How are banks handling with obtaining Beneficial Ownership on Dealer Loans? Once in a while, we'll have a business apply for credit through our indirect dealer loan channel. Our dealers CIP the business and then the loan is assigned to the bank (in other words we the dealer is the original creditor and the bank purchases the loan). I'm assuming we'll provide the Certification form to the Dealers and they will complete the form for Controlling Individuals and Beneficial Owners; this process will be similar to how we handle CIP.

Thoughts?

A purchased loan is not an account for CIP purposes.

Yes I agree, but for practical purposes are banks requesting Dealers gather any Beneficial Owner information or are banks completely ignoring this. It might be more of a risk tolerance question. Thanks for the response.

I would also caution that not all indirect lending follows your institution's model. For those that have a third party reliance agreement in their dealer contract because the FI is performing the underwriting and origination, they will be responsible for ensuring that the dealer does collect beneficial ownership information since the borrower is considered the FI's customer.

We are not participaing in indirect loans to businesses for this reason, as we are a small community bank. I just can't see the dealer getting all required information before the loan closes (they have a hard enough time doing that on the borrower).

Like any third party situation, the devil's in the details of the agreement between you and them.

And given the complexities of regulation and contracts, I think you're best off doing the following, regardless of the type of third-party relationship:

- Annual Certification pursuant to the reliance provision (whether or not reliance is allowed internally).
- Make a policy decision on whether reliance will be allowed.
- Ensure agreements specifically cover responsibilities and are tailored to the type of third party relationship.
- Set up controls to get all CIP and CDD data, including beneficial ownership information.

While you can certainly pick at the BO Rule and look for an "out", but remember, the performance of BOIP is only one aspect. If you're buying accounts, you still need to comply with recordkeeping requirements, 314(a) (for the customer, not the BO), and OFAC. Unless the selling FI retains servicing and clearly spells out in the contract they'll be doing all of those things as your agent, then your best bet is to incorporate it into your program.

Looking for some feedback.

Our Indirect department, along with our Legal department, have concluded that our indirect loans are excluded from the Beneficial Ownership Rule. The consensus reached at the CBA auto committee meeting last week was that indirect purchase money contracts are not subject to Beneficial Ownership because they are not considered a covered financial institution. Am I way out in left field with my belief that it *does* apply? I'm hung up on the part of the CIP FAQs that talks about needing to ensure that the dealers follow the bank's CIP and the overlap of the CIP definitions with the BO definitions. But when I go back and read the BO Final Rule through my Indirect department's lens, it does state that it applied to covered financial institutions and does not include dealers. It just seems to fly in the face of the spirit of the regulation but I also don't want to create unnecessary work either. Thoughts from my wise BOL counterparts?

Who is the dealer loan payable to - the bank or the dealer and then they sell it to you.

A purchased loan is not an account.

"it does state that it applied to covered financial institutions and does not include dealers" - where specifically? They talk about broker-dealers - those are not a place you go to buy a car..

For what it's worth, I've contacted FinCEN to pose the following question:

Question:



Response:

The loan is originated in the name of the dealer. We then purchase retail installment contacts from dealers provided they fit our underwriting criteria.

I understand that a purchased loan isn't an account for us. However, in the CIP FAQs of 2005 (question #3), it states that the financial institution purchasing the loans is responsible for ensuring the dealers adhere to the Bank's CIP.

In the BO Final Rule, however, it only talks about covered financial institutions. Nary a word is mentioned about car dealers. But then on page 206 of the Final Rule, it refers back to section 1020.220(a)(2) which are the CIP requirements. Then I circle back to the 2005 CIP FAQs, as I stated above.

So if I read the BO Final Rule with a very narrow scope, I can see that it applies to banks, brokers or dealers in securities, mutual funds and futures commission merchants and introducing brokers in commodities only. And therefore, car dealers are not considered a covered financial institution and are not required to obtain BO info at all.

However, I'm having a hard time reconciling that with how closely this ties to CIP and wonder if we have similar responsibilities: that is, to ensure the dealers are obtaining BO info and verifying it according to our BOIP procedures.

Hope that makes my question more clear. I appreciate you taking the time to answer!

That's strictly for the purposes of CIP. It doesn't apply to any other section of the BSA unless that section references the CIP definition itself. Relative to BOIP, that means the purchase itself does not trigger anything on the purchasing Bank's end, but once any triggering event occurs the Bank then needs to perform BOIP. Even though the only triggering event defined by regulation is a new account, if an Institution's policies are more robust, they might be opening themselves up to policy violations if they don't address any indirect commercial lending portfolio they have with a non-covered financial institution; or, if their lender doesn't obtain BOIP data as a best practice, even if not required.

Does you contract stipulate that they're acting as an agent of your or any other covered financial institution? If so, BOIP is still inherently required to be performed by the dealer. If not, then it'll be a risk-based decision depending on how often you anticipate your institution will be buying loans given to legal entities, and how often those entities will have "triggering events." My guess is that it would be so infrequent that no additional controls would be warranted.

I think you are referring to question #2 and that is not what it says, unless they are acting as your agent:

2. Are loan participations purchased from third parties and loans purchased from a car dealer or mortgage broker within the exclusion from the definition of “account” for loans acquired through an acquisition, merger, purchase of assets, or assumption of liabilities?

Yes, this exclusion is intended to cover loan participations purchased from third parties and loans purchased from a car dealer or mortgage broker. If, however, the bank is extending credit to the borrower using a car dealer or mortgage broker as its agent, then it must ensure that the dealer or broker is performing the bank’s CIP.

Thank you for the feedback. Yes, question #2, sorry! Full disclosure, really stupid question coming: How do I know if they are acting as our agent?

You need to review the contract you have with each dealer or the financial institution that is originating via the lenders. The details are extremely important here.

For instance, some of these lenders market these loans as a "pool of assets" but actually stipulate in the contract that the buyer is purchasing each contract individually. I've seen Institutions mistakenly think they're purchasing equity in a securitized asset or participation pool, when in actually they were just buying accounts outright! Understanding the contract and its ramifications is crucial.

"How do I know if they are acting as our agent?"

If they are acting as your agent, that would mean that you can be sued directly for any of their actions. Hopefully your dealer agreements with them make that distinction rather clearly.

That it does. "Dealer shall indemnify and hold Bank harmless from any and all liability...... etc, etc". So it would appear that we are not acting as the dealer's agent.

I sure appreciate all of your help today!!!! Thank you!