Loan reamortization w/change in payroll frequency

[Guest mo again]

Does anyone have experience/citations as to amortization of participant loans when there is a change in payroll frequency?

We have a large client who will be switching from weekly to bi-weekly payroll. The many existing loans were documented and repayments calculated based on weekly payroll. The client would like to just double the weekly deduction to determine the bi-weekly deduction, and to leave the amortization schedule alone. In the past, we have usually instructed our clients to reamortize the loan based on the new payment frequency; however this client is balking due to the large number of loans and the related recordkeeping costs for reamortization.

[Guest hank]

We just finished this process, going from bi-weekly to semi-monthly. Not only did we reammo the loans, we had all participants with outstanding loans execute new notes based on the new ammo schedules. Participants with loans also executed new consents to the different amounts deducted from pay to satisfy state laws regarding payroll deductions.

All done, I might add, on the advice of outside counsel.

[Guest mo again]

Thanks, hank. I don't suppose you were privy to counsel's thought process in reaching that conclusion? I don't think plan qualification is at issue, and so long as the interest rate remains reasonable, I don't think prohibited transactions are a concern... I think the biggest concern may be violation of the Federal Truth in Lending Law. But I don't know enough about that, nor do I know what the consequences of a violation are. Anyone?

[Guest hank]

Mo again

I forgot about the Truth in Lending piece. We also made new

disclosures and asked participants to sign new forms. Outside counsel was mainly concerned with the level amortization requirements of the plan loan rules, as I recall. It was a lot of work to reammo about 1300 loans, but we saw it coming about three months ahead of the switch in payroll periods.

[Guest mo again]

Thanks again hank. We ended up deciding to go ahead and let them double the weekly payment to achieve the bi-weekly payment. Our rationale was that 1) the payroll deduction language states the repayment amount as a per week vs. per payroll amount, so there are not really concerns about state laws and payroll deductions, and 2)after investigating the federal truth in lending rules, I saw that all the rules and sanctions relate to UNDERstatement of interest on the TIL disclosure. In our case, because the same payment amount is being made less frequently, there is actually a reduction in the interest rate, and if anything, it was OVERstated on the TIL. In addition, the term of each loan is unchanged. We might not make the same decision with a dissimilar fact pattern, but there you go.