BANK SECRECY ACT REQUIREMENTS FOR RESIDENTIAL MORTGAGE LOAN ORIGINATIORS: AN OVERVIEW June 6, 2012 Marjorie A. Corwin, Esquire Gordon Feinblatt LLC 233 East Redwood Street Baltimore, Maryland 21202 410-576-4041
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BSA Background The Bank Secrecy Act (BSA) is a group of federal statutes that require certain persons to keep records and file reports that “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings . . . .” Part of the BSA requires these certain persons to develop anti-money laundering (AML) programs. The authority to administer the BSA has been delegated to the Director of the Financial Crimes Enforcement Network (FinCEN).
New FinCEN Regulations On February 14, 2012, FinCEN issued BSA regulations that impose obligations on nondepository “residential mortgage lenders and originators” (RMLOs) Found at: 31 C.F.R. § 1010.100 and 31 C.F.R. Part 1029 Compliance Date: August 13, 2012
Coverage RMLOs: Persons engaged in the activities of a residential mortgage lender and/or residential mortgage originator, whether or not on a regular basis or as an organized business concern. Excluded: Individuals employed by RMLO
Penalties for Noncompliance Violations of BSA requirements may result in civil penalties: Civil penalties of $1,000 per day for each day of noncompliance. Willful violations may result in civil penalties for the RMLO or its employees, officers, or owners in an amount of the transaction (up to $100,000) or $25,000, whichever is greater. Civil penalties of up to $500 may be imposed for negligent violations, but if the RMLO engages in a pattern of negligent violations, then civil penalty could go up to $50,000. Criminal penalties also are possible.
Examinations Overall authority for enforcement and compliance of the rule is with FinCEN. FinCEN can further delegate this authority, and it plans to work with “relevant regulatory agencies” to develop consistent compliance exam procedures. So, who will conduct examinations of RMLOs? Stay tuned, but it could include:
FinCEN IRS State regulatory agencies CFPB Federal banking agencies
New FinCEN Regulations What is required? AML Written Program Filing Suspicious Activity Reports
AML Program Each RMLO must develop and implement a written AML program designed to prevent the RMLO from being used to facilitate money laundering or the financing of terrorist activities. Based on commentary to the regulation, FinCEN expects the AML program also to prevent the RMLO from being used to facilitate mortgage fraud or other criminal activity.
The AML program must be commensurate with the size, location, and activities of the RMLO. The program must be approved by senior management. The RMLO must make a copy of its AML program available to the FinCEN or its designee upon request.
AML Program Requirements Written program is based on 4 core actions (pillars): Develop policies, procedures, and controls based on RMLO’s own assessment of mortgage fraud, money laundering, and terrorist financing risks associated with its products and services (“know your customer”) Designate a responsible person (compliance officer) to ensure proper implementation and update of the program Ensure employees, agents, and brokers receive on-going training about the program Independently monitor to know that the program is adequate
AML Program Suggestions: Build on your existing risk management procedures and prudential business practices Focus on your current due diligence of borrowers and collateral associated with credit risk Document what you already do when situations “don’t smell right”
Suspicious Activity Reports (SARs) Every RMLO must file with FinCEN a report of any suspicious transaction relevant to a possible violation of law or regulation. SARs must be filed through FinCEN’s E-Filing system http://bsaefiling.fincen.treas.gov
When to File SARs A SAR must be filed no later than 30 days after initial detection by the RMLO of facts that may constitute a basis for filing a SAR. If no suspect is identified on the date of such initial detection, RMLO may delay filing a SAR for an additional 30 days to identify a suspect, but in no case may reporting be delayed more than 60 days after the date of initial detection.
Types of Reportable Activity Bribery Check Fraud Check Kiting Computer Intrusion Counterfeit Check Counterfeit Credit/Debit Card Credit/Debit Card Fraud Embezzlement
Mortgage Fraud False Statement Loan Fraud Misuse of Position Mysterious Disappearance Wire Transfer Fraud Tax Evasion Terrorist Financing Identity Theft
When SAR Filing is Required RMLO must report a transaction if it involves funds or other assets of at least $5,000, and the RMLO knows, suspects, or has reason to suspect that the transaction: 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 to evade BSA requirements; Has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage; or Involves use of the RMLO to facilitate criminal activity.
When SAR Filing is Permitted RMLO may file a SAR regarding any suspicious transaction that it believes is relevant to the possible violation of any law or regulation, but whose reporting is not required.
Red Flags for “SAR” Filings Unusual or Suspicious Applicant Activity Obvious over-pricing or under-pricing of property. Customer requests payment of loan proceeds to an unrelated third party with no reasonable explanation. Schemes (such as property flipping, flopping, and straw buyers) to generate equity for an immediate subsequent purchase.
Red Flags for “SAR” Filings Unusual or Suspicious Applicant Activity Questionable refinance or loan modification attempts targeting distressed homeowners (e.g., purported loan modification or foreclosure rescue specialists). Customer provides unusual or suspicious identification documents that cannot be readily verified. Customer provides conflicting information.
Red Flags for “SAR” Filings Unusual or Suspicious Borrower Activity Borrower makes “Freeman-style” debt renunciation. Repurchase requests and buy back demands are made under mortgage loan sale agreements. Questionable activity related to early defaults. Insurer notifies RMLO of investigation suspicious claim on a borrower’s hazard policy.
Red Flags for “SAR” Filings Suspicious employee activities Employee exhibits a lavish lifestyle that cannot be supported by his or her salary. Employee fails to conform to recognized policies, procedures, and processes. Employee is reluctant to take a vacation.
Retention of Records A copy of the SAR and the original supporting documentation for the SAR must be maintained for 5 years.
Confidentiality of SARs A SAR, and any information that would reveal the existence of a SAR, are confidential and shall not be disclosed except to FinCEN, federal, State, or local law enforcement agencies, and regulatory agencies.
Safe Harbor Liability protection for: Disclosures pursuant to BSA requirements; and Failure to provide notice of such disclosures to any persons identified in the disclosures.
Questions?
Thank you! Marjorie A. Corwin, Esquire Gordon Feinblatt LLC 233 East Redwood Street Baltimore, Maryland 21202 410-576-4041
[email protected]
