Loan Purpose

At one time I'm positive that BSA regulations stated that any loan over $10,000 and was unsecured had to have a specific loan purpose stated i.e. can't say personal expense. Has this changed in any way or am I just completely wrong?

Here's the requirement:

1010.410(a) A record of each extension of credit in an amount in excess of $10,000, except an extension of credit secured by an interest in real property, which record shall contain the name and address of the person to whom the extension of credit is made, the amount thereof, the nature or purpose thereof, and the date thereof;

Appendix P of the FFIEC BSA Exam Manual also outlines the record keeping requirements for loans not secured by real property as follows:

"Extension of Credit in Excess of $10,000 (Not Secured by Real Property)
This record shall contain:

Name of borrower.
Address of borrower.
Amount of credit extended.
Nature or purpose of loan.
Date of loan."

As long as it doesn't say personal expense in this case correct? Must be more detailed to satisfy BSA?

IMHO, "personal expense" is never enough. But I'm not sure you'll find that in writing anywhere.

I used to see a lender use 'short term living expenses' A LOT - for 3 year loans.

I think "personal expenses" is fine. Especially if it's a line of credit, the purpose will change as the line revolves.

I've never had an examiner question this. We routinely indicated "personal investments and expenses" for HELOCs where the borrower does not have an intended purpose, but wants the line in the event an opportunity/expense should arise in the future.

We routinely indicated "personal investments and expenses" for HELOCs

HELOCs are secured by real property therefore they are not subject to BSA purpose statement requirement.



Before you accept generic purposes such as "personal expenses" you may want to review the following 2007 Email to my bank's President.

Lon,

You know how I have always harped on the loan officers not getting a specific purpose for the loan request? That personal, business etc. was not sufficient. You might find the following interesting. This bank was fined $250,000 for violations of the Bank Secrecy Act. Not properly obtaining a specific loan purpose was one of the citations.

This it the legal document: http://www.occ.treas.gov/FTP/EAs/ea2007-011.pdf

This is a summary:

/12/2007 - The International Bank of Miami, N.A.
CMP: $250,000 Agencies: OCC Assets 9/30/06: $807 million
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.

For a closed-end loan, yes, there should be a definite purpose. But as I stated earlier, with an open-end product, the purpose will change over time as it revolves, so how do suggest they be documented Dan?

And what if there is no intended purpose when the line is granted? What if they are obtaining it "just in case" they may need it in the future? I know plenty of customers and individuals that have HELOCs that have never been drawn on (self included) just in case they want to use it for some unexpected expense or investment opportunity.

Never had an issue with indicating "working capital" or "personal expenses and investments" for these types of products. A working capital line can be used form many reasons over the term of the loan. All of the reasons involve running the daily operations of the business.

My impression is that the bank noted above had systemic issues in many areas. It's also likely that the advances on the loans were traced and determined to NOT be used for working capital which resulted in the recordkeeping violation. If the bank knew the funds weren't being used for the stated purpose, they should have filed a SAR. This may have been a factor in the violation.

I'm late to the party on this, but the FDIC BSA examination manual makes it very clear that "The stated purpose can be very general such as a passbook loan, personal loan, or business loan".

I was not aware that the FDIC had a BSA Examination Manual? Where in the FFIEC manual is that found?

BSA purpose aside, why would you make any loan without fully understanding the purpose of the loan?

It's in the "DSC Risk Management Manual of Examination Policies". Section 8.1-7

Because often it's "personal" and often, depending on the customer, we don't care if they use the money to burn a wet mule.

The requirement is to state the "nature OR purpose." IMO a description such as "personal expenses" adequately describes the nature of the loan.

It seems the FDIC would agree with you, and so do I.