Procedures for Applying Payments to Principal and Interest upon Loan Reamortization

Procedures for Applying Payments to Principal and Interest Upon Loan Reamortization

SUPPLEMENTARY INFORMATION:

The FRTIB administers the TSP, which was established by the Federal Employees' Retirement System Act of 1986 (FERSA), Public Law 99-335, 100 Stat. 514. The TSP is a retirement savings plan for Federal civilian employees and members of the uniformed services. It is similar to cash or deferred arrangements established for private-sector employees under section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)). The provisions of FERSA that govern the TSP are codified, as amended, largely at 5 U.S.C. 8351 and 8401-80.

I. Background

FERSA permits participants to borrow from their TSP accounts if they meet certain conditions. Two types of loans are available to TSP participants: general purpose and primary residence loans, the maximum repayment periods of which are five and 15 years, respectively.

Prior to the TSP's transition to a new record keeper in 2022, participants could voluntarily reamortize their loans at any time and for any reason under 5 CFR 1655.16. On March 1, 2022, the FRTIB proposed to amend the rule to permit loan reamortization only if a participant's pay cycle changed ( i.e., a participant goes from a biweekly to a monthly pay cycle). No public comments were received on the proposed change, and the FRTIB finalized the rule on May 24, 2022 (87 FR 31674). In addition, under 5 CFR 1620.45, participant loans can be reamortized if a participant enters nonpay status.

II. Proposed Rule

On April 18, 2025, the FRTIB published a proposed rule with request for public comments in the Federal Register (90 FR 16469, April 18, 2025). Section 1655.16 of the Code of Federal Regulations defines certain required procedures to reamortize a TSP loan. Previously, under section 1655.16(b), the outstanding principal balance of a participant's loan remained the same upon reamortization, and any accrued interest would be paid first before payments were applied to principal and current interest.

The FRTIB proposed to require the TSP record keeper to combine the accrued interest with the outstanding principal when reamortizing a loan. Combining the accrued interest with the outstanding principal would align the TSP's procedures with the TSP record keeper's procedures for processing reamortized loan repayments. The difference between the legacy and proposed methods results in a negligible increase of the total cost of the loan. This change impacts approximately one percent of all TSP participant loans.

III. Response to Public Comments

We received six comments, all of which opposed the proposal. Several commenters expressed concern that the TSP record keeper would financially benefit from the change at the cost of TSP participants. One commenter expressed concern that the compounding of interest would result in significantly increased long-term costs for participants and a diminishment of the value of their retirement. We believe we can alleviate these concerns with clarification about the nature of TSP loans.

While the interest paid on the loan will increase due to the compounding of interest, 100 percent of a participant's repayment, which includes both the principal and interest, is paid to his or her TSP account. Also, participants pay no additional loan fees for a reamortization. The TSP record keeper is paid no interest and receives no monetary benefit from a loan reamortization.

Another commenter expressed concern that a participant loan with a low interest rate could be reamortized at a higher interest rate. Pursuant to regulation section 1655.16(c), the interest rate on the reamortized loan does not change from the original terms of the loan. This amendment does not change that.

A commenter also expressed the view that participants who reamortize under this regulation are doing so because they have encountered financial hardship, and that combining the outstanding principal with the accrued interest would increase the amount of their loan repayment at a time of a participant's financial vulnerability. Implied in this view is that participants can voluntarily reamortize at any time, for any reason, and would only do so because they are in financial straits. However, participants cannot reamortize at any time. Rather, they can only reamortize after one of two triggers has occurred: their pay cycle changed, or they entered nonpay status. This rule does not change that.

Another commenter requested the TSP to revert to pre-transition rules that would permit voluntary reamortization of TSP loans at any time for any reason. This is beyond the scope of this regulation. As explained, a rule was proposed in 2022 to permit reamortization only in certain circumstances. The FRTIB received no comments in response to the proposed change and finalized the regulation in May 2022. That change became effective on June 1, 2022.

For the reasons described above, the FRTIB is adopting the proposed rule as final, without any substantive changes. Although the comments received did not cause us to make changes to the proposed rule, we carefully considered all comments received and appreciated the opportunity to understand participants' concerns.

Regulatory Flexibility Act

This final regulation will not have a significant economic impact on a substantial number of small entities. This regulation will affect Federal employees and members of the uniformed services who participate in the TSP and who take out a loan from their TSP account and later have their loan reamortized. The change impacts approximately one percent of all participant loans in the TSP.

Paperwork Reduction Act

This final regulation does not require additional reporting under the criteria of the Paperwork Reduction Act.

Submission to Congress and the General Accountability Office

Pursuant to 5 U.S.C. 801(a)(1)(A), the FRTIB submitted a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Government Accountability Office before its publication in the Federal Register . This rule is not a major rule as defined at 5 U.S.C. 804(2).

Unfunded Mandates Reform Act of 1995

Pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 602, 632, 653, and 1501-1571, the effects of this regulation on State, local, and Tribal governments and the private sector have been assessed. This regulation will not compel the expenditure in any one year of $100 million or more by State, local, and Tribal governments, in the aggregate, or by the private sector. Therefore, a statement under 2 U.S.C. 1532 is not required.

For the reasons stated in the preamble, the FRTIB amends 5 CFR part 1655 as follows:

PART 1655-LOAN PROGRAM