The extension of regulatory responsibilities to nonbank residential mortgage lenders and originators for suspicious activity reports and anti-money laundering efforts is far reaching, according to a recent discussion of the move by attorneys.
“Is it important to note that the final rule represents a significant extension of the scope of the reach of the [Bank Secrecy Act],” said attorney Audrey Wisotsky, partner at law firm Pepper Hamilton LLP in a webinar late last week.
“Where AML compliance and the filing of SARS was originally intended as a vehicle by which banks and other financial institutions monitored activity related to the financing of international terrorism, [the Treasury's Financial Crimes Enforcement Network] now is requiring the same kind of vigilance on the part of RMLOs with respect to discovering and reporting fraudulent and other suspicious activity related to the lending and origination of mortgage loans,” she said.
“This new rule is a sea change in the way that RMLOs have been treated and they will essentially be subject to the same rigorous requirements that banks have been subject to,” added attorney Richard Zack, who also is a partner at the law firm.
Drawing upon banks' experience with the rule that becomes effective April 16 and that RMLOs must comply with by Aug. 13, Zack said among the potential risks for noncompliance with it is the fact that, “Any time the regulators take an action or if there is some…red flag raised by the regulators, you can almost count on there being some sort of civil litigation or a class action addressing SAR issues.”
He said those covered by the rule need to not just catch the signs of suspicious activity but also “do the follow-up.”
Another partner at the firm, attorney Frank Mayer III, stressed that RMLOs should take steps so that compensation goals do not interfere with the filing of suspicious activity and AML reports.
Management should send the message that, “You, as a producer, are not going to be penalized because [a] particular deal had to be kicked out” due to fraud or money laundering suspicions.
Government rulemakers “don't want to see regulatory arbitrage” where a fraudster is able to “access mortgage credit to perhaps facilitate a straw party or flipping scheme or reverse mortgage scheme through some weaker credit provider” that is not subject to robust regulation.
“This is why the regulators feel the tone at the top [and] the corporate culture of the organization…is truly significant, so that the compensation incentives take into consideration this robust, important federal policy that is now mandated,” he said.
“This is what the intention is: to clean that gap up so people are not 'playing the system,'” said Mayer.
That is why the rule is being extended to the point where it covers, “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 signed at or immediately after settlement,” he said.
“So maybe you're thinking, 'this is good. If I just get a commitment issued to me and I quickly assign it before closing I don't have to worry about this.' No,” Mayer warned. “Your traditional sales force is covered [by the rule].”
There are some excluded from the rule, including individuals financing or selling their own real estate and entities already supervised by other regulators such as the government-sponsored enterprises.
The GSEs are not being left out, but rather a separate rule for them is in the works, Mayer explained.
Among other steps RMLOs that need to gear up for compliance with the rule need to take is to implement ongoing training for “staff,” including independent agents and brokers, he said.
There will also need to be independent testing, particularly when compliance is first rolled out, said Mayer.
“Independent testing is the last line of defense,” he said.
