Loan Refinancing

[MoShawn]

The following seems to work out mechanically. Any disagree?

Participant has 4 outstanding loans:

#1 Balance of $4,500, max payoff date of 5/30/2012, payment of $48

#2 Balance of $12,400, max payoff date of 8/15/2010, payment of $184

#3 Balance of $3,300, max payoff date of 9/16/2009, payment of $62

#4 Balance of $4,100, max payoff date of 9/29/2008, payment of $142

Total current balance of $24,300

Total payment of $436 per pay

High balance in last 12 months of $30,900

Current total account balance (including loans) of $100,000

Current amount available for loan is $43,400 (50,000-(30,900-24,300))

New loan of $16,500 to refinance #2 and #4 (because of high payments)

Total current balance of $24,300 plus the new $16,500 equals $40,800

Since this is less than the $43,400 from above, he is permitted to repay the new loan over 5 years.

This works out to approximately $147 per pay (6% interest), for a total payment after refinancing of $257 per pay (saves $179).

[QDROphile]

Disagree. Treas. Reg. section 1.72(p)-1, Q&A 20.

[MoShawn]

I think I'm ok under that Reg.

Vested balance is $100,000, so maximum amount of loans permitted is $50,000 reduced by the difference between the high balance in the last 12 months and the current outstanding balance:

50,000-(30,900-24,300) = 50,000-6,600 = 43,400

Since the replacement loan will extend beyond the maximum payoff date of either replaced loan, I have to include all loans as outstanding on the date of the refinancing:

4,500+12,400+3,300+4,100+16,500=40,800

Thus the total amount considered outstanding on the refinancing date will be less than the maximum amount permitted, and ok under 72(p), no? Am I missing something?

[QDROphile]

What is the maturity of the new loan?

[MoShawn]

What is the maturity of the new loan?

5 years from the current date. I realize this is beyond the maturity date of the existing loans. That is why I am considering the balance of the 4 current loans plus the balance of the new loan against his loan limit.

[QDROphile]

Violates the regulation.

[MoShawn]

Violates the regulation.

How. Please provide some detail.

[QDROphile]

#2 and #4 loan amounts will not be paid by the original latest maturity dates. The new loan could not comply unless it has step down payment schedule to provide for higher payments early in the term to correspond to the original maturities.

The payment relief you want from the refinancing is achieved by stretching the orignal payment over a longer period to provide for a smaller periodic payment on the remaining principal amount. That violates the regulation and probably also the amortization requirements.

[rcline46]

I think the loan is OK. THe amount borrowed is OK under the regs. The fact that the new loan is used only to pay off 2 old loans is not relevant.

[MoShawn]

#2 and #4 loan amounts will not be paid by the original latest maturity dates. The new loan could not comply unless it has step down payment schedule to provide for higher payments early in the term to correspond to the original maturities.

The payment relief you want from the refinancing is achieved by stretching the orignal payment over a longer period to provide for a smaller periodic payment on the remaining principal amount. That violates the regulation and probably also the amortization requirements.

Your argument disregards A-20: (a)(2) Loans that repay a prior loan and have a later repayment date. in Treas. Reg. Section 1.72(p)-1, Q&A 20.

[WDIK]

Your argument disregards A-20: (a)(2) Loans that repay a prior loan and have a later repayment date. in Treas. Reg. Section 1.72(p)-1, Q&A 20.

What about the following wording in the answer to which you refer?

For purposes of the preceding sentence, the latest permissible term of the replaced loan is the latest date permitted under section 72(p)(2)© (i.e., five years from the original date of the replaced loan...

[QDROphile]

Sorry. The new loan is small enough that it passes when all of the loans are treated as outstanding as provided in the regulation. You set that out in the original post. I would not have backed into the numbers the way you did, but the ultimate conclusion is the same for the amount of the new loan.

[WDIK]

Please feel free to disregard my prior myopic post.

[QDROphile]

I thought I had consumed all of the available myopia in this thread.