America is months away from a sea change in business law, thanks to the Corporate Transparency Act (“CTA”).
[Read Mike’s original post on the Corporate Transparency Act by clicking here.]
This law will add compliance obligations to every industry. The banking industry will be no different. Here are some implications of CTA for commercial lenders to keep in mind:
- An assist in organizational due diligence – Starting January 1, 2024, new entities will have 30 days to file a beneficial ownership report (“BOR”) to the IRS Financial Crimes Enforcement Network. All existing entities (unless exempt) must file a BOR by January 1, 2025. CTA’s regulations anticipate that lenders will obtain permission to receive the BOR from FinCEN. Once obtained, the BOR will have the same value to a lender as an org chart attached to an affidavit. The operating agreement and resolutions should be cross-checked against the BOR. Where they differ, there must be a reconciliation of the documents before closing.
- Get permission early – A lender won’t get the BOR without permission. To be most efficient, that permission should be built into a bank’s commitment letter, so there is no need for a separate request between the commitment letter and closing. That permission should include any upstream entities, as well as the borrower.
- Another nail in the opinion letter coffin – Opinion letters are becoming rarer already. That the BOR gives verified information about certain borrowers is another reason not to insist on such an opinion–at least as far as the authorization opinion goes.
- Whoops! – CTA is going to sneak up on people. Be sure of that. So what happens if the banker learns that a reporting company has, well, not reported? Do we ignore the deficiency? Insist that it be rectified? Do we weigh the cost of any fines in underwriting? These answers will vary on an institution-to-institution basis, and the big variable may be the level of enforcement by the feds.
- Add to the reps, warranties, and covenants – The penalties for CTA are stern enough to merit inclusion of post-closing compliance with CTA within the covenants of the loan agreement. Most notably, if a non-reporting company becomes a reporting company, a BOR must be filed. If the beneficial ownership information changes, an amended BOR must be filed. These original and amended BORs should be contemporaneously delivered to the lender, as well. The borrower should also represent and warrant that the pre-closing BOR is true and complete.
- Just checking in – When reviewing a loan periodically after closing, a bank might consider checking the borrowers’ most updated BOR. The permission to view BORs should be expansive enough to include future reports at future times. If FinCEN does not allow for such a blanket permission, then the loan agreement should require the borrower to provide future permission on demand.
- We go live in 2025 – The timing of CTA is a bit confusing, but any entity in existence prior to January 1, 2024 need not file the BOR until January 1, 2025. It might be a best practice to send borrowers across the portfolio a reminder of this obligation, late in 2024.
- CTA isn’t for everyone – There are many types of companies exempt from CTA. For purposes of commercial lending, the “bona fide operating company” is most notable. This applies if you can establish these three facts: (1) company has more than 20 employees, (2) company has more than $5MM in gross receipts in the previous taxable year, and (3) company has a physical office in the United States. But don’t let your guard down if your borrower is a bona fide operating company, for two reasons: (1) the borrower may have affiliates that are not exempt, and (2) a bona fide operating company could lose its exemption, if any of those three facts becomes untrue, and a report is due 30 days after such change.
Mike Rasor is Co-Chairman of Cavitch’s Business Practice Group, and Chairman of Cavitch’s Capital and Finance Group. Email him at [email protected].