Just when you thought there was enough to follow with the CFPB, on February 14, 2012 the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Department of Treasury, published final rules on anti-money laundering requirements for non-bank residential mortgage originators. The new requirements go into effect on August 13, 2012.

The regulations require non-bank mortgage originators to establish anti-money laundering programs and report suspicious activities.

Who is covered?

The FinCEN rules specifically target non-bank “residential mortgage lenders and originators” (RMLO). This term should jump out or at least sound vaguely familiar to everyone since it is similar to the “mortgage loan originator” language of SAFE Act and the “mortgage originator” language in Truth in Lending. In fact, the definition is similar, but also slightly different. The FinCEN rules explain in the commentary they purposefully modified their definition from the definition in SAFE Act.

The commentary of the final rule explicitly states, “FinCEN intends the Final Rule to be broad in scope and cover most non-bank residential mortgage originators.” The commentary goes on to state the final rule is intended to cover persons, “even if the business does not in any manner engage in negotiating the terms of a loan.” The rule makes it clear their broader definition from SAFE Act or other mortgage-related statutes was, “done intentionally.”

The definition under this rule of a RMLO is, “A person who accepts a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.”

The federal SAFE Act definition of a mortgage loan originator is, “an individual who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation or gain.”

The rule differs in its expansive nature in three key ways. First, the FinCEN rule uses the word “accepts” rather than “takes” a mortgage loan application. Second, the rule uses the broader “or” rather than “and.” Finally, the anti-money laundering rule makes no mention of a person needing to receive “compensation or gain” in order to be covered. These three key changes, done purposefully, expand the scope of coverage of FinCEN’s definition of a RMLO well beyond the SAFE Act definition of “mortgage loan originator.”

If you fall into the definition of a RMLO, what do you have to do?

A RMLO must have a written anti-money laundering program reasonably designed to prevent the RMLO from being used to facilitate money laundering or finance terrorist activities.

The following is a list of requirements:

1. The program must be approved by senior management;
2. The company must make a copy of its program available to the Financial Crimes Enforcement Network upon request;
3. The RMLO must develop policies, procedures and controls based on an assessment of money laundering and terrorist risks associated with its products and services;
4. The RMLO must designate a compliance officer to:
1. Ensure program implementation and monitoring
2. Ensure the program remains up to date
3. Ensure appropriate persons are educated and trained
5. The RMLOS must provide on-going training (either in-house or with a third-party); and
6. The RMLO must provide independent audits of the program (either in-house if the auditor is not the same person as the designated compliance officer or through a third-party).

If someone does trigger suspicion based on the RMLO program, then the RMLO must report any suspicious, or any believed to be, suspicious transaction. Also, one must report a transaction $5,000 or more if the company knows, suspects or has reason to suspect the transaction:

1. Involves funds from, or in attempt to hide, illegal activity;
2. Involves any attempt to evade the Bank Securities Act;
3. Has no business or apparent lawful purpose or is not the sort a normal costumer would engage; or
4. Involves the loan company to facilitate criminal activity

When, what and where to file a Suspicious Activities Report (SAR)?

An SAR is a promulgated form used to report suspicious activity. One should be filed in accordance with the instructions to the SAR using the web-based electronic filing system currently under development by FinCEN. The report is due within 30 days of the suspected activity. All records of SARs must be maintained for five years.

Exceptions to the rule

There are several limited exceptions to the FinCEN rule. First, individuals financing the sale of their own real estate are not covered by the rule. The commentary does not elaborate on a number or limitation of how many owner-financed sales this exception would cover. However, with the clear intent in the commentary of an intentionally broad rule seeking to cover a large range of participants, one could infer the intent behind the owner-finance exception is one of limited use. Second, the rule does not cover administrative assistances or office clerks who merely gather documents, review records and complete forms on behalf of an RMLO. Finally, the rule does not cover mortgage servicers so long as they do not also extend mortgage loans or offer or negotiate the terms of mortgage loans.

How to Comply?

If these new rules apply to your operations there are multiple ways to become compliant. Creating one’s own program is possible so long as a the person designing the program has a strong understanding of not only the new rules, but also the Bank Secrecy Act and the federal laws on records and reports on monetary instrument transactions. There are some third-party providers of programs and training as well as model templates being worked on by our national association.