Subsidiary requirements

Is anyone aware of any CIP requirements for a bank's subsidiaries? Such as if the bank has an insurance/investment company and/or a mortgage company.

Does the bank need to incorporate their CIP into the subsidiaries?

thanks so much!

Questions are mine not my employers.

My undstanding is that CIP applies to a bank's subsidiaries in the same way as the BSA program requirements apply. Since insurance/investment companies and mortgage companies don't meet the definition of "bank" under the BSA, I don't think CIP technically applies. Having said that, these companies DO meet the definition of a "financial institution" under the USA PATRIOT Act, so all the other requirements would apply (e.g., AML, OFAC, SARs, etc.) Also, I think these other companies may eventually have their own CIP regulations from their own regulators, but so far (I think) only broker/dealers have their own reg.

Yes. As I understand, subs must be covered by the bank's CIP. Affiliates are on their own for determination under applicable fed agencies CIP rules.

The preamble to the regulations says at p. 15-16: "As noted in the preamble for the proposal, the CIP must be a part of a bank’s BSA compliance program. Therefore, it will apply throughout such a bank’s U.S. operations (including subsidiaries) in the same way as the BSA compliance program requirement. However, all subsidiaries that are in compliance with a separately applicable, industry-specific rule implementing section 326 of the Act will be deemed to be in compliance with this final rule."

We have a sub that does leasing and brokers mortgage loans. As attorney that I spoke to stated that while the act applied to "financial instutions" the regulations issued by the federal regulators do not apply to leasing companies and mortgage brokers. He does not believe that our sub is subject to the CIP regulations.

I will be calling our regulator to get clarification on this issue.

Dolly: The attorney is right that the regulations do not apply to leasing companies and mortgage brokers generally. The issue is whether they are subject to CIP as a result of being a subsidiary of a depository institution under the language I quoted in my last post.

Ted,

So in your opinion they ARE subject to CIP only because they are a subsidiary?

Ted,

I was just sitting here reading the article in ABA Bank Compliance by John Byrne. He states:

"The financial institutions that will eventually be covered under Section 326 are extensive. Not all institutions, however, are obligated to comply with the rule at this time. For now, the rule covers only banks and trust companies, savings associations, credit unions, securities brokers and dealers, mutual funds, futures commission merchants, and futures-introducing brokers."

Sounds like for now our leasing and mortgage broker is not subject to the regulations.

Dolly,
Ted has provided you with the correct language:, they are not subject because they are a leasing company or a mortgage broker. They are subject because they are a subsidiary of the bank - it does not make any difference what business the subsidiary is in, it's covered.

John Byrne's statement relates to what is a financial institution, he makes no reference to subsidiaries - there is no conflict between what John said and the language Ted quoted from the supplementary information.

Ken, I was advised by an attorney that, since the CIP reg says that subsidiaries are covered "in the same way as the BSA program requirements apply," and since insurance companies, mortgage companies, etc. do not meet the definition of "bank" under the BSA reg, they are not technically covered by the CIP reg. They would still be subject to all the other aspects, e.g., AML, SARs, etc. What do you think?

I think the attorney is torturing the language. A bank's subsidiaries have always been subject to BSA; CIP is just another paragraph of the same regulation.

Deena: Remember that although subsidiaries are subject to CIP, some subsidiaries may not open "accounts" as defined in the regulation (depending on what business they are in).

Well, I find this all very interesting so I will be asking my regulator what the answer is. I understand everyone's point of view, however, my question has not been answered.

I'll let you know what the FDIC says!

With my understanding of this issue, all of the above answers are technically correct.

If the leasing company and/or mortgage broker were stand-alone companies they would not be subject to CIP (at this point in time), however, since they are a subsidiary of a financial institution that is subject to CIP then they are required to comply. Am I understanding correctly?

If this is correct, maybe the attorney or others understood the question to be whether those type of entities were required to comply w/o giving consideration to the fact that they are a subsidiary of a bank.

Ted or Ken: I'd like to ask a related question. If the bank's holding company owns a mortgage broker company and is thus an affilate of the bank, and the bank is not buying any of its brokered loans, would the mortgage broker company come under the BSA umbrella and CIP rules? And if you believe it still falls under the rules, since the broker is not what I would say technically opening accounts, would you rule out the CIP rules for it?

As of right now, I don't see the CIP requirements applying to holding company affiliates, as opposed to subsidiaries of the financial institution. If and when CIP rules are issued for mortgage brokers, they would be covered by those rules. In any situation there will be the separate question of "Does this company open "accounts" as defined in the regulations?" Remember that's a "formal BANKING relationship". If you have a subsidiary that conducts operations unrelated to banking, it may not be an issue.

Dolly -What did you find out from your regulator?

Ted (or anyone else) -

What if a Holding Company owns the banks and a leasing company? Based on Ted's above it quote, it doesn't appear that the CIP requirements apply to the BHC leasing company. Correct?

OK, let me ask this (possibly stupid) question---it may be determined that a standalone mortgage broker is not subject to CIP. If that is the case, then is the bank subject to CIP on the loans it approves from that broker? I know the answer to that should be "yes", as the bank has opened a banking relationship with the borrower, but if the broker is not subject to CIP, that makes it difficult for the bank to get the necessary requirements to satisfy CIP.

We're requiring our brokers to collect the CIP information on the appplications they originate. We won't allow an application to go to underwriting without the CIP documentation.

Yes, we're doing the same as you...requiring brokers to collect the necessary documents to satisfy CIP, combined with a credit report run on our end. It just seems funny that we are holding "CIP" over a broker's head, while they are not obligated to follow the same rules.

To WMathis:

Section 326 applies to all ‘‘financial institutions’’, which is defined in the BSA to include a loan or finance company and persons involved in real estate closings and settlements. Accordingly, Mortgage Brokers meet this definition of persons involved in real estate closings and settlements simply because they arrange financing. I believe it would be hard to argue that they do not operate as a loan company simply because funding occurs from the capital of others.

I agree with Ted and Ken regarding applicability. As I recall, the regulatory agency regulations, 12CFR200/CFR300/ 12CFR400/ & 12CFR500 specify extension of their regulations to subsidiary organizations.

I was wondering if you are requiring documentary evidence, for example driver's license information for mortgage lending, or depending soley on non-documentary verification and the notarization at loan closing? I want to make sure we are complying, but not adding more to the process than we need to.

If a broker closes a loan in the nameof the bank, they are subjec to CIP. Now here is a new one. Our bank is owned by a mortgage company that is not subject to CIP. We purchase loans from them. Since we are a sub. to them are they subject to this? FYI: I have them develping procedures since they already do everything but the notice.

I was in a similar situation previously and wonder if you are really a sub of the mortgage company or are you both subs of the same holding company? If you are a sub of the mortgage company they would be a bank holding company.

Sorry to kick the (almost) dead horse. If you accept the fact an entity may not be a "financial institution" under the current definition (eg., mortgage company)and would not be subject to the CIP rule if standalone but that the same entity, if a subsidiary is subject to CIP because of its status as a bank sub, can you have a contract and a safe harbor reliance on the sub's CIP procedures when they don't meet the definition of a financial institution? Sorry for the run on sentence.