Loan Cure Period

[Guest andmik]

Hello:

I have a situation I would like to see if anyone is able to provide some guidance.

I have a participant who takes a loan for 5 years. Weekly repayments. Cure period is end of quarter following quarter... He misses 4 payments at the 3-year point of the loan and then the loan payments pick up again. So although he is in arears, he is never in default because he never gets to end of a cure period without a payment. When the loan gets to the 5 year point he will be 4 payments short. Can he continue to make the 4 payments from payroll deduction and if the loan is paid before the end of the cure period at the end of the loan does he avoid having the loan treated as deemed distributed based on this timing scenario? Or is the 5 year point a hard date that must cause the deemed distribution to occur at that point in time?

Thank you for any feedback anyone might be able to offer.

andmik

[masteff]

It was debated recently in this thread: http://benefitslink.com/boards/index.php?showtopic=51935 The general consensus seemed to be that finishing out the final 4 payments was not a problem. Personally, I would and I have let the final payments run like normal and not think twice about it.

[K2retire]

I guess it depends on the question. The loan is not in default until the end of the cure period. But the plan has a prohibited transaction when the 5 year loan limit is exceeded.

[MoJo]

I guess it depends on the question. The loan is not in default until the end of the cure period. But the plan has a prohibited transaction when the 5 year loan limit is exceeded.

I'm not sure I agree (although I can argue it either way, depending on who my client is). The "four missed payments" are *NOT* cured when payments resume. The resumed payments are "current payments" for the "currently due" amount of the loan, leaving those four missed payments hanging out there until the end of the quarter following... at which point the loan defaults. To look at it any other way (i.e. the "first" resumed payment cures the "first" missed payment, etc. - always leaving the loan 4 payments behind) is 1) to make a mockery of the legal enforceability of the loan (a requirements, and one which probably says a "cure" (a *real* cure) must occur within a time frame specified, and indeed, defines "cure" in a way that actually never cures the problem; and 2) continues the loan as a "delinquent" loan for an indefinate period of time without a "default" ever being possible. A result I would not like to defend.

That said, others have taken the "rolling cure" position - but I haven't seen any IRS opinion on it....

[Bird]

That said, others have taken the "rolling cure" position

I'm 100% ok with the "rolling cure" and never heard it questioned - virtually every "late" loan is going to be in this position. And am (still) 100% ok with payments being made after the 5 year period, as long as they are within the cure period.

FWIW

[rcline46]

Our practice is to reamortize the loan so that it remains withing the 5 year period.

[MoJo]

That said, others have taken the "rolling cure" position

I'm 100% ok with the "rolling cure" and never heard it questioned - virtually every "late" loan is going to be in this position. And am (still) 100% ok with payments being made after the 5 year period, as long as they are within the cure period.

FWIW

The problem with a "rolling cure" is 1) it most certainly does not comport with the comercially reasonable test (no bank would allow it to continue for a "signature" loan, or even for an auto loan or the like indefinately); and 2) for you to truly be effective in allowing it, one would have to accrue and charge interest on each of the "late" payments (i.e., every payment becomes four weeks late) and tack that on to the loan, ever compounding the problem.

In other words, in no other universe but for the retirement sphere would anyone ever talk about a rolling cure as being even remotely appropriate.

[Bird]

In other words, in no other universe but for the retirement sphere would anyone ever talk about a rolling cure as being even remotely appropriate.

Sure but that's the environment we're in. I'm not trying to be argumentative or anything, but to me it seems black and white. I guess I could get slapped down on an audit; I'll be the first to let everyone know if I'm wrong.

[MoJo]

In other words, in no other universe but for the retirement sphere would anyone ever talk about a rolling cure as being even remotely appropriate.

Sure but that's the environment we're in. I'm not trying to be argumentative or anything, but to me it seems black and white. I guess I could get slapped down on an audit; I'll be the first to let everyone know if I'm wrong.

No doubt. And I see it happen (and have allowed it to happen) - *BUT* there is no justification to allow it to happen other than administrative convenience and to be "kind" to a participant. The "commercially reasonable" requirement *IS*, in fact, justification to look OUTSIDE of our universe to make that determination, and that would dictate a different result.

[Kevin C]

Anyone have a problem with the late payments on this 5 year note causing the repayment period to extend beyond 5 years? If all he did is restart payments after missing 4, I'm not convinced he corrected all of the problems within the initial cure period, since at that point, the loan is not going to be paid off within the original 5 year period. The only way I see rolling cure periods working is if you can get past the end of each prior cure period without the loan going into default.

The approach we take is to either have the participant make up the missed payments or reamortize the loan within the cure period.

[QDROphile]

Even if you believe in the theory of rolling cure, may a responsible fiduciary allow recurrent defaults without at some point requiring the loan be brought current (e.g. by payment or reamortization) as a condition of reinstatement?

[MoJo]

Anyone have a problem with the late payments on this 5 year note causing the repayment period to extend beyond 5 years? If all he did is restart payments after missing 4, I'm not convinced he corrected all of the problems within the initial cure period, since at that point, the loan is not going to be paid off within the original 5 year period. The only way I see rolling cure periods working is if you can get past the end of each prior cure period without the loan going into default.

The approach we take is to either have the participant make up the missed payments or reamortize the loan within the cure period.

I have a huge problem with the "beyond 5 year" payment plan - but my problem is one addressed by QDROphile - in that absent a current cure for that problem, is there not a fiduciary breach (i.e. taking a "wait and see" approach doesn't seem like a prudent position to take - especially when the loan is never "cured" - but, if the rolling cure is in effect, is constantly in a state of delinquency.