FinCEN’s Final Rule expanding the BSA reflects a decision that residential mortgage lenders and origination companies are the focus in what appears to be a multi-phase approach to include a broader loan or finance company category.
According to a Geraci Law Firm report — Anti-Money Laundering
Compliance: A Growing Concern — the expanded BSA applies to
“any lender who makes or acquires loans secured by deeds of trust or
mortgages on residential properties. This includes mortgage lenders,
bridge lenders and other investment-purpose loans secured by
Thus, all nonbank residential mortgage lending and originating
businesses must comply with the expanded set of FinCEN require-
ments. According to Stephen Hudak, who is chief of public affairs at
FinCEN, the rules apply to businesses that fit either the definition of
residential mortgage lender or residential mortgage originator.
The key word here is “businesses.” The law does not apply to individual loan originators except as part of the company’s requirements.
An individual originator operating in the capacity of a sole proprietor
would have to comply, however. Any company unsure if the requirements apply to them can write to FinCEN for clarification.
These lenders are expected under the expanded BSA to have in
place an effective AML program commensurate with their organization’s risk profile. Individual originators need to know this information
to help the companies they work for and the lenders they work with
implement their AML programs.
Without a comprehensive risk-based program built around the five
pillars of an effective BSA/AML program, a lender or mortgage company
is at a disadvantage in its ability to combat money laundering, terrorist
financing and even mortgage fraud. Mortgage lenders are in a unique
position to identify criminal activities and provide law enforcement with
vital information to stop perpetrators.
A successful BSA/AML program is supported by these five pillars:
n Designating a compliance officer;
n Implementing internal controls;
n Hiring a third party to conduct independent testing;
n Providing regular training tailored specifically to compliance staff,
plus additional training for the entire organization; and
n Instituting customer due-diligence procedures.
By now, most lenders and mortgage companies should be familiar with
their responsibilities as an institution and those of the individual originators and support staff working under their umbrella.
Individual originators should become familiar with, and learn to recognize, common red flags that point to money laundering, terrorist
financing or fraud. A willingness to comply with the internal procedures
in response to such activity also is a key factor in the success of their
company’s AML program.
In most cases, the actions of criminals are fairly straightforward. The
launderer will apply for a loan and use the downpayment, monthly payments and eventually pay-off transactions to launder money. They use
illicit funds for these payments to clean the money, which is referred to as
the layering and integration stages of money laundering. Some criminal
borrowers will attempt to make cash payments in effort to evade paying
tax on the funds used.
What are some of the more common forms of suspicious activities
that lenders may encounter? Some criminals use a straw buyer to take
out a mortgage loan using their legitimate information and then make
the payments using illicit funds. At some point after the loan closing,
the straw buyer will rent the property, often to another cutout or shell
company, allowing the criminals to retrieve their now clean money. This
straw buyer also may sell the property after a short time to another
party in the conspiracy and pay off the loan to clean the illicit funds, or
this person may refinance after a short period to draw out equity.
Individual originators should watch for red flags that could indicate
money laundering, fraud or other suspicious activities. These red
flags include recent large deposits on bank statements before a loan
application, large cash downpayments, discrepancies or irregulari-ties with income or employment verification, applicant- or borrower-identification discrepancies, excessive real estate commissions and
anything that creates uncertainty or suspicion about the legitimacy of
a transaction or document.
In addition, while the loan application is being processed and
underwritten, originators and staff should watch for anything that creates uncertainty or suspicion about the legitimacy of a transaction or
“Mortgage lenders are in a unique
position to identify
and provide law
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