Mortgage Fraud: Treasury Looks to Fill “Regulatory Gap”

July 16, 2009

As we noted last month, the federal government is considering new corporate compliance requirements to combat mortgage fraud. On July 15, 2009, the government took a first step when the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, issued a notice soliciting public comment on a proposal to subject “non-bank residential mortgage lenders and originators” to anti-money laundering (AML) compliance requirements.

Businesses subject to AML requirements must develop written compliance programs that (1) establish policies, procedures, and controls designed to ensure compliance with AML regulations; (2) designate a compliance officer with responsibility for coordinating and monitoring the AML program; (3) provide training for appropriate personnel; and (4) implement a plan for independent review of the AML programs.

Many businesses subject to AML requirements must file Suspicious Activity Reports (SARs), which notify law enforcement of suspicious transactions. According to FinCEN, in recent years a significant percentage of SARs filed by banks and other covered businesses have reported suspected mortgage fraud schemes.

Until now, FinCEN has exempted from AML requirements, including filing SARs, the categories of “loan or finance company” and “persons involved in real estate closings and settlements.” In light of the increasing concern among regulators, law enforcement, and Congress over sales and financing practices in the mortgage industry, FinCEN is contemplating an incremental approach to implementing AML requirements for these categories.

By focusing on “non-bank residential mortgage lenders and originators” at the outset, FinCEN is looking to regulate what it perceives to be the primary providers of mortgage finance and those persons in unique positions to assess and identify money laundering and fraud. Describing the current state of the law as a “regulatory gap,” FinCEN is exploring the extent to which non-bank residential mortgage lenders and originators should be subject to the same AML requirements as banks that conduct the same type of business.

McGuireWoods’ government investigations group has experience in the defense of fraud-related criminal investigations; the handling of internal investigations into these types of matters; and the establishment, review and revision of corporate compliance programs, including anti-money laundering compliance and investigation matters.

For more information about McGuireWoods’ capabilities and resources in connection with government investigations and compliance programs, please contact the authors or any other McGuireWoods attorney.