Aug. 18, 2012: Week 1 of FinCen – time for a primer & a review of penalties; how to spot counterfeit checks; lender updates

Aug. 18, 2012: Week 1 of FinCen – time for a primer & a review of penalties; how to spot counterfeit checks; lender updates Rob Chrisman

There are various methods that LO’s utilize to get their names and message out to the public: newsletters, e-mail, video, and so on. In Texas, Service First’s Cole Holmes uses talk radio that not only goes out to most of Texas but is also streamed through computers, online, at www.thewordfm.com by clicking on the “listen live” button on top. I mention this since today at 1PM CST, on the “Real Time Real Estate DFW with Cole” show, his guest is this strange fellow who sends out a daily mortgage commentary – even on Saturdays…

The mortgage banking industry just finished its first week dealing with FinCEN’s Bank Secrecy Act. Banks, of course, have been dealing with this for years. Who goes after mortgage fraud? The FBI certainly does: http://lacey.patch.com/articles/forked-river-employee-among-11-charged-in-15m-mortgage-scam. But the Bank Secrecy Act is something different!

FinCEN, which may just win the award for the most odd and difficult abbreviation to type, is a bureau of the U.S. Department of Treasury, and published a Final Rule in the Federal Register on April 16 that extended the definition of “financial institution” in the Bank Secrecy Act (“BSA”) to include mortgage bankers (who, historically, have not been subject to the BSA).  The BSA compliance date for mortgage bankers (“loan finance companies”) was August 13. In summary, the Rule has two essential requirements. The first is that a loan finance company must establish a written anti-money laundering (“AML”) program that is reasonably designed to prevent the company from being used to facilitate money laundering or the financing of terrorism.  At a minimum, that AML program must incorporate policies, procedures and internal controls for complying with the BSA; designate a compliance officer responsible for ensuring that the AML program is implemented effectively, including monitoring compliance by the company’s agents and LO’s, and updating the program as necessary; provide for ongoing employee training concerning their responsibilities under the BSA; and provide for independent testing of the AML program, including testing to determine compliance by the company’s agents and LO’s.

The second essential requirement is the filing of Suspicious Activity Reports (“SAR’s”). SAR’s must be filed in connection with transactions of $5000 or more if the company knows, or has reason to suspect, that the transaction involves funds derived from illegal activity; is designed to evade the BSA or the company’s AML; has no apparent business or lawful purpose; or, is intended to facilitate criminal activity.

But it doesn’t stop there, as there are a few other requirements with respect to SAR’s under the Final Rule. They must be filed electronically, with FinCen, within 30 days of initial detection of suspicious activity. The company is required to maintain a record of the filing, including supporting documentation, for 5 years. And the company is not to disclose the fact of the filing or the content to anyone, ever.  (There is no liability under federal, state, or contract law for the voluntary filing of SAR’s, i.e., the government is encouraging the filing of SAR’s, even if they are based on flimsy evidence or the information contained therein ultimately proves to be erroneous).

A willful violation by a loan finance company of the BSA is significant—the greater of either the amount involved in the transaction (up to $100,000) or $25,000.  Civil liability is also possible in an action by the Secretary of the Treasury – NOT the CFPB! Potential criminal penalties are also available, including imprisonment for not more than 5 years for a willful violation.

Mortgage bankers should have done a few things prior to the compliance date – if any of this is a surprise, you’d better get going!  One is to appoint a compliance officer for BSA/AML/SAR’s.  This appointment should be made by the Board of Directors and memorialized in Board Minutes. You need to have created and implemented written Policies and Procedures for BSA/AML/SAR compliance. (Some vendors such as AllRegs sell these policies.) Many mortgage banks now include a paragraph regarding BSA/AML/SAR compliance in LO employment agreements. Mortgage banks are expected to set up a program to continually test and update these AML/SAR policies and procedures, and make a written record of having done so, and to have a plan for conducting regular independent (third party) audits of these procedures, and make a written record of having done so.

Moving on, LO’s rarely handle checks, but I found this interesting enough to pass along. Counterfeit checks fall in one of three general categories: fake checks, altered checks, or forged checks (collectively “CAF checks”). For the first type, a fake check is an entirely fraudulent check, but is based on genuine information, usually taken from a victim of identity theft. Altered checks are genuine checks with a true signature, but with a forged adjustment, typically the amount. Lastly, forged checks are produced by either stolen blank checks or “washed” checks with a false signature.

Authorities will tell you that understanding the patterns that most forgers follow can help prevent checks from ever passing, or help discover CAF checks more rapidly. Fake check passers are the hardest to catch as they often use a counterfeit identification card in order to cash a check quickly. Here, the bank or merchant’s main countermeasure is to understand how to spot a fake ID, be able to verify ID information and be on the lookout for behavioral clues such as nervousness and an imposed time pressure on the person which the check was presented. A signature comparison usually helps if possible. (Measuring the length of the signature is the one of the most important comparison points as a person’s signature varies over time and under different conditions, but the length is usually consistent. In addition, forged or “new” signatures often have uneven pressure where the criminal may pause, mid-signature. Spacing between letters may be slightly larger than normal, there may be ink blots from holding the pen on the paper a longer amount of time and the starting stroke of the next letter will be heavier.)

CAF check writers often pass a few small regular checks at a specific institution with a specific employee in order to build rapport and then bring in a much larger check after the clerk feels comfortable with the individual because all other checks have passed without incident.

One of the most common types of CAF checks is the forged “washed” check. Here, education can play an immense part in fraud control because if bank employees know how these checks are created and how to identify them, they can be stopped before they are ever cashed. The Pacific Coast Bankers Bank notes that washed checks typically use checks that are stolen from the mail or other theft. The forger traces the original signature in pencil, before washing the pen ink off the checks in a chemical solution that is some combination of brake fluid, rubbing alcohol, acetone, and hydrogen peroxide. The graphite pencil trace of the signature remains on the check through the chemical wash, and after the check is dried, the signature is retraced in pen and the rest of the now blank check is completed. The physical features that most easily identify washed check are residual chemical odors, residual or smudged ink stains, unusual texture from chemical absorption into the check during the drying process, and eraser marks around the signature from erasing the graphite trace. Use a gel pen for signing! Anyway, that wraps up your check lesson du jour!

On to something more mundane, like investor, agency, and vendor updates. These relatively recent changes are meant to give you a flavor for trends – for specific details read the bulletin.

In compliance with the deadline set out by FinCEN, Franklin American, and other investors, now requires all non-depository lenders to have established an AML program. FAMC-approved non-depository lenders must submit an attestation that their company has adhered to all applicable AML requirements no later than August 31st, though typically the request for this form will be included in FAMC’s annual recertification process. Mountain West Financial reminds clients that, if any disputed accounts are found in the credit report of a borrower seeking an FHA 1st TD loan, the FHA 1st TD must be downgraded to a manual underwrite.  In the case of CHDAP loans, manual underwrites aren’t permitted, and a CHDAP 2nd TD will not be allowed. Radian Guaranty has rolled out its HARP Eligible Modification Program, which has been streamlined to eliminate any overlays to GSE guidelines.  Under the new program, Radian will not perform an underwriting review at the time of claim filing, rescind coverage on account of HARP credit or underwriting-related issues, or perform quality control audits in order to verify HARP underwriting access.  Full details of the HARP Eligible Modification Program policy are available via the Radian website. Affiliated Mortgage has added several appraisers to its Unacceptable Appraiser List, which can be accessed at http://www.affiliatedcorrespondent.com/wc/content/exhibits/4-19_Unacceptable_Appraiser_List.pdf.  The revised list affects all loans with underwriting decision made on July 11, 2012 and after.  The Settlement Agent List, which details the title companies and/or settlement agencies ineligible to close transactions that are delivered to AMC, has also been updated.  The full list may be viewed at http://www.affiliatedcorrespondent.com/wc/content/exhibits/5-01_Settlement_Agent_list.pdf. As of July 20th, EverBank ceased accepting any new loans under the Freddie Mac Refinance Open Access program.  Clients know that such loans were required be locked by July 20th and to have closed by September 28th.  Clients should ensure that the Freddie AU findings that show the loan as having received an “Accept” for the ROA program are included in the submission and that the findings have been released to EverBank. REMN reminds clients of the additional FHA overlays for 2-4 unit properties that went into effect earlier this month.  The requirements state that a full calendar year must have elapsed between the seller’s acquisition date and the execution date on the sales contract, that the subject property must not be in foreclosure, and that the 2-4 Unit Identity of Interest Certification must be executed at closing by the buyer, seller, and both attorneys confirming that no relationship exists between the buyer and seller.  Additionally, all 2-4 unit properties subject to a Short Sale Agreement need to have been listed on the MLS for a minimum of 90 days before the execution of the sales contract; properties designated on the MLS as an “Exclusive Listing” are ineligible. HUD has announced its next Single Family Loan Sale, which will take place on September 12, 2012.  Along with the standard whole loans for sale, it will be possible to purchase pools of severely distressed FHA-insured loans under the Distressed Asset Stabilization Program.  The loans that will be on offer, which will be sold at market-determined prices generally below the outstanding principal balance, will be from the Chicago, IL; Newark, NJ; Phoenix, AZ; and Tampa, FL metropolitan areas, which have felt the effects of the foreclosure crisis most acutely.  Interested parties can find out more about the sale at http://portal.hud.gov/hudportal/HUD?src/program_offices/housing/comp/asset/hsgloan.

(Here’s one for you Libertarians out there.)

Once upon a time the government had a vast scrap yard in the middle of a desert. Congress said, “Someone may steal from it at night.” So they created a night watchman position and hired a person for the job. Then Congress said, “How does the watchman do his job without instruction?” So they created a planning department and hired two people, one person to write the instructions, and one person to do time studies. Then Congress said, “How will we know the night watchman is doing the tasks correctly?” So they created a Quality Control department and hired two people. One was to do the studies and one was to write the reports. Then Congress said, “How are these people going to get paid?” So they created two positions: a time keeper and a payroll officer then hired two people. Then Congress said, “Who will be accountable for all of these people?” So they created an administrative section and hired three people, an Administrative Officer, Assistant Administrative Officer, and a Legal Secretary. Then Congress said, “We have had this command in operation for one year and we are $918,000 over budget, we must cut back.” So they laid-off the night watchman.

(During the Carter Administration, the Department of Energy was created on August 4, 1977 to lessen the U.S.’s dependence on foreign oil. Its budget is now $24.2 billion a year; it has 16,000 Federal employees and 100,000 contract employees. The problem is, 34 years ago 30% of our oil consumption was from foreign imports, and now 70% of our oil consumption is from foreign imports.)

If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the CFPB’s servicing proposals, for better or worse. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Rob Chrisman.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)