Updated: As AML/SAR Rule Anniversary Approaches, Little or No SAR Reporting Activity for Mortgage Brokers

Anti-Money Laundering (AML) and Suspicious Activity Reporting (SAR) for Non-Depository Mortgage Brokers and Correspondents became mandatory in August of 2012.  Two years later, we see little activity. Why?

7/18/14 Updated - New SAR Analysis from FinCEN?

It seems that FinCEN, after requiring so much input from the mortgage industry, but yet not releasing data, felt compelled to release a report.  That analysis is available here:

Click here to download FinCEN SAR Reporting Data 7/2014

Mortgage News Digest began requesting information from FinCEN's press office for statistics at the end of May.  Calls went unreturned, but this data satisfies the request.

From Mortgage News Digest June 2014 "Threats were made, and the industry scrambled to make sense of the procedures required and implement them.  Systems were automated to allow easier online reporting. Yet FinCEN still hasn't released any new data since Q2 of 2012 - almost 2 years later. How does this help us in the field?  Several calls to FinCEN went unreturned, so while there may be information in the works, we haven't seen it yet. (June 2014)

At last we have the data, but it shows anemic reporting data.  No wonder this became a low priority.

Of all product types resulting in filings, Mortgages rank #2 behind only credit cards for incidence rate.  In 2013 there were over 2500 mortgage related reports

Overall, mortgage fraud ranks behind Identity Theft and Credit Card Fraud as reported by Other Financial Institutions.  This is reflective of similar statistics by other regulated institutions, but the scale is much smaller.

Hotspots Revisited

While we knew Southern California, New York and Florida were hotspots, it may come as a surprise that Utah leads the nation in SAR reports.  Why is this?  Tribal Casinos report many transactions where chips are cashed in.  That would not be the case for the other states. 

Reviewing Closed Loans - Wrong Selection Criteria

Although the FinCEN guidelines suggest a strategy of annual audits and loan level audits, such as those conducted for quality control by most lenders, from the perspective of the initiative that spawned this requirement, the audits come too late to have any real benefit.  We have found that most mortgage brokers don't understand their role in this process.  "We haven't had any SARs!" comes the report at the audit.

These words are spoken with pride, but the revelation of NO findings may actually be a trigger for a regulator to look MORE closely, and then discover that the only loans included in the sampling are those which have already passed underwriting muster.  In today's environment brokers and small lenders alike should take the approach that the government has assigned them the role of "watchdog."  Embrace it.  File a SAR today! It's your PATRIOTic duty!

NO SAR may actually trigger an audit.  If your production staff isn't identifying red flags, you can't report.

"Don't Worry - Be SAR-ry!"

As lenders and brokers we also experience the mixed message: "Keep your customer's information private at all costs."  This trust is the foundation of our business.  "If I report this information about my customer to the Federal authorities, am I not breaching that trust? Won't it come back to me through my referral sources?" These concerns have a reasonable basis, but understand this:

1. There is no direct line from the reporting activity to the investigation and prosecution.  In fact, if it is an isolated incident, it likely will not draw attention to the authorities given the number of enforcement priorities already occupying their attention.  
2. You are not allowed to disclose the fact that a SAR is in process.  
3. Your potential criminal and legal liability for being perceived as participating or assisting in perpetrating fraud is far greater if it turns out you did not report something that later gets revealed.

July 4th - PATRIOT Act

The BSA/SAR reporting requirement is based on information derived from the mandatory requirements of the PATRIOT Act (Providing Appropriate Tools Required to Intercept and Obstruct Terrorism). Your prospect may not seem to be a terrorist, but terrorist funding is commonly sourced through illegal activity like real estate investment, cash businesses, medical companies and many self-employed businessmen.  After 9-11, your company mantra - regardless of whether you are a one-man shop or a large lender - should include "If you see something, say something."

Oh, By the Way, Your Annual AML Audit Deadline is Just Around the Corner

If you initiated your AML plan in August, 2012 with everyone else who became subject to the FinCEN rule at that time, you were required to review your AML procedures annually.  Your audit would be due in August. Let us help you with that.  Call or e-mail today.

You can also receive a free, simple self-audit checklist by requesting it here:

CFPB Rules Update - The HPML Appraisal Rule and The Concept of Layering

Current Customers can Download HPML Appraisal Policy Here - New Customers, see the site for a copy here.  

After all of the warnings, hyperbole and worry surrounding the CFPB's massive regulation initiative, surprisingly little has changed in the day-to-day of our business.  2014 regulations did not completely re-imagine our process in the way that 2010's GFE reform did. Originator Compensation proved that we will always find a way to create incentives within the system.  But, as always, the devil resides in the details. The CFPB has shown itself to be haphazard in its interpretation AND implementation.

You can download the ABA's entire letter here

One clear example of this can be seen in its regulation of HOEPA. Section 32 loans have always been at the margin of the mainstream mortgage business.

The Counseling Rule - Ubiquitous Requirement Hidden in Margins

Very few lenders breach the High Cost triggers, especially now that QM sets the bar so low.  Combine that with the decrease in business levels, generally, and we can acknowledge that very few HOEPA loans are being made.  But tucked into this very specific, narrow regulation, lurks a very general requirement FOR ALL BORROWERS ON FEDERALLY RELATED MORTGAGES (essentially ALL BORROWERS) to receive a notice of housing counseling.

What happened to simplification? Shouldn't this just be an addendum to the GFE?  That's where it goes from a rational perspective. So that is where we put it in our process flow.

"Where should this go?" the mantra we have continue to repeat at each new rule.  Regulations are sent at us in a "shotgun pellet" manner, ending up all over the place.  If we try and follow the regulator's approach we will have hundreds of different policies isolated from each other - we are bound to fail in that environment. We cannot build our businesses to satisfy a regulator. Rather, understanding that the regulator's lack of appreciation for how their rules must get implemented, should drive us to map our process better. We have to integrate regulations into our overall process flow.

The HPML Appraisal Rule - The Department of Redundancy Department

A perfect example of the overlapping of regulations appears in the HPML appraisal rule.  From a regulatory perspective the rule actually overlaps with the ECOA Appraisal Rule. The CFPB grants this in its small entity compliance guide. You can, in fact, use the same disclosure to satisfy both rules.

In addition, if you are originating Qualified Mortgages, or the HPML loan you are originating qualifies as a Qualified Mortgage, the HPML appraisal rule doesn't apply.  Technically, your HPML Appraisal Policy could be an addendum to your Ability to Repay Policy

The HPML policy itself actually overlaps with secondary marketing, because the loan pricing policy drives whether a loan is classified as HPML.  In fact, movements in the market throughout the day or over a week could change the profile of an entire pipeline from non-HPML to HPML loans.  

Once a loan earns the distinction of HPML, the lender must maintain tax and insurance escrows for five years.  More minutely, however, we note that for HPML loans, appraisers must a.) be licensed and b.) perform an interior inspection and c.) the borrower must receive a copy of the appraisal report 3 days prior to closing. The contents of that appraisal mirror standard requirements, but this should be part of your audit process.

The Devil in the Details - The "Flip" Rule

The pitfall of this process surrounds the purchase transaction where the subject property, unbeknownst to anyone except the seller, is a flip. Our best practices require that the appraiser indicate the date of last transfer, and that we conduct additional due diligence if the property was transferred within the last 12 months.  However, the Flip Rule takes it to a new level.

There are exemptions to the Flip Rule, primarily circumstantial, so that if you encounter a flip in your regular retail business, the rule probably applies.

Rules, Rules, Rules - It looked good on paper... That's why they put it on paper

The ABA provided a nice roundup of all of the changes and if you review their list you will see that you probably have already implemented most of these, or found that they do not apply to you.

If you are a customer of ours, you will recognize some of the major updates: We have been at the forefront of updating operating policies and procedures, so you should be alright if you have been following our alerts.

Social Media: Compliance Risks of the Emoticon?

A Social Media Policy can help manage the risks: Request a free sample

Corporate concerns with social media may

be over-emphasized when you look at the real utility of social media platforms. For a loan originator using Facebook or other social media platform to try and get business, marketing efforts focus more on developing name recognition and improving search engine placement through search engine optimization efforts than actual customer relationship management.  Potential applicants do not simply seek out mortgage lenders on social media sites.  However, the appearance of a lender or particular loan officer on a search engine result, particularly at a very specific search engine result, can result in new business generation.

Lenders' concerns run from simple compliance to privacy, fair lending and reputation risks.  So, will loan originators use a social media sites to divulge corporate information?  Or could they unintentionally accept a loan application without providing the appropriate loan disclosures in a timely manner?  Or could he or she engaged and prohibited types of communication that may appear to be a discriminatory or expose a lender to other potential compliance risks? 

In fact, the greater risk potential for may exist in the area of reputation.  For example, in the midst of the mortgage crisis, as foreclosure activity soared, activists accessed lenders through their social media. To this point, lenders enjoyed a certain anonymity.1  But as the number of foreclosures escalated, the victims no longer remained faceless.  Mortgage lenders became the enemy and public exposure through blogs and social media sites quickly became a vehicle for the public to pile onto.  Bank of America, which became a target through its purchase of the Countrywide powder-keg portfolio, had to resort to "bot-like" responses simply to keep up with the volume of communication, further inflaming the anti-mortgage sentiment.

Among the compliance concerns, Fair Lending issues may take precedence as social media vehicles give "testers" wide open, anonymous access to originators, in a perfect "matched-pairs" testing environment.2  In this case, disparate impact - today's hot button issue - figures less than a direct correlation to a discriminate act.   A loan originator may simply ignore a request from an individual with a racially specific profile and invite a claim.

By definition, public communication through social media represents a form of advertising.  Ensure any messages have met your requirements for advertising.

The compliance officer and production staff must really understand how social media advances marketing efforts.  Simply, do NOT use it as a bi-directional communication tool, but as a farm for sprouting keywords and relevant topics.

Content shouldn't come directly from loan originators, but a stream of suggestions for content to a central source can achieve this goal.  Allowing or requiring content from employees (particularly originators) creates an unnecessary burden for employees to participate in social media and could create more pressure on non compliant activity than necessary. Even re-posted material should be vetted against an advertising checklist.

Perhaps the best solution revolves around providing a social media content provider - someone who will provide pre-approved content to post on social media sites.  This can add to both corporate search engine optimization benefits as well as allowing individual loan originators to improve their own business results.

Resources:

Social Media Compliance Training Video - Pay attention to "Listening Technology" @ 21:00

1. Juris, J. S. (2012), Reflections on #Occupy Everywhere: Social media, public space, and emerging logics of aggregation. American Ethnologist, 39: 259–279. doi: 10.1111/j.1548-1425.2012.01362.x
2. "All Other Things Being Equal." : A Paired Testing Study of Mortgage Lending Institutions (Executive Summary). Web. 19 June 2014. <http://www.urban.org/publications/1000504.html>.

Request a FREE Sample Social Media Policy here

Bob Kemp - Mortgage Banker and Exemplary Father - Passes Away at 63

Occasionally you meet someone who does many things well and you wonder how they do it. In the case of Bob Kemp, who passed away suddenly this weekend, it is a story of singleness of purpose and focus on family.

Bob Kemp with son John (Prep 09) was
a fixture at the hockey rink.  Bob was
the Scott Smith Award recipient in 2007. 

Bob was a mortgage banker and, like many of us seasoned pros, had weathered the ups and downs the last three decades have wrought. I remember talking to him at the rink while we both waited to pick our sons up from hockey practice. I shared about my struggles managing the feast or famine cycles, and how the famine of that time (the post-2008 financial crisis) had hit my clients' businesses and mine.  He was sanguine in his response to me: "Every year is tough. Somehow, month after month, we look back at the end of the year, and we managed to make it."

I didn't get it.  Here was this laid back guy, but he had SEVEN (7) kids and was putting them all through private schools.  All of them were successful in their own way as athletes or students.  He didn't seem stressed out at all. I, on the other hand, felt my life in the mortgage business was a continuous stress sandwich... and I only had TWO kids in private school.

I realize now that his lesson was simple: focus on what is in front of you. Take care of the day to day and the big picture will take care of itself.  This bears repeating for those of us who face the seemingly overwhelming pressures of today's business decline. Somehow, month after month, we will manage to make it. So don't worry about it.

Here are several links about Bob:

Bethesda Magazine Article on Kemp Family
Bloomberg Listing on Bob's Career
Washington Post Obituary
Photo and Notice from Notre Dame Lacrosse
John Kemp - All American Goalie at Notre Dame

BK stickers emblazon the helmets of the Georgetown Prep Hoyas in memory of Bob Kemp, in solidarity with his sons who were major players in the program.  

BK on Notre Dame helmets honor the legacy of the Kemp Family
at Notre Dame.

If you wish to memorialize Bob, the family asks that you make a contribution to the Washington Jesuit Academy.

Bob's wake was held Thursday, May 15, 5:00 pm to 9:00 pm at Our Lady of Mercy in Potomac, MD.  If you wish to memorialize Bob, the family asks that you make a contribution to the Washington Jesuit Academy.

Beware of Pirated Manuals

Recently we have received a large number of calls from clients whose policy and procedures manuals are outdated. They are being rejected by their lenders, investors or regulators. Speaking to the customer we learned something shocking.  They recently purchased the products from a consultant who assured them that the product was current.  Not only were the products outdated, but they were stolen, so did not qualify for any warranty or service.

Here's how it happens.  A client orders a product, but they don't want the normal information services we give to customers.  We call and make sure they understand the license - that it can't be transferred - and they state they understand: it's only for their own purposes.  We have a reason we don't sell to consultants - they pirate our product and then don't stand behind it.

Who pays the price?

You do.  You buy a product which was good at the time, but 1/2 year later it is outdated.  You submit your product to an investor, regulator or wholesaler and now you look like you don't know what you are doing. Worse than the wasted time and prestige, you now likely have to fix the problem on your own.

Make Sure Your Product is Not Pirated

Questions to ask:

Is the consultant in the regular business of providing materials, or did the product emanate from a request from you?  If it's not something the consultant does as a main line of business, it is more likely that the consultant borrowed the product from another company.  Beware.
Does the consultant publish examples and samples of the work online?  If the consultant is overly protective of the content before you purchase it, it is likely that the work would be similar to other widely available products, or that it is, in fact, another company's work.  Legitimate companies don't need to hide their content, because they know it changes so much that even if you did borrow a swath of it, you would have to come back for updates later.
Are you getting e-mails from the publisher? Or is there silence after the purchase.  If it's the company's mainline business there is always a stream of information (welcome or not) that accompanies this type of purchase.