BANK SECRECY ACT REQUIREMENTSFOR

RESIDENTIAL MORTGAGE LOAN ORIGINATIORS:AN OVERVIEW

June 6, 2012

Marjorie A. Corwin, EsquireGordon Feinblatt LLC

233 East Redwood StreetBaltimore, Maryland 21202

410-576-4041mcorwin@gfrlaw.com

BSA Background

The Bank Secrecy Act (BSA) is a group of federalstatutes that require certain persons to keeprecords and file reports that “have a high degreeof usefulness in criminal, tax, or regulatoryinvestigations or proceedings . . . .”

Part of the BSA requires these certain persons todevelop anti-money laundering (AML) programs.

The authority to administer the BSA has beendelegated to the Director of the Financial CrimesEnforcement Network (FinCEN).

New FinCEN Regulations

On February 14, 2012, FinCEN issued BSAregulations that impose obligations on non-depository “residential mortgage lenders andoriginators” (RMLOs)

Found at: 31 C.F.R. § 1010.100 and 31 C.F.R.Part 1029

Compliance Date: August 13, 2012

Coverage

RMLOs: Persons engaged in the activitiesof a residential mortgage lender and/orresidential mortgage originator, whether ornot on a regular basis or as an organizedbusiness concern.

Excluded: Individuals employed by RMLO

Penalties for Noncompliance

Violations of BSA requirements may result in civil penalties:

Civil penalties of $1,000 per day for each day ofnoncompliance.

Willful violations may result in civil penalties for the RMLOor its employees, officers, or owners in an amount of thetransaction (up to $100,000) or $25,000, whichever isgreater.

Civil penalties of up to $500 may be imposed for negligentviolations, but if the RMLO engages in a pattern ofnegligent violations, then civil penalty could go up to$50,000.

Criminal penalties also are possible.

Examinations

Overall authority for enforcement and compliance of therule is with FinCEN.

FinCEN can further delegate this authority, and it plans towork with “relevant regulatory agencies” to developconsistent compliance exam procedures.

So, who will conduct examinations of RMLOs? Staytuned, but it could include:

FinCEN

IRS

State regulatory agencies

CFPB

Federal banking agencies

New FinCEN Regulations

What is required?

AML Written Program

Filing Suspicious Activity Reports

AML Program

Each RMLO must develop and implement a written AMLprogram designed to prevent the RMLO from being usedto facilitate money laundering or the financing of terroristactivities.

Based on commentary to the regulation, FinCEN expects theAML program also to prevent the RMLO from being used tofacilitate mortgage fraud or other criminal activity.

The AML program must be commensurate with the size,location, and activities of the RMLO.

The program must be approved by senior management.

The RMLO must make a copy of its AML programavailable to the FinCEN or its designee upon request.

AML Program Requirements

Written program is based on 4 core actions (pillars):

Develop policies, procedures, and controls based onRMLO’s own assessment of mortgage fraud, moneylaundering, and terrorist financing risks associated with itsproducts and services (“know your customer”)

Designate a responsible person (compliance officer) toensure proper implementation and update of the program

Ensure employees, agents, and brokers receive on-goingtraining about the program

Independently monitor to know that the program isadequate

AML Program

Suggestions:

Build on your existing risk managementprocedures and prudential business practices

Focus on your current due diligence of borrowersand collateral associated with credit risk

Document what you already do when situations“don’t smell right”

Suspicious Activity Reports (SARs)

Every RMLO must file with FinCEN areport of any suspicious transactionrelevant to a possible violation of law orregulation.

SARs must be filed through FinCEN’sE-Filing system

http://bsaefiling.fincen.treas.gov

When to File SARs

A SAR must be filed no later than 30 daysafter initial detection by the RMLO of factsthat may constitute a basis for filing aSAR.

If no suspect is identified on the date of suchinitial detection, RMLO may delay filing a SARfor an additional 30 days to identify a suspect,but in no case may reporting be delayed morethan 60 days after the date of initial detection.

Types of Reportable Activity

Bribery

Check Fraud

Check Kiting

Computer Intrusion

Counterfeit Check

Counterfeit Credit/DebitCard

Credit/Debit Card Fraud

Embezzlement

Mortgage Fraud

False Statement

Loan Fraud

Misuse of Position

MysteriousDisappearance

Wire Transfer Fraud

Tax Evasion

Terrorist Financing

Identity Theft

When SAR Filing is Required

RMLO must report a transaction if it involves funds orother assets of at least $5,000, and the RMLO knows,suspects, or has reason to suspect that the transaction:

Involves funds derived from illegal activity or is intendedor conducted in order to hide or disguise funds orassets derived from illegal activity as part of a plan toviolate or evade any federal law or regulation;

Is designed to evade BSA requirements;

Has no business or apparent lawful purpose or is notthe sort in which the particular customer would normallybe expected to engage; or

Involves use of the RMLO to facilitate criminal activity.

When SAR Filing is Permitted

RMLO may file a SAR regarding any suspicioustransaction that it believes is relevant to thepossible violation of any law or regulation, butwhose reporting is not required.

Red Flags for “SAR” Filings

Unusual or Suspicious Applicant Activity

Obvious over-pricing or under-pricing ofproperty.

Customer requests payment of loan proceedsto an unrelated third party with no reasonableexplanation.

Schemes (such as property flipping, flopping,and straw buyers) to generate equity for animmediate subsequent purchase.

Red Flags for “SAR” Filings

Unusual or Suspicious Applicant Activity

Questionable refinance or loan modificationattempts targeting distressed homeowners(e.g., purported loan modification orforeclosure rescue specialists).

Customer provides unusual or suspiciousidentification documents that cannot bereadily verified.

Customer provides conflicting information.

Red Flags for “SAR” Filings

Unusual or Suspicious Borrower Activity

Borrower makes “Freeman-style” debtrenunciation.

Repurchase requests and buy back demandsare made under mortgage loan saleagreements.

Questionable activity related to early defaults.

Insurer notifies RMLO of investigationsuspicious claim on a borrower’s hazardpolicy.

Red Flags for “SAR” Filings

Suspicious employee activities

Employee exhibits a lavish lifestyle thatcannot be supported by his or her salary.

Employee fails to conform to recognizedpolicies, procedures, and processes.

Employee is reluctant to take a vacation.

Retention of Records

A copy of the SAR and the originalsupporting documentation for the SARmust be maintained for 5 years.

Confidentiality of SARs

A SAR, and any information that wouldreveal the existence of a SAR, areconfidential and shall not be disclosedexcept to FinCEN, federal, State, or locallaw enforcement agencies, and regulatoryagencies.

Safe Harbor

Liability protection for:

Disclosures pursuant to BSA requirements;and

Failure to provide notice of such disclosuresto any persons identified in the disclosures.

Questions?

Thank you!

Marjorie A. Corwin, Esquire

Gordon Feinblatt LLC

233 East Redwood Street

Baltimore, Maryland 21202

410-576-4041 mcorwin@gfrlaw.com