Beneficial Ownership Rule and Automatic Renewals

Issue/Inquiry

The Bank has an automatic renewal process for commercial loans by which a later maturity date will be set. A credit report will be run, but underwriting will only be done if the credit score is below a certain threshold. Are the Beneficial Ownership Requirements applicable to such renewals?

Response Summary

Under recent FinCEN guidance, financial institutions will not be required to identify and verify the identity of beneficial owners at the time of rollovers, renewals, or modifications for certain financial services and products. In the case of loans, this exception would apply when the renewal does not require underwriting review and approval.

Response Detail

Under the Beneficial Ownership Requirements, a covered financial institution must identify and verify the identity of the beneficial owners of a legal entity at the time each new account is opened. 31 §1010.230(b)(1).

An “account” is a formal banking relationship established to provide or engage in services, dealings, or other financial transactions, including a deposit account, a transaction or asset account, a credit account, or other extension of credit. A “new account” is each account opened by a legal entity customer on or after the date of May 11, 2018. 31 CFR §1010.230(c),(g).

FinCEN guidance indicates that financial institutions are required to have their legal entity customers certify the beneficial owners for existing customers during the course of a financial product renewal. Each time a loan is renewed or a certificate of deposit is rolled over, the institution establishes another formal banking relationship and a new account is established.

For financial services or products established before May 11, 2018, covered financial institutions must obtain certified beneficial ownership information for the legal entity customers of such products and services at the time of the first renewal following that date. FinCEN, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, Q.12, FIN-2018-G001, April 3, 2018.

On September 7, 2018, FinCEN issued a ruling which granted exceptive relief to covered financial institutions from certain obligations under the Beneficial Ownership Requirements. An institution is not required to identify and verify the identity of beneficial owners when a new account is opened as a result of the following:

• A rollover of a certificate of deposit
• A renewal, modification, or extension of a loan (e.g., setting a later payoff date) that does not require underwriting review and approval
• A renewal, modification, or extension of a commercial line of credit or credit card account (e.g., a later payoff date is set) that does not require underwriting review and approval
• A renewal of a safe deposit box rental

In regard to loan renewals, modifications, and extensions, FinCEN noted that once a loan application process is finalized and a loan is approved, a financial institution may renew, extend, or otherwise modify the loan without substantively changing the terms or requiring additional underwriting. In addition, the current industry practice for renewing or extending these types of account relationships is generally automated and does not require an affirmative action of the customer.

The exception only applies to the rollover, renewal, modification, or extension of the named types of accounts occurring on or after May 11, 2018, and does not apply to the initial opening of such accounts. Notwithstanding the exception, covered financial institutions must continue to comply with all other applicable Anti-Money Laundering requirements under the Bank Secrecy Act and its implementing regulations, including program, recordkeeping, and reporting requirements. FinCEN, Exceptive Relief from Beneficial Ownership Requirements for Legal Entity Customers of Rollovers, Renewal, Modifications, and Extensions of Certain Accounts, FIN-2018-R003, September 7, 2018.

In this case, the Bank has an automatic process for renewing commercial loans that requires underwriting and approval only if the credit score for the borrower is below a certain threshold. As such, it qualifies for the exception granted since the renewal is granted automatically without the need for underwriting and approval. For those loans that do not qualify for automatic renewal, the Bank will have to fulfill the Beneficial Ownership Requirements to identify and verify the identity of the beneficial owners of the legal entity customer.

This entry was posted on Monday, October 29th, 2018 at 6:00 am.