Using the Bank Secrecy Act to
Combat Mortgage Fraud
Presented by
Andrew F. Campbell
© Copyright 2012. Sheshunoff Consulting + Solutions. All rights reserved.
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On February 14, 2012, the Financial Crimes Enforcement Network (FinCEN), a
bureau of the Treasury Department, published its final rule requiring non-bank
residential mortgage lenders and originators (RMLOs) to establish anti-money
laundering (AML) programs and to report suspicious activities under the Bank
Secrecy Act (BSA). 77 Fed. Reg. 8148.
While banks that make residential mortgage loans are already subject to
AML/BSA requirements, other RMLOs, such as mortgage brokers and nonbank
lenders, have been exempt. According to FinCEN, this gap has been exploited
by criminals and has hampered law enforcement's ability to detect and
investigate mortgage fraud. Through their involvement in up-front origination
and documentation efforts, and their direct access to the customer, RMLOs are
in a unique position to identify mortgage fraud before it occurs and to provide
important evidence to law enforcement.
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Mortgage Fraud is a Thriving Business
Loan Origination. The distressed real estate market has created
opportunities for perpetrators to prey on homeowners at the loan
origination stage, through misrepresentations on loan applications,
use of phony appraisals, creation of straw purchasers, and home
Fraudulent schemes. Fraudulent schemes have also been an
inevitable adjunct to the depressed market
– Foreclosure/Loan modification. Along with the increase in
foreclosures and the decline in home prices, there has been a
marked increase in scams involving firms promising foreclosure
rescue, loan modification guarantees, credit relief and repair,
and fraudulent short sales (through property "flopping")
– Existing Equity. Fraudsters are also targeting existing equity
and are preying on retirees through home equity conversion, or
reverse mortgage, schemes
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The AML/BSA Rule
• Adopts an Incremental Approach
• Initially it will cover only those business entities and sole proprietors,
though not individuals, that act as RMLOs
• Other entities involved in the origination process, such as real estate
agents and brokers, title companies, and appraisers, are not
covered by the Rule but may be the subject of a future rulemaking
• The Rule is effective April 16, 2012. The Compliance Date – i.e., the
date by which lender/originators must have a fully functioning
AML/BSA program – is August 13, 2012
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Loans Covered by the AML/BSA Rule
• The Rule covers any loan secured by a mortgage, deed of
trust, or other consensual security interest on a 1- to 4-family
• Includes condominium units, cooperative unit, or mobile
homes or trailers if used as a residence
• The definition thus covers 1st and 2nd lien transactions and
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Definitions – “Residential Mortgage Lender”
• Includes non-bank mortgage lenders as well as investors in
table funded transactions
• The term does not include a bank or savings association, but
appears to cover non-bank subsidiaries of banks, savings
associations, and their holding companies
• The term also does not cover individuals who finance the sale
of their own dwellings or real property
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Definitions – “Mortgage Originator”
• Purposefully broader than the SAFE Act definition
• Includes any person who accepts a residential mortgage loan
application or offers or negotiates terms of a residential mortgage
• Unlike the SAFE Act, the definition includes entities that merely
accept applications on behalf of a lender; there is no requirement
that the originator negotiate or impart the terms of a loan in any way
• The definition also covers entities that negotiate terms on behalf of a
lender, even if such entity does not physically accept the application
• May cover mortgage servicers under certain circumstances
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“Mortgage Originator” (continued)
• There are no de minimas exceptions for dollar amount, volume, net
worth, or number of employees
• The Rule covers every RMLO who is not covered by one of the
Rule's narrow exemptions
• One saving note is that the Rule does not apply to individuals
outside of their role as responsible parties in an RMLO entity. This is
unlike the SAFE Act, which generally includes individuals other than
certain administrative staff in its licensing and registration
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Exempt Persons
• Individuals, except in their capacity as a sole proprietor
• Banks and savings associations
• Persons registered with, and functionally regulated or examined by,
the SEC or Commodity Futures Trading Commission
• A government sponsored enterprise regulated by the Federal
Housing Finance Agency
• Federal or state agencies or authorities that administer mortgage or
housing assistance, fraud prevention or foreclosure prevention
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The AML/BSA Program
• Every RMLO must develop and implement a written AML program,
which must be approved by senior management and made available
to FinCEN upon request
• As with banks, the AML program will be subject to regular
compliance examinations. FinCEN will work with other regulatory
agencies to develop appropriate compliance examination
procedures and will delegate complete or partial examination
authority in later rulemakings
• At this time the candidates for such delegated authority include the
IRS, state regulatory agencies, the Consumer Financial Protection
Bureau, and the federal banking agencies with respect to bank
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Elements of the AML/BSA Program
• An effective AML/BSA program generally has 4 elements, known as
the “4 pillars”
• Every RMLO that implements a Program should
Create Written Policies, Procedures, and Controls
Designate a Compliance Officer
Provide for Ongoing Training
Require Independent Testing
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Written Policies, Procedures, and Controls
• Each RMLO must develop written policies, procedures, and controls
that enable it to effectively detect, investigate, and report mortgage
• Such policies, procedures and controls should integrate the RMLO's
agents and brokers and have a process for obtaining relevant
customer information
• Just as banks and other entities have crafted AML policies that
specifically address their individual businesses, RMLOs must design
policies that enable it to effectively address mortgage fraud
• Because of the regulatory attention being given to this issue,
bankers would be well advised to review their existing AML
programs to include a mortgage fraud component
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Designating a Compliance Officer
• Each RMLO must designate a compliance officer to implement its
AML/BSA Program
• The compliance officer is also responsible for monitoring and
updating the program and ensuring that appropriate persons are
• Most good-size corporate RMLOs probably have a compliance
officer and will be in charge of folding the new requirements into its
existing compliance program
• This requirement will likely be most burdensome to smaller shops
and individuals
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Ongoing Training
• The AML program must provide for on-going training of
appropriate persons concerning their responsibilities under
the program
• An RMLO may satisfy this requirement with respect to its
employees, agents, and brokers by directly training such
persons or verifying that such persons have received training
by a competent third party
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Independent Testing
• The AML program must provide for independent testing to
monitor and maintain an adequate program, including testing
to determine compliance by the company's agents and
brokers with their obligations
• Such testing may be conducted by a third party or by an
officer or employee of the RMLO
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BSA Reporting
• The Rule also brings RMLOs into the BSA reporting regime,
which requires each RMLO to file with FinCEN reports of
suspicious transactions (SARs) relevant to possible violations
of any laws or regulations
• An RMLO may also file a SAR if the RMLO believes it has
relevant information even if the SAR is not required
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Suspicious Activity Reports (SARs)
A transaction must be reported if it is conducted or attempted by, at, or
through an RMLO and involves funds or other assets of at least $5,000,
and the RMLO knows, suspects, or has reason to suspect that the
transaction, by itself or as part of a broader pattern:
– involves funds derived from illegal activity or is intended to hide
or disguise funds derived from illegal activity
– is designed, whether through structuring or other means, to
evade any requirements of the BSA
– has no business or apparent lawful purpose or is not the sort in
which the particular customer would normally be expected to
engage, and the RMLO knows of no reasonable explanation for
the transaction or
– involves use of the RMLO to facilitate criminal activity
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Timing; SAR Confidentiality/Immunity
• SARs must be filed within 30 calendar days after the date of the
initial detection by the RMLO of facts that may constitute a basis for
filing the SAR
• SARs, and any information that would reveal the existence of a
SAR, are confidential and generally may not be disclosed by the
filing party; such disclosure may result in stiff penalties
• To protect SAR filers from liability and to encourage the filing of
SARs, any party filing is exempt from civil liability from any person,
including the subject of the SAR
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Mortgage Fraud
• Mortgage fraud perpetrators include mortgage brokers, lenders,
appraisers, underwriters, accountants, real estate agents, settlement
attorneys, land developers, investors, builders, bank account
representatives, and trust account representatives
• Top states for mortgage fraud activity during 2010 were California,
Florida, New York, Illinois, Nevada, Arizona, Michigan, Texas,
Georgia, Maryland, and New Jersey; reflecting the same
demographic market affected by mortgage fraud in 2009
• Various organized criminal groups are becoming increasingly
involved in mortgage fraud activity, including Asian, Balkan,
Armenian, Russian, and Eurasian organized crime groups have
been linked to short sale fraud and loan origination schemes
Source: FBI 2010 Mortgage Fraud Report Year in Review (August 2011)
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Current Environment
“The current and continuing depressed housing market will
likely remain an attractive environment for mortgage fraud
perpetrators who will continue to seek new methods to
circumvent loopholes and gaps in the mortgage lending
market. These methods will likely remain effective in the
near term, as the housing market is anticipated to remain
stagnant ….”
FBI Report at p. 4
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Main Types of Mortgage Fraud
Prevalent mortgage fraud schemes include
– loan origination
– illegal property flipping
– straw borrowers and buyers
– title/escrow/settlement
– real estate investment
– short sales
– foreclosure rescue/loan modification
– other
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Loan Origination Fraud
Two types: Fraud for Property and Fraud for Profit
Applicant(s) misrepresents information to obtain the loan(s); e.g., income,
assets, debt level, job history and status, and may engage in occupancy
fraud and asset rental fraud
Fraud for Property
– Usually involves a single loan
– Borrower would not qualify for the loan without misrepresenting
personal information
Fraud for Profit
– May involve multiple loans
– Usually involves fraudulent appraisals and loan documents
– Third parties are often involved in the scheme and are paid for their
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Loan Origination Fraud continued
• Found in both residential and commercial loans
• FBI reports commercial real estate fraud can expose insider and
accounting fraud
• Found in half of all bank failures
• May be used by insiders to conceal the bank’s poor financial
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Illegal Property Flipping
Based on fraudulent appraisal
Property is purchased by the perpetrator and is then resold at a price based
on a fraudulent appraisal that inflates the property’s market value
Requires collusion with the appraiser and sometimes involves the loan
originator and title company who are paid for their efforts
Often involves straw purchasers
Purchase and sale transactions are closed within a short time frame, often
on the same day
Loan ends in first payment default
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Straw Borrower or Buyer
• Straw borrower: an individual whose personal profile is used to
serve as a cover for a transaction
• May be willing participants or victims of identity theft Straw buyers
can cause loans to be approved that would ordinarily be declined
• Individuals frequently act as straw buyers to help family and friends
obtain property
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Settlement Fraud
• Involves the diversion of funds at settlement
• May involve one or more of the following:
– Previous loans are not paid off
– Reconveyance or transfer of property
– Failure to record closing documents
– Charging the homeowner for title insurance that is never placed
– Fraudulent liens
– Phony escrow agents
– Outright theft of settlement funds
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Real Estate Investment Schemes
• Borrowers obtain loans for multiple properties within a short period
of time; frequently the subject properties are located in states
outside the borrower's home state.
Investors are solicited to purchase investment or rental properties at inflated
prices and are told properties will be renovated and sold in
approximately one year, and that mortgage payments would be
made with rental income
• Fraudulent activities include appraisal fraud, asset rental fraud,
occupancy fraud, illegal property flipping, forged or fraudulent
documents, the use of straw buyers and misrepresentation of assets
and debts
• Ultimately the borrowers were left owing mortgages that exceeded
the property value.
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Short Sale Schemes
• Involves “property flopping,” where the property value is deflated for
purposes of the short sale and is subsequently resold at actual
market value
• False statements to the lender regarding hidden relationships and
intentions to resell the property
• Often involves collusion with brokers, appraisers, and homeowners
and manipulation of the Broker’s Price Opinion (BPO)
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Foreclosure Rescue/Loan Modification
• A form of advance fee scheme where perpetrator guarantees
successful loan modification or prevention of foreclosure, takes fee
from the consumer and provides no service or disappears
• Foreclosure prevention may involve transfer of the property by the
homeowner to the perpetrator by quit-claim deed
• Perpetrators often located out-of-state from the property involved
• Scams feed on consumer desperation
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Other Types of Mortgage Fraud
• Builder Bailout Schemes
• Property Theft
– Fraudulent loan sales
– Loan applications made in the name of deceased owners
– ID theft
• Shotgun HELOC transactions
• Equity Skimming
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An Effective AML/BSA Policy
• Banks, savings associations, and RMLOs that wish to develop an
AML/BSA Policy that effectively combats mortgage fraud should at a
minimum, incorporate the following elements into their policy:
– Effective Fraud Detection Measures through the development
and maintenance of a “Red Flag” list designed to cover different
types of fraudulent activity
– Identify mortgages that may contain false or misleading
information through adequate mortgage application screening
– Performance of appropriate due diligence on borrowers, sellers,
and service providers, including appraisers, loan originators,
and settlement agents
• The policy will need to be continually updated as new varieties of
fraudulent activity are discovered
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Where to Look for Clues
Loan Application
Sales Contract
Credit Report
Verification of Employment (VOE)
Verification of Deposit (VOD)
Asset Documentation
Income Documentation/Tax return
Escrow/Closing Instructions
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