We have an employee who is getting a purchase money 2nd loan through the bank. The loan is 100% finacning and over the banks LTV policy requirements. The Lender wants to have an addendum to the note which states that the employee will need to apply all of thier annual net bonus money (paid by the bank) to the loan on an annual basis until the LTV is within the policy guidelines. Is there any kind of legal issue by taking the bonus $ or should it be noted as an annual principal reduction rather then reference the bonus $?

Would your loan officer require this if the borrower was not an employee? My personal opinion is that employee loans should be underwritten like any other loan.

If this is something that just has to happen, though - I'd put annual principal reductions in addition to the regular payment schedule in the note - with no mention of the bonuses. Won't that be a fun TIL disclosure!!??

I agree with Lestie. What if the employee leaves? At least by making them scheduled principal reductions, maybe they will continue to be made post-employment.

The Lender would not have made the loan to a non-employee, the bank was put in a hard spot on this one. The TIL issue was a good point that I did not think about. If we put the annual reduction information on the "Employee Addendum" vs. the note, would that be okay?

I'm not sure what an "Employee Addendum" is, but, if you want these terms to be enforceable, I would put the required annual principal reductions in the loan note.

You've still got to put it on the TIL - as this will affect the fed box disclosures. Also - have you addressed what will happen if the employee does not get a bonus? Will that cause a default on the loan?

If you don't like the loan terms, renegotiate it. Side agreements like this are dangerous and may help your LTV, but it pales to the HR risks I would believe you are exposing yourself to.

You may point out to the employee/borrower how this is to their advantage. Show them an amortization. But to require this is akin to a wage garnishment without due process. Likewise, the employees bonus should not consider that the funds will go toward the loan. That isn't right either.

Reg. Z requires you to base your disclosures on the legal agreement between the parties. In this case, the addendum becomes part of the legal obligation and these additional curtailments must be factored into the payment schedule, total of payments, finance charge and APR.

Because you need to estimate the dollar amounts of the future bonusses, this TIL disclosure may be too sensitive to be handled by your lending staff in the usual manner. As an additional problem, you may lack the software to adust your disclosure calculations to reflect differing curtailment amounts for the number of years required to bring your LTV into line with the bank's normal standards.

If you would like to consider outsourcing this one disclosure and having HR hold the retention copy, I'd be happy to help you produce a stand-alone TIL. This way, you will comply with Reg. Z, protect the borrowing employee's privacy, and preserve the integrity of your compensation system.