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Regulation Requires SARs Filings by Non-Bank Lenders

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Mortgage brokers and non-bank mortgage lenders will soon be required to file reports when mortgage fraud is suspected. The additional compliance burden is likely to lead to an increase in filing statistics even though actual fraud activity could retreat.

Non-bank residential lenders will now be required to file suspicious activity reports under new regulations finalized Tuesday by the Financial Crimes Enforcement Network, which is responsible for enhancing national security and deterring and detecting criminal activity.

SARs reports help identify straw buyers, fraudulent flips and short-sale fraud.

Lenders and originators need to establish anti-money laundering programs and file suspicious activity reports, as is already the case with other types of financial institutions, according to the agency.

FinCEN Director James H. Freis Jr. calls SARs “a critical source of information to law enforcement and regulatory agencies in their investigation and prosecution of mortgage fraud and a wide range of other financial crimes.”

FinCEN said it is involved in ongoing work directly supporting criminal investigations and prosecutions. Its activities are connected to the Financial Fraud Enforcement Task Force and the Residential Mortgage-Backed Securities Working Group.

“FinCEN believes that the new regulations will help mitigate some of the risks and minimize some of the vulnerabilities that criminals have exploited in the non-bank residential mortgage sector,” the statement said. “Analysis of SARs reported in FinCEN’s annual, quarterly and special fraud reports, shows that independent mortgage lenders and brokers originated many of the mortgages that were the subject of bank SAR filings.”

FinCEN said it proposed in November 2011 that Fannie Mae, Freddie Mac and the Federal Home Loan Banks be subject to anti-money laundering and SARs requirements.

Today’s announcement has its roots in the terrorist attacks at the turn of the century.

“This goes back all the way to nine eleven and the congressional result and reaction, that was the USA Patriot Act,” Richard J. Andreano Jr., partner, Ballard Spahr, said in a telephone interview. “What Congress had determined at that point is the people involved in nine eleven had used the U.S. financial system to fund their activities.”

Andreano explained that regulators originally delayed the implementation of the act against non-bank lenders and originators as they studied whether it was intended to apply to the group. A rule was proposed in October 2010 for non-bank lenders and, as Andreano interprets it, mortgage brokers.

The final rule will go into effect 60 days after it is published in the Federal Register. The Compliance date will be six months after publication.

Andreano warns non-bank lenders that once the regulation is in place, one of the first things regulators will look at will be anti-money laundering programs.

“Those who are found to have inadequate programs will likely face significant regulatory repercussions, including, it could be, stiff penalties,” he said. “This is one of those that is very near and dear to the heart of regulators.”

During fiscal-year 2010, there were 70,533 mortgage fraud SARs filed, according to the Federal Bureau of Investigation.

Andreano said that the number of filings is likely to rise as a result of the new regulation.

But he also noted that mortgage fraud activity is likely to decline because of the required reporting.

“The hope is by implementing these requirements, that, in fact, those who would be likely to engage in fraud will now think twice about it and not do it,” Andreano said, “but in fact if they do decide to go ahead that this will lead to certainly more investigations because there will now be more reporting.”

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