Senior management has made the decision to lower all employee auto loans to a specific rate (IRS AFR Floor Rate). Depending on what the original APR was, the new APR is .50% - 2.00% lower than the original APR. My compliance mind thinks that the employees affected should have signed a modification agreement to acknowledging the lower the rate and payment change Senior management said no.

Should the employees sign a modification and received notice of the new rate and payment?

What happens if they leave?

Procedures indicated that the original APR will be reinstated. The email announcement for this reduction indicates that the rate will not return to the original APR if the employee leaves the company.

I think the bank is free to lower the interest rate on an existing loan for any period of time without an actual modification then raise the rate back up to the contract rate if they leave, as long as you are not going to retro the higher rate. New loans will have to be treated as preferred rate loans and disclosed as such however.

Thanks Randy!

Would the waived interest be income (reportable and taxable) to the affected employees?

If the new APR was below the IRS AFR, then it would be reportable and taxable. All new loans will an APR that is not lower than the IRS AFR that is in effect of the date of the loan.