Mortgage Fraud Reporting, 43625-43628 [05-14957]
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43625
Rules and Regulations
Federal Register
Vol. 70, No. 144
Thursday, July 28, 2005
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
Office of Federal Housing Enterprise
Oversight
12 CFR Part 1731
RIN 2550–AA31
Mortgage Fraud Reporting
Office of Federal Housing
Enterprise Oversight, HUD.
ACTION: Final rule.
AGENCY:
SUMMARY: The Office of Federal Housing
Enterprise Oversight (OFHEO) is issuing
a final regulation that sets 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.
EFFECTIVE DATE: August 29, 2005.
FOR FURTHER INFORMATION CONTACT:
Isabella W. Sammons, Deputy 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 (Freddie Mac)
(collectively, the Enterprises) are
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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.1
On February 25, 2005, OFHEO
published for comment a proposed
regulation, at 70 FR 9255, which set
forth proposed safety and soundness
requirements with respect to mortgage
fraud reporting. The 30-day comment
period was extended until April 4,
2005.2 All comments received have
been made available to the public in the
OFHEO Public Reading Room and also
posted on the OFHEO Web site at
https://www.OFHEO.gov.
Comments Received
Comments were received from the
Inspector General for the Office of
Housing and Urban Development; the
Mortgage Asset Research Institute, a
subsidiary of ChoicePoint Services Inc.;
the Mortgage Bankers Association, a
national association representing the
real estate finance industry; the National
Association of Mortgage Brokers;
Freddie Mac; Fannie Mae; the Consumer
Mortgage Coalition, a trade group of
national residential mortgage lenders,
servicers and service providers; AMCO,
a valuation management firm; and
various private citizens. All comments
were taken into consideration. A
discussion of the significant comments
as they relate to the proposed sections
of the regulation follows.
Purpose and Scope
Several commenters questioned the
necessity for a regulation expressly
requiring reporting of mortgage fraud
and possible mortgage fraud and the
benefits of such reporting to the
Enterprises and the mortgage industry.
Two commenters recommended that
OFHEO consider alternative
approaches, such as reliance on private
industry ‘‘ineligible’’ lists.
The purpose of the regulation is to set
forth safety and soundness requirements
and expectations with respect to the
reporting of mortgage fraud in
furtherance of the supervisory
responsibilities of OFHEO, that is,
ensuring the safe and sound operations
of the Enterprises. OFHEO must gain
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1 12
2 70
U.S.C. 4514.
FR 15018 (March 24, 2005).
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timely information on actual or possible
mortgage fraud to assure that adequate
internal controls and systems exist to
protect the Enterprises from risks
associated with such fraud. The
information provided will be the subject
of review by the examination force of
OFHEO, as well as other appropriate
OFHEO offices. The information will
assist OFHEO in assessing internal
controls, security efforts, management of
risks, including reputation risk, and
other factors relevant to the safe and
sound operation of the Enterprises. The
oversight by OFHEO of programs to
detect and avoid mortgage fraud will
provide public understanding of the
expectation that the Enterprises will
remain vigilant in resisting fraudulent
practices and should have a deterrent
effect. OFHEO will develop a process
for sharing of information it acquires
with law enforcement authorities, while
assuring that the Enterprises do not
encounter liability issues.
The Federal Bureau of Investigation
(FBI) indicated in Financial Crimes
Report to the Public (May 2005) that
combating significant mortgage fraud is
an FBI priority because mortgage
lending and the housing market have a
significant overall effect on the nation’s
economy.3 The FBI explained that:
A significant portion of the mortgage
industry is void of any mandatory fraud
reporting. In addition, mortgage fraud in the
secondary market is often underreported.
Therefore, the true level of mortgage fraud is
largely unknown. The mortgage industry
itself does not provide estimates on total
industry fraud. Based on various industry
reports and FBI analysis, mortgage fraud is
pervasive and growing.
In combating mortgage fraud, the FBI
noted that it works actively to
investigate such fraud and has been
fostering relationships and partnerships
with the mortgage industry, including
the Enterprises. While OFHEO has no
authority to ‘‘police’’ the mortgage
industry for fraud or to prosecute
mortgage fraud, OFHEO has noted that
the Enterprises, as part of the financial
system, should operate in a manner to
deter fraud and thereby assist in systemwide efforts to make mortgage fraud an
unattractive avenue for corrupt
individuals or institutions.
The Enterprises currently investigate
and maintain information on mortgage
3 https://www.fbi.gov/publications/financial/
fcs_report052005/fcs_report052005.htm#d1.
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Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Rules and Regulations
fraud and possible mortgage fraud. A
formal reporting requirement to OFHEO
will focus Enterprise efforts on ensuring
that internal policies, procedures, and
training programs are in place to
minimize the risks from mortgage fraud.
No evidence exists that a formal
reporting requirement will create or
increase burdens on the Enterprises.
The Enterprises currently investigate
fraud or possible fraud, report fraud to
law enforcement authorities, and
provide reports to OFHEO as required;
this regulation contemplates such
routine reporting to OFHEO.
Additionally, no evidence exists that a
formal reporting requirement will
require the mortgage industry as a
whole to take on additional burdens.
The Enterprises currently, when fraud is
suspected, inquire of seller-servicers
and others about business transactions
and practices. Furthermore, law
enforcement authorities have reported
that much of the fraud involving
secondary market parties relates to
institutional fraud, not individuals
seeking to secure financing. Thus,
Enterprise efforts to report on possible
or actual mortgage fraud should have no
regulatory burden for the mortgage
finance industry as the Enterprises
already conduct due diligence in
dealing with seller-servicers and others
in the mortgage finance system.
For the reasons set forth above and
because of law enforcement reports of
an increasing incidence of mortgagerelated fraud—and the potential impact
of such fraud on Enterprise profits,
liquidity and reputation—OFHEO has
determined to issue the mortgage fraud
reporting regulation.
Definition of the Terms ‘‘Mortgage
Fraud’’ and ‘‘Possible Mortgage Fraud.’’
As proposed, the term ‘‘mortgage
fraud’’ would be defined under § 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
occurred.
OFHEO received a few comments on
the definition of the term ‘‘mortgage
fraud.’’ One commenter noted that the
definition treats all mortgage-backed
securities (MBS) as equivalent to
mortgages for purposes of mortgage
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fraud, whether issued or guaranteed by
an Enterprise or whether issued or
guaranteed by a third party. The
commenter explained that MBS issued
and guaranteed by a third party may
present securities fraud issues, but not
mortgage fraud issues, and requested
that the definition make clear that it
covers only MBS issued or guaranteed
by an Enterprise. Two other commenters
requested that the definition should
include the concept that the material
misstatement, misrepresentation, or
omission be ‘‘knowingly made’’ or
‘‘intentionally made.’’
OFHEO has revised the definition of
the term ‘‘mortgage fraud’’ to clarify that
it covers MBS issued or guaranteed by
an Enterprise. OFHEO does not believe
that it is necessary to include the
concept that the material misstatement,
misrepresentation, or omission be
‘‘knowingly made’’ or ‘‘intentionally
made.’’ Such language goes to the
definition of fraud that is well
established, as opposed to the definition
of a particular type, that is, fraud related
to mortgages. In addition, benchmarks
or ‘‘triggers’’ for providing information
to OFHEO, as discussed below, will be
developed as the reporting requirements
are implemented.
The term ‘‘possible mortgage fraud’’
was proposed to be defined to mean that
an Enterprise has cause to believe that
mortgage fraud may be occurring or has
occurred. Some commenters
recommended that OFHEO should
provide guidance, through regulation or
through guidance documents, as to
triggers and level of verification,
otherwise the definition, they argued, is
too broad. OFHEO agrees and will
provide guidance, as requested, as to
these and related matters as part of the
implementation of the reporting
requirements.
One commenter recommended that
the definition should include the
element of good-faith judgment on the
part of the Enterprise. Another
commenter recommended that the
definition should include the element of
reasonable or justifiable cause to believe
that mortgage fraud may be occurring or
has occurred. OFHEO agrees that the
definition should be modified to
include ‘‘reasonable cause’’ and has
clarified the definition of the term
‘‘possible mortgage fraud’’ accordingly.
Unsafe and Unsound Conduct
Proposed § 1731.3 would provide that
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
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Director under § 1731.4. One commenter
requested that this section should
clearly state that it does not prohibit the
Enterprises from declining purchases or
requiring repurchases if the Enterprises
are properly reporting mortgage fraud or
possible mortgage fraud. OFHEO agrees,
and has clarified the language of
§ 1731.3 accordingly.
Reporting Time-Period
As proposed, § 1731.4 would set forth
the procedures for reporting fraud and
possible mortgage fraud to OFHEO.
OFHEO would issue implementation
instructions with respect to reporting
such fraud. Section 1731.4 also would
provide that if a situation requires the
immediate attention of OFHEO, an
Enterprise would report immediately by
telephone or electronic communication.
A few commenters recommended that
the proposed four-day notification
period was too short and recommended
either a 30-day period or that
notification be ‘‘prompt.’’ OFHEO agrees
that a requirement for ‘‘prompt
reporting’’ would permit flexibility in
addressing different situations and
changing needs in the implementation
of the reporting requirement and has
modified the definition accordingly to
remove the fixed time period and will
address notification requirements as
part of the implementation of the rule.
The requirement for immediate
reporting, when appropriate, remains.
One commenter recommended that
the reporting requirement should not be
retroactive and apply only to mortgages
purchased or not purchased six months
after the effective date of the regulation.
OFHEO did not propose and does not
intend that the regulation have
retroactive application; OFHEO will
work with the Enterprises for an
effective transition while the Enterprises
develop and implement or enhance
reporting systems.
Non-Disclosure and Safe Harbor
As proposed, the section 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. The proposed section
expressly stated that the requirement
would not prevent an Enterprise from
disclosing or reporting such fraud
pursuant to legal requirements,
including reporting to appropriate law
enforcement authorities.
One commenter expressed a concern
that the proposed section would
discourage the Enterprises from
reporting fraud; another argued that the
Enterprises should be required to report
fraud to law enforcement authorities.
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Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Rules and Regulations
The Enterprises already have the
authority to report fraud to law
enforcement; the major focus of concern
of the proposed regulation is the need
to make routine reporting of possible
mortgage fraud to OFHEO and for
OFHEO to take actions regarding such
possible fraud. Another commenter
recommended the addition of a
clarification that the requirement of this
section does not limit the Enterprise
from reporting fraud to a third party or
from taking any legal or business action
it may deem appropriate, including an
action involving the party or parties
connected with the mortgage fraud or
possible mortgage fraud. OFHEO agrees
that this clarification is useful and has
modified the section accordingly.
A few commenters addressed ‘‘safe
harbor’’ concerns, in that the safe harbor
provisions of the Bank Secrecy Act
would not apply to the Enterprises
reporting of mortgage fraud to OFHEO,
and leave the Enterprises vulnerable to
liability should OFHEO refer an
Enterprise report to another government
agency. OFHEO recognizes the liability
concerns; nevertheless, OFHEO will
continue to provide information on
mortgage fraud to appropriate
authorities while addressing concerns
related to the absence of an explicit safe
harbor.
Except with respect to the
clarifications of the proposed language
as noted above, OFHEO has determined
to issue the regulation as proposed.
Regulatory Impact
Executive Order 12866, Regulatory
Planning and Review
The 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 foreignbased 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.
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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 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 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 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.
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:
I
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43627
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).
§ 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.).
§ 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, including a
mortgage associated with a mortgagebacked security or similar financial
instrument issued or guaranteed by an
Enterprise. Such mortgage fraud
includes, but is not limited to, a
material misstatement,
misrepresentation, or omission in
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 a reasonable
belief, based upon a review of
information available to the Enterprise,
that mortgage fraud may be occurring or
has occurred.
§ 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 § 1731.4. An Enterprise
may decline such purchase or require
such repurchase if it is reporting
mortgage fraud or possible mortgage
fraud in accordance with § 1731.4.
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§ 1731.4
Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Rules and Regulations
Procedures for reporting.
(a) Procedures for reporting. (1)
Prompt report. An Enterprise shall
report promptly mortgage fraud or
possible mortgage fraud in writing to the
Director in such format and under such
notification procedures 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.
(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 prohibit an
Enterprise from—
(1) Disclosing or reporting such fraud
pursuant to legal requirements,
including reporting to appropriate law
enforcement or other governmental
authorities; or
(2) Taking any legal or business action
it may deem appropriate, including any
action involving the party or parties
connected with the mortgage fraud or
possible mortgage fraud.
(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.
§ 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
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detect and report mortgage fraud or
possible mortgage fraud under this part.
§ 1731.6
Supervisory action.
Failure by an Enterprise to comply
with §§ 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: July 25, 2005.
Stephen A. Blumenthal,
Acting Director, Office of Federal Housing
Enterprise Oversight.
[FR Doc. 05–14957 Filed 7–27–05; 8:45 am]
BILLING CODE 4220–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. 2001–NM–343–AD; Amendment
39–14203; AD 2005–15–14]
RIN 2120–AA64
Airworthiness Directives; McDonnell
Douglas Model DC–8–11, DC–8–12,
DC–8–21, DC–8–31, DC–8–32, DC–8–
33, DC–8–41, DC–8–42, DC–8–43, DC–
8F–54, and DC–8F–55 Airplanes; and
DC–8–50, DC–8–60, DC–8–60F, DC–8–
70, and DC–8–70F Series Airplanes
Federal Aviation
Administration, Department of
Transportation (DOT).
ACTION: Final rule.
AGENCY:
SUMMARY: This amendment adopts a
new airworthiness directive (AD),
applicable to certain McDonnell
Douglas airplane models. This AD
requires a one-time test to determine the
material of the upper inboard spar cap
of the wing, and corrective actions if
necessary. This action is necessary to
prevent stress corrosion cracking in the
forward tang of the upper inboard spar
cap of the wing, which could result in
structural damage to adjacent
components of the wing and consequent
reduced structural integrity of the
airplane. This action is intended to
address the identified unsafe condition.
DATES: Effective September 1, 2005.
The incorporation by reference of a
certain publication listed in the
regulations is approved by the Director
of the Federal Register as of September
1, 2005.
ADDRESSES: The service information
referenced in this AD may be obtained
PO 00000
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from Boeing Commercial Airplanes,
Long Beach Division, 3855 Lakewood
Boulevard, Long Beach, California
90846, Attention: Data and Service
Management, Dept. C1–L5A (D800–
0024). This information may be
examined at the Federal Aviation
Administration (FAA), Transport
Airplane Directorate, Rules Docket,
1601 Lind Avenue, SW., Renton,
Washington; or at the FAA, Los Angeles
Aircraft Certification Office, 3960
Paramount Boulevard, Lakewood,
California.
Jon
Mowery, Aerospace Engineer, Airframe
Branch, ANM–120L, FAA, Los Angeles
Aircraft Certification Office, 3960
Paramount Boulevard, Lakewood,
California 90712–4137; telephone (562)
627–5322; fax (562) 627–5210.
SUPPLEMENTARY INFORMATION: A
proposal to amend part 39 of the Federal
Aviation Regulations (14 CFR part 39) to
include an airworthiness directive (AD)
that is applicable to certain McDonnell
Douglas Model DC–8–11, DC–8–12, DC–
8–21, DC–8–31, DC–8–32, DC–8–33,
DC–8–41, DC–8–42, DC–8–43, DC–8F–
54, and DC–8F–55 airplanes; and DC–8–
50, DC–8–60, DC–8–60F, DC–8–70, and
DC–8–70F series airplanes; was
published in the Federal Register on
August 14, 2003 (68 FR 48576). For
certain airplanes, that action proposed
to require a one-time test to determine
the material of the upper inboard spar
cap of the wing, or a one-time
inspection to determine if the slant
panel cap has been repaired previously.
For most airplanes, this action also
proposed to require a one-time
inspection for corrosion of the slant
panel cap of the wing leading edge
assembly, and follow-on actions.
FOR FURTHER INFORMATION CONTACT:
Comments
Interested persons have been afforded
an opportunity to participate in the
making of this amendment. Due
consideration has been given to the
comments received from a single
commenter, who is the airplane
manufacturer.
Request To Add Conductivity Test for
Group 2 Airplanes
The commenter requests that we
revise paragraph (a) of the proposed AD
to add Group 2 airplanes, as identified
in McDonnell Douglas Service Bulletin
DC8–57–072 R03, Revision 03, dated
October 2, 1995. (Paragraph (a) of the
proposed AD specifies that the actions
in that paragraph apply to airplanes in
Group 1 of that service bulletin.) The
commenter points out that Group 1
airplanes are those that do not have a
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]]>Agencies
[Federal Register Volume 70, Number 144 (Thursday, July 28, 2005)]
[Rules and Regulations]
[Pages 43625-43628]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-14957]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Rules
and Regulations
[[Page 43625]]
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is
issuing a final regulation that sets 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.
EFFECTIVE DATE: August 29, 2005.
FOR FURTHER INFORMATION CONTACT: Isabella W. Sammons, Deputy 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
(Freddie Mac) (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.\1\
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\1\ 12 U.S.C. 4514.
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On February 25, 2005, OFHEO published for comment a proposed
regulation, at 70 FR 9255, which set forth proposed safety and
soundness requirements with respect to mortgage fraud reporting. The
30-day comment period was extended until April 4, 2005.\2\ All comments
received have been made available to the public in the OFHEO Public
Reading Room and also posted on the OFHEO Web site at https://
www.OFHEO.gov.
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\2\ 70 FR 15018 (March 24, 2005).
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Comments Received
Comments were received from the Inspector General for the Office of
Housing and Urban Development; the Mortgage Asset Research Institute, a
subsidiary of ChoicePoint Services Inc.; the Mortgage Bankers
Association, a national association representing the real estate
finance industry; the National Association of Mortgage Brokers; Freddie
Mac; Fannie Mae; the Consumer Mortgage Coalition, a trade group of
national residential mortgage lenders, servicers and service providers;
AMCO, a valuation management firm; and various private citizens. All
comments were taken into consideration. A discussion of the significant
comments as they relate to the proposed sections of the regulation
follows.
Purpose and Scope
Several commenters questioned the necessity for a regulation
expressly requiring reporting of mortgage fraud and possible mortgage
fraud and the benefits of such reporting to the Enterprises and the
mortgage industry. Two commenters recommended that OFHEO consider
alternative approaches, such as reliance on private industry
``ineligible'' lists.
The purpose of the regulation is to set forth safety and soundness
requirements and expectations with respect to the reporting of mortgage
fraud in furtherance of the supervisory responsibilities of OFHEO, that
is, ensuring the safe and sound operations of the Enterprises. OFHEO
must gain timely information on actual or possible mortgage fraud to
assure that adequate internal controls and systems exist to protect the
Enterprises from risks associated with such fraud. The information
provided will be the subject of review by the examination force of
OFHEO, as well as other appropriate OFHEO offices. The information will
assist OFHEO in assessing internal controls, security efforts,
management of risks, including reputation risk, and other factors
relevant to the safe and sound operation of the Enterprises. The
oversight by OFHEO of programs to detect and avoid mortgage fraud will
provide public understanding of the expectation that the Enterprises
will remain vigilant in resisting fraudulent practices and should have
a deterrent effect. OFHEO will develop a process for sharing of
information it acquires with law enforcement authorities, while
assuring that the Enterprises do not encounter liability issues.
The Federal Bureau of Investigation (FBI) indicated in Financial
Crimes Report to the Public (May 2005) that combating significant
mortgage fraud is an FBI priority because mortgage lending and the
housing market have a significant overall effect on the nation's
economy.\3\ The FBI explained that:
\3\ https://www.fbi.gov/publications/financial/fcs_report052005/
fcs_report052005.htm#d1.
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A significant portion of the mortgage industry is void of any
mandatory fraud reporting. In addition, mortgage fraud in the
secondary market is often underreported. Therefore, the true level
of mortgage fraud is largely unknown. The mortgage industry itself
does not provide estimates on total industry fraud. Based on various
industry reports and FBI analysis, mortgage fraud is pervasive and
growing.
In combating mortgage fraud, the FBI noted that it works actively to
investigate such fraud and has been fostering relationships and
partnerships with the mortgage industry, including the Enterprises.
While OFHEO has no authority to ``police'' the mortgage industry for
fraud or to prosecute mortgage fraud, OFHEO has noted that the
Enterprises, as part of the financial system, should operate in a
manner to deter fraud and thereby assist in system-wide efforts to make
mortgage fraud an unattractive avenue for corrupt individuals or
institutions.
The Enterprises currently investigate and maintain information on
mortgage
[[Page 43626]]
fraud and possible mortgage fraud. A formal reporting requirement to
OFHEO will focus Enterprise efforts on ensuring that internal policies,
procedures, and training programs are in place to minimize the risks
from mortgage fraud. No evidence exists that a formal reporting
requirement will create or increase burdens on the Enterprises. The
Enterprises currently investigate fraud or possible fraud, report fraud
to law enforcement authorities, and provide reports to OFHEO as
required; this regulation contemplates such routine reporting to OFHEO.
Additionally, no evidence exists that a formal reporting requirement
will require the mortgage industry as a whole to take on additional
burdens. The Enterprises currently, when fraud is suspected, inquire of
seller-servicers and others about business transactions and practices.
Furthermore, law enforcement authorities have reported that much of the
fraud involving secondary market parties relates to institutional
fraud, not individuals seeking to secure financing. Thus, Enterprise
efforts to report on possible or actual mortgage fraud should have no
regulatory burden for the mortgage finance industry as the Enterprises
already conduct due diligence in dealing with seller-servicers and
others in the mortgage finance system.
For the reasons set forth above and because of law enforcement
reports of an increasing incidence of mortgage-related fraud--and the
potential impact of such fraud on Enterprise profits, liquidity and
reputation--OFHEO has determined to issue the mortgage fraud reporting
regulation.
Definition of the Terms ``Mortgage Fraud'' and ``Possible Mortgage
Fraud.''
As proposed, 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 occurred.
OFHEO received a few comments on the definition of the term
``mortgage fraud.'' One commenter noted that the definition treats all
mortgage-backed securities (MBS) as equivalent to mortgages for
purposes of mortgage fraud, whether issued or guaranteed by an
Enterprise or whether issued or guaranteed by a third party. The
commenter explained that MBS issued and guaranteed by a third party may
present securities fraud issues, but not mortgage fraud issues, and
requested that the definition make clear that it covers only MBS issued
or guaranteed by an Enterprise. Two other commenters requested that the
definition should include the concept that the material misstatement,
misrepresentation, or omission be ``knowingly made'' or ``intentionally
made.''
OFHEO has revised the definition of the term ``mortgage fraud'' to
clarify that it covers MBS issued or guaranteed by an Enterprise. OFHEO
does not believe that it is necessary to include the concept that the
material misstatement, misrepresentation, or omission be ``knowingly
made'' or ``intentionally made.'' Such language goes to the definition
of fraud that is well established, as opposed to the definition of a
particular type, that is, fraud related to mortgages. In addition,
benchmarks or ``triggers'' for providing information to OFHEO, as
discussed below, will be developed as the reporting requirements are
implemented.
The term ``possible mortgage fraud'' was proposed to be defined to
mean that an Enterprise has cause to believe that mortgage fraud may be
occurring or has occurred. Some commenters recommended that OFHEO
should provide guidance, through regulation or through guidance
documents, as to triggers and level of verification, otherwise the
definition, they argued, is too broad. OFHEO agrees and will provide
guidance, as requested, as to these and related matters as part of the
implementation of the reporting requirements.
One commenter recommended that the definition should include the
element of good-faith judgment on the part of the Enterprise. Another
commenter recommended that the definition should include the element of
reasonable or justifiable cause to believe that mortgage fraud may be
occurring or has occurred. OFHEO agrees that the definition should be
modified to include ``reasonable cause'' and has clarified the
definition of the term ``possible mortgage fraud'' accordingly.
Unsafe and Unsound Conduct
Proposed Sec. 1731.3 would provide that 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. One commenter requested that this section should
clearly state that it does not prohibit the Enterprises from declining
purchases or requiring repurchases if the Enterprises are properly
reporting mortgage fraud or possible mortgage fraud. OFHEO agrees, and
has clarified the language of Sec. 1731.3 accordingly.
Reporting Time-Period
As proposed, Sec. 1731.4 would set forth the procedures for
reporting fraud and possible mortgage fraud to OFHEO. OFHEO would issue
implementation instructions with respect to reporting such fraud.
Section 1731.4 also would provide that if a situation requires the
immediate attention of OFHEO, an Enterprise would report immediately by
telephone or electronic communication.
A few commenters recommended that the proposed four-day
notification period was too short and recommended either a 30-day
period or that notification be ``prompt.'' OFHEO agrees that a
requirement for ``prompt reporting'' would permit flexibility in
addressing different situations and changing needs in the
implementation of the reporting requirement and has modified the
definition accordingly to remove the fixed time period and will address
notification requirements as part of the implementation of the rule.
The requirement for immediate reporting, when appropriate, remains.
One commenter recommended that the reporting requirement should not
be retroactive and apply only to mortgages purchased or not purchased
six months after the effective date of the regulation. OFHEO did not
propose and does not intend that the regulation have retroactive
application; OFHEO will work with the Enterprises for an effective
transition while the Enterprises develop and implement or enhance
reporting systems.
Non-Disclosure and Safe Harbor
As proposed, the section 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. The
proposed section expressly stated that the requirement would not
prevent an Enterprise from disclosing or reporting such fraud pursuant
to legal requirements, including reporting to appropriate law
enforcement authorities.
One commenter expressed a concern that the proposed section would
discourage the Enterprises from reporting fraud; another argued that
the Enterprises should be required to report fraud to law enforcement
authorities.
[[Page 43627]]
The Enterprises already have the authority to report fraud to law
enforcement; the major focus of concern of the proposed regulation is
the need to make routine reporting of possible mortgage fraud to OFHEO
and for OFHEO to take actions regarding such possible fraud. Another
commenter recommended the addition of a clarification that the
requirement of this section does not limit the Enterprise from
reporting fraud to a third party or from taking any legal or business
action it may deem appropriate, including an action involving the party
or parties connected with the mortgage fraud or possible mortgage
fraud. OFHEO agrees that this clarification is useful and has modified
the section accordingly.
A few commenters addressed ``safe harbor'' concerns, in that the
safe harbor provisions of the Bank Secrecy Act would not apply to the
Enterprises reporting of mortgage fraud to OFHEO, and leave the
Enterprises vulnerable to liability should OFHEO refer an Enterprise
report to another government agency. OFHEO recognizes the liability
concerns; nevertheless, OFHEO will continue to provide information on
mortgage fraud to appropriate authorities while addressing concerns
related to the absence of an explicit safe harbor.
Except with respect to the clarifications of the proposed language
as noted above, OFHEO has determined to issue the regulation as
proposed.
Regulatory Impact
Executive Order 12866, Regulatory Planning and Review
The 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 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 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 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.
0
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).
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, including a mortgage
associated with a mortgage-backed security or similar financial
instrument issued or guaranteed by an Enterprise. Such mortgage fraud
includes, but is not limited to, a material misstatement,
misrepresentation, or omission in 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 a
reasonable belief, based upon a review of information available to the
Enterprise, 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. An Enterprise may decline
such purchase or require such repurchase if it is reporting mortgage
fraud or possible mortgage fraud in accordance with Sec. 1731.4.
[[Page 43628]]
Sec. 1731.4 Procedures for reporting.
(a) Procedures for reporting. (1) Prompt report. An Enterprise
shall report promptly mortgage fraud or possible mortgage fraud in
writing to the Director in such format and under such notification
procedures 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.
(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
prohibit an Enterprise from--
(1) Disclosing or reporting such fraud pursuant to legal
requirements, including reporting to appropriate law enforcement or
other governmental authorities; or
(2) Taking any legal or business action it may deem appropriate,
including any action involving the party or parties connected with the
mortgage fraud or possible mortgage fraud.
(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: July 25, 2005.
Stephen A. Blumenthal,
Acting Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 05-14957 Filed 7-27-05; 8:45 am]
BILLING CODE 4220-01-P
