Ultimate Beneficial Ownership Rules for Loans

As we are now just two weeks away from the May 11, 2018 implementation date for the new Ultimate Beneficial Ownership (UBO) rules that apply to any legal entity customer opening a new account, I thought it would be a good time to discuss how these new rules will affect the lending side of your financial institution.

Ultimate Beneficial Ownership Rules Apply to Loans

The first thing I would like to clarify is that a new loan to a legal entity customer is absolutely covered by the new UBO rules.  I have received several questions regarding applicability of the UBO rules to loans, and feel that it is important to point out that loans are considered an account under BSA rules, and therefore are clearly covered by the UBO requirements.  

As a reference, we can look to the April 28, 2005 Frequently Asked Questions (FAQs) on the final CIP rule.  In these FAQs, question number one discusses the definition of a customer and how the definition is generally “a person that opens a new account” and provides specific guidance as to how this applies when the account is a loan:

“[The term] ‘customer’ does not include a person who does not receive banking services, such as a person whose loan application is denied.  Therefore, when the account is a loan, the account is opened when the bank enters into an enforceable agreement to provide a loan to the customer.”  

In other terms, an applicant turns into a customer (subject to BSA rules, including the new UBO rules) at the time of loan origination (i.e. upon the signing of the promissory note.)  This means that the UBO identification and verification should be complete by the time the loan closes and the promissory note is signed.

How UBO Rules Apply to Loan Renewals

The new UBO rules have made it clear that they apply to loan renewals, which is something that is different than what many lenders had expected.  As the term “loan renewal” can mean a number of things, it is my understanding that the new rules apply to any type of loan renewal such as a refinance, modification, or even a loan extension.  Though the rules don’t define the term “loan renewal,” a conservative approach of including all types of renewals in the UBO rules will help to ensure compliance.

When a loan to a legal entity customer is being renewed, a financial institution has two different options to comply with the UBO rules.  First, a financial institution could treat the loan renewal like a brand new loan and obtain a full Certification Form with the identification and verification for each UBO.  While this may be the most simple approach for some financial institutions, there is a second option to comply with the rules that may prove to some to be a more effective approach.  

The section option permitted by the rules for complying with the UBO rules for loan renewals is to have the customer complete an initial UBO Certification Form (presumably at the time of the initial loan) and then to agree to notify the financial institution of any changes in information.  If a customer agrees to this, the agreement can be considered a certification (or confirmation) from the customer and is acceptable in lieu of obtaining a new, full UBO Certification Form at the time of loan renewal. Basically, if the customer completes an initial UBO Certification Form and also agrees to contact the financial institution if anything changes (and the financial institution effectively documents this certification/confirmation in their files), a new Certification Form is not required at the time of loan renewal.

As a reference, FAQ 12 of the April 2018 FAQs on the UBO rules states the following:

“Consistent with the definition of “account” in the CIP rules and subsequent interagency guidance, each time a loan is renewed… the bank establishes another formal banking relationship and a new account is established.  Covered financial institutions are required to obtain information on the beneficial owners of a legal entity that opens a new account, meaning (in the case of a bank) for each new formal banking relationship established, even if the legal entity is an existing customer.  For financial services or products established before May 11, 2018, covered financial institutions must obtain certified beneficial ownership information of the legal entity customers of such products and services at the time of the first renewal following that date. At the time of each subsequent renewal, to the extent that the legal entity customer and the financial service or product (e.g., loan or CD) remains the same, the customer certifies or confirms that the beneficial ownership information previously obtained is accurate and up-to-date, and the institution has no knowledge of facts that would reasonably call into question the reliability of the information, the financial institution would not be required to collect the beneficial ownership information again. In the case of a loan renewal or CD rollover, because we understand that these products are not generally treated as new accounts by the industry and the risk of money laundering is very low, if at the time the customer certifies its beneficial ownership information, it also agrees to notify the financial institution of any change in such information, such agreement can be considered the certification or confirmation from the customer and should be documented and maintained as such, so long as the loan or CD is outstanding.”

Loans in Process Prior to May 11, 2018

As a reminder for those of you who will be implementing the UBO rules on or just before the May 11, 2018 deadline, any loan to a legal entity that will close on or after May 11, 2018 will need to comply with the new UBO rules.  This means that, regardless of your financial institution’s implementation date of the new rules, your loan in process prior to May 11, 2018 will be affected by the new UBO rules if they close or fund on or after May 11, 2018. Therefore, each financial institution will need to proactively ensure that any loan closing on or after May 11, 2018 has all required UBO information and verification complete before the loan can be finalized.

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