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#2192307 - 09/12/18 02:42 PM Student Loan and Reg Z Violation
Anonymous
Unregistered

We have a situation where a lender extended an unsecured personal loan for the purpose of paying off student loan debt. We do not do student loans. This was not identified until after the loan closed putting us in violation of the applicable regulation Z, 12 CFR 1026, Subpart F). Can anyone provide any suggestions on how we attempt to fix this/mitigate risk with the loan?
Thank you!

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#2192336 - 09/12/18 06:47 PM Re: Student Loan and Reg Z Violation Anonymous
Tracey, CRCM Offline
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Gorham, ME
I am confused. You aren't issuing a student loan. You issued an unsecured personal loan. What the customer does with those unsecured funds doesn't matter.
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#2192339 - 09/12/18 06:55 PM Re: Student Loan and Reg Z Violation Tracey, CRCM
raitchjay Online
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Originally Posted By Tracey, CRCM
I am confused. You aren't issuing a student loan. You issued an unsecured personal loan. What the customer does with those unsecured funds doesn't matter.


It certainly does matter. Where in the Reg. Z student loan rules is this exemption for unsecured personal loans?
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#2192348 - 09/12/18 07:29 PM Re: Student Loan and Reg Z Violation Anonymous
Oursisnottoreasonwhy Offline
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Oursisnottoreasonwhy
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Posts: 503
Central Illinois
I would agree it is a Private Education Loan under Reg Z 1026.46(b)(5) and all of those disclosures should have been provided. I don't believe there is anyway to unring the bell.

"if any part of such loan is used for postsecondary educational expenses as defined in §1026.46(b)(3), then compliance with Subpart F is mandatory not optional."

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#2192354 - 09/12/18 07:51 PM Re: Student Loan and Reg Z Violation Anonymous
Adam F Offline
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VA
The error is already made, so I would note the error and the corrective action taken to prevent it from happening in the future.
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#2192419 - 09/13/18 12:55 PM Re: Student Loan and Reg Z Violation Anonymous
Tracey, CRCM Offline
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Gorham, ME
Do you ask what the funds are for? I have seen instances where the use of funds for unsecured loans is not asked or provided by the customer, so in those cases you wouldn't know what the funds were for.

Still not sure I agree, its an unsecured loan. Not a student loan.
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#2192420 - 09/13/18 01:04 PM Re: Student Loan and Reg Z Violation Anonymous
Skittles Online
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IMHO the bank should always know the use of the funds. If the loan is in excess of $10,000 and not secured by real estate it's a requirement of BSA.
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#2192426 - 09/13/18 01:46 PM Re: Student Loan and Reg Z Violation Anonymous
raitchjay Online
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The OP's first sentence says they knew what the funds were for.....so the "do you ask what the funds are for?" discussion is moot, no?
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#2192428 - 09/13/18 02:04 PM Re: Student Loan and Reg Z Violation Anonymous
Dan Persfull Offline
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Bloomington, IN
I have seen instances where the use of funds for unsecured loans is not asked or provided by the customer, so in those cases you wouldn't know what the funds were for.

If the loan amount is greater than $10,000 then you have numerous violations of the BSA section 103.33(a) 1010.410(a).
Last edited by John Burnett; 09/14/18 03:25 PM. Reason: Updated CFR reference
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#2192433 - 09/13/18 02:10 PM Re: Student Loan and Reg Z Violation Anonymous
RR Joker Offline
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As a former lender I have never made an unsecured loan without at least 'thinking' I knew what they planned to do with the money...that's kinda underwriting 101, in my opinion.
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#2192435 - 09/13/18 02:22 PM Re: Student Loan and Reg Z Violation Anonymous
Tracey, CRCM Offline
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Gorham, ME
Thinking and knowing what the use of funds are is different. And yes, I know the requirement of the loans above $10,000. OP doesn't say what loan amount was.

Just an observation, not all unsecured loans will you know for sure the use of funds. And if you are not paying off the student loans at disbursement, who is to say the customer didn't use the funds for something else?
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#2192436 - 09/13/18 02:30 PM Re: Student Loan and Reg Z Violation Anonymous
raitchjay Online
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Who is to say? The borrower. IMO, you can't ignore what the borrower SAYS they are using the funds for because you don't like the answer.
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#2192442 - 09/13/18 02:36 PM Re: Student Loan and Reg Z Violation Anonymous
Adam Witmer Offline
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I agree with others that you absolutely have to know the purpose for loans greater than $10,000. This is a BSA requirement.

To answer the OP's question on how to mitigate risk going forward, I would personally do two things. First, I would train on student loans so that I was sure everyone was clear in their understanding of the requirements and possible consequences of originating a student loan when the applicant expressly states it is for applicable purposes. Secondly, I would require a purpose on each non-real estate request, as Skittles stated. Further justification on this is that you must have the purpose (for BSA) when the amount is over $10,000. Because of this, it is just easier from a management perspective to require the purpose every time. Otherwise, errors will occur when lenders are trying to remember when they need to collect it and when they don't have to.
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All statements are my opinion, not those of my employer, and should not be taken as legal advice.
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#2192443 - 09/13/18 02:38 PM Re: Student Loan and Reg Z Violation Anonymous
raitchjay Online
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I think Adam's answer is spot on.
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#2192455 - 09/13/18 03:48 PM Re: Student Loan and Reg Z Violation Anonymous
Dan Persfull Offline
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Bloomington, IN
Just an observation, not all unsecured loans will you know for sure the use of funds

Then your loan officers are just application takers and not loan officers. Any, and I mean any, loan officer worth their salt will interview the applicant and determine the purpose of the loan proceeds whether it's a $500 loan or a $5,000,000 loan.

A loan customer can be scammed in the same manner as a deposit customer. If the applicant tells the loan officer they are borrowing $3,000 to send to the Irish Lottery Office to claim their $100 trillion winnings, would the loan officer make the loan?

As mentioned earlier, knowing the purpose of the loan is lending 101.

From a 2007 enforcement action.

$250,000 CMP Assessed

The International Bank of Miami, N.A., Coral Gables, Florida, is alleged to have violated the Bank Secrecy Act; to have engaged in unsafe and unsound practices when it failed to supervise adequately its Capital Markets Group (CMG); and to have failed to ensure that CMG's securities transactions were conducted safely, soundly, and legally. Specifically, the OCC's order alleges that the bank:
• Violated the BSA and 31 CFR 103.33(a) [records of loan transactions] by permitting CMG to maintain records that frequently failed to adequately identify a legitimate business purpose for loans, or fully and adequately describe the nature and purpose of loans (loans were described merely as being for "working capital").
• Failed to maintain a system of controls to monitor and report suspicious activity.
• Failed to adequately identify and monitor accounts of politically-exposed persons (PEPs).
• Failed to monitor loans accounts and payments for suspicious activity.
• Did not have an adequate training program on detecting and reporting suspicious activity.
• Permitted CMG to make loans that did not conform to the bank's own lending policies, and to omit obtaining proper authorization for large credits.
• Allowed CMG to provide incomplete or inadequate loan documentation and recordkeeping, not in accordance with bank policies.
• Failed to do adequate customer due diligence, especially for high-risk customers.
• Allowed CMG to maintain an inadequate record of its securities transactions.
• Permitted OMG to engage in securities transactions in violation of OCC regulations.
• Allowed CMG to conduct securities transactions with high-risk countries without risk management procedures.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2192457 - 09/13/18 04:07 PM Re: Student Loan and Reg Z Violation Anonymous
RR Joker Offline
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This ^^^. During an interview, you ask. Preferably, you have a statement of purpose on the application or stand-alone form. Then, if the customer uses it for some other reason and it comes back to bite you in some manner [illegal use of the funds...scam...etc.] you have proof you did not aid and abet/collude/enable the customer in any way. If they lied to you, they committed fraud. You have documentation if you did your job as a loan officer lending the FI's money.
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#2192653 - 09/14/18 05:55 PM Re: Student Loan and Reg Z Violation Anonymous
Anonymous
Unregistered

Original Poster:
Yes, the loan purpose was asked for and it was documented on the application "to pay off student loan debt". Unfortunately, we are clearly in violation with Reg Z.. We can't unscramble the egg at this point but was just looking for suggestions on what to do next, other than the obvious one being (more) lender training. We are going to provide the final disclosures to the customer now. At this stage in the game it seems providing the initial disclosures and approval disclosures would not be of any value to the customer unless you feel we should send those as well?
Thank you all for your comments!

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#2192658 - 09/14/18 06:20 PM Re: Student Loan and Reg Z Violation Anonymous
RR Joker Offline
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RR Joker
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The Swamp
Sounds like you have the best plan of 'attack' to me that you can do at this point.
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My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

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#2192687 - 09/14/18 08:24 PM Re: Student Loan and Reg Z Violation Anonymous
Reads Regs Offline
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Joined: Nov 2004
Posts: 2,307
Curious as to how you will generate the private education loan disclosure required by Reg. Z? Does your LOS have this as an option or will you manually create and produce it?
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#2192816 - 09/17/18 07:33 PM Re: Student Loan and Reg Z Violation Anonymous
SeekingKnowledge Offline
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SeekingKnowledge
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SC
Just to add to this thread, because I haven't seen it expressly stated above, the Official Interpretation for 1026.46(b)(5) states that the definition includes "loans extended to consolidate a consumer's pre-existing private education loans." I realize the OP is not arguing that point, but it seems to be relevant information to the rest of the discussion.

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