FinCen Issues FAQs on Customer Due Diligence Rule

Written by: Lindsay Harden

On Tuesday, the Financial Crimes Enforcement Network (FinCEN) issued Frequently Asked Questions regarding the new Customer Due Diligence rule.  Affected financial institutions must comply with the new rule beginning on May 11, 2018. This rule will apply to federally regulated banks and federally insured credit unions, among other financial entities, and it imposes heightened customer due diligence requirements as well as a new requirement that covered financial institutions must verify the identity of the beneficial owners of their legal entity customers.

The FAQs offer interpretive guidance that is helpful to understanding the rule. For instance, they clarify the meaning of terms like “beneficial owner” and “legal entity,” and discuss the various exceptions to the rule. In addition, they provide clarification that the rule does not cover existing accounts, and that financial institutions are generally not responsible for incorrect information provided by their customers with respect to the identities of beneficial owners. Click here to review the FAQs and prepare your institution for the Customer Due Diligence rule.


July 22, 2016 at 11:20 am

CFPB Releases Proposed Rule to Increase Regulation of Payday Lenders

Written by: George Sand

On June 1, 2016, the Consumer Financial Protection Bureau released a proposed rule that would restrict the ability for payday lenders to originate loans. The proposal includes both loans with a term of 45 days or less and loans with a term greater than 45 days that have an annual percentage rate greater than 36 percent and either are repaid from the consumer’s account or income or are secured by the consumer’s vehicle (payday loans, vehicle title loans and certain high-cost installment loans) (together, “Payday Loans”). Excluded from the list of Payday Loans are credit cards; student loans; non-recourse pawn loans; overdraft services and lines of credit; loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; and home mortgages and other loans secured by real property or a dwelling if recorded or perfected.

Short Term Payday Loans

The proposed rule would require payday lenders to enhance their screening process prior to approving a short term Payday Loan. Generally, the payday lender would be required to reasonably determine that the customer will be able to meet basic living needs and verify ability to meet financial obligations as they become due. The payday lender would be required to:

  • verify the consumer’s net income;
  • verify the consumer’s debt obligations using a national consumer report and a consumer report from a “registered information system” as described below;
  • verify the consumer’s housing costs or use a reliable method of estimating a consumer’s housing expense based on the housing expenses of similarly situated consumers;
  • forecast a reasonable amount of basic living expenses for the consumer—expenditures (other than debt obligations and housing costs) necessary for a consumer to maintain the consumer’s health, welfare, and ability to produce income;
  • project the consumer’s net income, debt obligations, and housing costs for a period of time based on the term of the loan; and
  • determine the consumer’s ability to repay the loan based on the lender’s projections of the consumer’s income, debt obligations, and housing costs and forecast of basic living expenses for the consumer.

In addition, if a consumer approaches the payday lender for a short term Payday Loan within 30 days of a short term or long term (with balloon payments) Payday Loan, the payday lender would be required to presume a consumer is unable to pay the short term Payday Loan unless the payday lender can sufficiently document betterment in the consumer’s financial circumstances. Payday lenders would be prohibited from making a Payday Loan to a consumer that has undertaken three short term Payday Loans within a 30-day span.

Under certain conditions, a payday lender would be permitted to make short term Payday Loans without making any determination. With specific disclosures, a payday lender could make a principal loan less than $500, a second loan up to two-thirds the amount, and a third loan up to one-third the amount within a 30-day span; however, no more than six short term Payday Loans and no more than 90 days of a consumer experiencing debt would be permitted within a 12-month period.

Long Term Payday Loans

Similar to short term Payday Loans, the proposed rule would require an enhanced screening process for long term Payday Loans to reasonably determine that the customer will be able to meet basic living needs and verify consumer ability to meet financial obligations as they become due  prior to approval. The proposed rule for long term Payday Loans would require all of the same determinations discussed in the previous section regarding short term Payday Loans. However, in addition, payday lenders would be required to reasonably account for volatility in the consumer’s basic living expenses, income, and financial obligations. Similar to short term Payday Loans, payday lenders would be required to assume a consumer is unable to repay a Payday Loan when the consumer that has already undertaken a Payday Loan within a 30-day span, or has expressed struggle to pay other debts of the payday lender or an affiliate. The payday lender can overcome the assumption with documented proof the consumer’s financial position has improved.

Without engaging in screening for consumer capability to repay the loan, a lender would be able to make a long term Payday Loan under a conditional exemption modeled on the National Credit Union Administration’s (NCUA) Payday Alternative Loan (PAL) program. Under the exemption, a payday lender would be required to have a principal greater than $200 and less than $1,000, fully amortizing payments, with a term of over 46 days but less than six months, among other conditions. Such loans would be required to have an application fee of over $20 and have an interest rate permitted for Federal credit unions under the PAL regulations.

In addition, a payday lender can deviate from the screening of consumers’ capability to repay the loan if a long term Payday Loan satisfies certain structural conditions. The exemption would require the long term Payday Loan to have a term more than 46 days but less than 24 months and fully amortizing payments, an annual default rate less than 5 percent, a modified total cost of credit of less than or equal to an annual rate of 36 percent, and a origination fee less than $50 or reasonably proportionate to the underwriting costs, among other conditions. If in any year the lender exceeds an annual default rate of 5 percent, the lender would be required to refund all origination fees paid by all consumers.

Collection Practices

The proposed rule would restrict payday lenders’ collection practices. Payday lenders would be required to give at least three business days’ notice prior to each Payday Loan collection attempt from a consumer’s checking, savings, or prepaid account. The notice would contain material information surrounding the upcoming payment attempt, and electronic notices would be acceptable with the consent of the consumer. In addition, payday lenders would be prohibited from withdrawing payments from consumer accounts in the event of two consecutive failed withdrawal attempts due to a lack of sufficient funds. The payday lender would be required to notify the consumer of such event and follow procedures to receive consumer authorization to enable the payday lender to make subsequent withdrawals from the account. Such prohibition would apply to both failed attempts that are initiated through a single payment channel or different channels (e.g., automated clearinghouse system and the check network).


The proposed rule would require at origination payday lenders to furnish to registered information systems basic information for most Payday Loans, update the information over the life of the loan, and furnish information at the conclusion of the Payday Loan. Prior to originating a Payday Loan, a payday lender would be required to obtain the consumer report from the registered information system and review the report for material information.

The rule would require payday lenders to increase their documentation and recordkeeping. A lender would have to establish written policies and procedures that ensure compliance with the proposal, and follow such policies and procedures. The payday lender would be required to retain all documentation, including the loan agreement and electronic records in tabular format exhibiting origination calculations and determinations for consumers that qualify for exceptions to or overcome a presumption of unaffordability.

Comment Period and Effective Date

Comments to the proposed rule are accepted on or before September 14, 2016. The rule is projected to become effective 15 months after publication in the Federal Register.

June 3, 2016 at 1:18 pm

Financial Regulators Explain Their Expectations for Deposit Reconciliation

Written by: Lindsay Harden

Yesterday, the Federal Reserve Board, CFPB, FDIC, NCUA and OCC issued guidance regarding the agencies’ supervisory expectations for deposit reconciliation on consumer accounts. The agencies summarized their observations on deposit reconciliation practices, and expressed particular concern about credit discrepancies—which occur when a customer deposits more than is ultimately credited to his or her account, resulting in a benefit to the financial institution.

The Interagency Guidance discussed the types of legal and regulatory issues that could arise if a financial institution’s policies or practices do not appropriately reconcile credit discrepancies. For instance, civil liability or agency action could result from failure to comply with the Expedited Funds Availability Act and Regulation CC which implements the Act. The agencies also noted that when ineffective deposit reconciliation practices cause credit discrepancies, they could be considered unfair or deceptive acts or practices under the Federal Trade Commission Act or the Dodd-Frank Act. The agencies did acknowledge, however, that under limited circumstances, proper reconciliation may be impossible, such as when an item has been damaged beyond recognition.

To minimize the risk of financial loss and supervisory action, the agencies suggest financial institutions do the following:

  • Adopt policies and practices designed to avoid discrepancies
  • Effectively manage deposit reconciliation practices to comply with applicable laws or regulations
  • Ensure that any information provided to customers about the institution’s deposit reconciliation practices is accurate
  • Implement effective compliance management systems
  • Above all, ensure consumers are not disadvantaged or harmed by the financial institution’s deposit reconciliation policies and practices

This guidance comes after bank regulators and the CFPB took action in August 2015 against Citizens Financial Group, Inc. and its bank subsidiaries for failing to credit consumers the full amounts of their deposited funds. In its Consent Order with the CFPB, Citizens Bank agreed to pay a total of $18.5 million—$11 million to compensate customers and $7.5 million in civil money penalties. In addition to the CFPB action, the OCC and FDIC separately ordered the banks to pay $10 million and $3 million in civil penalties, respectively.

Go online to view the entire Interagency Guidance.

May 20, 2016 at 11:17 am

New FinCEN Rule Requires Identification Procedures for Legal Entity Customers and Heightened Anti-Money Laundering Diligence for Financial Institutions

Written by: George Sand

A new FinCEN rule under the Bank Secrecy Act will require institutions to more specifically identify legal entity customers and increase Anti-Money Laundering (AML) diligence.  The rule will apply to “Covered Financial Institutions,” which includes banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities.

Under the rule, Covered Financial Institutions will be required to verify the identity of the beneficial owners of all legal entity customers when a new account is opened, with exceptions.  A beneficial owner is an individual who owns more than 25 percent of the equity interests in a company or is the single individual who exercises control. Covered Financial Institutions will be in compliance with obtaining beneficial owner information by either obtaining the information on a model certification form or by any other method that complies with the substantive requirements of the rule.  The procedures for identifying and verifying legal entity customers will be similar to the procedures for identifying individual customers under the Customer Identification Program (CIP).  Covered Financial Institutions identifying beneficial owners of legal entity customers may rely on the information supplied by the customer, provided that there is “no knowledge of facts that would reasonably call into question the reliability of the information.”  Covered Financial Institutions will be required to maintain records of the beneficial ownership information obtained, but may assign this duty to another financial instruction.

In addition, the FinCEN rule amends the Anti-Money Laundering (AML) Program Rule for each Covered Financial Institution to include risk-based procedures for conducting ongoing customer due diligence.  The amended rule applies to all entity customers, including existing entity customers.  The amended rule requires Covered Financial Institutions to develop a customer risk profile by using customer information gathered at account opening and using it as a baseline for suspicious activity reporting.  The rule requires ongoing monitoring to identify and report suspicious transactions, and update the customer information.  When a Covered Financial Institution detects relevant activity of a customer—for example, a change in beneficial ownership or increase in international wire activity—it is required to reassess and reevaluate the risk posed by the customer and update the customer information, including beneficial ownership information.  The rule is event-driven, and does not require Covered Financial Institutions to update the information on a periodic basis.

The rule is effective July 11, 2016, but compliance will not be mandatory until May 11, 2018. The Federal Register is expected to publish the rule on May 11, 2016.

May 12, 2016 at 10:42 am

FinTech – Embracing the Disruption

Please join us on Wednesday, May 25 for an in-depth discussion on FinTech (Financial Technology). Stinson Leonard Street Partners, Steve Cosentino, Karen Garrett and Mark Hargrave, will discuss what FinTech is and how it will disrupt the Financial Services Industry. In this discussion we will:

  • Explore what types of businesses and services comprise the FinTech industry with a focus on the challenges that FinTech presents to incumbent financial systems and banks
  • Examine the growth of the FinTech industry and how it is likely to expand in the coming years
  • Look at how traditional financial systems and banks can embrace FinTech and turn disruptive technology into an asset

In addition there will be a discussion of some of the key regulatory challenges facing FinTech. We will cover:

  • Money transmitter issues
  • UDAAP considerations
  • Third party risk management issues

There will also be a non-technical discussion about the consumer data driving much of FinTech. We will address:

  • Security issues and risks relating to the security of customer data
  • Legal issues surrounding the ownership and use of customer data
  • How to address customer data in contracts with FinTech service providers

This program will be presented from our Kansas City office and videoconferenced to our Minneapolis, Denver and St. Louis offices. We will be hosting receptions following the presentations in each of the participating cities.

Register today for this informative seminar

We hope to see you there!



Wednesday, May 25

1:30 p.m. (MDT)
2:30 p.m. (CDT)

2 – 3:30 p.m. (MDT)
3 – 4:30 p.m. (CDT)

Cocktail reception immediately following the program.


Stinson Leonard Street

Kansas City



St. Louis


If you are unable to attend the live presentation, you may join us by webinar.

May 11, 2016 at 7:00 am

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