[Federal Register Volume 77, Number 30 (Tuesday, February 14, 2012)]
[Rules and Regulations]
[Pages 8148-8160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3074]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Parts 1010 and 1029
RIN 1506-AB02
Anti-Money Laundering Program and Suspicious Activity Report
Filing Requirements for Residential Mortgage Lenders and Originators
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Final rule.
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SUMMARY: FinCEN, a bureau of the Department of the Treasury
(``Treasury''), is issuing this Final Rule defining non-bank
residential mortgage lenders and originators as loan or finance
companies for the purpose of requiring them to establish anti-money
laundering programs and report suspicious activities under the Bank
Secrecy Act.
DATES: Effective Date: This rule is effective April 16, 2012.
Compliance Date: The compliance date for 31 CFR 1029.210 is August
13, 2012.
FOR FURTHER INFORMATION CONTACT: FinCEN, Regulatory Policy and Programs
Division at (800) 949-2732 and select Option 1.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
The Bank Secrecy Act (``BSA'') \1\ authorizes the Secretary of the
Treasury (the ``Secretary'') to issue regulations requiring financial
institutions to keep records and file reports that the Secretary
determines ``have a high degree of usefulness in criminal, tax, or
regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, including analysis, to
protect against international terrorism.'' \2\ In addition, the
Secretary is authorized to impose anti-money laundering (``AML'')
program requirements on financial institutions.\3\ The authority of the
Secretary to administer the BSA has been delegated to the Director of
FinCEN.\4\
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\1\ ``Bank Secrecy Act'' is the name that has come to be applied
to the Currency and Foreign Transactions Reporting Act (Titles I and
II of Pub. L. 91-508), its amendments, and the other statutes
referring to the subject matter of that Act. These statutes are
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C.
5311-5314 and 5316-5332, and notes thereto.
\2\ 31 U.S.C. 5311.
\3\ 31 U.S.C. 5318(h).
\4\ See Treasury Order 180-01 (Sept. 26, 2002).
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Financial institutions are required to establish AML programs that
include, at a minimum: (1) The development of internal policies,
procedures, and controls; (2) the designation of a compliance officer;
(3) an ongoing employee training program; and (4) an independent audit
function to test programs. When prescribing minimum standards for AML
programs, FinCEN must ``consider the extent to which the requirements
imposed under [the AML program requirement] are commensurate with the
size, location, and activities of the financial institutions to which
such regulations apply.'' \5\ The BSA also requires financial
institutions to file suspicious activity reports (``SARs'').\6\
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\5\ Public Law 107-56 352(c), 115 Stat. Sec. 322, codified at
31 U.S.C. 5318 note. Public Law 107-56 is the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (``USA PATRIOT Act'').
\6\ 31 U.S.C. 5318(g). Section 5318(g) gives the Secretary
authority to require financial institutions to file SARs. This
section was added to the BSA by section 1517 of the Annunzio-Wylie
Anti-Money Laundering Act, Title XV of the Housing and Community
Development Act of 1992, Public Law 102-550; it was expanded by
section 403 of the Money Laundering Suppression Act of 1994, Title
IV of the Riegle Community Development and Regulatory Improvement
Act of 1994, Public Law 103-325, to require designation of a single
government recipient for reports of suspicious transactions.
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The BSA defines the term ``financial institution'' to include, in
part, a loan or finance company.\7\ The term ``loan or finance
company'' is not defined in any FinCEN regulation, and there is no
legislative history on the term. The term, however, can reasonably be
construed to extend to any business entity that makes loans to or
finances purchases on behalf of consumers and businesses. Some loan and
finance companies extend personal loans and loans secured by real
estate mortgages and deeds of trust, including home equity loans. Non-
bank residential mortgage lenders and originators (``RMLOs''--generally
known as ``mortgage companies'' and ``mortgage brokers'' in the
residential mortgage business sector) are a significant subset of the
``loan or finance company'' category, in terms of the number of
businesses and the aggregate volume
[[Page 8149]]
and value of transactions they facilitate.\8\
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\7\ 31 U.S.C. 5312(a)(2)(P).
\8\ Loan and finance companies also supply short- and
intermediate-term credit for such purposes as the purchase of
equipment, accounts receivable portfolios and motor vehicles, and
the financing of inventories. In addition, specialized wholesale
loan and finance companies provide liquidity that allows retail loan
and finance companies, as well as banks and others, to service end
users.
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In 2002, FinCEN issued a regulation that temporarily exempted loan
and finance companies and other categories of BSA-defined financial
institutions from the obligation to establish AML programs.\9\ The
purpose of the exemption was to enable Treasury and FinCEN to study
these categories of institutions and to consider the extent to which
BSA requirements should be applied to them, taking into account their
specific characteristics and money laundering vulnerabilities.\10\ As a
result, RMLOs did not have to comply with AML or SAR regulations or
other BSA reporting and recordkeeping requirements intended to help
prevent money laundering and fraud, and support law enforcement
efforts. Subsequently, FinCEN analyses and law enforcement
investigations identified this exemption as a regulatory gap that can
be exploited by criminals, particularly in the conduct of mortgage
fraud.
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\9\ 31 CFR 1010.205 (2011).
\10\ See 67 FR 21113 (Apr. 29, 2002), as amended at 67 FR 67549
(Nov. 6, 2002), corrected at 67 FR 68935 (Nov. 14, 2002), recodified
at 75 FR 65806 (Oct. 26, 2010).
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On July 21, 2009, FinCEN issued an Advance Notice of Proposed
Rulemaking (``ANPRM'') \11\ soliciting general comments on whether
FinCEN should issue AML and SAR program regulations for RMLOs. Most of
the comments received in response to the ANPRM generally supported AML
and SAR regulations for RMLOs. On December 9, 2010, FinCEN issued a
Notice of Proposed Rulemaking (``NPRM'') \12\ to solicit comments on
specific proposed regulations for RMLOs. The NPRM proposed AML and SAR
regulations with standards and requirements that are substantially
identical to those in AML and SAR regulations for banks and other
financial institutions that offer retail consumer banking services and
originate mortgage loans.
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\11\ 74 FR 35830 (July 21, 2009). ``Anti-Money Laundering
Program and Suspicious Activity Report Requirements for Non-Bank
Residential Mortgage Lenders and Originators.'' http://edocket.access.gpo.gov/2009/pdf/E-9-17117.pdf.
\12\ 75 FR 76677 (Dec. 9, 2010). ``Anti-Money Laundering Program
and Suspicious Activity Report Filing Requirements for Residential
Mortgage Lenders and Originators.'' http://edocket.access.gpo.gov/2010/pdf/2010-30765.pdf.
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Both the ANPRM and the NPRM suggested that the AML program and SAR
filing regulations for RMLOs would be issued as the first step in an
incremental approach to implementation of regulations for the broad
loan or finance company category of financial institutions. Thus, the
definition of ``loan or finance company'' would initially include only
RMLOs, but would be structured to permit the addition of other types of
loan and finance related businesses and professions in future
amendments.
Since 2006, FinCEN has issued numerous studies analyzing SARs
reporting suspected mortgage fraud and money laundering that involved
both banks and RMLOs, the latter typically brokering or selling
purchase money and refinance loans to lending institutions.\13\ The
reports underscore the potential benefits of AML and SAR regulations
for a variety of businesses in the primary and secondary residential
mortgage markets, including RMLOs. As noted in the NPRM and emphasized
in several related public comments, RMLOs are primary providers of
mortgage finance--in most cases dealing directly with the consumer--and
are in a unique position to assess and identify money laundering risks
and fraud while directly assisting consumers with their financial needs
and protecting the sector from the abuses of financial crime. Comments
on the ANPRM and NPRM emphasized that the risks of fraud and other
financial crimes, including money laundering, are substantial in the
RMLO sector and are growing. Some comments stated that the financial
crime risks in the sector are ``no less significant'' than those faced
by banks providing mortgage loan services.\14\
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\13\ See Mortgage Loan Fraud Update (SARs Jan. 1-Mar. 31, 2011),
June 2011, http://www.fincen.gov/news_room/rp/files/MLF_Update_1st_Qtyl_11_FINAL_508.pdf; Mortgage Loan Fraud Update (SARs Jan.
1-Dec. 31, 2010), Mar. 2011, http://www.fincen.gov/news_room/rp/files/MLF_Update_4th_Qtly_10_FINAL_508.pdf; Mortgage Loan
Fraud Update (SARs July 1-Sept. 30, 2010), Jan. 2011, http://www.fincen.gov/news_room/rp/files/MLF_Update_3rd_Qtly_10_FINAL.pdf; Mortgage Loan Fraud Update (SARs Apr. 1-June 30, 2010),
Dec. 2010, http://www.fincen.gov/news_room/rp/files/MLF_Update_2nd_Qtly_10_FINAL.pdf; Mortgage Loan Fraud Update: SAR Filings
Jan. 1-Mar. 31, 2010, http://www.fincen.gov/news_room/rp/files/MLF_Update_1st_Qtly_10_FINAL.pdf. See also NPRM, notes 13, 20
and 21.
\14\ See NPRM, 75 FR at 76679. One government agency comment on
the NPRM stated that the ``regulatory gap in coverage has hampered
efforts to be proactive in detecting and investigating mortgage
fraud at non-banks (i.e., unsupervised lenders and originators
[RMLOs under this Final Rule]) * * *.'' The commenter further noted
that in 2010, unsupervised lenders and originators comprised fully
two-thirds (67 percent) of FHA's approved originating lenders. The
commenter also stated that ``[o]ne vital weapon in the war on
mortgage fraud has been FinCEN's regulations that require banks to
establish AML programs and to file SARs.''
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Most of the comments on the NPRM generally supported the issuance
of AML program and SAR filing regulations for RMLOs. The Final Rule is
based on the NPRM and adopts all of the regulatory provisions proposed
with a few exceptions, noted below. The AML regulation promulgates the
four minimum requirements noted earlier. The SAR regulation requires
reporting of suspicious activity, including but not limited to
fraudulent attempts to obtain a mortgage or launder money by use of the
proceeds of other crimes to purchase residential real estate. The Final
Rule does not require RMLOs to comply with any other BSA reporting or
recordkeeping regulations, such as currency transaction reports
(CTRs).\15\ The few large currency transactions expected to be
conducted in the sector will continue to be subject to reporting on
FinCEN Form 8300.\16\
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\15\ 31 CFR 1010.310.
\16\ 31 CFR 1010.330.
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FinCEN believes that much of the effort necessary to meet these
regulatory obligations, including information gathering, will be
accomplished through business operations already undertaken as part of
normal transaction negotiation, completion of required Federal forms
and disclosures, and due diligence and review of property and
collateral. With this Final Rule, FinCEN believes RMLOs will assume a
crucial role in government and industry efforts to protect consumers,
mortgage finance businesses, and the U.S. financial system from
mortgage fraud, money laundering, and other financial crimes.
II. Notice of Proposed Rulemaking
The comment period on the NPRM ended on February 7, 2011. FinCEN
received 15 comment letters from individuals, businesses, and
representatives of various groups whose members had an interest in the
proposed AML and SAR program requirements. The comments offered a range
of views on the appropriate scope of any new regulations, and on
various implementation- and compliance-related matters of concern to
industry, regulators and law enforcement.
A. Incremental Implementation of Rules
The NPRM proposed specific AML program and SAR filing requirements
for RMLOs as the first step in an incremental approach to
implementation of regulations for loan and finance companies. In order
to limit the scope of the Final Rule to RMLOs, the NPRM proposed a
definition of the
[[Page 8150]]
term ``loan or finance company'' that includes business entities or
sole proprietorships (not individuals) acting within the bounds of
specified definitions for the terms residential mortgage lender and
residential mortgage originator.
Seven comments on the NPRM addressed aspects of the incremental
approach FinCEN has chosen, mostly supportive. Many commenters also
urged that the Final Rule cover other types of businesses and
professions in the primary and secondary residential real estate
markets, as well as other types of consumer and commercial loan and
finance companies, not just residential mortgage lenders and
originators.
Two commenters argued that FinCEN should not delay implementation
of BSA requirements for other loan or finance companies. One argued
that an uneven playing field would be to the advantage of fraudsters
and criminals, who will take advantage of financial industry sectors
that have less stringent BSA requirements. The other commenter argued
that such an incremental approach misses the opportunity to provide law
enforcement with critical information about high-risk real estate
transactions and needlessly continues the exemption of U.S. real estate
and escrow agents. A number of comments suggested that FinCEN issue
final rules for commercial lenders, as well as RMLOs, in connection
with this rulemaking.
Comments of this nature were anticipated from industry as well as
regulators and law enforcement, due to heightened concern about
criminals potentially shifting the focus of their fraud and other
illegal financial transactions and money laundering to uncovered
businesses and professions. Arguably, the absence of rules for other
types of loan or finance companies might be exploited by criminals
insofar as they may shift the focus of their criminal enterprises from
residential real estate to other consumer and commercial finance
businesses. FinCEN reports note that SARs involving commercial real
estate, in particular, have increased in recent periods.\17\
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\17\ See, e.g., Mortgage Loan Fraud Update (SARs Apr. 1-June 30,
2010), Dec. 2010, page 18. http://www.fincen.gov/news_room/rp/files/MLF_Update_2nd_Qtly_10_FINAL.pdf. See also Commercial
Real Estate Financing Fraud (SARs by Depository Institutions, Jan.
1, 2007 to Dec. 31, 2010) Mar. 2011; Advisory: Activities
Potentially Related to Commercial Real Estate Fraud (Mar. 30, 2011);
Remarks of James H. Freis, Jr., Director, FinCEN, delivered at the
Mortgage Bankers Association National Fraud Issues Conference, Mar.
28, 2011, page 4 (the ``Fraud Conference Speech''). http://www.fincen.gov/news_room/speech/pdf/20110328.pdf.
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Some comments urged simultaneous--or very prompt--issuance of AML
and SAR rules for businesses in a separate, but related, category of
BSA-defined financial institution--``persons involved in real estate
closings and settlements.'' \18\ FinCEN regulations in this category
could include persons as varied as real estate agents and real estate
brokers, closing attorneys and agents, title search and title insurance
companies, appraisers, escrow companies, and other firms involved in
initial purchase money transactions as well as subsequent refinancing
in the form of, for example, home equity loans, reverse mortgages, and
real estate-secured consumer loans. Three commenters suggested that
FinCEN should propose rules for real estate agents and other persons
involved in real estate closings and settlements. One commenter
advocated for the Final Rule to include two types of businesses that
logically belong in the ``persons involved * * *'' category--real
estate agents and escrow companies. The comment emphasized the critical
role a few of these companies played in recent high-profile money
laundering cases. One comment specifically opposed such a proposal,
arguing that in nearly all real estate finance transactions in which
real estate agents participate funds are transferred using the services
of different businesses that already are required to comply with AML
and SAR regulations.
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\18\ 31 U.S.C. 5312(a)(2)(U).
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In sum, several comments on the NPRM expressed support for
expanding the scope of the Final Rule to cover businesses and
professions involved in a broad range of consumer and commercial real
estate and non-real estate related finance. Upon consideration of the
comments, FinCEN is not inclined at this time to propose a definition
of ``loan or finance company'' that would encompass other types of
consumer or commercial finance companies, or real estate agents and
other ``persons involved in real estate closings and settlements.''
FinCEN intends to defer regulations for these other businesses and
professions until further research and analysis can be conducted to
enhance our understanding of the operations and money laundering
vulnerabilities of these businesses. Accordingly, as the NPRM
suggested, the definition of ``loan or finance company'' in the Final
Rule has been structured to permit the addition of other types of loan
and finance companies in future rulemakings.
B. Final Rule Limited to AML and SAR Regulations Only
The NPRM suggested that FinCEN would not propose any additional BSA
regulations for the sector at this time, including CTR
requirements.\19\ One commenter addressed this issue specifically,
supporting FinCEN's view that CTR filing requirements are unnecessary
for loan or finance companies. FinCEN agrees, and therefore, the Final
Rule does not adopt any CTR requirements or any other BSA
regulations.\20\
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\19\ See note 15, supra.
\20\ As financial institutions for purposes of 31 U.S.C.
5312(a)(2), loan or finance companies have been, and remain subject
to, the special information procedures to deter money laundering and
terrorist activity. See Subpart E of 31 CFR Part 1010.
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C. Consideration of Examination Authority
FinCEN sought comment on any particular aspects of the loan or
finance company sector that should be considered when making a decision
about whether, to whom, and how to delegate examination authority.
Under 31 CFR 1010.810(a), ``[O]verall authority for enforcement and
compliance, including coordination and direction of procedures and
activities of all other agencies exercising delegated authority under
this chapter, is delegated [by the Secretary of the Treasury] to the
Director, FinCEN.'' In turn, Federal functional regulators have been
delegated authority to examine certain financial institutions they
oversee for compliance with FinCEN's regulations. As noted in the NPRM,
the Internal Revenue Service (``IRS'') has been delegated the
authority, under this regulation,\21\ to examine for compliance with
FinCEN's regulations those financial institutions that are not examined
by a Federal functional regulator.
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\21\ 31 CFR 1010.810(b)(8).
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Commenters suggested options for FinCEN to delegate complete or
partial examination authority over RMLOs for compliance with the Final
Rule. The options noted in the public comments included, in addition to
the IRS, state regulatory agencies, the Consumer Financial Protection
Bureau, and the Federal banking agencies (particularly with respect to
RMLOs affiliated with banks or insured depository institutions and
their holding companies). Upon consideration of all the comments,
FinCEN will work with other relevant regulatory agencies in the
development of consistent compliance examination
[[Page 8151]]
procedures, and in the future will provide public notice of other
agencies that will exercise delegated compliance examination authority
with respect to certain classes of RMLOs and other loan or finance
companies.
D. SAR Filing System and Form
Three commenters suggested that FinCEN establish a separate SAR
filing system and form for the exclusive use of residential mortgage
lenders and originators. Another commenter requested that FinCEN
continue to accommodate manual paper SAR filings, as many covered
entities do not have automated systems.
FinCEN considered requiring RMLOs to use Treasury SAR Form TD F 90-
22.47, presently used by banks and other insured depository
institutions. The information required for a SAR from an RMLO would be
substantially the same as that required of banks and other depository
institutions that make mortgage loans and use Form TD F 90-22.47.
However, FinCEN is modernizing its SAR filing system and intends to
establish a uniform electronic form for use by all financial
institutions with a SAR filing obligation.\22\ Accordingly, the Final
Rule has a delayed compliance date to allow time for industry to
implement programs and systems and for FinCEN to implement the new SAR
filing system. In addition, FinCEN intends to phase out the manual
filing of paper SAR forms.\23\ RMLOs will, therefore, be required to
use FinCEN's electronic, web-based E-Filing system under development
for the filing of the uniform SAR form. This electronic filing system
will not require use of commercial automated systems, but will be
usable by anyone with access to the Internet.\24\
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\22\ 75 FR 63545 (Oct. 15, 2010).
\23\ 76 FR 57799 (Sept. 16, 2011).
\24\ Id., note 4, referencing information on filing methods
posted on FinCEN's Web site, http://bsaefiling.fincen.treas.gov/main.html.
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E. Exclusions and Exemptions Considered
The NPRM suggested exceptions or exclusions for: banks and insured
depository institutions; persons registered with and functionally
regulated or examined by the U. S. Securities and Exchange Commission
or the Commodity Futures Trading Commission; individuals employed by
covered loan or finance companies and affiliated financial
institutions; and individuals who finance the sale of their own
property (i.e., seller-financed sales). The NPRM expressed the long-
held view that exceptions are appropriate for individuals and entities
already subject to AML and SAR regulations to avoid overlapping or
duplicative requirements, and that seller-financed transactions do not
present the same risks as most transactions conducted at arm's-length.
In response to FinCEN's request for comments on the matter of
appropriate exclusions and exceptions, some commenters opposed any
additional exemptions or exceptions beyond those suggested in the NPRM,
while others urged FinCEN to consider one or more additional
exceptions. One commenter stated that the registration and training
requirements mandated by the Secure and Fair Enforcement for Mortgage
Licensing Act of 2008 (``SAFE Act'') \25\ are sufficient to address
anti-money laundering and terrorist financing risks encountered by
RMLOs. Another commenter argued that small businesses with fewer than
five employees should be exempt.
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\25\ See Title V of Division A of the Housing and Economic
Recovery Act of 2008, Pub. L. No. 110-289, 122 Stat. 2810 (2008),
codified at 12 U.S.C. 5101, et. seq.
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FinCEN does not agree that the registration and training
requirements under the SAFE Act are sufficient to address all of the
concerns and accomplish all of the goals related to AML and SAR
programs. However, FinCEN intends to continue its dialogue with the
CSBS to coordinate the identification and examination of mortgage
originators subject to the Final Rule. SARs filed pursuant to FinCEN's
regulations go into a database that is accessible to regulatory
agencies and law enforcement on the Federal, state and local levels.
The information in FinCEN's database, and FinCEN's complementary
analysis, is crucial to the successful investigation and prosecution of
money laundering, fraud, and other financial crimes--a point emphasized
in several comments on the NPRM.
FinCEN does not agree that RMLOs with less than a certain arbitrary
number of employees or net worth should be excepted from the Final
Rule. Such an exception would leave a large gap in coverage of RMLO
businesses. Comments on the NPRM confirm that the absence of SAR rules
for RMLOs has resulted in a substantial gap in mortgage fraud related
SAR reporting. FinCEN believes that a ``small business'' exclusion or
exception for businesses with fewer than five employees, or for
businesses that satisfy some other arbitrary size, net worth or similar
criteria, would perpetuate the present substantial gap in SAR
reporting. The widespread knowledge that all banks and other insured
depository institutions have well-established AML and SAR programs
likely has deterred some criminals and caused them to consider other
options for integrating illicit funds into the financial system. The
inclusion of arbitrary, size-related exceptions from the Final Rule may
result in unintended consequences that undermine the effectiveness of a
comprehensive, risk-based AML and SAR program regime. Such exceptions
could, for example, encourage a shift of a substantial portion of
mortgage transactions to small lenders and brokers, however ``small''
is defined.
A similar comment suggested a de minimis exception for businesses
that lend or broker loans under a relatively low value, or low
aggregate volume of transactions within a set time period. For the
reasons stated above, we see no compelling reason to except any
businesses or transactions based on an arbitrary, de minimis dollar
amount or volume of transactions.
Commenters both supported and opposed the NPRM's proposed coverage
of sole proprietorships. Consistent with the NPRM, the Final Rule
explicitly covers sole proprietorships. For the same reasons that
support the rejection of an exception for small businesses, the Final
Rule does not recognize an exception based on a business's status as a
sole proprietorship or other kind of business entity under Federal or
state incorporation or tax laws. An exception for sole proprietorships
likely would perpetuate, to some degree, the SAR filing gap and risk
adverse impacts on the mortgage markets. Thus, the Final Rule does not
incorporate any such exceptions for businesses based on their form of
organization.
III. Section-by-Section Analysis
A. Definition of Loan or Finance Company
Section 1010.100(lll) defines the key terms used in the Final Rule.
The definitions reflect FinCEN's determination that the term ``loan or
finance company'' should be limited, at this time, to RMLOs, and that
AML program and SAR requirements should be applied first to these
businesses, and later--as part of a phased approach--applied to other
consumer and commercial loan and finance companies. With the exception
of the addition of explicit exclusions for government-sponsored
enterprises and certain government programs and a slight change to the
definition of residential mortgage originator, discussed below, the
Final Rule adopts the definitions as proposed.
[[Page 8152]]
In the NPRM, ``residential mortgage originator'' was defined as a
person who ``takes a residential mortgage loan application and offers
or negotiates terms of a residential mortgage loan for compensation or
gain.'' One commenter suggested that the proposed language ``takes a
residential mortgage loan application'' was ambiguous as to who would
be subject to the requirements. FinCEN intends the Final Rule to be
broad in scope and cover most non-bank residential mortgage
originators, with the few exceptions recognized in the Final Rule and
described in this notice. FinCEN intends the Final Rule to cover any
business that, on behalf of one or more lenders, accepts a completed
mortgage loan application, even if the business does not in any manner
engage in negotiating the terms of a loan. FinCEN also intends the
Final Rules to cover businesses that offer or negotiate specific loan
terms on behalf of either a lender or borrower, regardless of whether
they also accept a mortgage loan application. Accordingly, the Final
Rule modifies the proposed definition of ``residential mortgage
originator'' slightly to include ``persons'' who accept a residential
mortgage loan application or that offer or negotiate terms of a
residential mortgage loan.'' The change made from the NPRM of replacing
the term ``take'' with ``accept'' is intended to differentiate the
Final Rule from the SAFE Act. The change from ``and'' to ``or'' is
intended to ensure that persons who either accept an application or
offer or negotiate the terms of a loan are covered. In addition, FinCEN
intends the Final Rule to apply to residential mortgage originators,
regardless of whether they receive compensation or gain for acting in
that capacity. Accordingly, the phrase ``for compensation or gain'' in
the proposed definition is removed from the definition in the Final
Rule. These changes create greater differences between the definitions
in this Final Rule and those used in the SAFE Act and other federal
mortgage-related statutes. This was done intentionally to differentiate
this Final Rule from those statutes so that the interpretation of this
Final Rule is not based on the interpretation of those statutes. FinCEN
intends the definitions in the Final Rule and subsequent amendments
thereto to be consistent with definitions in the SAFE Act and other
federal mortgage-related statutes, only to the extent deemed
appropriate to advance FinCEN's mission, strategic goals, and policies.
As discussed in the NPRM, the Final Rule does not contemplate coverage
of an individual employed by a loan or finance company or financial
institution, and provides an exception for individuals financing the
sale of their own real estate.\26\ For example, individuals employed by
a loan or finance company that would be not be subject to the rule
include administrative assistants and office clerks who gather
documents, review land records and complete forms on behalf of a lender
or originator.
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\26\ The Final Rule applies to businesses, including sole
proprietorships, not individuals. Some individuals covered by the
SAFE Act definition of ``loan originator,'' 12 U.S.C.
5102(3)(A)(ii), would not be covered by the Final Rule.
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One commenter inquired whether the Final Rule (or any aspects
thereof) would apply to the housing government sponsored enterprises
(``GSEs'') and their employees involved in ``loss mitigation''
activities. FinCEN would like to clarify that no provision of the Final
Rule applies to the housing GSEs or any of their employees, regardless
of whether they are involved in loss mitigation or any other housing
GSE activity or program. FinCEN has revised the proposed definition of
``loan or finance company'' to exclude ``any government sponsored
enterprise regulated by the Federal Housing Finance Agency.'' Where
fraud is suspected by a housing GSE, there is an established procedure,
currently set forth in a Memorandum of Understanding between FinCEN and
the Federal Housing Finance Agency (``FHFA'') for the GSE to report to
the FHFA, which then reports the suspicious activity to FinCEN.\27\
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\27\ In a recently issued NPRM, FinCEN proposed AML and SAR
regulations for the housing GSEs that would, in part, replace the
existing reporting arrangement with a more direct and efficient
reporting procedure. See 76 FR 69204 (Nov. 8, 2011). http://www.gpo.gov/fdsys/pkg/FR-2011-11-08/pdf/2011-28820.pdf.
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The Final Rule generally is intended to cover initial purchase
money loans and traditional refinancing transactions facilitated by
RMLOs. Another commenter asked FinCEN to clarify whether the Final Rule
would apply to transactions involving funds or programs under the
Troubled Asset Relief Program and similar Federal programs,\28\ or any
similar state housing authority or housing assistance program. These
programs are intended to prevent loan default and foreclosure. Most of
these programs apply to existing loans in default or at risk of
default. While these programs are administered by government agencies
that have developed standards, procedures, and qualifications to
prevent fraud and abuse, the programs nonetheless are vulnerable to
fraud and money laundering--a risk acknowledged by the commenter.
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\28\ Other Federal programs noted by the commenter include the
Making Home Affordable Program, the Home Affordable Modification
Program, the Hardest Hit Funds Program and the Federal Housing
Administration Refinance Program.
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Since 2009 FinCEN has warned financial institutions and consumers
about the fraud and money laundering risks associated with foreclosure
prevention and loan modification programs,\29\ and FinCEN agrees with
the commenter's assessment of the risks associated with the programs
identified in the comment. Accordingly, FinCEN expects that RMLOs
participating in such programs to comply with the Final Rule to the
extent any transactions conducted by the RMLO could reasonably be
considered to be extending a residential mortgage loan or offering or
negotiating the terms of a residential mortgage loan, within the
meaning of the definitions of ``residential mortgage lender'' and
``residential mortgage originator'' in the Final Rule. The Final Rules,
however, do not apply to the Federal or state housing authorities and
agencies administering such programs. The proposed definition of ``loan
or finance company'' has been revised to exclude ``any Federal or state
agency or authority administering mortgage or housing assistance, fraud
prevention or foreclosure prevention programs.''
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\29\ See FIN-2010-A005--Advisory to Financial Institutions on
Filing Suspicious Activity Reports Regarding Home Equity Conversion
Mortgage Fraud Schemes (Apr. 27, 2011), http://www.fincen.gov/statutes_regs/guidance/html/fin-2010-a005.html; FIN-2009-A001--
Guidance to Financial Institutions on Filing Suspicious Activity
Reports regarding Loan Modification/Foreclosure Rescue Scams (Apr.
6, 2009), http://www.fincen.gov/statutes_regs/guidance/html/fin-2009-a001.html.
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The commenter also requested clarification whether the Final Rule
would apply to foreclosure prevention actions and counseling services
performed by legitimate, non-profit organizations--some of which may
receive minimal compensation to assist in the preparation of a mortgage
application, or provide short-term loans to facilitate foreclosure
prevention actions. Consistent with our views regarding RMLOs that
participate in Federal and state foreclosure prevention programs,
FinCEN also expects non-profit housing organizations to comply with the
Final Rule, to the extent any such organization may reasonably be
deemed to be extending a residential mortgage loan (including a short-
term mortgage loan), or offering or negotiating the terms of a
residential mortgage loan. However, FinCEN would not expect legitimate,
non-profit organizations that limit their activities
[[Page 8153]]
to assisting with the preparation of loan applications or referral of
prospective borrowers to qualified lenders, for free or for a fee; that
provide short-term, non-mortgage loans to qualified borrowers or
homeowners; or that otherwise facilitate the extension of a residential
mortgage loan (but do not make the loan or offer or negotiate the terms
of the loan), to fall within the scope of the Final Rule.
One commenter requested that FinCEN exclude mortgage servicers from
the definition of residential mortgage loan originator. FinCEN
generally views loan servicers as businesses that support post-
origination principal and interest collection and taxation, and not as
a business or activity that ``offers or negotiates'' the terms of a
mortgage loan. FinCEN agrees that the typical activities of mortgage
servicing companies do not fall within the definition of residential
mortgage originator in this Final Rule. We will not, however, make a
blanket exclusion or exception for mortgage servicers. The definition
is based on the activity in which an entity is engaged. Thus, as long
as a mortgage servicer does not extend residential mortgage loans or
offer or negotiate the terms of a residential mortgage loan
application, it will not fall under of the definition of residential
mortgage loan originator. The commenter also requested that FinCEN
exclude servicers working with loan modification programs, such as the
Home Affordable Modification Program, or ``HAMP,'' from the definition
of residential mortgage loan originator. FinCEN agrees that loan
modifications under such programs are not covered by this Final Rule to
the extent that the modifications do not involve extending new
residential mortgage loans or offering or negotiating the terms of a
residential mortgage loan application.
B. Anti-Money Laundering Program
Section 1029.210 requires that each loan or finance company develop
and implement an anti-money laundering program reasonably designed to
prevent the loan or finance company from being used to facilitate money
laundering or the financing of terrorist activities. Two commenters
argued that RMLOs should not be required to maintain AML programs, but
only be required to file SARs. One commenter, a mortgage company,
argued that mortgage fraud was the primary issue and not money
laundering, so an AML program is unnecessary. The other commenter, a
trade association, argued that SAR filings are the primary means of
conveying valuable information to law enforcement, as contemplated
under the BSA, and that requiring a full AML program imposes
unnecessary complexity, paperwork, and regulatory burdens that outweigh
the potential benefits to law enforcement. The commenter argued simply
that maintaining an AML program would create an unnecessary regulatory
burden, and the costs would far outweigh the benefits to law
enforcement.
FinCEN believes that a complete AML program is essential to an
adequate, efficient SAR filing program. FinCEN refers to the ``four
pillars'' of an AML program for a reason, as each one is critical to
holding up the overall structure of the program. Without one, the
others will fail.\30\ It would be difficult to expect useful SAR
reporting without the pillars of an AML program firmly in place.
Moreover, it is in the best interest of everyone involved in a mortgage
finance transaction to try to prevent the fraud before it occurs.
Prevention is a core purpose behind FinCEN's regulatory requirements
for AML programs.
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\30\ See the Fraud Conference Speech, fn. 17.
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FinCEN's regulations are structured to ensure that financial
institutions are knowledgeable of risks and vigilant against criminal
abuse. With all BSA AML regulations, businesses are required to
implement risk-based programs that take into account the unique risks
associated with that particular business' products and services, as
well as the business' size, market, and other issues. Thus, each AML
program would necessarily be different than those of businesses with
different product, geographic, and other risks. FinCEN reports and
other research underscore that mortgage fraud is one of the most
significant operational risks facing RMLOs in the ordinary course of
business.
Under a risk-based approach to implementation of the Final Rule,
FinCEN expects fraud prevention, as well as money laundering
prevention, to be key goals underlying the various policies and
procedures in an effective AML program for an RMLO. Therefore, the
proposed AML regulation is adopted in this Final Rule without change.
C. Reports of Suspicious Transactions
Section 1029.320 contains the rules setting forth the obligation of
loan or finance companies to report suspicious transactions that are
conducted or attempted by, at, or through a loan or finance company and
involve or aggregate at least $5,000 in funds or other assets. It is
important to recognize that transactions are reportable under this
Final Rule and 31 U.S.C. 5318(g) regardless of whether they involve
currency. The $5,000 minimum amount is consistent with existing SAR
filing requirements for other financial institutions regulated by
FinCEN.
Section 1029.320(a)(2) specifically describes the four categories
of transactions that require reporting. A loan or finance company is
required to report a transaction if it knows, suspects, or has reason
to suspect that the transaction (or a pattern of transactions of which
the transaction is a part): (i) Involves funds derived from illegal
activity or is intended or conducted to hide or disguise funds or
assets derived from illegal activity; (ii) is designed, whether through
structuring or other means, to evade the requirements of the BSA; (iii)
has no business or apparent lawful purpose, and the loan or finance
company knows of no reasonable explanation for the transaction after
examining the available facts; or (iv) involves the use of the loan or
finance company to facilitate criminal activity.\31\
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\31\ The fourth reporting category has been added to the
suspicious activity reporting rules promulgated since the passage of
the USA PATRIOT Act to make it clear that the requirement to report
suspicious activity encompasses the reporting of transactions
involving fraud and those in which legally derived funds are used
for criminal activity, such as the financing of terrorism.
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Several comments requested guidance with regard to when a SAR would
be required to be filed. A determination as to whether a SAR is
required must be based on all the facts and circumstances relating to
the transaction and customer of the loan or finance company in
question. Different fact patterns will require different judgments.
Some examples of red flags are referenced in previous FinCEN reports on
mortgage fraud and money laundering in the residential and commercial
real estate sectors.\32\ However, the means of commerce and the
techniques of money laundering and mortgage fraud are continually
evolving, and there is no way to provide an exhaustive list of
suspicious transactions. FinCEN will continue to pursue a regulatory
approach that involves a combination of appropriate regulations,
written guidance, support of industry training programs, and
maintenance of a government-industry information exchange so that any
new AML program and SAR reporting regulations can be implemented in as
flexible and cost efficient way as possible, while protecting the
sector and the financial
[[Page 8154]]
system as a whole from fraud, money laundering, and other financial
crimes.
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\32\ See note 17, supra. See also NPRM, notes 13 and 20.
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Section 1029.320(b) sets forth the filing procedures to be followed
by loan or finance companies making reports of suspicious transactions.
Within 30 days after a loan or finance company becomes aware of a
suspicious transaction, the business must report the transaction by
completing a SAR and filing it with FinCEN. Two commenters addressed
FinCEN's SAR reporting system. The first commenter suggested that there
should be one centralized place for reporting to allow streamlined
interaction with regulators. That is, in fact, the case, as all SARs
are filed with FinCEN and made available to the appropriate agencies.
The second commenter argued that a specific system for residential
mortgage lenders needs to be developed that is separate from the
current system for other financial industries. While FinCEN's new
uniform filing system, discussed in II.D. above, will require the use
of one form by all businesses subject to FinCEN SAR regulations, the
uniform form has been designed to be used by a range of filer types,
with required data fields for each type of filer reflecting the kinds
of activities reported by those specific filer types, including RMLOs.
Section 1029.320(d)(1) reinforces the statutory prohibition against
the disclosure by a financial institution of a SAR (regardless of
whether the report is required by the Final Rule or is filed
voluntarily). Thus, the section requires that a SAR and information
that would reveal the existence of that SAR be kept confidential and
not be disclosed except as authorized within the rules of construction.
The Final Rule includes rules of construction that identify actions an
institution may take that are not precluded by the confidentiality
provision. These actions include the disclosure of SAR information to
FinCEN, or Federal, state, or local law enforcement agencies, or a
Federal regulatory authority that examines the loan or finance company
for compliance with the BSA, or a state regulatory authority
administering a State law that requires the loan or finance company to
comply with the BSA or otherwise authorizes the State authority to
ensure that the loan or finance company complies with the BSA.\33\ This
confidentiality provision also does not prohibit the disclosure of the
underlying facts, transactions, and documents upon which a SAR is based
(provided the existence of the SAR is not disclosed), or the sharing of
SAR information within the loan or finance company's corporate
organizational structure for purposes consistent with Title II of the
BSA as determined by FinCEN in regulation or in guidance.\34\
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\33\ See NPRM, 75 FR at 76683. The language in the rules of
construction pertaining to State regulators has been revised in the
Final Rule to reflect the terms adopted in FinCEN's SAR
confidentiality rulemaking, finalized in December 2010. See 75 FR
75593, 75596-97 (December 3, 2010).
\34\ On January 20, 2006, FinCEN issued guidance for the
banking, securities, and futures industries authorizing the sharing
of SAR information with parent companies, head offices, or
controlling companies. http://www.fincen.gov/statutes_regs/guidance/pdf/sarsharingguidance01202006.pdf. To date, no such
guidance has been issued for the loan or finance industry.
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Section 1029.320(d)(2) incorporates the statutory prohibition
against disclosure of a SAR or the fact that a SAR has been filed,
other than in fulfillment of official duties consistent with the BSA,
by government users of SAR data. The section also clarifies that
official duties do not include the disclosure of SAR information in
response to a request for non-public information \35\ or for use in a
private legal proceeding, including a request under 31 CFR 1.11.\36\
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\35\ For purposes of this rulemaking, ``non-public information''
refers to information that is exempt from disclosure under the
Freedom of Information Act.
\36\ 31 CFR 1.11 is the Department of the Treasury's information
disclosure regulation. Generally, these regulations are known as
``Touhy regulations,'' after the Supreme Court's decision in United
States ex rel. Touhy v. Ragen, 340 U.S. 462 (1951). In that case,
the Supreme Court held that an agency employee could not be held in
contempt for refusing to disclose agency records or information when
following the instructions of his or her supervisor regarding the
disclosure. An agency's Touhy regulations are the instructions
agency employees must follow when those employees receive requests
or demands to testify or otherwise disclose agency records or
information.
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Section 1029.320(e) provides protection from liability for making
reports of suspicious transactions, and for failures to disclose the
fact of such reporting, to the full extent provided by 31 U.S.C.
5318(g)(3). Two commenters requested the same protection from liability
for RMLOs as that which exists for other financial institutions. This
Final Rule, in section 1029.320(e), provides exactly the same ``safe
harbor'' for RMLOs as is provided for other financial institutions. The
provisions in the NPRM are adopted without change.
Section 1029.320(f) notes that compliance with the obligation to
report suspicious transactions will be examined by FinCEN or its
delegates, and provides that failure to comply with the Final Rule may
constitute a violation of the BSA and the BSA regulations. One comment
requested that FinCEN clearly define the consequences of failing to
file a SAR. Section 1029.320(f) is intended to cover violations of SAR
filing requirements, and FinCEN is authorized to impose a range of
civil and criminal penalties, the severity of which depends on the
specific circumstances.\37\
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\37\ See 31 U.S.C. 5321 and 5322, and 31 CFR 1010.820 and
1010.840.
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Section 1029.320(g) provides that the new SAR requirement applies
to transactions occurring after an AML program is required, which is
[six months from the Final Rule's publication date]. As noted above,
the delayed compliance date for SAR filings is also intended to allow
time for implementation of the new SAR filing system.
D. Special Information Procedures To Deter Money Laundering and
Terrorist Activity
Section 1029.500 states generally that loan or finance companies
are subject to the special information procedures to detect money
laundering and terrorist activity requirements set forth and cross
referenced in sections 1029.520 (cross-referencing to 31 CFR 1010.520)
and 1029.540 (cross-referencing to 31 CFR 1010.540). Sections 1010.520
and 101.540 implement sections 314(a) and 314(b) of the USA PATRIOT
Act, respectively, and generally apply to any financial institution
listed in 31 U.S.C. 5312(a)(2) and any such financial institution that
is subject to an AML program requirement, respectively. Because loan or
finance companies are specifically enumerated in section 5312(a)(2),
and upon the effective date will be subject to the AML program
requirement, they will be subject to the section 314 rules on that
date. For the sake of clarity, the Final Rule adds subpart E to part
1029 to confirm that both of the section 314 rules will apply to loan
or finance companies on that date.
IV. Regulatory Flexibility Act
When an agency issues a rulemaking, the Regulatory Flexibility Act
(``RFA'') requires the agency to ``prepare and make available for
public comment a regulatory flexibility analysis'' which will
``describe the impact of the rule on small entities'' (5 U.S.C.
603(a)). Section 605 of the RFA allows an agency to certify a rule, in
lieu of preparing an analysis, if the rulemaking is not expected to
have a significant economic impact on a substantial number of small
entities.
Estimate of the number of small entities to which the Final Rule
will apply:
For the purpose of arriving at an estimated number of RMLOs, FinCEN
relied on information gathered from
[[Page 8155]]
various public sources, including major trade associations and Federal
and state government regulators. Estimates based on this data suggest
that as of 2010 there were approximately 31,000 qualifying entities in
the United States, down from approximately 42,000 in 2009. FinCEN also
referred to information gathered from the North American Industry
Classification System codes, which lists loan or finance companies as
codes 522292 (Real Estate Credit) and 522310 (Mortgage and Nonmortgage
Loan Brokers).\38\ The U.S. Census Bureau estimated there were about
36,275 entities in these classifications in 2002. However, these
classifications include services that are broader than those provided
by loan or finance companies, so the number of loan or finance
companies to which this Final Rule is applicable is significantly less.
Within this classification, those entities that have less than seven
million dollars in annual gross revenue are considered small. FinCEN
estimates that 95% of the affected industry is considered a small
business, and that the Final Rule will affect most RMLO compliance
programs in a limited manner.
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\38\ See NPRM, note 23.
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Description of the reporting and recordkeeping requirements of the
Final Rule:
The Final Rule requires loan or finance companies to maintain AML
programs and file reports on suspicious transactions. By requiring
this, FinCEN is addressing vulnerabilities in the U.S. financial system
and is leveling the playing field between bank and non-bank lenders.
FinCEN does not foresee a significant impact on the regulated industry
from these requirements. Loan or finance companies, as a usual and
customary part of their business for each transaction, conduct a
significant amount of due diligence on both the property securing the
loan and the borrower. This process of due diligence involves the types
of inquiry and collecting the types of information that would be
expected in any program to prevent money laundering and fraud and to
detect and report suspicious transactions.\39\
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\39\ See, e.g., Form 1003 Uniform Residential Mortgage
Application, available at https://www.efanniemae.com/sf/formsdocs/forms/pdf/sellingtrans/1003.pdf or http://www.freddiemac.com/uniform/doc/form_65_urla_7_05.doc.
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AML Program Requirement in General
The Final Rule does not impose significant burden on loan or
finance companies. These companies may build on their existing risk
management procedures and prudential business practices to ensure
compliance with this Final Rule. FinCEN and other agencies have issued
substantial guidance on the development of AML programs and SAR
reporting requirements.\40\ Most loan or finance companies subject to
the Final Rule likely will not need to obtain more sophisticated legal
or accounting advice than that already required to run their
businesses. Residential mortgage lenders and originators undertake due
diligence of borrowers and collateral to assess the credit risk
associated with a particular loan. The information gathered by these
businesses generally is the same as, or very similar to, the
information that is expected in any programs to prevent money
laundering and detect and report suspicious transactions.
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\40\ See, e.g., Guidance--Preparing a Complete and Sufficient
Suspicious Activity Report Narrative (including related PowerPoint
Presentation--Keys to Writing a Complete and Sufficient SAR
Narrative), Nov. 2003, http://www.fincen.gov/statutes_regs/guidance/html/narrativeguidance_webintro.html; Guidance--
Suggestions for Addressing Common Errors Noted in Suspicious
Activity Reporting, Oct. 10, 2007, http://www.fincen.gov/statutes_regs/guidance/html/SAR_Common_Errors_Web_Posting.html;
Guidance--Suspicious Activity Report Supporting Documentation, June
13, 2007 (FIN-2007-G003), http://www.fincen.gov/statutes_regs/guidance/html/Supporting_Documentation_Guidance.html; The SAR
Activity Review--Trends, Tips and Issues (Issue 16), Oct. 2009,
Section 4, Law Enforcement Suggestions When Preparing Suspicious
Activity Reports, p. 45, http://www.fincen.gov/statutes_regs/guidance/html/narrativeguidance_webintro.html. See also NPRM, note
45.
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In the NPRM, FinCEN sought comment on the extent to which AML
programs or SAR reporting requirements would require affected
businesses to conduct a degree of due diligence, or collect an amount
of information, beyond that presently conducted to assess credit
worthiness and minimize losses due to fraud. Of the three responses on
this issue, two (one from a mortgage company and one from a trade
association representing mortgage related businesses) argued that AML
program and SAR reporting requirements could be integrated into
existing compliance and anti-fraud infrastructure without considerable
difficulty. One commenter suggested that such integration could be done
efficiently and effectively if accompanied by guidance, training, and
feedback from FinCEN. Only one commenter questioned FinCEN's
assumptions regarding integration of the proposed rules into existing
procedures and systems of affected businesses. The commenter stated
that FinCEN had not offered evidence that AML programs could be
efficiently and cost-effectively integrated into businesses' existing
anti-fraud programs, and that businesses would need to establish new,
separate programs to satisfy FinCEN's AML program requirements. Based
on the comments that responded positively to FinCEN's assumptions and
analysis regarding this issue, and FinCEN's experience over two decades
with other businesses that have been required to adopt AML programs--
including businesses which all have the same or more extensive
requirements than are required by this Final Rule and have gone through
this same process of building on existing compliance policies and
procedures--FinCEN believes that loan and finance companies will be
able to build on their existing compliance policies and procedures and
prudential business practices to ensure compliance with this Final Rule
with relatively minimal cost and effort. As FinCEN has done with the
other industries subject to the requirements of the BSA, FinCEN will
actively engage with loan and finance companies, provide guidance and
feedback, and endeavor to make compliance with the regulations as cost
effective and efficient as possible for all affected businesses.
A few commenters opposed the NPRM, arguing that the regulations
would be too burdensome and costly, particularly for small businesses.
One commenter stated that the burden falls on the owner of a small
business to be the compliance officer and do training, which takes away
from time developing business. The costs and burdens of developing risk
management and AML compliance procedures, complying with a range of
consumer protection regulations, and generally establishing safe and
sound business practices, however, generally are borne by businesses of
all sizes, and the exceptions available to small businesses with
respect to some specific requirements may minimize--but not entirely
eliminate--general compliance costs and burdens. FinCEN believes that
the minimal, incremental increase in compliance costs and burdens that
may potentially be borne by affected businesses in complying with the
Final Rule will not disproportionately burden small businesses; thus,
the Final Rule does not establish any blanket exception for any
businesses, regardless of size or other criteria or characteristics.
One commenter suggested that loan and finance companies should have
AML programs commensurate with their risk profile, as is the case with
banks subject to AML and SAR regulations. FinCEN believes that the
flexibility incorporated into the Final Rule permits each loan and
finance company to tailor its AML program to
[[Page 8156]]
fit its own size, needs, and operational risks. In this regard, FinCEN
believes that expenditures associated with establishing and
implementing an AML program will be commensurate with the size and risk
profile of a loan or finance company. Based on inherent risks, some
businesses may deem it appropriate to implement more comprehensive
policies, procedures, and internal controls than others. FinCEN does
not intend for each RMLO to have identical policies and procedures for
their AML programs. This flexibility to tailor programs to the risk
profile of the loan or finance company is exactly what one trade
association commenter noted. As with other financial institutions
subject to the requirements of the BSA, if a loan or finance company is
small or does not engage in high-risk transactions the burden to comply
with the Final Rule likely will be negligible. One commenter disagreed
with the estimated burden hours listed in the NPRM, for both AML
program and SAR filing requirements, but did not provide any specific
estimates or data for FinCEN to consider in the alternative. The
estimated hours for the establishment of a new AML program and SAR
filing requirements are based on FinCEN's experience with other
industries newly required to comply with the same or more extensive BSA
obligations, and these estimates are the same as those used in other
such rulemakings for businesses that, as yet, have had no AML program
or SAR filing requirement.
FinCEN understands that commenters are concerned about the
potential impact that compliance regulations--BSA-related or
otherwise--may have on small firms and solo practitioners. Nonetheless,
the Final Rule requires the establishment of a complete AML program. An
AML program is essential to an effective SAR reporting program. The AML
regulations are risk-based, as are all FinCEN AML regulations.
Accordingly, company management has broad discretion to design and
implement programs that reflect and respond to the company's unique
fraud and money laundering risks. Small businesses will not be expected
to invest in elaborate or expensive systems to comply with the Final
Rule, nor will they be required to hire consulting firms or outside
professionals to assess risks. FinCEN estimates that the impact of the
AML program requirement and the assessment of risks associated with it
will not be significant for covered loan and finance companies.
Suspicious Activity Reporting
The Final Rule requires loan or finance companies to report on
transactions of $5,000 or more that they determine to be suspicious.
Loan or finance companies have not previously been required to comply
with such a regulation. However, as noted above, most loan or finance
companies, in order to remain viable, have in place policies and
procedures to prevent and detect fraud, insider abuse, and other
crimes. Established anti-fraud measures should assist loan or finance
companies in reporting suspicious transactions. Many loan or finance
companies already voluntarily report suspicious transactions and fraud
through entities such as the Loan Modification Scam Prevention
Network.\41\ Additionally, loan or finance companies, as part of the
application process for loans, already gather the information necessary
to fill out SAR forms as a usual and customary part of their business.
It is likely that the software packages most of these companies already
use will, after this regulation, incorporate the ability to
automatically fill out all but the narrative field in a SAR based on
information already input for the loan application. Therefore, FinCEN
estimates that the burden of the SAR filing requirements for loan or
finance companies will be low.
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\41\ The Loan Modification Scam Prevention Network includes
Fannie Mae, Freddie Mac, the Lawyers' Committee for Civil Rights
Under Law (Lawyers' Committee) and NeighborWorks America, among
others, with representatives from key governmental agencies, such as
the Federal Trade Commission, the Department of Housing and Urban
Development, the Department of Justice, the Department of the
Treasury, the Federal Bureau of Investigation, and state Attorneys
General offices, as well as leading non-profit organizations from
across the country. See http://www.preventloanscams.org/.
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Certification
The additional burden under the Final Rule is a requirement to
maintain an AML program and a SAR filing requirement. As discussed
above, FinCEN estimates that the impact from these requirements will
not be significant. Accordingly, FinCEN certifies that the Final Rule
will not have a significant impact on a substantial number of small
entities.
V. Paperwork Reduction Act Notices
The collection of information contained in this Final Rule is being
submitted to OMB for review in accordance with the Paperwork Reduction
Act of 1995 (``PRA'').\42\ The information collections in this proposal
are contained in 31 CFR 1029.210 and 31 CFR 1010.320.
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\42\ 44 U.S.C. 3507(d).
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AML Program for Loan or Finance Companies
AML programs for loan or finance companies (31 CFR 1020.210). This
information is required to be retained pursuant to 31 U.S.C. 5318(h)
and 31 CFR 1029.210. The collection of information would be mandatory.
The information is collected pursuant to 103.142 and is used by
examiners to determine whether loan or finance companies comply with
the BSA.
Description of Recordkeepers: Loan or finance companies as defined
in 31 CFR 1010.100(lll).
Estimated Number of Recordkeepers: 31,000.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1029.210 is three hours.
Estimated Total Annual Recordkeeping Burden: FinCEN estimates that
the annual recordkeeping burden is 93,000 hours.
In order to manage our estimated burden hours related to
implementation of new AML program regulations most efficiently, the
burden hours associated with this Final Rule will be included (added
to) the existing burden listed under OMB Control Number 1506-0035
currently titled AML Programs for insurance companies. The new title
for this control number will become AML Programs for insurance
companies and loan or finance companies. The new total burden will be
94,200 hours.
SAR Filing for Loan or Finance Companies
SARs for loan and finance companies (31 CFR 1029.320). This
information is required to be provided pursuant to 31 U.S.C. 5318(g)
and 31 CFR 1029.320. This information is used by law enforcement
agencies in the enforcement of criminal and regulatory laws and to
prevent loan and finance companies from engaging in illegal activities.
The collection of information is mandatory. The Final Rule increases
the number of recordkeepers by 31,000.
Description of Recordkeepers: Loan or finance companies as defined
in 31 CFR 1010.100(kkk).
Estimated Number of Recordkeepers: 31,000.
Estimated Average Annual Burden Hours per Recordkeeper: The
estimated average annual burden associated with the recordkeeping
requirement in 31 CFR 1029.320 is 2 hours per report, and FinCEN
estimates that, on average, one report per filer will be filed per
year.
[[Page 8157]]
Estimated Total Annual Recordkeeping Burden: The Final Rule
increases the estimated annual burden by 62,000 consisting of one hour
for report completion and one hour for required recordkeeping. The
reporting and recordkeeping burden for this requirement is reflected
under OMB Control Number 1506-0065, the BSA Suspicious Activity Report,
which is increased by 62,000 hours.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number. Records required to be
retained under the BSA must be retained for five years.
VI. Executive Orders 13563 and 12866
It has been determined that this Final Rule is a significant
regulatory action for purposes of Executive Orders 13563 and 12866.
VII. Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded
Mandates Act''), Public Law 104-4 (March 22, 1995), requires that an
agency prepare a budgetary impact statement before promulgating a rule
that may result in expenditure by the state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 202 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. Taking into account the
factors noted above and using conservative estimates of average labor
costs in evaluating the cost of the burden imposed by the Final Rule,
FinCEN has determined that it is not required to prepare a written
statement under section 202.
List of Subjects in 31 CFR Parts 1010 and 1029
Administrative practice and procedure, Banks, Banking, Brokers,
Currency, Foreign banking, Foreign currencies, Gambling,
Investigations, Penalties, Reporting and recordkeeping requirements,
Securities, Terrorism.
Authority and Issuance
For the reasons set forth in the preamble, Chapter X of title 31 of
the Code of Federal Regulations is amended as follows:
PART 1010--GENERAL PROVISIONS
1. The authority citation for part 1010 continues to read as
follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
0
2. Amend Sec. 1010.100 by adding paragraph (lll) to read as follows:
Sec. 1010.100 Meaning of terms.
* * * * *
(lll) Loan or finance company. A person engaged in activities that
take place wholly or in substantial part within the United States in
one or more of the capacities listed below, whether or not on a regular
basis or as an organized business concern. This includes but is not
limited to maintenance of any agent, agency, branch, or office within
the United States. For the purposes of this paragraph (lll), the term
``loan or finance company'' shall include a sole proprietor acting as a
loan or finance company, and shall not include: A bank, a person
registered with and functionally regulated or examined by the
Securities and Exchange Commission or the Commodity Futures Trading
Commission, any government sponsored enterprise regulated by the
Federal Housing Finance Agency, any Federal or state agency or
authority administering mortgage or housing assistance, fraud
prevention or foreclosure prevention programs, or an individual
employed by a loan or finance company or financial institution under
this part. A loan or finance company is not a financial institution as
defined in the regulations in this part at 1010.100(t).
(1) Residential mortgage lender or originator. A residential
mortgage lender or originator includes:
(i) Residential mortgage lender. The person to whom the debt
arising from a residential mortgage loan is initially payable on the
face of the evidence of indebtedness or, if there is no such evidence
of indebtedness, by agreement, or to whom the obligation is initially
assigned at or immediately after settlement. The term ``residential
mortgage lender'' shall not include an individual who finances the sale
of the individual's own dwelling or real property.
(ii) Residential mortgage originator. A person who accepts a
residential mortgage loan application or offers or negotiates terms of
a residential mortgage loan.
(iii) Residential mortgage loan. A loan that is secured by a
mortgage, deed of trust, or other equivalent consensual security
interest on:
(A) A residential structure that contains one to four units,
including, if used as a residence, an individual condominium unit,
cooperative unit, mobile home or trailer; or
(B) Residential real estate upon which such a structure is
constructed or intended to be constructed.
(2) [Reserved]
Sec. 1010.205 [Amended]
0
3. Amend Sec. 1010.205 in paragraph (b)(1) by removing paragraph
(b)(1)(ii) and redesignating paragraphs (b)(1)(iii) through (x) as
paragraphs (b)(1)(ii) through (ix), respectively.
0
4. Add part 1029 to read as follows:
PART 1029--RULES FOR LOAN OR FINANCE COMPANIES
Subpart A--Definitions
Sec.
1029.100 Definitions.
Subpart B--Programs
1029.200 General
1029.210 Anti-money laundering programs for loan or finance
companies.
Subpart C--Reports Required To Be Made By Loan or Finance Companies
1029.300 General.
1029.310 [Reserved]
1029.315 [Reserved]
1029.320 Reports by loan or finance companies of suspicious
transactions.
1029.330 Reports relating to currency in excess of $10,000 received
in a trade or business.
Subpart D--Records Required To Be Maintained By Loan or Finance
Companies
1029.400 General.
Subpart E--Special Information Sharing Procedures To Deter Money
Laundering and Terrorist Activity
1029.500 General.
1029.520 Special information sharing procedures to deter money
laundering and terrorist activity for loan or finance companies.
1029.530 [Reserved]
1029.540 Voluntary information sharing among financial institutions.
Subpart F--Special Standards of Diligence; Prohibitions, and Special
Measures for Loan or Finance Companies
1029.600 [Reserved]
1029.610 [Reserved]
1029.620 [Reserved]
1029.630 [Reserved]
1029.640 [Reserved]
1029.670 [Reserved]
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314
and 5316-5332; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307.
Subpart A--Definitions
Sec. 1029.100 Definitions.
Refer to Sec. 1010.100 of this Chapter for general definitions not
noted herein.
[[Page 8158]]
Subpart B--Programs
Sec. 1029.200 General.
Loan or finance companies are subject to the program requirements
set forth and cross referenced in this subpart. Loan or finance
companies should also refer to subpart B of part 1010 of this chapter
for program requirements contained in that subpart which apply to loan
or finance companies.
Sec. 1029.210 Anti-money laundering programs for loan or finance
companies.
(a) Anti-money laundering program requirements for loan or finance
companies. Each loan or finance company shall develop and implement a
written anti-money laundering program that is reasonably designed to
prevent the loan or finance company from being used to facilitate money
laundering or the financing of terrorist activities. The program must
be approved by senior management. A loan or finance company shall make
a copy of its anti-money laundering program available to the Financial
Crimes Enforcement Network or its designee upon request.
(b) Minimum requirements. At a minimum, the anti-money laundering
program shall:
(1) Incorporate policies, procedures, and internal controls based
upon the loan or finance company's assessment of the money laundering
and terrorist financing risks associated with its products and
services. Policies, procedures, and internal controls developed and
implemented by a loan or finance company under this section shall
include provisions for complying with the applicable requirements of
subchapter II of chapter 53 of title 31, United States Code and this
part, integrating the company's agents and brokers into its anti-money
laundering program, and obtaining all relevant customer-related
information necessary for an effective anti-money laundering program.
(2) Designate a compliance officer who will be responsible for
ensuring that:
(i) The anti-money laundering program is implemented effectively,
including monitoring compliance by the company's agents and brokers
with their obligations under the program;
(ii) The anti-money laundering program is updated as necessary; and
(iii) Appropriate persons are educated and trained in accordance
with paragraph (b)(3) of this section.
(3) Provide for on-going training of appropriate persons concerning
their responsibilities under the program. A loan or finance company 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 with respect
to the products and services offered by the loan or finance company.
(4) Provide for independent testing to monitor and maintain an
adequate program, including testing to determine compliance of the
company's agents and brokers with their obligations under the program.
The scope and frequency of the testing shall be commensurate with the
risks posed by the company's products and services. Such testing may be
conducted by a third party or by any officer or employee of the loan or
finance company, other than the person designated in paragraph (b)(2)
of this section.
(c) Compliance. Compliance with this section shall be examined by
FinCEN or its delegates, under the terms of the Bank Secrecy Act.
Failure to comply with the requirements of this section may constitute
a violation of the Bank Secrecy Act and of this part.
(d) Compliance date. A loan or finance company must develop and
implement an anti-money laundering program that complies with the
requirements of this section by August 13, 2012.
Subpart C--Reports Required To Be Made by Loan or Finance Companies
Sec. 1029.300 General.
Loan or finance companies are subject to the reporting requirements
set forth and cross referenced in this subpart. Loan or finance
companies should also refer to subpart C of part 1010 of this chapter
for reporting requirements contained in that subpart which apply to
loan or finance companies.
Sec. 1029.310 [Reserved]
Sec. 1029.315 [Reserved]
Sec. 1029.320 Reports by loan or finance companies of suspicious
transactions.
(a) General. (1) Every loan or finance company shall file with
FinCEN, to the extent and in the manner required by this section, a
report of any suspicious transaction relevant to a possible violation
of law or regulation. A loan or finance company may also file with
FinCEN a report of any suspicious transaction that it believes is
relevant to the possible violation of any law or regulation, but whose
reporting is not required by this section.
(2) A transaction requires reporting under this section if it is
conducted or attempted by, at, or through a loan or finance company, it
involves or aggregates funds or other assets of at least $5,000, and
the loan or finance company knows, suspects, or has reason to suspect
that the transaction (or a pattern of transactions of which the
transaction is a part):
(i) Involves funds derived from illegal activity or is intended or
conducted in order to hide or disguise funds or assets derived from
illegal activity (including, without limitation, the ownership, nature,
source, location, or control of such funds or assets) as part of a plan
to violate or evade any Federal law or regulation or to avoid any
transaction reporting requirement under Federal law or regulation;
(ii) Is designed, whether through structuring or other means, to
evade any requirements of this part or any other regulations
promulgated under the Bank Secrecy Act, Public Law 91-508, as amended,
codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-
5314, 5316-5332;
(iii) 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 loan or finance company knows of no reasonable explanation for
the transaction after examining the available facts, including the
background and possible purpose of the transaction; or
(iv) Involves use of the loan or finance company to facilitate
criminal activity.
(3) More than one loan or finance company may have an obligation to
report the same transaction under this section, and other financial
institutions may have separate obligations to report suspicious
activity with respect to the same transaction pursuant to other
provisions of this part. In those instances, no more than one report is
required to be filed by the loan or finance company(s) and other
financial institution(s) involved in the transaction, provided that the
report filed contains all relevant facts, including the name of each
financial institution involved in the transaction, the report complies
with all instructions applicable to joint filings, and each institution
maintains a copy of the report filed, along with any supporting
documentation.
(b) Filing and notification procedures--(1) What to file. A
suspicious transaction shall be reported by completing a Suspicious
Activity Report (``SAR''), and collecting and maintaining supporting
documentation as required by paragraph (c) of this section.
(2) Where to file. The SAR shall be filed with FinCEN in accordance
with the instructions to the SAR.
[[Page 8159]]
(3) When to file. A SAR shall be filed no later than 30 calendar
days after the date of the initial detection by the reporting loan or
finance company of facts that may constitute a basis for filing a SAR
under this section. If no suspect is identified on the date of such
initial detection, a loan or finance company may delay filing a SAR for
an additional 30 calendar days to identify a suspect, but in no case
shall reporting be delayed more than 60 calendar days after the date of
such initial detection.
(4) Mandatory notification to law enforcement. In situations
involving violations that require immediate attention, such as
suspected terrorist financing or ongoing money laundering schemes, a
loan or finance company shall immediately notify by telephone an
appropriate law enforcement authority in addition to filing timely a
SAR.
(5) Voluntary notification to FinCEN. Any loan or finance company
wishing voluntarily to report suspicious transactions that may relate
to terrorist activity may call the FinCEN's Financial Institutions
Hotline at 1-866-556-3974 in addition to filing timely a SAR if
required by this section.
(c) Retention of records. A loan or finance company shall maintain
a copy of any SAR filed by the loan or finance company or on its behalf
(including joint reports), and the original (or business record
equivalent) of any supporting documentation concerning any SAR that it
files (or is filed on its behalf), for a period of five years from the
date of filing the SAR. Supporting documentation shall be identified as
such and maintained by the loan or finance company, and shall be deemed
to have been filed with the SAR. The loan or finance company shall make
all supporting documentation available to FinCEN, or any Federal,
State, or local law enforcement agency, or any Federal regulatory
authority that examines the loan or finance company for compliance with
the Bank Secrecy Act, or any State regulatory authority administering a
State law that requires the loan or finance company to comply with the
Bank Secrecy Act or otherwise authorizes the State authority to ensure
that the loan or finance company complies with the Bank Secrecy Act,
upon request.
(d) Confidentiality of SARs. A SAR, and any information that would
reveal the existence of a SAR, are confidential and shall not be
disclosed except as authorized in this paragraph (d). For purposes of
this paragraph (d) only, a SAR shall include any suspicious activity
report filed with FinCEN pursuant to any regulation in this part.
(1) Prohibition on disclosures by loan or finance companies--(i)
General rule. No loan or finance company, and no director, officer,
employee, or agent of any loan or finance company, shall disclose a SAR
or any information that would reveal the existence of a SAR. Any loan
or finance company, and any director, officer, employee, or agent of
any loan or finance company that is subpoenaed or otherwise requested
to disclose a SAR or any information that would reveal the existence of
a SAR, shall decline to produce the SAR or such information, citing
this section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify FinCEN of
any such request and the response thereto.
(ii) Rules of construction. Provided that no person involved in any
reported suspicious transaction is notified that the transaction has
been reported, paragraph (d)(1) of this section shall not be construed
as prohibiting:
(A) The disclosure by a loan or finance company, or any director,
officer, employee, or agent of a loan or finance company of:
(1) A SAR, or any information that would reveal the existence of a
SAR, to FinCEN or any Federal, State, or local law enforcement agency,
any Federal regulatory authority that examines the loan or finance
company for compliance with the Bank Secrecy Act, or any State
regulatory authority administering a State law that requires the loan
or finance company to comply with the Bank Secrecy Act or otherwise
authorizes the State authority to ensure that the loan or finance
company complies with the Bank Secrecy Act; or
(2) The underlying facts, transactions, and documents upon which a
SAR is based, including, but not limited to, disclosures to another
financial institution, or any director, officer, employee, or agent of
a financial institution, for the preparation of a joint SAR.
(B) The sharing by a loan or finance company, or any director,
officer, employee, or agent of the loan or finance company, of a SAR,
or any information that would reveal the existence of a SAR, within the
loan or finance company's corporate organizational structure for
purposes consistent with Title II of the Bank Secrecy Act as determined
by regulation or in guidance.
(2) Prohibition on disclosures by government authorities. A
Federal, state, local, territorial, or tribal government authority, or
any director, officer, employee, or agent of any of the foregoing,
shall not disclose a SAR, or any information that would reveal the
existence of a SAR, except as necessary to fulfill official duties
consistent with Title II of the Bank Secrecy Act. For purposes of this
section, official duties shall not include the disclosure of a SAR, or
any information that would reveal the existence of a SAR, in response
to a request for disclosure of non-public information or a request for
use in a private legal proceeding, including a request pursuant to 31
CFR 1.11.
(e) Limitation on liability. A loan or finance company, and any
director, officer, employee, or agent of any loan or finance company,
that makes a voluntary disclosure of any possible violation of law or
regulation to a government agency or makes a disclosure pursuant to
this section or any other authority, including a disclosure made
jointly with another institution, shall be protected from liability for
any such disclosure, or for failure to provide notice of such
disclosure to any person identified in the disclosure, or both, to the
full extent provided by 31 U.S.C. 5318(g)(3).
(f) Compliance. Loan or finance companies shall be examined by
FinCEN or its delegates under the terms of the Bank Secrecy Act, for
compliance with this section. Failure to satisfy the requirements of
this section may be a violation of the Bank Secrecy Act and of this
part.
(g) Compliance date. This section applies to transactions initiated
after an anti-money laundering program required by section 1029.210 of
this part is required to be implemented.
Sec. 1029.330 Reports relating to currency in excess of $10,000
received in a trade or business.
Refer to Sec. 1010.330 of this chapter for rules regarding the
filing of reports relating to currency in excess of $10,000 received by
loan or finance companies.
Subpart D--Records Required To Be Maintained By Loan or Finance
Companies
Sec. 1029.400 General.
Loan or finance companies are subject to the recordkeeping
requirements set forth and cross referenced in this subpart. Loan or
finance companies should also refer to subpart D of part 1010 of this
chapter for recordkeeping requirements contained in that subpart which
apply to loan or finance companies.
[[Page 8160]]
Subpart E--Special Information Sharing Procedures To Deter Money
Laundering and Terrorist Activity
Sec. 1029.500 General.
Loan or finance companies are subject to the special information
sharing procedures to deter money laundering and terrorist activity
requirements set forth and cross referenced in this subpart. Loan or
finance companies should also refer to subpart E of part 1010 of this
chapter for special information sharing procedures to deter money
laundering and terrorist activity contained in that subpart which apply
to loan or finance companies.
Sec. 1029.520 Special information sharing procedures to deter money
laundering and terrorist activity for loan or finance companies.
(a) Refer to Sec. 1010.520 of this chapter.
(b) [Reserved]
Sec. 1029.530 [Reserved]
Sec. 1029.540 Voluntary information sharing among financial
institutions.
(a) Refer to Sec. 1010.540 of this chapter.
(b) [Reserved]
Subpart F--Special Standards of Diligence; Prohibitions, and
Special Measures for Loan or Finance Companies
Sec. 1029.600 [Reserved]
Sec. 1029.610 [Reserved]
Sec. 1029.620 [Reserved]
Sec. 1029.630 [Reserved]
Sec. 1029.640 [Reserved]
Sec. 1029.670 [Reserved]
Dated: February 6, 2012.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2012-3074 Filed 2-13-12; 8:45 am]
BILLING CODE 4802-10-P