re-amortization of ESOP loan

[Guest MLipp]

I have an interesting situation that's causing some decent. This is a leveraged ESOP using the principal and interest release method. The employer made the scheduled payments for 2010 and the share release was calculated using the amortization schedule in effect. However, in March the employer decided to make a partial prepayment on the loan, and wanted the shares that released to be allocated as of 2010. The note allows prepayment and calls for the payment to be applied to the scheduled payment that matures last (presumably this means the final payment on the schedule), interest first and then principal.

Does this automatically result in a re-amortization of the note, and, if so, which amortization schedule applies for the release calculation - the one in effect on December 31, 2010 or the one resulting from the pre-payment made on April 1st? The note itself does not address re-amortization at all, just that accrued interest is recalculated in the event of a prepayment resulting in a complete satisfaction of the loan obligation.

Opinions or direction, anyone?

[Marcus R Piquet]

I'm not exactly sure what you mean by "re-amotization of the note." When the trust makes a prepayment on the note, you simply update the amortization schedule to reflect the prepayment. Usually (but not always) this does not affect the amount or timing of future payments; you simply continue making the previously scheduled payments. The result will be a shortened term - the loan will be paid off sooner. This is just like paying on a home or auto loan; just because you make a prepayment, your future payments are not effected other than there will be fewer of them.

I do have a few clients, however, whose stock acquisition notes allow prepayments to cancel future payments, as long as the principal is amortized at least as quickly as the original schedule.