When is a participant loan "made"? When they call or when t

[Guest Cliff Langwith]

When is the amount available for loan determined, when the participant calls to find out what is available, or when the analyst sits down to do the check?

The regs say ambiguously the amount is determined when the loan is made, without saying "when the loan is made" is.

[actuarysmith]

To be "safe" how about using the date on the promissory note? This date would be used to drive the amortization schedule also.

Are you asking this question because there was considerable lag time between the request for the loan and the actual processing of the loan? (Did the account balance change dramatically between these dates?)

More information might be helpful.

[Guest RNorris]

We have had this issue come up several times in the last six months due to the declining market. I agree that the DOL Reg (sec. 2550.408b-1)is quite vague. Administratively, we consider the loan to be "made" on the date it is issued. Thus, the loan does not exceed 50% of the balance at the time the check is issued.

[actuarysmith]

I am not sure that the last response answers the question.

It is always true that the 50% loan limit is only an issue at the time the loan is taken out. If the market tanks after that date and the account balance in the plan declines sharply, there is no problem. The collateral is only required to be sufficient at the time the loan is made.

What if a participant asked the HR dept for a loan on Jan 5th, was given the loan app package on Jan 10th, returned the loan app on Jan 15th, was forwarded to the administrator on Jan 18th, promissory note and amort schedule created and mailed back to participant Jan 23rd, signed by participant on Jan 25th, distribution request sent to financial institution on Jan 27th, check cut and mailed on Jan 30th?

Let's also assume that between Jan 5th and Jan 30th the market took a dump and dropped 30%. (I know this is extreme, we're in hypothetical land now).

How would you determine which value to use for the 50% collateral rule? (It was probably determined at the time the amort schedule was made up. There was ample time for the market to decline significantly after that date, and before the check was cut).

Forget whether or not the loan processing schedule was reasonable or not - the fact that the question is even being asked implies that it took quite some time to get the loan processed...........

[MoJo]

Gee, if that's how long it takes to process a loan, I'd find another service provider! :-) Just kidding. The approaches I've seen include limiting the amount of the loan to something less than the regulatory maximums (ie only take into account 90% of the account balance when the loan is initiated to calculate the 50% limit to account for market fluctuations - but of course, the plan needs to say this...), and actually speeding the process up so the loan is issued when requested (same day, or next day) but is made subject to the condition subsequent of approvals, etc. Neither is elegant, and each has disadvantage, but in reality, I think speed is the key. Issue the loan quickly after request, and you minimize the problem.

[Guest RNorris]

Under Actuarysmith's hypothetical, I agree that the date the promissory note and amotization schedule is prepared is the date to use to determine the 50%. However, I don't think that this is the process most often used for a daily val plan.

Typically, the loan check is cut at the same time as the promissory note and amortization schedule are prepared, with the endorsement of the check constituting acceptance of the terms of the loan.

The original question was "When is the amount available for loan determined, when the participant calls to find out what is available, or when the analyst sits down to do the check?"

I think the implication here is that is the available loan balance determined when the participant calls a VRU to request a loan, or when the loan is processed. If I'm understanding this correctly, then the determination should be made when the loan is processed.

For example, a participant calls in to request a loan on January 5th and has an account balance of $10,000, with an available loan balance of $5,000. The loan application is mailed the same day, but the participant does not return the application until January 30th (received and processed by daily val provider). The market has dropped 30% (as in the prior example), leaving the participant with an account balance of $7,000. Under this scenario, the participant's maximum loan available would be $3,500. I realize this is a simplified example, but I believe it addresses the original question.

[Guest UKH]

The more conservative approach would be to start the loan clock ticking from the time the check is cut. You can argue both ways but in the daily val scenario it is hard to ignore the vested balance as of the stock market close.

[Guest Cliff Langwith]

Thanks everyone for the insights. It seems the timing of the 50% balance is a matter of interpetation as I am sure our friends in government intended. For those institutions who whip out checks with prom notes and am schedules together - be happy. This problem is really for those of us who have to send out the prom note and TIL statement for signature, and get it back before a check can be issued. Our compliance folks take the position that the date on the check must equal the date on the prom note because it has something to do with the APR. Which is a whole other subject. What is the relevence of APR to a guy who wants a loan to put a new stero in his boat? The timing issue obvious affects the guy who wants the maximum 50% of his vested balance. Those who something less than the maximum are not so affected. It also is a problem for plans with company stock when the stock. Even if they turn the documents around in a day, they could be disadvantaged by market fluctuation.