Interest rate used for COVID reamortization of loan

[thepensionmaven]

We prepared a loan document for a client in December, 2019, at that time, prime rate +2%, and loan issued at 5.75%.

With the COVID suspension and re-amortization, would the interest rate need to be the same?

Since the new re-amortization can not go beyond the original term of the loan, and this participant only made 3 loan payments prior to suspension, the new loan amount plus accrued interest from date of suspension through 12/31/20 at the same 5.75%, yields a higher monthly payment than the existing amortization schedule.

That does not make sense.

[Bird]

I hadn't even thought of changing the interest rate.  I suppose you could, if there is something in the loan policy saying you do that for reamortizations (but reamortizations aren't generally contemplated).

Did you add one year to the loan payment schedule?  Generally I'd expect payments to be lower.

[C. B. Zeller]

10 hours ago, thepensionmaven said:

Since the new re-amortization can not go beyond the original term of the loan,

Why? If this was a suspension under the CARES Act then you can extend the term of the loan by up to 1 year. See section 5  of Notice 2020-50.

 

10 hours ago, thepensionmaven said:

That does not make sense.

If you're not extending the term of the loan then it makes perfect sense. Let's say the outstanding balance when the suspension started was $25,000 with 57 payments remaining. Then you decide to eliminate 9 of those payments. Even if it wasn't increased with interest, dividing the balance by a smaller number of remaining payments is going to result in a larger installment amount.

 

10 hours ago, thepensionmaven said:

With the COVID suspension and re-amortization, would the interest rate need to be the same?

I believe it would. However if the plan permits participants to refinance their loans it may be possible for them to replace the loan with a new loan that has a different interest rate.