Loans extended past 60 months - general loans

[Guest Achilles]

I have a loan origination date that is 1/24/01, and the first payment date of the loan is 2/16/01.

This is a 60 month loan, paid weekly.

52 weeks * 5 years = 260 payments.

Based on 260 payments, including the first one on 2/16/01, the final payment will be made on 2/3/06.

With 1/24/01 as the origination date, this loan exceeds 60 months.

Can this be corrected? Is it an issue because of the approx. 3 week difference between origination and first payment?

What options do I have to remedy this?

I did chang the origination date to 2/3/01, but then the client will receive the proceeds before the origination date. Is this permitted?

Thanks You!

[Wessex]

There is some old IRS guidance that I believe provides for up to a two month period between loan initiation and the first payment (for example, to account for time to set up the loan repayments on the payroll system) that it not counted in the 60 month maximum.

On second thoughts, the two month period may have been in legislative committee reports.

[Bill Berke]

I think you are okay. If you converted the loan to monthly, the first payment would be due 2/24/01 and the last payment would be due 2/24/06 - after your planned final payment. While I don't remember anything specifically in the reg's, there is a common sense that the payments begin after the loan proceeds are received by the borrower. Rarely is the first payment discounted from the proceeds of a loan of this type. And loans are still governed by fiduciary rules which use a commercial banking standard and everything you have descibed certainly complies with that standard. And watch some lawyer show how I'm all wet.

[Kirk Maldonado]

Well, I may be a lawyer, but I'm not going to try to prove that Bill Berke is all wet, at least not on this issue.

He brings up a good point that I'd like to expand even further. If you have monthly payments that begin one month after the disbursement of the loan proceeds, and require the last payment to occur on or before the 5th anniversary of the loan, then as a practical matter you have a 4 year and 11 month loan, not a five year loan.

[Richard Anderson]

I'm not sure I understand Kirk Maldonado's post. If a loan is taken out on 1/1/2001, and the first of 60 monthly payments begins on 2/1/2001, then the last of the 60 payments will occur on 1/1/2006, exactly 5 years later. But the same result does not occur if the first of 260 weekly payments occurs on 2/1/2001. In that case, the last payment will not occur until late in January 2006; several weeks past the five year period. Is that really an issue to anyone? I don't know. But, I'm sure that lots of loans with weekly amortization schedules are going a few weeks past 5 years.

72(p) states "such loan, by its terms, is required to be repaid within 5 years." It doesn't say 5 years from the first payment date, or 5 years and a few weeks extra if you need it. If you interpret 72(p) literally, then a weekly loan repayment schedule of 260 payments would have to have the first payment commence no later than one week after the loan origination date. Bi-weekly payments would have to have payments begin two weeks after the loan origination date, and monthly payments one month after.

[Guest Achilles]

I have clients that have been fined because the final payment was entended beyond the 5 year max. period - extended by only a few days.

These bank auditors referenced the origination date of the loan, not the first payment date.

I think that this client of mine should have set the first payment date a week earlier, than all would be fine. I don't know what their reason is for having the first payment date approx. 3 weeks after the origination date. Many times this is an administrative issue - they need time to prepare paperwork, alert their payroll provider as to when to start these deductions from his/her paycheck, etc.

To me, this would be a common occurrence. And their should be set guidelines to follow - something like, a set time frame permitted between origination and first payment, or not referencing origination date, instead looking at the first payment date.

If I would let this loan go through, extending beyond 60 months from origination, my client will be fined!

[Richard Anderson]

Achilles

Since you asked how to fix this, here is what I would do. I'm sure there will be other suggestions.

Since the original note has mistakes in it, I would replace it with the correct one and amortize at 256 or 257 weeks, instead of 260. That should get you within the 5 year period, and you can still use the 2/16/01 date for the first payment. The difference in weekly payments should be very small.

[Guest Achilles]

Thanks for your response, and all others.

I considered that, and proposed a 59 month loan, as opposed to a 60 month loan, but the client would not accept that, while others clients are fine with it.

I think in this case, when this comes up in the future, I will have to run a preliminary amortization schedule, and examine the final payment date. If it exceed 60 months from the origination date, than I will have to find out why.

In my example, I think the client first payment date needs to be reduced from 3 weeks after origination, to 2 weeks after.