SI CHI01120.220 Oral Loans (RTN 418 -- 12/2010)

A. General

(See SI 00815.350, SI 01120.220, SI 01140.300)

This regional POMS supplement describes state law only as it applies to oral loan agreements and not to other types of oral contracts or promises, such as contracts for the sale of land or promises to pay for the debt of a third person.

To be considered a bona fide loan, an oral agreement must meet the requirements listed in SI 01120.220C and be legally binding under state law.

B. State Law - Region V

All six states in the Chicago Region recognize the validity of oral loans in certain circumstances.

1. Oral Loan is Repayable Within One (1) Year

The following is in addition to the requirements in SI 01120.220C.

  • An oral loan is valid if it is repayable within one (1) year of the date of the agreement. This means that the terms of the agreement must allow a possibility (not necessarily a probability) that the loan can be repaid within one (1) year.

  • Loans that, by their terms, preclude repayment within one (1) year generally must be written unless one of the conditions in subsections (2) or (3) are satisfied. Oral loans that, by their terms do not preclude the possibility of repayment within one (1) year, even though repayment is improbable (e.g., current income is insufficient), however, are valid loans. Therefore, even though the timetable for repaying the oral loan (SI 01120.220C) extends beyond a year, the loan is valid if repayment within a year is not specifically prohibited by the agreement.

  • The date the agreement was formed is used in evaluating the one (1) year timetable, not the date the field office makes its evaluation. This is true in initial claims as well as redeterminations.

  • The fact that the loan actually is not repaid within one (1) year is irrelevant in determining whether it meets this particular requirement. This is true in initial claims as well as redeterminations. (If it is discovered at a subsequent redetermination that the loan was not repaid, our determination that the oral loan was valid at the time the agreement was made does not change).

2. Oral Loan Is Not Repayable Within One (1) Year but Lender Fully Performs Within One Year

If an oral loan meets all the requirements in SI 01120.220C but, by its terms, is not repayable within one (1) year, it still may be a valid oral loan based on full performance by the lender to the oral loan agreement (i.e., lender has paid all funds).

In Illinois, Indiana, Minnesota, Ohio, and Wisconsin, if an oral loan agreement is not repayable within one (1) year, the oral loan agreement is enforceable under state law if the lender has fully performed under the agreement within one (1) year of the date the agreement was made.

Example:

Amy and Bob orally agree that Amy will loan Bob $1,000 and Indiana law governs the agreement. The terms of the oral loan do not permit Bob to repay the loan within one year. Amy gives Bob the $1,000 within one year of making the oral loan agreement. One side of the agreement has been fully performed within one year by one party to the oral loan agreement and the agreement is enforceable under Indiana state law.

In Illinois, Indiana, Minnesota, Ohio, and Wisconsin, if one party to the agreement has fully performed, but not within one year of the date, the agreement was made, the case should be submitted to ARC-MOS CRSI/SSI for review and possible referral to the Office of General Counsel, per SI CHI01120.220C.

Example:

Amy and Bob orally agree that Amy will loan Bob $1,000. The terms of the oral loan do not permit Bob to repay the loan within one year.

Amy gives Bob the $1,000 more than one year after making the oral loan agreement. Neither side of the agreement was fully performed by either party to the oral loan agreement within one year. Therefore, the agreement may not be enforceable under state law.

In Michigan, if an oral loan agreement is not repayable within one (1) year of the date of the agreement, full performance by the lender does not make the oral loan agreement enforceable under state law, even if the lender fully performs within one year. In Michigan, cases involving full or partial performance by one party should be submitted to ARC-MOS CRSI/SSI for review and possible referral to the Office of General Counsel per SI CHI01120.220C.

Example:

Amy and Bob orally agree that Amy will loan Bob $1,000.