We have found with a new client that they did not follow the directions of the loan policy when preparing new loans. Policy states prime plus 2....client provided all loans at 7.5%. A bargain when the rates were at 8-10%. However not so good when rates were much lower.

Now to correcting it. Do we reamortize all the loans over the orignal time frame using the current balance? Or do we have to take each loan and calculate the actual-should be balance differential and either force extra payments to catch up or process distributions based upon the balances?

There are a number of loans involved so obviously not an easy chore. A number of participants who have benefited from a reduced rate are almost done with their loans so a large payment would be a bit unweildy for them.

The are allowed multiple loans so new loan/payoff options are possible in some cases.

I'm not comfortable with the position that the plan could require an additional payment amount if the promissory note indicating the repayment terms (even if they did not follow the plan document) was properly executed.

I dont see how you can change the terms of the promissory note that the participant signed even if the plan requires a different interest rate because the note is a contract between the plan and the participant. The plan is stuck with the terms of the note that it prepared. Where the loan rates are higher than the plan provisons the participant can be issued a new loan at the correct rate.