Mortgage Fraud Reporting, 9255-9257 [05-3590]

Agencies

• Federal Housing Enterprise Oversight Office
• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
• Office of Federal Housing Enterprise Oversight

[Federal Register Volume 70, Number 37 (Friday, February 25, 2005)]
[Proposed Rules]
[Pages 9255-9257]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-3590]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 70, No. 37 / Friday, February 25, 2005 / 
Proposed Rules

[[Page 9255]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1731

RIN 2550-AA31


Mortgage Fraud Reporting

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Proposed rule.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
issuing a proposed regulation that would set forth safety and soundness 
requirements with respect to mortgage fraud reporting in furtherance of 
the supervisory responsibilities of OFHEO under the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992.

DATES: Written comments on the proposed regulation must be received by 
March 28, 2005. For additional information, see SUPPLEMENTARY 
INFORMATION.

ADDRESSES: You may submit your comments on the proposed regulation and 
collection of information, identified by regulatory information number 
(RIN) 2550-AA31, by any of the following methods:
     U.S. Mail, United Parcel Post, Federal Express, or Other 
Mail Service: The mailing address for comments is: Alfred M. Pollard, 
General Counsel, Attention: Comments/RIN 2550-AA31, Office of Federal 
Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2550-AA31, 
Office of Federal Housing Enterprise Oversight, Fourth Floor, 1700 G 
Street, NW., Washington, DC 20552. The package should be logged at the 
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
     E-mail: RegComments@OFHEO.gov. Comments to Alfred M. 
Pollard, General Counsel, may be sent by e-mail at 
RegComments@OFHEO.gov. Please include RIN 2550-AA31 in the subject line 
of the message.
    Instructions: OFHEO requests that comments to the proposed 
amendments include the reference RIN 2550-AA31. OFHEO further requests 
that comments submitted in hard copy also be accompanied by the 
electronic version in Microsoft[supreg] Word or in portable document 
format (PDF) on 3.5'' disk. Please see the section, SUPPLEMENTARY 
INFORMATION, below, for additional information on the posting and 
viewing of comments.

FOR FURTHER INFORMATION CONTACT: Isabella W. Sammons, Associate General 
Counsel, telephone (202) 414-3790 (not a toll-free number); Office of 
Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The telephone number for the Telecommunications 
Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. 102-550, titled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) established 
OFHEO as an independent office within the Department of Housing and 
Urban Development to ensure that the Federal National Mortgage 
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(collectively, the Enterprises) are adequately capitalized and operate 
safely and soundly in compliance with applicable laws, rules, and 
regulations. To carry out its statutory responsibilities, OFHEO may, 
among other things, require an Enterprise to submit reports.
    As a member of the President's Corporate Fraud Task Force that 
focuses on maximizing cooperation and joint regulatory and enforcement 
efforts, OFHEO is aware of the impact of mortgage fraud, not only with 
respect to the Enterprises, but with respect to the mortgage market as 
a whole. Losses resulting from mortgage fraud impact, among other 
things, profits, liquidity levels, and capitalization ratios.
    For example, a recent investigation revealed a fraud scheme 
committed by insiders of First Beneficial Mortgage Corporation against 
Fannie Mae and the Government National Mortgage Association (Ginnie 
Mae). First Beneficial Mortgage Corporation sold fraudulent loans to 
Fannie Mae. When Fannie Mae discovered that the mortgages were 
fraudulent, it forced First Beneficial to repurchase the loans. To 
raise the money to repurchase the loans, First Beneficial sold 
fraudulent mortgages to Ginnie Mae.\1\ Fannie Mae did not inform Ginnie 
Mae that First Beneficial had made fraudulent loans. Fannie Mae agreed 
to a consent order to forfeit approximately $7.5 million to the Federal 
government, which represents the amount, plus interest, that the First 
Beneficial principals obtained through fraud.\2\ This and other frauds 
in the mortgage industry reflect the need to deter and, if necessary, 
detect and remedy fraud.\3\
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    \1\ See, e.g., Statement of Chris Swecker, Assistant Director, 
Criminal Investigative Division, FBI, Before the House Financial 
Services Subcommittee on Housing and Community Opportunity (Oct. 7, 
2004).
    \2\ See Fannie Mae Statement by Chuck Greener, Senior Vice 
President, Communications (Dec. 8, 2004), https://www.FannieMae.com/
media/issues.
    \3\ Other recent examples of mortgage fraud include lawsuits 
against Olympia Mortgage Corporation and United Homes L.L.C. 
involving alleged fraudulent appraisals. ``Losing Your Dream Home,'' 
The New York Times, Oct. 17, 2004. The F.B.I. has reported that the 
number of complaints involving mortgage fraud increased from 5,623 
in fiscal year 2001 to 12,134 in fiscal year 2003. Id.
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Analysis of Proposed Regulation

    In light of the impact of mortgage fraud on the safe and sound 
operations of the Enterprises, the proposed regulation sets forth 
safety and soundness requirements with respect to mortgage fraud 
reporting. OFHEO solicits comment on the purpose of the proposed 
regulation.
    The term ``mortgage fraud'' would be defined under Sec.  1731.2 to 
mean a material misstatement, misrepresentation, or omission relied 
upon by an Enterprise to fund or purchase--or not to fund or purchase--
a mortgage, mortgage backed security, or similar financial instrument. 
The term would include, but not be limited to, identification and 
employment documents, mortgagee or mortgagor identity, and appraisals 
that are fraudulent. The term ``possible mortgage fraud'' would be 
defined to mean that an Enterprise has cause to believe that that 
mortgage fraud is occurring or has

[[Page 9256]]

occurred.\4\ OFHEO would issue guidance and instructions with respect 
to format and content of mortgage fraud reports, including an 
elaboration of defined terms. OFHEO solicits comment on the definition 
of the terms ``mortgage fraud'' and ``possible mortgage fraud'' and on 
the other definitions set forth in the proposed regulation.
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    \4\ OFHEO recognizes that documentary evidence of fraud or 
possible mortgage fraud may also be the basis for financial 
institution reports to their regulators and Federal agencies that 
investigate fraud.
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    Under Sec.  1731.3, an Enterprise would not be permitted to require 
the repurchase of or decline to purchase a mortgage, mortgage backed 
security, or similar instrument if it has notice of fraud or possible 
mortgage fraud until it promptly reports such fraud to the Director. 
OFHEO solicits comments on this proposed section.
    Section 1731.4 would set forth the procedures for reporting fraud 
and possible mortgage fraud to OFHEO. As noted above, OFHEO would issue 
guidance and instructions with respect to format and content of 
mortgage fraud reports. Section 1731.4 also would provide that if the 
situation requires the immediate attention of OFHEO, an Enterprise 
would report immediately by telephone or electronic communication. The 
section further would provide for retention of records by the 
Enterprise and would prohibit the disclosure of reporting mortgage 
fraud or possible mortgage fraud to the parties connected with such 
fraud without the prior written approval of the Director.\5\ This 
requirement would not prevent an Enterprise from disclosing or 
reporting such fraud pursuant to legal requirement, including to 
appropriate law enforcement authorities. Acceptance by OFHEO of other 
reporting formats promulgated by agencies with jurisdiction over 
mortgage fraud reporting would also be provided by Sec.  1731.4. 
Finally, the section would state that an Enterprise does not waive any 
privilege it may claim under law by reporting mortgage fraud or 
possible mortgage fraud. OFHEO solicits comments on the proposed 
procedures for reporting mortgage fraud and possible mortgage fraud and 
the proposed requirements and provisions relating to use of other 
forms, nondisclosure, and no waiver of privilege.
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    \5\ OFHEO notes that staff of OFHEO would be prohibited from 
disclosing any report without the prior written approval of the 
Director pursuant to its Releasing Information regulation, 12 CFR 
part 1703.
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    Section 1731.5 of the proposed regulation would provide that an 
Enterprise must establish adequate and efficient internal controls and 
procedures and an operational training program to assure an effective 
system to detect and report mortgage fraud. OFHEO solicits comments on 
this proposed requirement.
    Section 1731.6 expressly would state that failure to comply with 
the requirements of the regulation may subject the Enterprise or the 
board members, officers, or employees of the Enterprise to supervisory 
action by OFHEO under the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992, including but not limited to, cease-and-
desist proceedings and civil money penalties. OFHEO solicits comments 
on this proposed section.

Request for Comments on the Proposed Regulation

    OFHEO invites comments on all aspects of the proposed regulation 
and will take all comments into consideration before issuing the final 
regulation. The comment period has been set at 30 days because of the 
impact of mortgage fraud on safety and soundness, the size of the 
Enterprises, the volume of mortgage business, and the public interest 
in assuring deterrence and detection of such fraud.
    All comments received will be posted without change to https://
www.ofheo.gov, including any personal information provided. Copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m., at the Office 
of Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street 
NW., Washington, DC 20552. To make an appointment to inspect comments, 
please call the Office of General Counsel at (202) 414-6924.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    The proposed regulation is not classified as an economically 
significant rule under Executive Order 12866 because it would not 
result in an annual effect on the economy of $100 million or more or a 
major increase in costs or prices for consumers, individual industries, 
Federal, state, or local government agencies, or geographic regions; or 
have significant adverse effects on competition, employment, 
investment, productivity, innovation, or on the ability of United 
States-based enterprises to compete with foreign-based enterprises in 
domestic or foreign markets. Accordingly, no regulatory impact 
assessment is required. Nevertheless, the proposed regulation was 
submitted to the Office of Management and Budget for review under other 
provisions of Executive Order 12866 as a significant regulatory action.

Executive Order 13132, Federalism

    Executive Order 13132 requires that Executive departments and 
agencies identify regulatory actions that have significant federalism 
implications. A regulation has federalism implications if it has 
substantial direct effects on the states, on the relationship or 
distribution of power between the Federal Government and the states, or 
on the distribution of power and responsibilities among various levels 
of government. The Enterprises are federally chartered corporations 
supervised by OFHEO. The proposed regulation would require reporting of 
mortgage fraud to OFHEO. It would not affect in any manner the powers 
and authorities of any state with respect to the Enterprises or alter 
the distribution of power and responsibilities between Federal and 
state levels of government. It would in no way limit the authority of 
any state to take actions for violations of its laws. Therefore, OFHEO 
has determined that the proposed regulation has no federalism 
implications that warrant the preparation of a Federalism Assessment in 
accordance with Executive Order 13132.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
proposed regulation under the Regulatory Flexibility Act. The General 
Counsel of OFHEO certifies that the proposed regulation would not be 
likely to have a significant economic impact on a substantial number of 
small business entities because it would be applicable only to the 
Enterprises, which are not small entities for purposes of the 
Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1731

    Administrative practice and procedure, Government sponsored 
enterprises.


[[Page 9257]]


    For the reasons stated in the preamble, part 1731 is added to 
chapter XVII, title 12 of the Code of Federal Regulations to read as 
follows:

PART 1731--MORTGAGE FRAUD REPORTING

Sec.
1731.1 Purpose and scope.
1731.2 Definitions.
1731.3 Unsafe and unsound conduct.
1731.4 Procedures for reporting.
1731.5 Internal controls, procedures, and training.
1731.6 Supervisory action.

    Authority: 12 U.S.C. 4513(a) and 4513(b)(1), (2), and (7).

PART 1731--MORTGAGE FRAUD REPORTING


Sec.  1731.1  Purpose and scope.

    The purpose of this section is to set forth safety and soundness 
requirements with respect to the reporting of mortgage fraud in 
furtherance of the supervisory responsibilities of OFHEO under the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 
(12 U.S.C. 4501 et seq.).


Sec.  1731.2  Definitions.

    For purposes of this part--
    (a) Director means the Director of OFHEO, or his or her designee.
    (b) Enterprise means the Federal National Mortgage Association or 
the Federal Home Loan Mortgage Corporation.
    (c) Mortgage fraud means a material misstatement, 
misrepresentation, or omission relied upon by an Enterprise to fund or 
purchase--or not to fund or purchase--a mortgage, mortgage backed 
security, or similar financial instrument. Such mortgage fraud 
includes, but is not limited to, identification and employment 
documents, mortgagee or mortgagor identity, and appraisals that are 
fraudulent.
    (d) OFHEO means the Office of Federal Housing Enterprise Oversight.
    (e) Possible mortgage fraud means that an Enterprise has cause to 
believe that mortgage fraud may be occurring or has occurred.


Sec.  1731.3  Unsafe and unsound conduct.

    An Enterprise may not require the repurchase of or may not decline 
to purchase a mortgage, mortgage backed security, or similar financial 
instrument because of possible mortgage fraud without promptly 
reporting to the Director under Sec.  1731.4.


Sec.  1731.4  Procedures for reporting.

    (a) Procedures for reporting. (1) General. An Enterprise shall 
report mortgage fraud or possible mortgage fraud--
    (i) In writing to the Director in such format as prescribed by 
OFHEO. The report shall describe the mortgage fraud or possible 
mortgage fraud in detail sufficient under OFHEO guidance. The 
Enterprise, at the sole discretion of the Director, may be required to 
provide additional or continuing information in connection with such 
mortgage fraud; and
    (ii) Within four business days after identifying mortgage fraud or 
possible mortgage fraud.
    (2) Immediate report. In addition to reporting in writing under 
paragraph (a)(1) of this section, in any situation requiring immediate 
attention by OFHEO, an Enterprise shall report the mortgage fraud or 
possible mortgage fraud to the Director by telephone or electronic 
communication.
    (b) Retention of records. An Enterprise shall maintain a copy of 
any report submitted to the Director and the original or business 
record equivalent of any supporting documentation for a period of five 
years from the date of submission.
    (c) Nondisclosure. An Enterprise may not disclose, without the 
prior written approval of the Director, to the party or parties 
connected with the mortgage fraud or possible mortgage fraud that it 
has reported such fraud under this part. This restriction does not 
limit an Enterprise from disclosing or reporting such fraud pursuant to 
legal requirement, including to appropriate law enforcement 
authorities.
    (d) Acceptance of other forms. The Director may, upon written 
notice to each Enterprise, accept reports of mortgage fraud or possible 
mortgage fraud in formats promulgated by any Federal agency that has 
jurisdiction over the reporting of mortgage fraud or possible mortgage 
fraud by the Enterprises.
    (e) No waiver of privilege. An Enterprise does not waive any 
privilege it may claim under law by reporting mortgage fraud or 
possible mortgage fraud under this part.


Sec.  1731.5  Internal controls, procedures, and training.

    An Enterprise shall establish adequate and efficient internal 
controls and procedures and an operational training program to assure 
an effective system to detect and report mortgage fraud or possible 
mortgage fraud under this part.


Sec.  1731.6  Supervisory action.

    Failure by an Enterprise to comply with Sec. Sec.  1731.3, 1731.4, 
and 1731.5 may subject the Enterprise or the board members, officers, 
or employees thereof to supervisory action by OFHEO under the Federal 
Housing Enterprises Safety and Soundness Act of 1992 (12 U.S.C. 4501 et 
seq.), including but not limited to, cease-and-desist proceedings and 
civil money penalties.

    Dated: February 18, 2005.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 05-3590 Filed 2-24-05; 8:45 am]
BILLING CODE 4220-01-P