SI DEN01120.220 Informal Loans
The purpose of these instructions is to provide updated information about the enforceability of informal loans based on a review of state law by the Office of the General Counsel (OGC). The instructions provide guidelines for identifying a bona fide informal loan, oral or written, that is binding under state law in the Denver Region. SI 01120.220 describes agency policy for determining whether loan agreements should be treated as resources.
B. Formal versus informal loans
A loan is a transaction whereby one party, the lender, advances money or goods to or on behalf of another party, the borrower. The borrower agrees to repay the debt in full. Contracts negotiated between individuals and commercial lending institutions are formal loans. An informal loan is a loan in which the lender is not a commercial lender. Because they are agreements with commercial lenders, formal loans will generally be in writing. Informal loans can either be written or oral.
C. Bona fide versus not bona fide loans
The treatment of a loan for resource calculation purposes depends on whether the loan is bona fide. A formal loan is assumed to be bona fide and should be analyzed in accordance with those rules. An informal loan, whether written or oral, is bona fide if it meets the following requirements:
it is enforceable under state law;
the loan agreement was in effect at the time of the transaction (i.e., a gift cannot become a loan after the fact);
the lender and borrower must acknowledge an obligation to repay the loan;
there is a plan for repayment; and
the repayment plan is feasible.
These instructions address the first question, whether the informal loan is enforceable under state law.
D. Enforceability of informal loans under State law
1. Written loans — all States
A written, informal loan in Region VIII should be assumed to be enforceable under state law if it is signed by the borrower. Consider whether it also satisfies the remaining requirements in SI DEN01120.220C, to determine whether it is bona fide.
If the loan agreement has not been signed by the borrower, evaluate the agreement under the standards for oral loans.
2. Oral loans — South Dakota
Oral loan agreements are unenforceable under South Dakota law. Thus, any oral loan agreement in South Dakota is not bona fide.
3. Oral loans — other States
a. General rule
Oral loan agreements are generally enforceable in the remaining states in this region, provided there is evidence of mutual assent. There is mutual assent if all the parties agreed to be bound by the agreement and had a “meeting of the minds” as to the agreement terms, i.e., the parties have the same understanding as to what the contract requires.
b. Exceptions to the general rule
Despite the general rule described in SI DEN01120.220D.3.a, in certain circumstances loan agreements must be in writing. These instances are:
In Colorado, Montana, North Dakota, Wyoming and Utah, a loan agreement that cannot be repaid within one year must be in writing. This exception only applies if the terms of the agreement prohibit the borrower from repaying the loan in less than a year. If, for example, the lender and borrower agree that the borrower will repay the loan over a period of two years, but the borrower is not prohibited from repayment in less than a year, no writing is required. Informal loan agreements that cannot be performed in one year are rare, and should be referred to OGC.
In North Dakota, a loan agreement for a loan of $25,000 or more must be in writing.
In Colorado, Montana, North Dakota, Utah, and Wyoming, an agreement in which an individual agrees to pay the debt of another person must be in writing.
If these agreements are not in writing, they are unenforceable under state law and not bona fide. If, however, an oral loan agreement is not in one of these categories and there was a mutual agreement as to the terms, treat it as enforceable under state law. Consider whether it also satisfies the remaining requirements in SI DEN01120.220C, to determine whether it is bona fide.
Informal loans meeting any of the following criteria should be submitted to the Center for Program Support (CPS) for review and possible referral to the Office of General Counsel (OGC):