54.4975-7(b)(5)(iii) has a cryptic requirement that payments with respect to an exempt loan during a plan year not exceed an amount equal to the sum of contributions (and earnings on the contributions) received by the ESOP during the year or prior years less such payments during prior years. I'm trying to figure out what the purpose of this requirement is? All I can figure is it is an old attempt to keep other plan earnings like dividends from being used to make loan payments. However as we know 404(k) specifically allows that. Back in 1985 the above reg. was in the code but the 404(k) section allowing dividends to be used for loan payments was not. Am I missing something or is the above the proper explanation?

I think you are reading the regulation too narrowly. It is referring to the list of items available for collateral which is contributions, earnings on contributions and earnings on collateral. You are correct that there is a disconnect between this language and the subsequent changes with respect to dividends paid on shares that are no longer held as collateral.