Loans and Reg Z
Rev. 04/24/09; E-mail Alert 2009-6

Effective July 1, 2010, most plans that offer loans to participants will no longer be required to provide disclosures under the Truth in Lending Act (TILA).  This change is a result of the Federal Reserve amending Regulation Z of the TILA to include an exemption for retirement plan loans. 

Currently, retirement plans making 25 or more participant loans (or five or more loans secured by a mortgage) in the current or prior calendar year are required to provide truth-in-lending disclosures to participants under Regulation Z of the TILA.  Regulation Z requires creditors to disclose certain terms of lending agreements to consumers.  These disclosures include the amount financed, the finance charge, interest rates, the timing of payments, and the total amount to be paid.

In issuing this exemption, the Federal Reserve has acknowledged the difference between a commercial loan and a plan loan taken from a participant’s account balance.   A plan loan is secured by a participant’s account balance, and both the principal and interest payments are reinvested into the participant’s account.  Plan loans also typically involve lower costs than a commercial loan.

Plans that offer loan amounts in excess of a participant’s vested account balance will not be exempt from this regulation, they will still be required to comply with the disclosure requirements of Regulation Z.  All other plans that restrict loan amounts to a participant’s vested account balance and also comply with Code Section 72 will be exempt from the disclosure requirements.  Since participants can generally only borrow up to 50% of their vested account balance; the exemption should apply to most loans.

It is important to note that existing Department of Labor regulations requiring that plans subject to ERISA disclose administrative fees will still apply.  Although this amendment by the Federal Reserve will offer plan administrators some relief, they will still need to ensure compliance with both ERISA and the Internal Revenue Code.

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