New Federal Regulations Impose Anti-Money Laundering and Suspicious Activity Reporting Requirements on Non-Bank Mortgage Lenders and Brokers

On February 14, 2012, the Financial Crimes Enforcement Network (“FinCEN”) published in the Federal Register new regulations that will require non-bank mortgage lenders and brokers to develop and implement anti-money laundering (“AML”) programs and file suspicious activity reports (“SARs”). The AML program and SAR filing requirements have a mandatory compliance date of August 13, 2012. While depository institutions have had AML program and SAR filing obligations for several years, these new rules will impose the same requirements on non-bank mortgage lenders and brokers in order to close a perceived “regulatory gap” in the reporting of suspected fraud, money laundering or terrorist activity in the mortgage industry.

Coverage

The new regulations apply to both non-bank residential mortgage lenders and “mortgage originators” (i.e., brokers).¹ A covered residential mortgage lender is defined as a person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness, or to whom the obligation is initially assigned at or immediately after settlement.² A residential mortgage originator is defined as a person who either accepts a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.³ Note that the definition of a mortgage originator is potentially broad enough to encompass third-party vendors, such as contract processors and underwriters, depending upon the precise nature of their activities.

AML Program

Mortgage lenders and brokers will be required to develop and implement a written AML program that is “reasonably designed to prevent the [lender or broker] from being used to facilitate money laundering or the financing of terrorist activities.”⁴ Because a primary thrust of the rules is to prevent mortgage fraud, FinCEN has stated that a lender/broker’s AML program must also be tailored to address mortgage fraud schemes, even where there is no evidence of possible money laundering or terrorist activity.⁵

A lender/broker’s AML program must be approved by senior management and must be made available to FinCEN or its designee upon request.⁶ At a minimum, an AML program must:

• Incorporate policies, procedures and internal controls based on the lender/broker’s assessment of money laundering, terrorist financing and fraud risks associated with its products and services. The AML program must also integrate the lender/broker’s agents and brokers, and provide for obtaining all relevant customer-related information necessary for an effective AML program.
• Designate a compliance officer who will be responsible for ensuring that the AML program is implemented effectively, updated as necessary and that appropriate persons are educated and trained.
• Provide for on-going training of appropriate persons concerning their responsibilities under the AML program. The training can either be done by the lender/broker directly or by a third party. The obligation to ensure proper training also extends to agents and brokers of the lender/broker.
• Provide for independent testing to monitor and maintain an adequate AML program, which testing must also extend to the lender/broker’s agents and brokers. The testing can be done by either a third party or by any employee of the lender/broker, other than the designated AML compliance officer.⁷

FinCEN will have authority to examine any lender/broker for compliance with the AML program requirements, and noncompliance may constitute a violation of the Bank Secrecy Act.⁸

SAR Filing

Non-bank mortgage lenders and brokers will also be required to file SARs with FinCEN. A SAR must be filed for any transaction that is conducted or attempted by, at, or through a mortgage lender or broker that involves or aggregates funds or other assets of at least $5,000, and where the mortgage lender or broker “knows, suspects, or has reason to suspect” that the transaction (or a pattern of transactions):

• Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law or regulation;
• Is designed or structured to evade any requirements of the Bank Secrecy Act;
• Has “no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage,” and the lender or broker knows of no reasonable explanation for the transaction after examining the available information; or
• Involves the use of the lender/broker to facilitate criminal activity⁹ (This last provision is a “catch all” reporting provision that was added to cover activities such as fraud).¹⁰

A SAR must be filed with FinCEN no later than 30 calendar days after the date of the initial detection of the facts that may constitute a basis for filing of a SAR. If no suspect is identified on the date of the initial detection, a lender or broker can delay filing of a SAR for an additional 30 calendar days to identify a suspect, but in no case can reporting be delayed more than 60 calendar days after the date of initial detection.¹¹ In cases involving violations that require immediate attention, such as suspected terrorist financing or ongoing money laundering schemes, a mortgage lender or broker must immediately notify by telephone an appropriate law enforcement authority, in addition to timely filing a SAR.¹² Any lender/broker filing a SAR must maintain a copy of the SAR and any supporting documentation for a period of five years from the date of the filing. The supporting documentation must be made available to FinCEN upon request, and must also be made available upon request to any other law enforcement agency or federal regulator that examines the lender/broker for compliance with the Bank Secrecy Act, or to any state regulatory authority administering a state law that requires Bank Secrecy Act compliance.¹³

A SAR, and any information that would reveal the existence of a SAR, is generally strictly confidential and cannot be disclosed, except in limited instances.¹⁴ If a lender/broker receives a subpoena for a SAR or information that would reveal the existence of a SAR, or is otherwise requested to disclose a SAR or such information, the lender/broker must decline to produce the SAR or such information and must notify FinCEN.¹⁵ Notwithstanding the foregoing, a SAR and information that would reveal the existence of a SAR may be disclosed to FinCEN, appropriate federal, state or local law enforcement officials and regulators examining the lender/broker for Bank Secrecy Act compliance. A SAR and information that would reveal the existence of a SAR may also be disclosed within the lender or broker’s corporate organizational structure with certain limitations.¹⁶

As with the AML program requirements, FinCEN may examine lenders and brokers for compliance with the SAR reporting requirements, and noncompliance may constitute a violation of the Bank Secrecy Act.¹⁷

Conclusion

These new regulations will require mortgage lenders and brokers to enhance their existing policies and procedures designed to detect and prevent mortgage fraud, money laundering or possible terrorist activity. In this regard, it is important to note that these new requirements do not supplant any existing legal and regulatory requirements. For instance, proper OFAC screening of loan applicants must still occur. HUD’s requirement that FHA-approved lenders promptly report instances of potential fraud through Neighborhood Watch remains in place. Similarly, the requirement to maintain and update procedures to detect “red flags” of potential identify theft remains in effect.

Rather, the AML program rule will require lenders and brokers to incorporate these existing requirements and the new requirements for SAR reporting into an overarching, robust program that will place non-bank mortgage lenders and brokers on the same footing as depository institutions with respect to detecting and preventing mortgage fraud, money laundering and terrorist activity.

For More Information

If you have any questions about this Alert or if we can assist you in reviewing or designing your AML programs, please contact Paul H. Schieber at 610.205.6040.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

¹ The regulations refer to “loan or finance companies,” which includes mortgage lenders and brokers. FinCEN has indicated that, over time, it may impose similar AML program and SAR filing requirements on other non-bank consumer credit providers. See 77 Fed. Reg. 8148, 8149-50 (Feb. 14, 2012).
² 31 C.F.R. § 1010.100(lll)(1)(i).
³ 31 C.F.R. § 1010.100(lll)(1)(ii).
⁴ 31 C.F.R. § 1029.210(a).
⁵ See 77 Fed. Reg. at 8153 (“FinCEN expects fraud prevention, as well as money laundering prevention, to be key goals underlying the various policies and procedures in an effective AML program … .”).
⁶ 31 C.F.R. § 1029.210(a).
⁷ 31 C.F.R. § 1029.210(b).
⁸ 31 C.F.R. § 1029.210(c).
⁹ 31 C.F.R. § 1029.320(a)(2).
¹⁰ See 77 Fed. Reg. at 8153, n.31.
¹¹ 31 C.F.R. § 1029.320(b)(3).
¹² 31 C.F.R. § 1029.320(b)(4).
¹³ 31 C.F.R. § 1029.320(c).
¹⁴ 31 C.F.R. § 1029.320(d)(1).
¹⁵ Id.
¹⁶ Id.
¹⁷ 31 C.F.R. § 1029.320(f).