(the following blog was originally posted at www.KYC.com and can be viewed at http://bit.ly/11CAwYm)
Until August 2012, a segment of the financial industry known as non-bank residential mortgage lenders and originators (RMLOs) was exempt from the AML requirements that the Bank Secrecy Act and USA Patriot Act imposed upon commercial banks, broker-dealers and commodity futures brokerage firms.
The Final Rule defining non-bank residential mortgage lenders and originators as loan and finance companies, for the purpose of requiring them to establish anti-money laundering programs and report suspicious activities, had an Effective Date of April 16, 2012. The Compliance Date, for meeting the Code of Federal Regulations 31 CFR 1029.210, was August 13, 2012.
· Residential Mortgage Lender: The person to who the debt arising from a residential mortgage loan is initially payable or to whom the obligation is initially assigned at or immediately after settlement.
· Residential Mortgage Originator: A person who accepts a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.
These companies are popularly known as mortgage companies and mortgage brokers.
Commercial Banks vs Non-Bank Mortgage Lenders
Prior to August, 2012, non-bank RMLOs were not defined as loan or finance companies and therefore were exempt from most AML regulations. They were not obligated to file suspicious activity reports (SARs) nor were they required to follow certain BSA record-keeping and reporting requirements. FinCEN analyses and law enforcement investigations identified this exemption as a regulatory gap that could be exploited by criminals, particularly in the conduct of mortgage fraud. (1)
However, not all of the BSA’s anti-money provisions were imposed on RMLOs when the Final Rules were published in 2012. For example, RMLOs are currently exempt from Section 311 of the USA Patriot Act (2), Currency Transaction Reports (CTR) and certain special recordkeeping requirements.
A Focus on Mortgage Fraud
Because AML programs are designed to be “risk-based,” taking into account the specific nature of, and services offered by, financial lenders, it is no surprise that FinCEN urges RMLOs to recognize that mortgage fraud is likely a more pervasive problem than a more traditional definition of money laundering that banks and brokerage firms must address. To illustrate the scope of mortgage fraud, the FBI reported that their investigations “resulted in 1,082 convictions of mortgage fraud, resulting in $1.38 billion in restitutions; $116.3 million in fines; seizures valued at $15.7 million; and $7.33 million in forfeitures in FY 2011.” (3)
Shortly after the August 13, 2012 Compliance Date, FinCEN’s director addressed the American Association of Residential Mortgage Regulators. In his prepared remarks, he expressed the view that "…one of the predominant risks of criminal activity is mortgage fraud. Therefore, under a risk-based approach, we would expect this to be an area of concentration in a new AML program. RMLOs must also be aware of other risks, in particular, that criminals may attempt to launder proceeds of crime by investing them in real estate. The SAR regulation for RMLOs requires reporting of suspicious activity, including but not limited to fraudulent attempts to obtain a mortgage or attempts at laundering money through the purchase of residential real estate." (4)
The various mortgage frauds for which RMLOs must be on the alert, and which could prompt the filing of a SAR, can be placed in three categories. My typography and several examples include:
Fraud perpetrated on the mortgage lender (though without a criminal intent)
· Occupancy fraud: The borrower is purchasing a vacation home or investment property, but applies for a primary residence loan; which typically offers more favorable terms.
· Liability fraud: Lying about the extent of one’s financial liabilities.
Fraud perpetrated on the mortgage lender with a criminal purpose in mind
· Identity theft: Lying about one’s true identity or applying for a loan with the stolen identity of another individual, usually involving a stolen Social Security number (SSN), to fraudulently obtain a mortgage.
· Income fraud (understating): Lying about one’s true income, in order to qualify for hardship concessions or possible government assistance for low-income families applying for a mortgage.
· Appraisal fraud: One variation of this type of fraud is obtaining an overly high property appraisal, in order to profit from cash-out refinancing.
Fraud perpetrated on the borrower (the individual)
· Debt-elimination schemes: Might involves phony promises to assist home-owners in reducing or eliminating their mortgage obligations. Typically big upfront fees are charged.
· Foreclosure rescue scams: Another form of consumer fraud whereby a homeowner transfers title to a (criminal) third-party, in the belief that the purported rescuer can stop or delay an imminent foreclosure.
Lacking a self-regulatory organization like FINRA or the NFA, it will be interesting to see just how many RMLOs will be in compliance with a required AML program as the industry approaches the one-year anniversary of the FinCEN-mandated Compliance Date.
1. Financial Crimes Enforcement Network website: http://www.fincen.gov/statutes_regs/frn/pdf/1506-AB02_RMLO_Final_Rule.pdf
2. This Section of the CFR refers to identifying customers using correspondent accounts, including obtaining information comparable to information obtained on domestic customers and prohibiting or imposing conditions on the opening or maintaining in the U.S. of correspondent or payable-through accounts for a foreign banking institution.
3. Federal Bureau of Investigation website: http://www.fbi.gov/stats-services/publications/financial-crimes-report-2010-2011/financial-crimes-report-2010-2011#Mortgage.
4. Prepared remarks of James H. Freis, Jr. Director, Financial Crimes Enforcement Network; Delivered at the American Association of Residential Mortgage Regulators 23rd Annual Conference in Boston, MA, August 16, 2012.
About the author
Larry Schneider is vice-president of EA Compliance, Inc., a leading supplier of AML compliance training and AML audit services to the mortgage lending, trading and financial services industries. He has written a web-based AML training course designed specifically for employees of RMLOs which can be viewed at http://www.eacompliance.com/aml_training.html . Larry can be reached at email@example.com