We have indirect lending relationships with a number of area auto / RV dealers. If the applicant's loan is channeled through our institution, the borrower signs a contract showing them as the "buyer", the dealership as the "seller" and our bank as the "assignee".

Basically, we approve / disapprove the loan, and if it is originated, we buy the paper. In this situation is the dealer our "agent" or not?? We are trying to determine if the CIP rules apply to the borrowers who obtain these indirect loans.

If the loan is originated in your bank's name, CIP applies.

It is my understanding CIP Rules do apply to your situation since your bank makes the credit decision and the indirect loan is originally booked by your bank.

Indirect loans can be excluded only if they were orginally booked by another institution and then transferred to your bank.

But that is where the confusion lies. The bank's name appears on the contract as the "assignee". However, the bank does not purchase the loan until the dealership closes the sale. As a matter of fact, there is always a possibility (albeit slight)that the bank will not purchase the loan if it is not closed as approved.

In any event, we do make the credit decision and are willing to ensure our dealers comply with CIP if applicable. We just didn't want to cause them undo work if we do not have to.

Just because these are risk based, re-read Deena's post which is in the spirit and intent of this provision.

Your dealers may be of a higher standard than some of those I have experienced, but I believe CYA and risk mitigation is a key element of any banks program. Saving them work is good, but not if it is at your expense. Lack of verifications on purchased assets could be a hole in the law as to laundering. Plug it now if you can. (You'd still want necessary data in the file.)

Anonymous: Remember that is is not the sale that triggers the CIP requirements, it is the loan. Under your described scenario, your institution makes the credit decision and funds the loan, which is the "opening of an account" for CIP purposes. The dealer is the "seller" but not the lender.

This is exactly our indirect scenario. Yes, the dealer closes the loan in our name. The customer is the buyer, the dealer is the seller and the contract is assigned to the bank. Funding was done in the OLD days when the dealer brought the contact to the bank, and was paid by check. Now, a draft system is used. I firmly believe that the onus is on the bank for CIP.

Anon,

Quote:

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Basically, we approve / disapprove the loan, and if it is originated, we buy the paper.

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If you don't approve the loan it does not get made. I do not see the basis for an argument that the loans you do approve are transferred to you rather than made by you.

Whether your concern is over avoiding an increase in the dealer's workload or just making certain things are done right, you can probably integrate CIP with your process more easily than you can avoid it.

David: The impression that I had was that the bank made the decision to extend credit and if it rejected the loan, it was not made. If it approved the loan the dealer would do the paperwork in the bank's name, but the dealer wouldn't "fund" anything (since any proceeds would go to the dealer). So the "approval" was also an agreement to fund the loan by the bank. I would say that the only way that this would qualify for the transfer exception is if the transaction would take place whether the bank approved it or not, and the paper could be sold to another bank or kept by the seller.

In my opinion CIP applies to loans originated with a dealership. We have made some decisions regarding how we will handle CIP. We are requiring the dealer to obtain the name, DOB, address, ID #, and one document. (We do not accept deals in business names, so this will be a drivers license.) We will use the credit report, a thank you letter, and the coupon book as nondocumentary methods of verification on our end. If you see any holes in this, please let me know.

We are struggling with the notice requirement. Has any one decided how they are planning to handle this? We added it to our applications, but not all dealers use our applications and any way the application is not the account opening phase of the transaction. We considered adding it to the contracts (dealers must use our contracts), but the vendor could only find space to fit it on the back of the contract, which may not qualify as 'reasonable notice'.

vig,
I do not see any holes in your approach. The one thing I have seen banks add is a requirement that a bank employee speak directly with the potential borrower immediately prior to relating loan approval to the dealer. In that conversation the bank seeks confirmation of some the information that is in the credit report which was not requested in the application. (This is as much for the purpose of preventing identity theft as compliance with CIP.) However, since the disclosure can also be given orally, the conversation also gives the bank an opportunity to assure the disclosure is made prior to opening the account.

I would still put the disclosure on the application and the back of the contracts as you plan to do. It is highly likely that all banks making these types of loans will eventually include the language on their applications, but dealers will undoubtedly find and use old forms for years to come.

Oops, the immediately preceding Anon is me.

I am in agreement that for indirect loans since we underwrite, fund and close in our name (or sometimes are assigned after closing) are our responsibility. We are going to look at revising our dealer contracts to emphasize the dealers responsibility to collect the information we require and to follow our CIP.

A question I have about all this is, do dealers have to follow any rules as far as ensuring a customer has a valid driver's license, or that the customer is who they say they are? Who regulates the dealers, the State?

I would like to re-open this discussion. In our indirect program, the dealer sends apps to one, or several banks - we don't know. We will make a decision and relate that back to the dealer. The dealer will write up the paperwork with the bank listed as "assignee". The customer signs and drives away with their new car. From there, the dealer sends the note to the bank. The note says "For value recieved, seller hereby sells, assigns and transfers to ...". If all is fine, the bank will send the dealer a check payable to the dealership and book the loan. If a problem comes up, the bank can refuse the note and send it back to the dealer. This doesn't happen very often but has happened on occasion.

Does CIP apply to this type of credit? We would still obtain ID information regardless but do we have to address indirect lending in our CIP ... and have the dealership provide the CIP notice?

See David's Q&A question 9.

Just picked up on the Q&A. Thanks for the wonderful research and work on your part, David. Thank you too to BOL, you provide a great service for us in the banking, etc. world.
Enjoy the day!!!

Thanks David. I have not been on line in a few days and didnt see your new Q&A. I am sure I speak for all to say we truly appreciate your input.

We have relationships with some vendors in our community who forward applications exclusively to our bank from their locations. Has anyone developed a form to gather all of the required information?

Banker's Compliance Consulting has a good Q&A on there website (www.bankerscompliance.com). Q9 talks about indirect lending and CIP. Basically, if the bank makes the credit decision and the loan will not be made if the bank denies the application, then CIP applies regardless of whether the loan is closed in the dealer or bank's name.

CIP allows for a reasonable time to verify identity. I think it may say 30 days. With indirect auto lending, however, the person/borrower has the loan and is out the door with their new car within hours. The risk is that by the time the bank verifies the identity, it may realize the identity can't be verified. In that case, the loan has already been made so I assume the bank's reasonable response would be to just freeze out any other services to the person other than just the auto loan. Is that what everyone else does?

As you suggest, the regulation indicates that identity must be verified within "a reasonable time after opening the account." It does not make any suggestion regarding a specific period of time.

To avoid the issue you mention, most banks actually verify the pieces of information they receive before the account is opened, particularly if it's a loan. While verifying identity after the loan is made might technically satisfy a BSA examiner, the other members of a safety and soundness examination team would have a fit.

The minimum standards for CIP should not be used to dilute the bank's minimum standards for underwriting loans.

The bank can delegate CIP to the dealer and many do, as well as use automated resources to verify before making the decision to purchase.

Just one comment. A bank may require by contract that the auto dealer perform specific functions and provide specific information to the bank in order for the bank to comply with CIP. The bank remains ultimately responsible.

A bank cannot delegate CIP to the dealer as they are not a financial institution. However, who is the actual creditor and are these purchased loans?

The risk is that by the time the bank verifies the identity, it may realize the identity can't be verified.

You really are kidding - correct? If not, then you have some serious weaknesses in your indirect program. CIP might be one, but identity theft, red flag, and just general safety and soundness issues would seem to me to be of grave concern.