loan repayments--amount financed

[Felicia]

A loan program has a $75 administrative fee which the employee pays at the time he requests a loan. The $75 fee is not distributed from plan assets. If an employee requests a $5,000 loan and receives a check for $5,000, is the amount financed $5,000 or $5,000 less the $75 fee? Cites would be helpful. Thanks.

[Erik Read]

If the $75 isn't paid from the plan, then it's not included or excluded from the $5k. If the distribution is $5k then amortize $5k. If the loan was for $5k and you subtracted the $75 before the check went to the participant, then amortize $5k.

[KIP KRAUS]

Our Plan Trustee is Vanguard and they say that the loan initiation fee must be part of the loan if not paid by the plan. Therefore if the loan is for $5k then $75 is deducted from the loan and $5k is amortized. Don't know any site for their reasoning, but they said if the $75 was simply deducted from the participant's account and the full amount of the $5k loan was given to the participant that the $75 would be an in-service-distribution from the plan, which the participant would otherwise not be elibile for as an active employee. Made sense to me.

[QDROphile]

For truth-in-lending purposes, the $75 is part of the amount financed. The plan can be designed to loan the $5000 to the participant and the participant may have to pay the loan fee with outside money. The loan from the plan would be $5000 and the $75 would not be taken into consideration for repayment to the plan. You could design the plan to deduct the fee from the account and either automatically add it to the face amount of the loan amount or not. Check the plan document. There is an alternate analysis that would get you to a different conclusion than the conclusion attributed to Vanguard. But an internet bulletin board is not what should use to reach a conclusion.

[Felicia]

The $75 fee is outside money which has to be paid up-front. We have been told that for truth-in-lending purposes, the amount financed is the amount given to the participant ($5K) less the $75 fee. It just sounded strange since the participant is getting $5K from the plan while the $75 fee is paid with outside money to the TPA.

[QDROphile]

The $75 fee is a cost of getting the money and must be accounted for in the truth-in-lending computation and presentation of borrowing rate and cost. I may have used incorrect terminology when I called it "amount financed." The point is that the plan disregards the $75 as part of the loan but for truth-in-lending, the $75 is not disregarded.