SR 18-6:

Interagency Exemption Order from Customer Identification Program Requirements for Loans Extended by Banks and Their Subsidiaries to Commercial Customers to Facilitate Purchases of Property and Casualty Insurance Policies

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

DIVISION OF
SUPERVISION AND REGULATION

SR 18-6
September 28, 2018

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK

SUBJECT:

Interagency Exemption Order from Customer Identification Program Requirements for Loans Extended by Banks and Their Subsidiaries to Commercial Customers to Facilitate Purchases of Property and Casualty Insurance Policies

Applicability:  This order applies to all banking organizations supervised by the Federal Reserve that are subject to Customer Identification Program requirements under the Bank Secrecy Act.1

The Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, collectively the Federal Banking Agencies (FBAs), and the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) are issuing the attached interagency order to grant an exemption from the requirements of the Customer Identification Program (CIP) rule for loans extended by banks and their subsidiaries to commercial customers to facilitate purchases of property and casualty insurance policies (hereinafter referred to as premium finance loans or premium finance lending). Effective immediately, a banking organization that provides loans to commercial customers to facilitate purchases of property and casualty insurance policies can utilize this CIP exemption and should update its CIP policies and procedures accordingly.

The CIP rule, set forth in Section 326 of the USA PATRIOT Act,2 requires a bank to implement a CIP that includes risk-based verification procedures that enable the bank to form a reasonable belief regarding the identity of each "customer," including, at a minimum, obtaining the customer's name, date of birth, address, and tax identification number and to establish risk-based procedures to verify the identity of new customers.

Under the CIP rule, the appropriate FBA with the concurrence of the Secretary of the Treasury may by order or regulation exempt any bank or type of account from the requirements of the CIP rule. The Secretary's authority under this provision has been delegated to FinCEN. Pursuant to the criteria for exemptive relief set forth in the CIP rule,3 the FBAs and FinCEN have determined that the exemption set forth in the order would be consistent with the purposes of the Bank Secrecy Act (BSA) and with safe-and-sound banking practices.

Premium finance loans provide short-term financing to businesses to facilitate their purchases of single-premium property and casualty insurance policies. According to FinCEN, these types of loans present a low risk of money laundering because of the purpose for which the loans are extended and limitations on the ability of a customer to use such funds for any other purpose.4 Moreover, according to FinCEN, property and casualty insurance policies themselves are not an effective means for transferring illicit funds.5 Therefore, an exemption is consistent with the purposes of the BSA, based upon FinCEN's determination that premium finance loans present a low risk of money laundering. Finally, as premium finance loans are generally secured by the unearned premiums associated with property and casualty insurance policies, an exemption is consistent with safe-and-sound banking practices. The resulting change to banking practices will not be contrary to generally accepted standards of prudent banking operations, and will not give rise to abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.

Reserve Banks are asked to distribute this SR letter to the domestic and foreign banking organizations supervised by the Federal Reserve in their districts, as well as to supervisory and examination staff. Please direct any questions concerning the SR letter or the interagency exemption order to the following individuals:

  • Division of Supervision and Regulation:  Koko Ives, Manager, at (202) 973-6163 or Jay Song, Senior Supervisory Financial Analyst at (202) 973-7425; or
  • Legal Division:  Jason Gonzalez, Senior Special Counsel, at (202) 452-3275.

In addition, questions may be sent via the Board's public website.6

signed by
Arthur Lindo
Deputy Director
Division of
Supervision and Regulation

Cross References:
  • SR letter 05-9, "Frequently Asked Questions Relating to Customer Identification Program Rules"
Notes:
  1. Banking organizations supervised by the Federal Reserve subject to the CIP requirements include:  state member banks (Regulation H, 12 CFR 208.63(b)(2)), Edge and agreement corporations (Regulation K, 12 CFR 211.5(m)(2)), and branches, agencies and representative offices of foreign banking organizations operating in the United States (Regulation K, 12 CFR 211.24(j)(2)).  Return to text
  2. 31 U.S.C. 5318(l).  See also SR letter 05-9, "Frequently Asked Questions Relating to Customer Identification Program Rules," for interagency guidance on common questions regarding the CIP Rule.  Return to text
  3. 31 C.F.R. § 1020.220(b).  Return to text
  4. See "Customer Due Diligence Requirements for Financial Institutions," 81 FR 29398, 29418 (May 11, 2016).  Return to text
  5. See "Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act Regulations-Anti-Money Laundering Programs for Insurance Companies," 70 FR 66754, 66757 (Nov. 3, 2005).  Return to text
  6. See http://www.federalreserve.gov/apps/contactus/feedback.aspx.  Return to text
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Last Update: September 28, 2018