More mortgage fraud reporting?

Introduction

Nonbank mortgage lenders would have to file reports of suspected fraud for the first time, under a new proposal issued Wednesday by the Financial Crimes Enforcement Network, or FinCEN, an arm of the Treasury Department.

Most financial companies, including banks, casinos, check cashers, money wirers, and investment firms, must file the Suspicious Activity Reports, or SARs, when a questionable transaction takes place. But, as PaperTrail reported last week, non-depository lenders do not currently have to file these reports, despite making billions in subprime loans. Under the changes outlined in the notice of proposed rule-making, non-depository mortgage lenders and brokers would be subject to anti-money laundering laws, including requirements to file SARs.

“As primary providers of mortgage finance who generally deal directly with consumers, these lenders and originators are in a unique position to assess and identify money laundering risks and possible mortgage fraud,” said FinCEN Director James H. Freis, Jr., in a statement.

Non-depository lenders were responsible for $677 billion in subprime loans from 2005 through 2007, according to a recent Center analysis — almost half of all subprime loans made in those three years. That group includes companies like Ameriquest and New Century Financial, the second and third biggest subprime lenders in the country during those years.

Although they do not yet have to file their own reports of suspicious activity, “non-bank mortgage lenders and originators initiated many of the mortgages that were associated with SAR filings,” according to a FinCEN statement.

When a SAR is filed, explains FinCEN spokesman Bill Grassano, the reporting institution writes a narrative detailing the specifics of the suspicious activity and identifying the subject, or main actor, in the potential fraud. Over the last few years, companies regulated by FinCEN were increasingly identifying non-bank mortgage lenders and brokers as subjects in their reports, Grassano said. Mortgage brokers were the subject of more than a quarter of all mortgage fraud reports between April 2006 and April 2007, according to a 2008 FinCEN report. In the notice of proposed rule-making, FinCEN notes that to date, there has been a “regulatory gap” regarding oversight of non-bank lenders, which may have made them “more vulnerable to financial crime and money laundering than their bank counterparts.”

The move drew praise from Representative Maxine Waters, a California Democrat, who serves on the House Committee on Financial Services. “The role that these lenders played in helping bring about the financial meltdown was so egregious and so involved that that federal government should be doing everything in its power to rein them in,” she said. “FinCen’s proposed changes are an important development in our continued efforts to protect homeowners and to root out the worst actors in the system.”

Comments on the advanced notice of proposed rule-making are due by August 15. After that deadline, the comments will be analyzed, and a proposed final rule will be issued. Then more comments, more analysis, and a final rule. The time frame for the process depends on the number of comments and the complexity of the issue, Grassano said, adding that the proposed changes have been in the works for some time.