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Spotlight on Anti-Money Laundering (Part 3 of 3): SAR Reporting for RMLOs
For the first time, all non-bank residential mortgage lenders and originators (RMLOs) are required to file mandatory and voluntary Suspicious Activity Reports (SARs) with the government through the e-filing system established by FinCEN. Similar to the establishment of an AML program, compliance for this regulation is August 13, 2012. A company may file a voluntary report with FinCEN to alert them of any suspicious transaction they have reason to believe is a possible violation of any law or regulation, without any de minimus amount. A company must file a SAR once they have become aware of a transaction that:
- Is conducted or attempted by, at, or through a RMLO
- Involves or aggregates funds or assets of at least $5,000
- The RMLO knows, suspects, or has reason to suspect that the transaction or pattern of transactions:
- Involves funds derived from illegal activity or conducted to hide funds or assets derived from illegal activity
- Is designed to evade BSA requirements
- Has no business or apparent lawful purpose, i.e., doesnt look right
- Involves the use of the company to facilitate criminal activity
According to Howard Eisenhardt, Counsel in BuckleySandlers Washington, DC office, At the heart of a companys AML program is compliance with the requirement to file SARs to report known, attempted, or suspected crimes and suspicious transactions that involve money laundering or other illegal activity. There isnt a checklist available to help you determine when a SAR should be filed. Instead, the determination is based on all the facts and circumstances relating to the transaction and customer of the RMLO in question. The FFIEC and Fannie Mae both have lists of red flags for mortgage transactions that can be reviewed. Should a company file a SAR, the SAR and the information provided must be kept confidential and must not be disclosed except as authorized. FinCEN wanted RMLOs to have the requirement to file SARs, explains Eisenhardt. SARs provide the government with the ability to gather information and open an investigation. The government is anticipating that the filing of additional SARs identifying potential mortgage fraud will lead to a greater ability stop or control money laundering and mortgage fraud. FinCEN believes that much of the effort necessary to meet these regulatory obligations of implementing an AML program and filing SARs will be accomplished through business operations already taking place, including SAFE Act requirements and fraud monitoring tools that are already in place. However, Eisenhardt cautions, there are several challenges for RMLOs to overcome, including the short timeframe, limited financial resources, new training requirements, and inexperienced personnel who must learn a completely new area which theyve never faced before.
CFPB Finalizes Rule Governing Treatment of Privileged Information
On June 28, the CFPB released a final rule that will govern how it handles privileged information submitted by supervised financial institutions. In the final rule, the CFPB adopted the proposed rule without modification. The rule allows parties to submit information to the CFPB in the supervisory or regulatory process without waiving any applicable privileges; it further permits the CFPB to share that information with federal and state agencies without affecting federal or state privileges. The rule takes effect 30 days following its publication in the Federal Register.
CFPB Releases Report on Reverse Mortgages
On June 28, the CFPB released a report to Congress detailing the characteristics and evolving uses of reverse mortgages in today’s marketplace. The report presents findings from a CFPB study on reverse mortgages required by the Dodd-Frank Act. Among the findings, the CFPB report states that reverse mortgages are often difficult for consumers to understand. The report further observes that reverse mortgages are being used by younger borrowers to obtain all available equity upfront, a use that contravenes the original and intended use of reverse mortgage products and may pose substantial risks to consumers. Concurrent with the release of the report, the CFPB issued a Notice and Request for Information on topics related to reverse mortgages and will accept comments for 60 days following publication of the Notice in the Federal Register. The CFPB intends to use the information and comments received from the public, as well as the findings from its study, to determine whether further consumer education or regulatory action related to reverse mortgages is necessary.
Sixth Circuit Holds Foreclosure Filing Before Transfer of Mortgage and Note May Violate FDCPA
On June 26, the U.S. Court of Appeals for the Sixth Circuit concluded that a misrepresentation of the creditors name in a foreclosure action may constitute a false representation actionable under Section 1692e of the FDCPA. Wallace v. Washington Mut. Bank, F.A., No. 10-3694, 2012 WL 2379664 (6th Cir. June 26, 2012). In Wallace, a law firm allegedly brought a foreclosure action before the firms bank client received an assignment of the mortgage and transfer of the promissory note. The borrower contended that the law firm violated the FDCPA in foreclosing on behalf of the bank before the transfer and assignment occurred. The district court dismissed the case, holding that the failure to record an assignment before filing a foreclosure action is not a deceptive practice under the FDCPA. The Sixth Circuit disagreed and reversed, holding that the borrowers allegations were sufficient to support a claim of material misrepresentation that would confuse or mislead an unsophisticated consumer.
Massachusetts Supreme Judicial Court Rules That Lenders May Foreclose Without Possessing Mortgage Note, But Only In Certain Circumstances
On June 22, the Massachusetts Supreme Judicial Court held that lenders do not need to be in physical possession of a mortgage note to foreclose on a property, but that they must establish that they are acting on behalf of the noteholder. Eaton v. Federal Nat’l Mortgage Ass’n, No. SJC-11041, 2012 WL 2349008 (Mass. June 22, 2012). The lower court had preliminarily enjoined defendant Fannie Mae from evicting the plaintiff following a foreclosure sale; that court interpreted the term “mortgagee,” as used in Massachusetts’ statutes, to refer to a person holding both the mortgage and the mortgage note. At the time of the foreclosure, the foreclosing party held only the mortgage. Reversing the lower court, the Supreme Judicial Court found that the term “mortgagee” refers to a person who (i) holds the mortgage, and (ii) either physically holds the mortgage note or acts on behalf of the mortgage note holder. Recognizing that it was common prior practice to interpret the term “mortgagee” as requiring possession of only the mortgage, the court held that its new interpretation of “mortgagee” should be given only prospective effect.
FTC Sues Hotel Corporation and Subsidiaries Over Data Protection Practices
On June 26, the FTC filed a complaint in the U.S. District Court for the District of Arizona alleging that Wyndham Worldwide Corporation (and several of its subsidiaries) violated the FTC Act by misrepresenting the adequacy of their data security procedures. The FTC specifically maintains that Wyndham and its subsidiaries engaged in unfair and deceptive practices when they represented on their website that they maintained measures adequate to protect customers’ personal information. In truth, the FTC alleges, Wyndham failed to maintain such protections. According to the FTC, the companies’ lack of reasonable data security allowed intruders to obtain unauthorized access to that information on three separate occasions. These breaches purportedly resulted in more than $10.6 million in fraud loss and the export—to a foreign-registered domain—of payment card account information for hundreds of thousands of consumers.
California Supreme Court Ruling Stops Convenience Check Class Action
On June 21, the California Supreme Court held that the National Bank Act (NBA) preempts California Civil Code section 1748.9, which requires that certain disclosures accompany preprinted checks provided by a credit card issuer to its cardholders. Parks v. MBNA Am. Bank, N.A., No. S183703, 2012 WL 2345006 (Cal. June 21, 2012). In a unanimous decision, the court concluded that the NBA preempts section 1748.9 because the law is an obstacle to the broad grant of power given to national banks to conduct the business of banking. The court held that the specific disclosure obligations imposed by section 1748.9, including precise language and placement of the disclosures, exceeded any federal law requirements. In addition, the court recognized that the NBA was intended to prevent banks from complying with a patchwork of local disclosure requirements like section 1748.9.
House Committee Approves Legislation to Alter ATM Fee Disclosure Requirement
On June 27, the House Financial Services Committee unanimously approved H.R. 4367, which would amend the Electronic Fund Transfer Act to remove the requirement that ATMs attach a placard disclosing fees. Instead, the bill would require only that fees be disclosed on the ATM screen.
State Law Update: North Carolina Overhauls Banking Statute
On June 21, North Carolina Governor Bev Perdue signed Senate Bill 816, which rewrites substantial portions of the states banking laws. The bill derives from a Joint Legislative Study Commission report, which found several deficiencies in the states existing state banking laws. In particular, the report found that the states banking laws (i) needed to be modernized in the wake of the Dodd-Frank Act and other changes in federal law, (ii) encouraged banks to avoid the burden of the banking law by forming holding companies under the more liberal standards of the North Carolina Business Corporation Act, and (iii) failed to address changes in banks capital needs. To remedy these and other issues, the bill revises several parts of the existing law, including: (i) the size and composition of the Banking Commission, (ii) the rules regarding bank governance, powers, and operations, and (iii) the framework for bank supervision and liquidation.
State Law Update: NAAG to Focus on Privacy; Vermont, Connecticut, Oklahoma Make E-Commerce Changes
Incoming NAAG President to Focus on Privacy Issues. On June 22, after being elected president of the National Association of State Attorneys General (NAAG), Maryland Attorney General Doug Gansler announced a year-long Presidential Initiative titled “Privacy in the Digital Age.” The Initiative will explore the best ways to manage consumer privacy risks in light of “emerging technologies and business models” that are challenging consumers’ ability to control their personal information. Through the Initiative, state Attorneys General will attempt to ensure that “the Internet’s major players protect online privacy and provide meaningful options for privacy control” to consumers.
Two States Expand Data Breach Notification Requirements. Recently, Connecticut and Vermont altered state requirements for firms experiencing a data breach to report the breach. Connecticut’s revision – in the state’s annual budget bill, House Bill 6001 – expanded existing breach notification provisions to include notification to the state attorney general and takes effect October 1, 2012. Vermont amended, in House Bill 254, its breach notice law to require consumer notice of a security breach within 45 days and notification to the attorney general within 14 days of discovery of the incident. The Vermont requirement was effective as of May 8, 2012.
Oklahoma High Court Approves Rules for Electronic Filing and Signatures. On June 21, the Supreme Court of Oklahoma issued new state court rules governing the electronic filing of court documents in that state. These rules apply to a new statewide electronic management system that will replace the mix of electronic and paper-based record systems previously used in Oklahoma. Among other things, the rules provide for the use of electronic signatures where any statute or court rule requires a person’s signature in an Oklahoma state court. Like the new electronic system, the new rules will be phased in gradually; they become effective in each district and appellate court at the time the Oklahoma Unified Case Management System is implemented in that court.