Plan Loans Exempt from Truth-in-Lending Disclosure

The Federal Reserve System's Board of Governors amended Regulation Z to exempt most retirement plan loans from the disclosure requirement of the federal Truth-in-Lending Act.

Generally, the act requires lenders to provide borrowers with a disclosure form explaining the full cost of a loan if the amount financed is $25,000 or less and the lender has made more than 25 loans per year in both the current and preceding calendar years.

In explaining the change, the board noted that retirement plan loans to participants are substantially different from other loans because there is no third-party creditor imposing finance charges, According to the Employee Benefits Institute of America (EBIA). The interest and principal are reinvested in the participant’s own account.

EBIA reported that the Board decided to exempt loans made by qualified plans subject to Code Section 401(a) if three conditions are met:

  • the loan must be made to a participant;
  • the loan must be from fully vested funds in the participant’s account;
  • the loan must be made in compliance with the requirements of the Internal Revenue Code (including but not limited to the requirements of Code Section 72).

The exemption also applies to loans made by Code Section 403(b) annuities and Code Section 457(b) governmental plans. The amended regulations become effective July 1, 2010.

The full amendment to Regulation Z can be found in the January 29 edition of the Federal Register.