@pk
The foregone interest ($80 per month on $20,000) is a gift from the lender to the borrower, that comes back as taxable interest. While the gift from the lender to the borrower is certainly below the gift reporting threshold, the taxable interest (imputed interest income) to the lender is required to be reported by regulation.
Do people do this all the time without reporting? Probably. But I won't tell the taxpayer to ignore the requirement to report the interest. That's their risk to take if they choose.
