BSA Statement of Loan Purpose
In this video, Adam discusses the BSA record retention requirements for obtaining a clear statement of purpose on certain loans. Adam explains the requirement in detail including which loans the rule applies to, common errors, and best practices to ensure compliance.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to discuss the statement of loan purpose under the Bank Secrecy Act. So, this is a BSA topic.
BSA rules have certain record retention requirements and one of those requirements has to do with loans. Specifically, BSA rules require that certain loans contain a specific nature or purpose of the loan, and this is required for loans that are not secured by real property and in amounts over $10,000. So what we're talking about here are non real estate loans and in amounts over $10,000. So what we’re talking about here is non-real estate loans in amounts greater than $10,000. So this could be an auto loan, which your statement of purpose should be pretty simple - to purchase an automobile - or it could be a CD secured loan or an unsecured loan. And I will tell you the biggest errors I have seen as an auditor in this area have to do with unsecured loans.
Now, some of you may be saying, “Hey, Adam wait a second. We don't do unsecured loans in amounts over $10,000.” I get it. Some of you don't but I will tell you I've been in a number of financial institutions where they will do unsecured loans in amounts up to $50,000 or even $100,000 depending on the business model of the financial institution. So for those of you who do unsecured loans over $10,000, you need to pay attention because this is a very common error. It’s even a common error for your deposit-secured loans, share loans, or CD secured loans.
The biggest thing we're focusing on here is the nature or purpose of the loan, but the way the rule is written, there's actually a number of requirements. For those of you who are auditing BSA and you're trying to determine what to look at, we go to Appendix P of the BSA Exam Manual from the FFIEC. So, this is the FFIEC BSA Exam Manual in Appendix P. It says that BSA records shall include a number of things. For those of you who are auditors, this should be your checklist. First of all, it would include the name of the borrower, the address of the borrower, the amount of credit extended, the date of the loan, and, of course, the nature or purpose of the loan. So, that is the actual requirement. This is one reason why it's a good idea to require applications.
Now, of course, under the lending rules, an application is only required for certain real estate mortgages and it;s not required for unsecured loans, auto loans orCD secured loans. But I;ve said for years, it is a best practice to require an application, and this is one of those reasons. Because, for loans with amounts over $10,000 where it's not secured by real estate, you have to retain the name of the borrower, the address, the amount of credit extended, and the date of the loan. Some of that should be on your note, but it's a good idea to have that on your application as well.
The biggest piece of course we worry about is the nature or purpose of the loan. Now, what is the best practice to ensure compliance? Well, there's a couple of things you can do, specifically three things that I recommend.
Number one is to require a statement of purpose for all loans. Yes, you heard me to require it for all loans. Now, you may be saying, wait a second, Adam, isn't that requiring more than what is necessary? Well, yes it is. What I’m talking about here is a management philosophy. What happens if you tell your lenders to do something one time, but not do it another time, but do it another time, but not another time? What ultimately happens is they miss the requirement. So, when I have found it's easier to just recommend and require it every time and it becomes a better management practice. So, for loans under $10,000, I strongly recommend that you require your lenders to get that specific statement of purpose if the loan is not secured by real estate. If you train like this, you say, “Look, if the loan is not secured by real estate, we need a specific statement of purpose on the loan.” That makes it easy, because what happens is unsecured loans, especially, in amounts over $10,000 are extremely rare in some financial institutions. So what happens is the lender gets used to not requesting it, and when they do have one over $10,000, they forget. Bottom line is, it's easier to just require it every time and to test that way, and then that ensures compliance.
The second best practice recommendation I have is to conduct regular training. The old saying goes “out of sight, out of mind,” right? What I have found is the more that you remind your lenders and processors of this, the more you're going to find this in the file, the less violations you'll have.
The third best practice recommendation I have for you today on this is to test this. I understand most of you have an internal audit function or a compliance audit function, that is good to look for this, but I recommend doing regular monitoring to look for this, especially for those of you who have a lot of unsecured loans in amounts over $10,000. This is one of the most common BSA violations that I typically find. And when I would go into financial institutions to conduct an audit, what I normally do is I go straight into the loan request. I look for unsecured loans in amounts over $10,000 and go straight to the business purpose. And I will tell you, it felt like over half the time I would find violations in this are. So this is a very common error so make sure you test for this.
That’s all I have for you today.