[MWeddell]

The last time I looked at survey questions on this issue, a huge (85%?) majority of DC plans with participant loan provisions were basing their interest rates on the prime rate plus or minus an increment. If the DOL disagrees with that position for 16 years now, it sure is doing a poor job communicating what to do. I think it's implausible that one would suffer any sanctions for using prime rate or prime rate + 1%, plus it is administratively easy.

Banks are not in the business of making loans secured by half of one's vested defined contribution plan account balance and it's unclear what a similar loan would be. There's no commercial market that makes those loans. Hence, the guidance in the regulations is pretty sounding verbiage but doesn't really give guidance on what to do.

[Bill Presson]

The other thing that has always burned me up about this is the DOL recommending calling three banks. Now, if I did this once, no big deal. Call a couple of time, probably still not a huge issue.

But if I called week after week, how long before the bankers tell me where to go? It's not in their business plan to constantly supply the pension industry with comparative data so that the participants don't have to go to the bank.

This has always struck me as one of the stupidest "requirements".

[R. Butler]

Most of the plans we handle use "prime +". Many of our plans use recordkeepers where the loan is initiated by the participant via the recordkeeper's website or toll-free number. We still have the check & paperwork come through here, but the amortization schedule is generated by the recordkeeper. For plans using that type of investment product, the recordkeeper requires an easily determinable rate.