Tough new rules designed to red flag financial crimes have been expanded to include residential mortgage lenders.
The Financial Crimes Enforcement Network (FinCEN) this week announced it has lifted a 2002 regulation that once exempted residential mortgage lenders and originators (RMLOs) from anti-money laundering (AML) requirements.
Under the new regulations, lenders will be required to establish AML programs and produce suspicious activity reports (SARs) under the Bank Secrecy Act (BSA) – or face strict penalties for failing to do so.
FinCEN already requires a range of financial institutions to report SARs, formal tips about suspicious financial transactions.
“Today, FinCEN is closing a regulatory gap,” said FinCEN director James H. Freis, Jr., in a statement. “Suspicious activity reports are a critical source of information to law enforcement and regulatory agencies in their investigation and prosecution of mortgage fraud and a wide range of other financial crimes.”
RMLOs will need to establish new internal policies and procedures, retraining employees in order to raise red flags on suspicious transactions. The effort is meant to crack down on a range of financial crimes and fraudulent activities, from false statements, to the use of straw buyers, to identity theft.
Suspicious transactions might involve funds derived from illegal activity; have no clear, legitimate purpose; or attempt to evade BSA requirements, causing the RMLO to facilitate criminal activity, according to FinCEN.
“This is another tool law enforcement can use to see where fraud is, who is committing it and gather additional information that will help them in prosecutions,” said Bill Grassano, a spokesman with FinCEN.
RMLOs subject to the new regulation are required to implement an AML program 180 days after the final rule has been published in the Federal Register.
However, the transition could stumble beyond that time frame, causing headaches and costing a fair share of dollars along the way, as lending shops, small or large, struggle to find the wherewithal to police and produce reports that they know little to nothing about, some said.
“If you are one of the residential mortgage loan originators, you are going to think this is terrible and onerous,” said Beth Moskow-Schnoll, a partner at law firm Ballard Spahr.
The former U.S. Attorney who was a prosecutor in AML and SAR cases said many of the banks she once represented had “no clue” that their clients were engaging in criminal activity. The new legislation means that RMLOs could face fines for activities they knew nothing about.
“Some things that may seem obvious to FinCEN or law enforcement may not be immediately obvious to people who aren’t in law enforcement,” she said. “What the government is saying is, ‘You need to know, you should know and we don’t really know care if you didn’t actually know.’”
Under the new provision, a sole proprietorship is considered an originator, but an individual employee of a lender or broker is not. But varying definitions under different federal statutes — from the Secure and Fair Enforcement Act, to the Loan Originator Compensation regulation, to the Dodd Frank mortgage provisions — are bound to cause additional confusion, as RMLOs scramble not only to understand their obligations, but whether or not they are exempt, others said.
“The government has created so many different definitions depending on which statute or regulation you’re in,” said Rich Andreano, a mortgage compliance expert, also with Ballard Spahr. “We’ve heard a lot of people saying, ‘Oh no, you mean now I have to have different charts and checks over which employees of mine fall into these categories.’”
The fines are steep. Under the BSA, criminal penalties for non-compliance are as high as $250,000 per violation and five years in prison for individuals, Moskow-Schnoll said.
Wachovia proved just how tough they can be in 2010, when they ultimately shelled out $110 million to federal authorities after admitting that they knowingly failed to maintain an anti-money laundering program between May 2003 and June 2008.
Some RMLOs will view the new regulation as burdensome, especially smaller businesses without the manpower to execute the strict regulations. Just one fine could be enough to seriously rattle a small shop’s bottom line.
FinCEN, in an apparent effort to quell some of the jitters, has stated that it will examine an institution’s size, location and activities when determining if an RMLO has met its minimum standards.
FinCEN also plans to work with local governments to notify RMLOs of their obligations and will automate the process electronically, making it much simpler for them to identify red flags and automate the SAR process, said Grassano, the FinCEN spokesman.
“It’s not like we’re here to just throw rules out,” Grassano said. “The benefit to them (RMLOs) is that their reputation is protected and they are helping law enforcement — whether it’s to stop a scammer, money laundering, or financing of terrorist activities. Put it in that light, then ask the question, ‘Is it a burden?'”
*this article appeared in the March 7, 2012 print version of Real Estate Weekly