Monday, December 13, 2010

Follow the Money

Any fan of police or courtroom dramas or true crime television knows that when a prosecutor needs to establish a link between a particular set of activities and perpetrators, the first rule of detective work is to "follow the money."  But if the Treasury Department has its way with a new proposed rule, that could soon be our job as loan originators.

On December 9, 2010, the Financial Crimes Enforcement Network (FinCEN) which is a bureau of the U.S. Treasury, issued a notice of proposed rule making which would make non bank residential mortgage lenders and originators subject to anti money laundering and suspicious activities reporting (SAR ) requirements of the federal Bank Secrecy Act.

Here on the U.S. Mexican border, where people culturally prefer to deal in cash as much as possible rather than bank accounts and credit cards, sourcing money can be an on-going struggle.  Having spent many years attempting to educate new homebuyers that lenders do not accept "mattress money" and that they need to deposit their funds in the bank and leave them there several months prior to closing, I can appreciate the issues created by unsophisticated borrowers who think banks are the enemy.  And part of the Dodd Frank bill is designed to help borrowers who currently operate outside of the financial system establish bank accounts and a credit history.  But counseling borrowers about the need to source and season money (deposit it into a bank account and leave it there for at least two months) is a far cry from becoming part of the financial police and filing suspicious activity reports on borrowers who may be dodging their tax responsibilities or trying to hide funds. 

It is a well known fact that depository banks are required to report transactions over a certain dollar amount in one day.  About a year ago, a car dealer was arrested in downtown El Paso and charged with money laundering and financial crimes.  The car dealer had been depositing $9900 every day into his bank accounts, in an attempt to stay under the legal reporting limit (which he believed to be $10,000.)  What he apparently did not understand was that banks are required to report any large deposits consistently made into an account. Further, it turns out that it is against the law to attempt to dodge the reporting requirements by deliberately making cash deposits under the legal benchmark.  These activities are "suspicious" and as such, they must be reported by the financial institution in a suspicious activities report.

According to the FinCEN proposed rule, "The Bank Secrecy Act ("BSA") authorizes the Secretary of the Treasury (the Secretary) to issue regulations requiring financial institutions to keep records and file reports that the Secretary determines "have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism."  Additionally, financial institutions must develop anti-money laundering protocols which include, "1. The Development of internal policies, procedures, and controls, 2. the designation of a compliance officer, 3. an ongoing employee training program; and 4. an independent audit program to test standards."    The Bank Secrecy Act includes as financial institutions loan or finance companies (including mortgage brokers) but in April and again in November of 2002 FinCEN exempted loan and finance companies from the reporting requirements.  Now, however with the SAFE Act requiring national training and testing for mortgage originators, FinCEN sees an opportunity to include training on money laundering activities. "Residential mortgage lenders and originators (e.g. independent mortgage loan companies and mortgage brokers) are primary providers of mortgage finance--in most cases dealing directly with the consumer--and are in a unique position to assess and identify money laundering risks and fraud while directly assisting consumers with their financial needs and protecting them from the abuses of financial crisis."  

The new rule, if implemented, would apply to all loan originators.  It provides an exemption for sellers financing their own homes, but it does not provide any exemption based on a low volume of loans (for example, companies originating fewer than 5 transactions per year are not exempt.)  The rule does not extend to real estate agents or title officers, although the wording of the rule leaves that possibility open to further rule-making at a later date.

The new proposed requirements are spelled out in section 103 of the proposed rule. Transactions involving an aggregate of more than $5000.00 of funds or assets would be subject to filing requirements.  The rule is designed "to encourage the reporting of transactions that appear relevant to violations of law or regulation even in cases in which the rule does not explicitly so require for example in the case of a transaction falling below the $5000.00 threshold in the rule."  Under the new rules, a mortgage originator must report a transaction, "if it knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part): (i) Involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity, (ii) is designed, whether through structuring or other means, to evade the requirements of the BSA; (iii) has no business or apparent lawful purpose, and the loan or finance company knows of no reasonable explanation for the transaction after examining the available facts; or (iv) involves the use of the loan or finance company to facilitate criminal activity."

FinCEN admits that they are painting with a pretty broad brush here.  (After nearly thirteen years as a mortgage originator I have seen a few transactions for which "there was no reasonable explanation after examining the available evidence," but that does not mean that the parties to the transaction were breaking the law. If making stupid decisions ever becomes criminal we will all be in prison.)  Because the "means of commerce and the techniques of money laundering are continually evolving, and there is no way to provide an exhaustive list of suspicious transactions," each mortgage company is required to develop and implement a monitoring program for suspicious transactions that "is appropriate for the particular loan or finance company in light of such risks."  Within 30 days of observing the suspicious activity, the loan originator must file a report with FinCEN along with any supporting documentation.  (In the case of an emergency, the originator can file the initial report by telephone.)  The originator must then keep copies of the supporting documentation for up to five years.

The second part of the rule is the anti-money laundering provision.  Residential mortgage loan originators must put into place internal procedures and controls to guard against money laundering including keeping track of methods of payment by customers.  Each mortgage company must designate a compliance officer  who is "competent and knowledgeable" regarding the Bank Secrecy Act requirements and money laundering issues and risks.  The compliance officer's job is to make sure that "1. The program is implemented effectively; 2. The program is updated as necessary; 3. The appropriate persons are trained and educated."

On-going training of employees is a requirement of the anti-money laundering provisions of the proposed rule.  This training may be conducted on site, or through outside seminars, or through computer based on-line training, but it must be regular and comprehensive.  Finally the compliance program must be periodically tested for effectiveness to make sure that it complies with the guidelines of the proposed rule.  While this testing does not have to be performed by an outside consultant or accountant, it cannot be performed by the compliance officer or any employee who reports to the compliance officer.

For independent mortgage brokers who are not currently regulated by a federal agencies who would enforce the Bank Secrecy Act, the IRS will act as the enforcement entity to make sure that the program is in place and that it meets guidelines.

I have to say that I have a number of objections to this entire proposal.  First and foremost--the cost of complying with and implementing this new proposal would be huge.  All of those of us who are independent mortgage brokers have seen our cost of doing business go steadily upward for the past three years, but to have to pay for additional training and set up a new program for reporting suspicious transactions to the federal government would be very expensive.  Even by the standards of the proposed rule, this is going to affect small business primarily, "95% of the affected industry is considered a small business, and...the proposed regulation would affect all of them."  Although FinCEN estimates that the burden of additional paperwork will be small because the software systems that mortgage brokers currently use will undoubtedly be upgraded to include a suspicious activities report form, they do not take into consideration the cost of program implementation and on-going training, which on top of the other training that we are required to have and pay for is a lot of extra money for an industry that is barely surviving right now.

Second, I have an issue with making the IRS the regulatory authority for compliance with pretty much everything.  It is the IRS who is responsible for enforcing health care, the IRS who is responsible for enforcing new FinCEN proposed regulations, and the IRS who will be summoned  if the Consumer Financial Protection Bureau suspects any mortgage lender of wrong doing.  The Internal Revenue Service already needs 16,000 new agents in order to enforce the health care laws; they are going to need a lot more agents than that to enforce compliance with this statute as well.

Third, while we all support anti-money laundering and anti-terrorist provisions, do we really want to become a nation with a legal mandate to turn every person we meet over to the government?  The proposed rule admits that mortgage fraud is already a crime, and money laundering is already a crime.  "Many loan and finance companies already voluntarily report suspicious transactions and fraud through entities such as the Loan Modification Scam Prevention Network."  There are a lot of provisions in place right now for reporting fraud.  But do we really want to have to fill out a Suspicious Activities Report on the 70 year old grandmother who kept her life savings in her pillow case and cannot prove where she got her cash?  That's a little too much oversight from Big Brother for me.

The proposed rule is open for public comment until February 7, 2011.  If you would like to read the entire, you may do so by logging on to    To comment, log on to  Follow the instructions and reference 1506-AB02.  Be sure to refer to docket number FINCEN-2010-0001.


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