Full Version: Participant Loan- 15 year term
The participant is using a loan to purchase a principal residence so the term will be 15 years. What is a reasonable interest rate to use? Help!
QUOTE (Randy Watson @ Sep 24 2009, 05:02 PM) 
The participant is using a loan to purchase a principal residence so the term will be 15 years. What is a reasonable interest rate to use? Help!
What's the rate in your locale for 15 year mortgages?
No one knows.
The legal standard is to use an interest rate "commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances." I don't know of any persons in the business of lending money at a fixed rate of 15 years to individuals who do not have to demonstrate credit worthiness where the loan is fully secured by an account balance already on deposit with the lender. Hence, from the moment the loan regulations were issued 20 years ago, it is never been clear what interest rate to use. (Banks actually used to make passbook savings loans -- don't know whether they still do but in any case the interest rates for them are not widely communicated and I doubt they were long-term loans anyway.)
When in doubt, I figure there is safety in numbers. Given that surveys indicate the most common interest rate charged by other DC plans is prime rate + 1% (and that it typically doesn't change depending on whether the plan is making a 5-year or a 15-year loans), then pragmatically, I would use that interest rate. That's not a theoretically satisfactory answer at all, just a pragmatic one. I can't see the DOL taking any enforcement action against using prime rate + 1% given their lack of useful guidance and their knowledge that that's what the plurality of plans are using.
Others' opinions may differ.
The legal standard is to use an interest rate "commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances." I don't know of any persons in the business of lending money at a fixed rate of 15 years to individuals who do not have to demonstrate credit worthiness where the loan is fully secured by an account balance already on deposit with the lender. Hence, from the moment the loan regulations were issued 20 years ago, it is never been clear what interest rate to use. (Banks actually used to make passbook savings loans -- don't know whether they still do but in any case the interest rates for them are not widely communicated and I doubt they were long-term loans anyway.)
When in doubt, I figure there is safety in numbers. Given that surveys indicate the most common interest rate charged by other DC plans is prime rate + 1% (and that it typically doesn't change depending on whether the plan is making a 5-year or a 15-year loans), then pragmatically, I would use that interest rate. That's not a theoretically satisfactory answer at all, just a pragmatic one. I can't see the DOL taking any enforcement action against using prime rate + 1% given their lack of useful guidance and their knowledge that that's what the plurality of plans are using.
Others' opinions may differ.
QUOTE (MWeddell @ Sep 25 2009, 01:53 PM)
No one knows.
The legal standard is to use an interest rate "commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances." I don't know of any persons in the business of lending money at a fixed rate of 15 years to individuals who do not have to demonstrate credit worthiness where the loan is fully secured by an account balance already on deposit with the lender. Hence, from the moment the loan regulations were issued 20 years ago, it is never been clear what interest rate to use. (Banks actually used to make passbook savings loans -- don't know whether they still do but in any case the interest rates for them are not widely communicated and I doubt they were long-term loans anyway.)
When in doubt, I figure there is safety in numbers. Given that surveys indicate the most common interest rate charged by other DC plans is prime rate + 1% (and that it typically doesn't change depending on whether the plan is making a 5-year or a 15-year loans), then pragmatically, I would use that interest rate. That's not a theoretically satisfactory answer at all, just a pragmatic one. I can't see the DOL taking any enforcement action against using prime rate + 1% given their lack of useful guidance and their knowledge that that's what the plurality of plans are using.
Others' opinions may differ.
The legal standard is to use an interest rate "commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances." I don't know of any persons in the business of lending money at a fixed rate of 15 years to individuals who do not have to demonstrate credit worthiness where the loan is fully secured by an account balance already on deposit with the lender. Hence, from the moment the loan regulations were issued 20 years ago, it is never been clear what interest rate to use. (Banks actually used to make passbook savings loans -- don't know whether they still do but in any case the interest rates for them are not widely communicated and I doubt they were long-term loans anyway.)
When in doubt, I figure there is safety in numbers. Given that surveys indicate the most common interest rate charged by other DC plans is prime rate + 1% (and that it typically doesn't change depending on whether the plan is making a 5-year or a 15-year loans), then pragmatically, I would use that interest rate. That's not a theoretically satisfactory answer at all, just a pragmatic one. I can't see the DOL taking any enforcement action against using prime rate + 1% given their lack of useful guidance and their knowledge that that's what the plurality of plans are using.
Others' opinions may differ.
I agree. This is another example of regs that just don't work in the real world. So we all use prime + 1% and wait for the "knock on the door".
When I've contacted banks to get a rate, the situation I have posed is if someone had a CD with the bank for like term and in the same amount as the loan will be, and is willing to pledge that CD as collateral for such loan, what would the interest rate be?
I have found that 3 or 4 banks, some regional and some local, publish internally on a daily basis, such a rate. They also explain that because the CD is with that bank and pledged, giving the bank full, liquidable security, the bank would not have a creditworthiness criteria for such a loan.
For that situation, most do prime+2 pts but one does prime+1 pt.
I have found that 3 or 4 banks, some regional and some local, publish internally on a daily basis, such a rate. They also explain that because the CD is with that bank and pledged, giving the bank full, liquidable security, the bank would not have a creditworthiness criteria for such a loan.
For that situation, most do prime+2 pts but one does prime+1 pt.
We do a poll of 3-4 different banks in areas needed in order to obtain an average percentage for interest rates on secured loans(esentially what a participant loan is) and use that table for all loans in the target area, broken down by amount and term. It might be beneficial to contact the banks in your area for those rates. I know for a fact that Wells Fargo publishes their rates on their website.
In my 2 years of obtaining these rates on a quarterly basis, I have seen that some banks use whatever rates their CD's are at and add on 2-4% for the interest. While not a great comparison, it's always nice to have multiple sources of information.
In my 2 years of obtaining these rates on a quarterly basis, I have seen that some banks use whatever rates their CD's are at and add on 2-4% for the interest. While not a great comparison, it's always nice to have multiple sources of information.
John --
"Liquidable security", ehh? Does that mean the pledge is of a case of century old fine wine?
"Liquidable security", ehh? Does that mean the pledge is of a case of century old fine wine?
Yeah, Larry. It's amazing how creditworthy you become if you give a case of wine to your local banker--not to mention the better interest rate you then get.
QUOTE (J Simmons @ Nov 12 2009, 08:29 PM)
Yeah, Larry. It's amazing how creditworthy you become if you give a case of wine to your local banker--not to mention the better interest rate you then get.
And that is as it should be!
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