Loan Refinance

[Guest tajcc]

Total vested account balance is $200,000.00

Current loan balance is $23,000.00

Highest outstanding loan balance in past 12 months is $25,000.00

Participant would like to refinance this loan and pull the maximum amount out allowed for a loan.

Can someone tell me what the max. allowed would be?

Thank you.

[JanetM]

If the plan allows this.

Max is $50,000, less highest balance of $25,000 leaves $25,000 available.

[Guest tajcc]

Correct me if I am wrong, but is this the way it would be calculated?

Reduce the $50,000.00 by the difference of the highest outstanding loan in the past 12 months and the loan balance:

$25,000.00 - $23,000.00 = $2,000.00

$50,000.00 - 2,000.00 = $48,000.00

Since they are looking to refinance the $23,000.00 and pull additional money for a loan - new loan amount would be $48,000.00 - payoff the existing loan of $23,000.00, participant would receive a check for $25,000.00.

Also, the original loan period was for 5 years, can they start a new 5 year period with this loan being refinanced and additional money being added through the "replacement loan"?

[JanetM]

I will make it clearer.

50K max is reduced by highest balance of 25K. New loan amount 25K. new loan and highest balance added together can't exceed 50k.

New loan can be 25k. If they go over the 25k they must pay the amount back by the due date of the original loan. They do not start new 5 year clock under section 72p.

[Guest tajcc]

Thank you Janet - I appreciate your insight. One more question if I may...

Say we are talking about a loan of a lesser amount with an account balance of under 100k....Loan amount of $10,000.00, participant has been paying on it for a year (originally amortized over a five year period) and the participant wants to refinance this loan and pull an additional 10,000.00. So the replacement loan would be for $20,000.00. In this case, if I am reading correctly from the ERISA Outline Book p.7.233 in the 2006 edition, the replacement loan is a new loan; therefore, it would be able to amortized over a new five year period?

[Guest Judy S]

I agree with tajcc-the reduced loan limit is $48,000 or

50,000 - (25,000 - 23,000) = 48,000

If the new loan is paid off by the end of the 5-year period for the current loan, the participant can have new cash of $25,000--

48,000 - 23,000 = $25,000

New loan of $48,000 is amortized over the time left in the 5-year period of the original loan.

If the new loan starts a new 5-year amortization period, the participant can have new cash of only $2,000--

$48,000 - 23,000 - 23,000 = $2,000

New loan of $25,000 is amortized over 5 years.

See 2007 Erisa Outline Book, Chapter 7, Section IX, Part C1

[Trekker]

Do you consider whether the Plan allows more than one loan outstanding at a time? If so, I believe the new loan could start its own 5-year payback. If the plan permits only one loan at a time, I think it would be a refinance, and the term of the replacement loan may not exceed the term of the original loan.

I agree that $25,000 is the max permitted for the second loan (or refinance).

I'm not a lawyer or TPA, so this is just my humble opinion.

[Guest tajcc]

The plan only allows one loan at a time, that is why we have the issue of refinancing. Thank you!

[JanetM]

If the plan allows only one loan at a time you can't technically refinance. That would mean for just a short period of time there are two loans.

[Guest tajcc]

Janet

In the ERISA outline book, it is stating that you can refinance, that if the participant is taking more money out and refinancing their existing loan, it would be considered a replacement loan.

I'm really confused now, any insight would be appreciated.

[masteff]

You have to specify the term of the refinancing to determine whether it counts as two simultaneous loans or not.

The following excerpt is from the Q&A-20 of the final regs: "For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction."

So if the refinancing extends the loan past the original 5 year allowable term, then it counts as two loans on the transaction date (and thus violating a plan provision limiting to one loan).