In a move that will directly affect non-bank mortgage lenders, federal regulators have significantly expanded the list of those subject to anti-money laundering regulations to include mortgage lenders and brokers.

The Department of the Treasury, through the Financial Crimes Enforcement Network, known as FinCEN, issued a final rule on February 7, 2012, requiring non-bank residential mortgage lenders and originators to establish anti-money laundering (AML) programs and to report suspicious activities under the Bank Secrecy Act (BSA). The regulations will become effective 60 days after publication in the Federal Register. Those subject to the new regulations will be required to implement an AML program 180 days after publication.

As a result of this new regulation, RMLOs (residential mortgage lenders and originators) must immediately establish and implement an AML program that includes, at a minimum: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs. As part of that program, RMLOs must develop and implement programs to report potential money laundering, fraud, and other criminal activity to the government in the form of suspicious activity reports, or SARs. In determining whether an RMLO’s AML program meets minimum standards, FinCEN will look to the institution’s size, location, and activities. Notably, other BSA requirements, including currency transaction reporting requirements (CTRs), were found to be unnecessary for loan or finance companies and the Final Rule does not adopt them.

Ballard Spahr’s Consumer Financial Services Group is ready to offer advice on the new scope of this program and the duties it imposes on our clients, including the filing of SARs with the government.

Responding to the events of 9/11, Congress, through the USA Patriot Act, greatly expanded AML and SAR requirements for many financial institutions. In 2002, however, FinCEN issued a regulation that temporarily exempted non-bank RMLOs from these requirements. FinCEN now removes that exemption based on its finding that criminals could exploit this “regulatory gap,” particularly in the conduct of mortgage fraud—which FinCEN calls “one of the most significant operational risks facing RMLOs.”

As the primary providers of mortgage financing, FinCEN sees RMLOs as uniquely positioned “to assess and identify money laundering risks and fraud while directly assisting consumers with their financial needs and protecting the sector from the abuses of financial crime.” With this in mind, FinCEN predicts that “the new regulations will significantly increase the number of mortgage related SAR filings; give law enforcement and regulators more comprehensive data on specific crimes; and provide government and industry a more complete perspective on mortgage related crime trends nationwide.”

RMLOs now must report four categories of transactions. An RMLO must report a transaction if it “knows, suspects, or has reason to suspect” that the transaction or pattern of transactions (1) either involves funds derived from illegal activity or is intended to conceal funds derived from illegal activity; (2) is designed to evade the reporting requirements of the BSA; (3) has no legitimate purpose, and the RMLO “knows of no reasonable explanation for the transaction after examining the available facts;” and (4) involves the RMLO in facilitating criminal activity.

The regulations broadly define a “residential mortgage originator” as “a person who accepts a residential mortgage application or offers or negotiates terms of a residential mortgage loan.” Thus, both residential mortgage lenders and brokers are subject to the new requirements. Employees of residential mortgage lenders and brokers, however, are not personally subject to the requirements (but of course they will need to comply with the policies and procedures of their employers that are implemented based on the requirements).

FinCEN explains that the issuance of these regulations is but the first step “in an incremental approach to implementation of regulations for the broad loan or finance company category of financial institution.” Thus, other types of loan and finance companies should expect that future amendments to the regulations will extend BSA regulations to them.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The Group advises mortgage lenders and brokers on regulatory compliance and administrative enforcement actions and investigations and has represented financial institutions targeted by the government for alleged violations of the Bank Secrecy Act.  

The group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right. For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or; Practice Leader Richard J. Andreano, Jr., 202.661.2271 or; Practice Leader John D. Socknat, 202.661.2253 or; John L. Culhane, Jr., 215.864.8535 or; Beth Moskow-Schnoll, 302.252.4447 or; Keith R. Fisher, 202.661.2284 or; or Mark J. Furletti, 215.864.8138 or


Copyright © 2012 by Ballard Spahr LLP.
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