ABA Compliance Center Inbox, November/December 2015

Q: One of our executive officers is purchasing a home to use as his primary residence. In addition to a closed-end mortgage, he is opening a HELOC for $165,000 and taking a draw of $120,000 at closing to use toward the purchase. Because the entire transaction (i.e., the acquisition of the residence) is for the purchase of his primary residence, I am assuming that this falls under the 215.5(c)(2) exemption in Regulation O for the purchase of a primary dwelling. Am I missing anything?

A:Yes. While 215.5(c)(2) allows for an “extension of credit” in “any amount” to finance (or refinance) the purchase, construction, maintenance, or improvement of a residence of the executive officer, this is limited to those that are secured by a first lien on a residence that is owned or expected to be owned by the EO. Given that the HELOC will most likely be in a subordinate-lien position, it would therefore not be eligible for the exemption under 215.5(c)(2).

The HELOC would then be limited to the amounts under 215.5(c)(4), which is in aggregate with other loans not eligible for an exemption pf no more than the higher of 2.5 percent of the bank’s “unimpaired capital and unimpaired surplus” or $25,000, yet in no event more than $100,000. In addition, please note that there may be only one extension of credit under the 215.5(c)(2) exception at a time (i.e., there could not be two first-lien extensions of credit in any amount on residences of the EO), as well as the fact that in order for a HELOC to qualify for the exemption under 215.5(c)(2) it must be limited to the purpose of the purchase, construction, maintenance or improvement of a residence of the EO. Finally, even though the EO is purchasing one residence, the fact is that there are multiple extensions of credit. (Response provided Sept. 2015)

Q: Is the bank required to perform a review of existing loans with required flood insurance for detached structure exemptions?

A: No. There is no requirement to perform a review of existing “designated loans,” although an institution could perform such a review if it wishes to do so. In addition, detached structures should be re-examined upon a MIRE event (making, increasing, renewing or extension of a designated loan) to determine the status of the detached structure exemption. If a lender or servicer subsequently becomes aware that a detached structure is no longer exempt, the borrower must be notified that flood insurance is now required, and that if insurance is not obtained within 45 days of that notification, the lender will force-place it. (Response provided Sept. 2015)

Q: What are the flood insurance escrow requirements and when are the 
rules effective?

A: An institution or servicer shall require escrowing of all premiums and fees for any flood insurance required for any designated loan secured by residential improved real estate or a mobile home that is made, increased, renewed or extended (MIRE event) on or after Jan. 1, 2016. This requirement does not apply to institutions that meet the small lender exception or the designated loan is covered by one of the six defined loan exceptions.

Additionally, as of June 30, 2016, lenders and servicers shall offer and make available to borrowers the option to escrow for any loan secured by residential improved property or a mobile home outstanding on Jan. 1, 2016, unless: 1) the loan or institution qualifies for an escrow exception; 2) the borrower is already escrowing for flood insurance on the loan; or 3) the institution is already escrowing for flood insurance as required by the regulation. (Response provided Sept. 2015)

When doing a credit card cash advance for $3,000 or more, are we required to enter that transaction into our Monetary Instrument Log?

A: No. Monetary instrument sales include the purchase of cashier’s checks, official bank checks, money orders or traveler’s cheques in amounts of $3,000 to $10,000. If giving cash was considered a monetary instrument, every cash transaction, including withdrawals or cashed checks, of $3,000 or more would need to be recorded. (Response provided Sept. 2015)

Our check printer wants to market checks to customers of our bank who did not request this service at account opening. Could we consider the check printer to be a financial institution so that we can enter into a joint marketing agreement and allow it to market to our customers?

A: A check printing company is a financial institution according to §1016.3(l)(3)(ii)(E): “A business that prints and sells checks for consumers, either as its sole business or as one of its product lines, is a financial institution because printing and selling checks is a financial activity that is listed in 12 CFR 225.28(b)(10)(ii) and referenced in section 4(k)(4)(F) of the Bank Holding Company Act.” This section goes on to state that “Banks can share with these entities in order to facilitate a transaction the customer has requested—for example, if the customer wants checks, the bank can share so that the customer can receive those checks. (See §1016.14(a)(1)).”

The reason for the explicit reference to the §1016.14 exception as mentioned in the definition is that check printing is thought to be a routine part of a transaction (customers need checks) whether or not the customer ordered them. Therefore, your check company could market checks to your customers without benefit of a joint marketing agreement. However, if the check company wants to market other financial products or services, you would need to have a joint marketing agreement in place and because a check printer meets the definition of a “financial Institution,” then you could enter into a joint marketing agreement and allow them to market to your customers. This agreement must be in writing and must be disclosed on your privacy notice, although there are no opt-out rights for joint marketing. (Response provided Sept. 2015)

Q: I have a question regarding completion of Part III of the Suspicious Activity Report (“Information about Financial Institution Where Activity Occurred”). The question is whether or not this section should contain other banks/branches involved in the activity even if the SAR is not a jointly filed SAR. For example, if Bank A’s customer received a fraudulent wire from Bank B, should Bank A include Bank B’s information in Part III as well as their own? I think it should, but I am getting push-back from our security officer who files our SARs.

A: According to a FinCEN representative, you are correct. The SAR instructions state, “Complete a separate Part III record on each financial institution involved in the suspicious activity.” According to the FinCEN SAR electronic filing instructions, “Part III records information about the financial institution(s) where the suspicious activity occurred. Complete a separate Part III record on each financial institution involved in the suspicious activity.” Therefore, a Part III should be completed for all institutions where suspicious activity occurred using the “+” sign at the top of part III; there is no requirement that these institutions be affiliated. It may be the case that Bank A is unable to obtain all of Bank B’s information. In those cases, the “Unknown” box should be selected where appropriate. (Response provided Sept. 2015)

Answers are provided by Leslie Callaway, CRCM, director of compliance outreach and development; Mark Kruhm, CRCM, senior compliance analyst; and Rhonda Castaneda, compliance analyst, ABA Center for Regulatory Compliance. Answers do not provide, nor are they intended to substitute for, professional legal advice. Answers were current as of the response date shown at the end of each item.