More than a year after it proposed anti-money laundering (AML) regulations for mortgage lenders, the Financial Crimes Enforcement Network (FinCEN) has issued a new rule finalizing these requirements. The new rule, issued February 7, 2012, requires non-bank residential mortgage lenders and originators to institute AML programs and subjects them to Suspicious Activity Report (SAR) filing requirements. Though they were considered, currency transaction reporting requirements were not imposed.
FinCEN believes that these new regulations will help “mitigate some of the risks and minimize some of the vulnerabilities that criminals have exploited in the non-bank residential mortgage sector.” FinCEN Director James H. Freis stated that FinCEN was “closing a regulatory gap by requiring non-bank mortgage lenders and originators to develop anti-money laundering programs and file suspicious activity reports with FinCEN,” noting that “[s]uspicious activity reports are a critical source of information to law enforcement and regulatory agencies.”
FinCEN analysis indicated that independent mortgage lenders and brokers originated many of the mortgages that were the subject of bank SAR filings, and FinCEN believes these entities are “in a unique position to assess and identify money laundering risks and fraud.” The new rules will likely significantly increase the number of mortgage-related SAR filings. They will also force residential mortgage lenders and originators (RMLOs) to develop and institute AML programs conforming to Bank Secrecy Act (BSA) requirements, including requirements such as designating an AML compliance officer and the development of internal policies and procedures.
The new rule defines a residential mortgage lender as “[t]he person to whom debt arising from a residential mortgage loan is initially payable . . . or to whom the obligation is initially assigned at or immediately after settlement,” though does not include individuals financing the sale of their own property. It defines a residential mortgage originator as “[a] person who accepts a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.”
RMLOs not complying with AML program and SAR filing requirements face potentially serious criminal and civil penalties. In addition, RMLOs will now be officially protected by the BSA’s “safe harbor” provisions, which protect financial institutions against potential civil liability incurred as a result of filing SARs (e.g., defamation).
These new regulations represent a significant expansion of entities subject to AML and SAR requirements. Previously, AML and SAR requirements primarily applied to depository institutions, casinos and card clubs, securities and futures industries, and money services businesses, all defined as covered “financial institutions” by the BSA. The text of the BSA, however, leaves significant room for the expansion of the definition of financial institutions by including broad terms such as “loan or finance company.”
Though the term “loan or finance company” was previously left undefined by the BSA and FinCEN, FinCEN’s position had been that the term “loan or finance company” was structured to permit the addition of “other types of loan and finance related businesses and professions” in future regulatory amendments, and FinCEN has discussed issuing rules and guidance concerning this term since at least 2009. With the new rules, FinCEN has made clear that it believes RMLOs to be a significant subset of the “loan and finance company” category.
FinCEN has also called the new rules “the first step in an incremental approach to implementation of regulations for the broad loan or finance company category of financial institutions.” Though it’s impossible to say how the definition of “loan or finance company” will be expanded, FinCEN has placed combating mortgage and loan fraud as one of its highest priorities over the past five years. In November 2011, FinCEN proposed AML program and SAR filing requirements for Federal government sponsored entities (Fannie Mae and Freddie Mac), calling it “another step to help restore the integrity of the mortgage market.”
The final rule regarding non-bank mortgage lenders and originators will be effective 60 days after publication in the Federal Register. The compliance date for the final rule will be six months after publication in the Federal Register. The final rule can be accessed at: http://www.fincen.gov/statutes_regs/frn/pdf/1506-AB02_RMLO_Final_Rule.pdf.
Non-bank residential mortgage lenders and originators should move quickly to acquire the necessary expertise and to implement an effective BSA/AML program and SAR filing processes, and should consult with counsel to gain a thorough understanding of the impact of the new rule.