On September 28, 2018, the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency (Federal Banking Agencies or FBAs), in conjunction with FinCEN, announced an order exempting premium finance loans, made by banks to commercial customers, from the Customer Identification Program (CIP) requirements implementing section 326 of the USA Patriot Act (31 U.S.C. § 5318(l)). This is in line with FinCEN’s earlier exemption of these same products from the Beneficial Ownership rules.
According to the CIP rules, banks must implement a customer identification program that enables the bank to form a reasonable belief of the true identity of its customers, including specific identifying information the bank will obtain prior to account opening. For lenders who participate in premium finance lending, complying with the CIP requirement for premium finance loans proves to be difficult.
Premium finance loans are short term extensions of credit that provide financing to businesses to facilitate their purchases of property and casualty insurance policies. Generally, insurance agents or brokers work to help arrange such financing of single premium insurance. Borrowers typically make a down payment toward the insurance premium directly to the agent or broker and the lender will then advance a loan to the borrower, with the proceeds being paid directly to the insurance company or broker, to cover the remainder of the premium.
According to the exemptive Order, banks noted these loans are “typically submitted, approved and funded within the same business day and are conducted through insurance agents or brokers with no interaction between the bank and the borrower.” As a result, it is difficult for banks to fully comply with the CIP information collection requirements.
Considering the information from banks and evaluating the premium finance loan products and processes, FinCEN has determined these types of loans present a low risk of money laundering and terrorist financing. Since funds are remitted directly to insurance companies or brokers rather than the borrower, customers have restricted use of funds which means the policies are not effective means for transferring illicit funds. The FBAs also found the exemption consistent with safe and sound banking practices as such loans are a form of secured lending; if a borrower defaults the insurance company is legally obligated to return any unearned premiums to the lender.
Although premium finance loans are exempt from the CIP requirements, banks must continue to comply with all other BSA requirements, as applicable, when engaging in premium finance lending.
The Order is available here.