News & Views

TRUTH IN LENDING RULES AMENDED TO EXCLUDE PARTICIPANT LOANS

The Federal Truth in Lending Act was enacted to promote informed use of consumer credit.  Regulation Z requires lenders to disclose certain information to borrowers about the terms of the loan and to provide borrowers with periodic loan statements.  Qualified Retirement Plans that allowed Participants to make loans were considered lenders and were subject to the Regulation Z requirements.

In December 2008, the Federal Reserve Board approved final rules amending Regulation Z to exempt Participant loans taken from Qualified Retirement Plans, 403(b) Plans or 457(b) Plans.  The exemption applies only if the loan proceeds are comprised of 100% vested funds from the Participant’s account and are made in compliance with the applicable Internal Revenue Code requirements.

Qualified Retirement Plans have been exempted because: 1) the Participant’s interest and principal payments on the loan are reinvested in the Participant’s own account and there is no third-party creditor imposing finance charges on the Participant; and 2) the costs of a loan taken against assets invested in a plan are not comparable to a third-party loan because Participants pay the interest to themselves rather than to a third-party.