Financial Crimes Enforcement Network: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators, 76677-76688 [2010-30765]
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Federal Register / Vol. 75, No. 236 / Thursday, December 9, 2010 / Proposed Rules
comply with rigorous recordkeeping and
real-time reporting regimes.
and 3 p.m., by calling the Disclosure
Officer at (703) 905–5034 (not a toll-free
call).
FOR FURTHER INFORMATION CONTACT: The
FinCEN regulatory helpline at (800)
949–2732 and select Option 6.
SUPPLEMENTARY INFORMATION:
[FR Doc. 2010–30884 Filed 12–8–10; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506–AB02
Financial Crimes Enforcement
Network: Anti-Money Laundering
Program and Suspicious Activity
Report Filing Requirements for
Residential Mortgage Lenders and
Originators
Financial Crimes Enforcement
Network (‘‘FinCEN’’), Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
FinCEN, a bureau of the
Department of the Treasury
(‘‘Treasury’’), is issuing proposed rules
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: Written comments on this notice
of proposed rulemaking (‘‘NPRM’’) must
be submitted on or before February 7,
2011.
SUMMARY:
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ADDRESSES:
FinCEN: You may submit comments,
identified by Regulatory Identification
Number (RIN) 1506–AB02, by any of the
following methods:
• Federal E-rulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting comments.
Include 1506–AB02 in the submission.
Refer to Docket Number FINCEN–2010–
0001.
• Mail: FinCEN, P.O. Box 39, Vienna,
VA 22183. Include 1506–AB02 in the
body of the text. Please submit
comments by one method only.
Comments submitted in response to this
NPRM will become a matter of public
record. Therefore, you should submit
only information that you wish to make
publicly available.
Inspection of comments: Public
comments received electronically or
through the U.S. Postal Service sent in
response to a notice and request for
comment will be made available for
public review as soon as possible on
https://www.regulations.gov. Comments
received may be physically inspected in
the FinCEN reading room located in
Vienna, Virginia. Reading room
appointments are available weekdays
(excluding holidays) between 10 a.m.
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I. 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 program requirements on
financial institutions.3 The authority of
the Secretary to administer the BSA has
been delegated to the Director of
FinCEN.4
A. Anti-Money Laundering Programs
Financial institutions are required to
establish anti-money laundering
(‘‘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.5 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.’’ 6
The BSA defines the term ‘‘financial
institution’’ to include, in part, ‘‘a loan
or finance company.’’ 7 On April 29,
2002, and again on November 6, 2002,
FinCEN temporarily exempted this
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).
5 31 U.S.C. 5318(h).
6 Public Law 107–56 § 352(c), 115 Stat. § 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’’).
7 31 U.S.C. 5312(a)(2)(P).
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category of financial institution, among
others, from the requirement to establish
an AML program.8 The purpose of the
temporary exemption was to enable
Treasury and FinCEN to study the
exempted categories of institutions and
to consider the extent to which AML
requirements should be applied to them,
taking into account their specific
characteristics and money laundering
vulnerabilities.
The statutory mandate that all
financial institutions establish an antimoney laundering program is a key
element in the national effort to prevent
and detect money laundering and the
financing of terrorism. This NPRM
proposes to apply the AML program
requirement to companies performing
specified services in connection with
residential mortgages. This would put
these institutions on par with
depository institutions performing such
services in this respect.9
B. Suspicious Activity Reporting
Programs
With the enactment of 31 U.S.C.
5318(g) in 1992,10 Congress authorized
the Secretary to require financial
institutions to report suspicious
transactions. As amended by the USA
PATRIOT Act, subsection (g)(1) states:
The Secretary may require any financial
institution, and any director, officer,
employee, or agent of any financial
institution, to report any suspicious
transaction relevant to a possible violation of
law or regulation.
There has been a regulatory gap
between the BSA’s coverage of
depository institutions and residential
mortgage lenders and originators in that
the latter are currently not subject to
BSA requirements, the Suspicious
Activity Report (‘‘SAR’’) foremost among
them. Imposing a SAR requirement
would address this regulatory gap.
Moreover, a SAR requirement would
potentially expand the kinds of
activities being reported to FinCEN’s
BSA database, thereby giving our
regulatory and law enforcement partners
a more complete picture, both on a
systemic and case-specific level, of
8 See 31 CFR 103.170; 67 FR 21113 (Apr. 29,
2002), as amended at 67 FR 67549 (Nov. 6, 2002)
and corrected at 67 FR 68935 (Nov. 14, 2002).
9 See 31 CFR 103.120.
10 31 U.S.C. 5318(g) 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 (the
Money Laundering Suppression Act), 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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mortgage-related financial crimes. In
these and other respects, residential
mortgage lenders and originators may
assume an increasingly crucial role in
government and industry efforts to
protect consumers, mortgage finance
businesses, and the U.S. financial
system from money laundering and
other financial crimes.
C. Regulatory Background
On April 10, 2003, FinCEN issued an
advance notice of proposed rulemaking
(‘‘ANPRM’’) regarding AML
requirements for ‘‘persons involved in
real estate closings and settlements’’
(‘‘2003 ANPRM’’).11 The 2003 ANPRM
noted that the BSA had no definition of
the term ‘‘persons involved in real estate
closings and settlements;’’ that FinCEN
had not had occasion to define the term
in a regulation; and that the legislative
history of the term provided no insight
into how Congress intended the term to
be defined.
The 2003 ANPRM noted that real
estate transactions could involve
multiple ‘‘persons’’ (i.e., individuals and
business entities), including: real estate
agents, banks, mortgage banks, mortgage
brokers, title insurance companies,
appraisers, escrow agents, settlement
attorneys or agents, property inspectors,
and other persons directly and
tangentially involved in property
financing, acquisition, settlement, and
occupation. The 2003 ANPRM further
noted that persons involved in real
estate transactions, and the nature of
their involvement, could vary with the
contemplated use of the real estate, the
nature of the rights to be acquired, or
how these rights were to be held, e.g.,
for residential, commercial, portfolio
investment, or development purposes.
The 2003 ANPRM also expressed
FinCEN’s views as to guiding principles
that should be considered in defining
persons involved in real estate closings
and settlements. Any definitions or
terms that define the scope of the rule
should consider: (1) Those persons
whose services rendered or products
offered in connection with a real estate
closing or settlement can be abused by
money launderers; (2) those persons
who are positioned to identify the
purpose and nature of the transaction;
(3) the importance of various
participants to successful completion of
the transaction, which may suggest that
they are well positioned to identify
suspicious conduct; (4) the degree to
which professionals may have very
different roles, in different transactions,
11 See
68 FR 17569 (Apr. 10, 2003). This category
of financial institution is listed at 31 U.S.C.
5312(a)(2)(U).
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which may result in greater exposure to
money laundering; and (5) involvement
with the actual flow of funds used in the
transaction.12 FinCEN has not issued
any additional notices regarding persons
involved in real estate closings and
settlements since the 2003 ANPRM.
FinCEN has, in the interim, continued
its research and analysis related to the
various categories of financial
institutions exempted in 2002.
In view of increasing concern among
regulators, law enforcement, and
Congress over abusive and fraudulent
sales and financing practices in
residential mortgage markets, FinCEN
has undertaken a number of strategic,
outreach, and law enforcement support
initiatives and analytical reports related
to mortgage fraud.13
On July 21, 2009, FinCEN issued an
ANPRM entitled ‘‘Anti-Money
Laundering Program and Suspicious
Activity Report Requirements for NonBank Residential Mortgage Lenders and
Originators.’’ 14 The 2009 ANPRM
expressed FinCEN’s inclination to
develop AML and SAR program
regulations for a specific subset of loan
and finance companies: non-bank
residential mortgage lenders and
originators.15 The 2009 ANPRM
suggested that any new rules likely
would contain standards and
requirements analogous to those
currently applicable to federally
regulated depository institutions.16
D. Key Issues Related to Proposed AML
and SAR Regulations for Residential
Mortgage Lenders and Originators
With this NPRM, FinCEN is proposing
an incremental approach to
implementation of AML and SAR
regulations for loan and finance
companies that would focus first on
those business entities that are engaged
in residential mortgage lending or
origination and are not currently subject
to any AML or SAR program
requirement under the BSA. Residential
12 See
68 FR 17569, 17570 (Apr. 10, 2003).
Mortgage Fraud (a listing of FinCEN’s
mortgage fraud related initiatives) https://
www.fincen.gov/mortgagefraud. See also, remarks
of James H. Freis, Jr., Director, FinCEN, delivered
at the ABA/ABA Money Laundering Enforcement
Conference, Oct. 13, 2009 (the ‘‘Initiatives Speech’’),
https://www.fincen.gov/news_room/speech/html/
20071022. See also, remarks of Timothy Geithner,
Secretary, U.S. Department of the Treasury, on ‘‘The
Financial Fraud Enforcement Task Force’’, Nov. 17,
2009, https://www.fincen.gov/whatsnew/html/
20091117.
14 74 FR 35830 (July 21, 2009) (‘‘2009 ANPRM’’).
15 Id. See also note 7, supra. In this case, and
throughout this NPRM, the term ‘‘residential
mortgage originator’’ is defined to include, among
other persons, entities commonly referred to as
brokers in the residential mortgage sector.
16 See 74 FR at 35831.
13 See
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mortgage lenders and originators (e.g.,
independent mortgage loan companies
and mortgage brokers) 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 them from the abuses of
financial crime. FinCEN believes that
new regulations requiring residential
mortgage lenders and originators to
adopt AML programs and report
suspicious transactions would augment
FinCEN’s initiatives in this area. Among
other benefits, such regulations would
complement efforts underway by these
companies to comply with the
nationwide licensing system and
registry under development since the
passage of the Secure and Fair
Enforcement for Mortgage Licensing Act
of 2008 (‘‘SAFE Act’’).17 As mortgage
companies and brokers implement
systems and procedures to comply with
the SAFE Act, there will be
opportunities for them to review and
enhance their educational and training
programs to ensure that employees are
able to identify and deal with fraud,
money laundering, and other financial
crimes appropriately.
In the 2009 ANPRM, FinCEN sought
public comment on a wide range of
issues, including: (1) The incremental
approach to the issuance of regulations
for loan and finance companies that
would initially affect only those
businesses engaged in residential
mortgage lending or origination; (2) how
any such regulations should define
businesses engaged in residential
mortgage lending or origination; (3) the
financial crime and money laundering
risks posed by such businesses; (4) how
AML programs for such businesses
should be structured; (5) whether such
businesses should be covered by BSA
requirements other than the AML
program requirement and the SAR
reporting requirement; and (6) whether
certain businesses or transactions
should be exempted from AML program
or SAR reporting requirements. By
issuing this NPRM, FinCEN again
requests comments on these issues, this
time in the context of a specific
proposed regulation, as well as on the
matters addressed below.
FinCEN received twelve comments on
the 2009 ANPRM: one from the U.S.
Department of Justice; five from trade
associations; one from a Federal credit
17 See Title V of Division A of the Housing and
Economic Recovery Act of 2008, Public Law 110–
289, 122 Stat. 2810 (2008), codified at 12 U.S.C.
5101, et seq.
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union; one from a mortgage company;
one from a U.S. Senator; and three from
individuals writing on their own
behalf.18 The 2009 ANPRM sought
information on a number of key issues
related to the possible implementation
of AML and SAR program regulations
for the sector.
1. Risks of Mortgage Fraud and Money
Laundering
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As noted in the 2009 ANPRM and the
2003 ANPRM, the residential real estate
sector may be vulnerable at all stages of
the money laundering process. Money
laundering is a process by which the
illicit origin of funds is obscured, and a
plausible legitimate origin often
substituted.19 The crime of money
laundering is defined, in part, with
respect to the proceeds of specific
unlawful ‘‘predicate’’ activities. Both
mortgage fraud and the act of laundering
mortgage fraud proceeds are crimes, and
both are destructive to consumers,
individual businesses and the financial
system as a whole. Despite the relative
illiquidity of most real estate assets,
money launderers have used residential
mortgage transactions—fraudulently
and legitimately structured—to disguise
the proceeds of crime.
In recent years, a significant
percentage of SARs filed with FinCEN
have reported suspected fraud schemes
involving real estate lenders, brokers,
agents, appraisers, and other businesses
associated with real estate finance and
settlements.20 FinCEN studies also have
18 Comments to the 2009 ANPRM are available for
public viewing at https://www.regulations.gov.
19 There are three general stages of money
laundering: placement, layering, and integration.
The ‘‘placement’’ stage is the stage at which funds
from illegal activity or funds intended to support
illegal activity are first introduced into the financial
system. Money laundering ‘‘layering’’ involves the
distancing of illegal funds from their criminal
source through the creation of complex layers of
financial transactions. ‘‘Integration’’ occurs when
illegal funds are made to appear to have been
derived from a legitimate source.
20 See Advisory to Financial Institutions on Filing
Suspicious Activity Reports Regarding Home Equity
Conversion Mortgage Fraud Schemes, Apr. 2010,
https://www.fincen.gov/statutes_regs/guidance/htm/
fin-2010-a005.html ; Mortgage Loan Fraud Update,
Feb. 2010, https://www.fincen.gov/news_room/nr/
pdf/20100218.pdf; Filing Trends in Mortgage Loan
Fraud, Feb. 2009, https://www.fincen.gov/
news_room/nr/pdf/20090225a.pdf; Mortgage Loan
Fraud: an Update of Trends Based upon Analysis
of Suspicious Activity Reports, Apr. 2008, https://
www.fincen.gov/news_room/rp/files/
MortgageLoanFraudSARAssessment.pdf; Suspected
Money Laundering in the Residential Real Estate
Industry, Apr. 2008, https://www.fincen.gov/
news_room/rp/files/
MLR_Real_Estate_Industry_SAR_web.pdf; Money
Laundering in the Commercial Real Estate Industry;
Dec. 2006, https://www.fincen.gov/news_room/rp/
reports/pdf/CREassessment.pdf; Mortgage Loan
Fraud: An Industry Assessment Based Upon
Suspicious Activity Report Analysis, Nov. 2006,
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shown the connection between
businesses involved in mortgage fraud
and other suspected financial crimes.21
There was broad agreement among the
comments submitted on the 2009
ANPRM that the risks of fraud and other
financial crimes, including money
laundering, are substantial in the nonbank mortgage finance sector and
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.
A few comments stated that the primary
risk in the sector is mortgage fraud, and
that the risk of money laundering,
specifically, is lower than for fraud.
Such comments notwithstanding, the
proceeds of any mortgage fraud have a
high likelihood of being laundered
through other financial institutions
subject to the BSA, either directly in
conjunction with the granting of the
mortgage loan and related settlement
transactions or at a later stage in
conjunction with the placement,
layering or integration of proceeds
connected with the mortgage fraud.22
FinCEN requests comments that address
the experience of the residential
mortgage lending sector with money
laundering and fraud schemes generally.
FinCEN specifically requests
information regarding the existence of
any safeguards in the sector to guard
against fraud, money laundering, and
other financial crime, and the
applicability of such safeguards to the
development of AML and SAR reporting
programs.
2. An Incremental Approach to the
Sector: Starting With Residential
Mortgage Lenders and Originators
As is the case with the term ‘‘persons
involved in real estate closings and
settlements,’’ the term ‘‘loan or finance
company’’ is not defined or discussed in
any FinCEN regulation, and there is no
legislative history on the term. The
term, however, could conceivably
extend to any business entity that makes
loans to or finances purchases on behalf
of consumers and businesses. Loan and
finance companies originate loans and
leases to finance the purchase of
consumer goods such as automobiles,
furniture, and household appliances.
They also extend personal loans and
https://www.fincen.gov/news_room/rp/reports/pdf/
mortgage_fraud112006.pdf.
21 See Mortgage Loan Fraud Connections with
Other Financial Crime: An Evaluation of Suspicious
Activity Reports Filed by Money Services
Businesses, Securities and Futures Firms, Insurance
Companies and Casinos, Mar. 2009, https://
www.fincen.gov/news_room/rp/files/
mortgage_fraud.pdf.
22 Id.
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loans secured by real estate mortgages
and deeds of trust, including home
equity loans. They supply short- and
intermediate-term credit for such
purposes as the purchase of equipment
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.23
Comments submitted on the 2009
ANPRM expressed general support for
an incremental approach. One
commenter emphasized that the sector
has been the primary focus of recent
government-wide law enforcement antifraud programs. Another commenter
expressed the view that most if not all
state regulators of mortgage companies
likely would support FinCEN’s
proposal. While the comments
expressed general support for an
incremental approach, there also was
some concern voiced about limiting the
scope of the rules to residential
mortgage lenders and originators at this
time. A few commenters cautioned that
FinCEN should not delay
implementation of rules for other
consumer and commercial finance
companies and one commenter urged
FinCEN to implement such
requirements for persons involved in
real estate closings and settlements.
Arguably, the absence of rules for
these 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 to other consumer and
commercial finance businesses. As
noted in the 2009 ANPRM, FinCEN is
inclined to defer regulations for
commercial real estate finance
businesses and other types of consumer
and commercial finance businesses
until further research and analysis can
be conducted to enhance our
understanding of the number and kinds
of businesses in their sector, their
business operations and money
laundering vulnerabilities. For the same
23 The North American Industry Classification
System (‘‘NAICS’’) classifies approximately 10 types
of mortgage finance related businesses and
professions and over 60 other businesses,
professions and institutions (e.g., consumer and
commercial finance companies, pawnshops, auto
finance, equipment leasing, personal credit
companies, industrial loan companies and
government sponsored enterprises) as primarily
engaged in consumer and commercial lending and
finance. NAICS was developed as the standard for
use by Federal statistical agencies in classifying
business establishments for the collection, analysis,
and publication of statistical data related to the
business economy of the U.S. NAICS was
developed under the auspices of the Office of
Management and Budget (‘‘OMB’’), and adopted in
1997.
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reasons, FinCEN is not inclined at this
time to propose rules for real estate
agents and other persons involved in
real estate closings and settlements.
FinCEN will continue to study a range
of consumer and commercial finance
companies with a view toward
determining the extent to which it is
appropriate to expand the scope of the
definition of loan or finance company
proposed in this NPRM in a future
rulemaking. FinCEN seeks general
comment on the application of AML
program and SAR regulations to other
loan and finance companies. FinCEN
requests comment on how new AML
and SAR program requirements could
be integrated into existing compliance
and anti-fraud programs of such
companies.
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3. Scope of the Rules; Loan or Finance
Company
As noted above, ‘‘Loan or Finance
Company’’ is a term that could
encompass many categories of entities.
At this time, FinCEN is only addressing
residential mortgage lenders and
originators, but future rulemakings may
include other types of loan or finance
companies. A loan or finance company
does not include banks or persons
registered with and functionally
regulated or examined by the Securities
and Exchange Commission or the
Commodity Futures Trading
Commission, all of which are already
subject to AML program and SAR
reporting requirements. Additionally, a
loan or finance company does not
include an individual employed by a
loan or finance company or other
financial institution. FinCEN does not
seek to obligate individuals, but rather
businesses, including sole
proprietorships, because enterprise
wide anti-money laundering programs
are more effective and reduce
duplicative efforts.
4. Scope of the Rules; Residential
Mortgage Lender or Originator
The challenge for FinCEN in drafting
rules is that most real estate finance—
both residential and commercial—
involves complex transactions and
multiple parties whose roles are not
always readily discernable by the titles
and terms used to describe them in
generally accepted business practices or
under applicable licensing and
registration regimes. The primary
mortgage market in the United States is
fragmented, and even simple real estate
finance transactions may involve one or
more parties that may originate, fund,
broker, purchase, transfer, service,
securitize, or insure the mortgage loan.
Additionally, the market is fragmented
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between different types of entities, some
of which are already regulated financial
institutions, such as banks, and some of
which are small independent entities,
such as many mortgage brokers.
FinCEN believes that the views,
assumptions and guiding principles
noted in the 2003 ANPRM are equally
relevant to the development of AML
program and SAR reporting regulations
for residential mortgage lenders and
originators. In the 2009 ANPRM and the
2003 ANPRM, FinCEN stated that AML
obligations should be applicable to
those persons that ‘‘conduct the
activities that place them in the best
position to identify the nature of the
transaction, recognize suspicious
activity, and prevent misuse of their
services for money laundering and other
financial crimes.’’ 24 This activity-based
approach focuses on the nature of the
activity conducted and its primary
function in a particular residential
mortgage transaction, rather than on the
name or title ascribed to the person
facilitating the transaction.
Comments on the 2009 ANPRM
reflected broad agreement that the
definitions should be crafted so that the
rules encompass an appropriate range of
key non-bank residential mortgage
lenders and originators. FinCEN seeks
comment on which participants
involved in non-bank residential
mortgage finance are in a position where
they can effectively identify and guard
against fraud, money laundering, and
other financial crimes. Commenters
may, among other things, address both
the extent to which various participants
have access to information regarding the
nature and purpose of the transactions
at issue and the importance of the
participants’ involvement to successful
completion of the transactions.
Comments are welcome from those
involved centrally in the residential
mortgage finance process (i.e., those
who may act as an agent for some or all
of the parties and are responsible for
reviewing the form and type of
payment, as well as being aware of the
parties to the mortgage transaction), and
those who view their involvement as
more peripheral. FinCEN seeks
comment specifically on whether
FinCEN should adopt the definitions of
‘‘residential mortgage lender,’’
‘‘residential mortgage originator,’’ and
‘‘residential mortgage loan’’ set forth in
the proposed regulation at
103.11(ddd).25
24 2009
ANPRM, 74 FR at 35833.
noted in the 2009 ANPRM, several
definitions in current federal law (e.g., definitions
of ‘‘mortgage lending business’’ and ‘‘loan
originator’’) may be useful references for comments
25 As
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5. Scope of the Rules; Entities Not
Covered by the Definitions
The proposed definitions do not
include natural persons and certain
businesses and transactions, described
below.26 FinCEN therefore requests
comment on whether the definitions
used should be wider or narrower in
scope to include or exclude any specific
types of residential mortgage lenders or
originators or any specific category of
mortgage finance customer or
transaction. Two commenters on the
2009 ANPRM expressed the view that
any new rules should not recognize or
permit any exemptions or exceptions.
Consistent with FinCEN’s perspective
on the issue, several comments
submitted on the 2009 ANPRM
suggested that any exemptions FinCEN
considers should take into account and
balance the risks of money laundering
against the implementation and
compliance costs and obligations likely
to be borne by this sector. FinCEN
endeavors to balance and take into
account the benefits of the regulations
(including the prevention and detection
of money laundering and other financial
crimes, as well as the value to law
enforcement and regulatory agencies of
additional data on suspected financial
crimes) against the implementation and
compliance costs and obligations likely
to be borne by the industry.
One comment submitted on the 2009
ANPRM stated that individuals in
seller-financed transactions should be
excluded from the scope definitions, or
exempt from the rules. FinCEN agrees,
and this NPRM proposes exemptions for
individuals financing the sale of their
own real estate. Two comments on the
2009 ANPRM suggested that persons
conducting a de minimis number of
transactions—as few as one and as many
as five were suggested—should be
carved out of the scope definitions or
exempt. At this time, FinCEN does not
intend to propose an exemption for a
person that conducts or facilitates a
relatively low volume of mortgage
finance transactions if the person
nonetheless falls within the definition
of residential mortgage lender or
originator. FinCEN intends the proposed
regulations to reflect the distinction
between a seller-financed transaction
(which typically involves family
members or friends in a one-time
transaction) and a person that is
on the scope of the proposed regulations. See 74 FR
at 35833.
26 The proposed regulations apply to businesses,
including sole proprietorships, not individuals.
Thus, for example, individuals covered by the
SAFE Act definition of ‘‘loan originator,’’ 12 U.S.C.
5102(3)(A)(ii), would not be covered by the
proposed regulations.
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primarily engaged in the mortgage
finance business but for business
reasons or changes in markets,
competition or other factors, conducts
relatively few transactions within a
given period.
The proposed definitions also do not
include those persons that are solely
responsible for administrative functions
that support or facilitate residential
mortgage finance transactions. FinCEN
requests comment on whether it is
necessary for FinCEN to provide a
specific exemption for persons
performing administrative support
functions. Such an exemption would be
consistent with the SAFE Act, which
recognizes an administrative support
exemption or carve-out from the
definition of ‘‘loan originator.’’ 27
FinCEN seeks comment on whether
other specific businesses or transactions
should be excluded from the definition
of loan or finance company.
Comments regarding the scope of the
definitions should be designed to enable
FinCEN to evaluate the risks of money
laundering, the potential value to law
enforcement, and other relevant factors.
FinCEN also seeks suggestions on how
FinCEN may craft clearly delineated
categories of included and excluded
businesses or transactions.
6. Structure and Elements of AML and
SAR Regulations
The 2009 ANPRM stated FinCEN’s
inclination to propose AML and SAR
rules that have similar reporting
standards, thresholds, and procedures to
those set forth in AML and SAR
regulations for other industries. The
proposed AML and SAR rules contain
essentially the same standards and
requirements as the existing BSA rules
for other financial institutions.
FinCEN has promulgated SAR
reporting regulations for a number of
financial institutions that have AML
program requirements, including:
mutual funds, insurance companies,
futures commission merchants and
introducing brokers in commodities,
banks, brokers or dealers in securities,
money services businesses, and
casinos.28
In applying the AML program
requirements to residential mortgage
lenders and originators, FinCEN must
consider the extent to which the
standards for AML programs are
commensurate with the size, location,
and activities of such persons.29 FinCEN
recognizes that while large businesses
are engaged in mortgage finance,
businesses in this industry may also
include smaller companies or sole
proprietors. FinCEN thus seeks
comment on any particular concerns
smaller businesses may have regarding
the implementation of AML and SAR
reporting programs.
FinCEN believes that AML programs
will complement the anti-fraud and
general compliance programs that
residential mortgage lenders and
originators have established to comply
with the SAFE Act and other Federal
and State laws and protect their own
business operations. Many residential
mortgage lenders and originators may be
able to integrate risk-based AML
reporting programs into existing
enterprise-wide, anti-fraud, and
compliance programs in a
complementary manner that utilizes
efficiencies and commonalities and
enhances the effectiveness of a
business’s compliance measures. As
noted, these businesses also may have
procedures in place to prevent fraud,
which they may be able to integrate into
their AML programs.30 FinCEN seeks
comment on how the programs and
practices that residential mortgage
lenders and originators have in place to
prevent mortgage fraud and other illegal
activities may be applicable to the
development of AML and SAR
programs.
Accordingly, in this NPRM, FinCEN
proposes AML and SAR regulations
applicable to residential mortgage
lenders and originators that contain
similar reporting standards, thresholds,
and procedures to those set forth in
AML and SAR regulations for other
industries. As FinCEN has emphasized
in its recent reports on mortgage loan
fraud trends, SARs provide a valuable
tool for regulatory and law enforcement
agencies seeking to isolate specific
instances of potential criminal activity
for further investigation, and to identify
emerging money laundering and
terrorism financing trends.31 The due
diligence necessary for financial
institutions to detect and report known
or suspected suspicious activity greatly
reduces vulnerability to the abuses of
money laundering and terrorist
financing.
In response to the 2009 ANPRM, one
law enforcement agency stated that the
absence of SAR data from the sector has
impeded law enforcement analysis of
mortgage fraud and related crimes.
Several comments agreed that SARs
provide important, timely information
30 See
Initiatives Speech, page 4.
Filing Trends in Mortgage Loan Fraud, Feb.
2009, page 1, https://www.fincen.gov/news_room/nr/
pdf/20090225a.pdf.
27 See
12 U.S.C. 5102(3)(A)(ii).
28 See 31 CFR 103.15–103.21.
29 See note 6, supra.
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to help investigate and prosecute
financial crimes and that mortgage
lenders should be required to file SARs.
Three major trade associations stated
that mortgage lenders and originators
are in a unique position to identify and
report mortgage-related money
laundering and fraud.
Several commenters urged FinCEN to
propose only AML and SAR program
requirements for the sector at this time.
Because FinCEN believes an
incremental approach is appropriate,
FinCEN defers proposing additional
BSA regulations for the sector at this
time, including Currency Transaction
Report (CTR) requirements. Entities
subject to this regulation would still
have to file Form 8300 for transactions
involving the receipt of more than
$10,000 in currency. However, FinCEN
may determine, after further research,
that additional BSA regulations may be
appropriate for this sector. FinCEN
seeks comment on whether it should
consider other BSA regulations in
addition to AML program and SAR
requirements.
FinCEN seeks general comment
regarding the impact of the proposed
new rules, specifically: (1) The impact
of AML or SAR regulations on business
operations, profitability, growth and
practices; (2) the impact of AML or SAR
regulations or other BSA regulations on
consumers seeking to obtain residential
mortgages; (3) the effectiveness of
examining for and enforcing compliance
with any such regulatory requirements;
and (4) the advisability of establishing
some minimum transaction threshold
value or annual volume threshold below
which some or all regulatory
requirements would not apply. We also
solicit comment on the value to law
enforcement and regulatory agencies of
the proposed regulations. Comments on
all aspects of the NPRM are welcome,
and we encourage all interested parties
to provide their views.
7. Consideration of Examination
Authority
Generally, the Internal Revenue
Service has been delegated the authority
to examine for BSA compliance
purposes those regulated entities
without a Federal functional regulator
with broad supervisory authority.32
FinCEN seeks 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. FinCEN
also seeks comment on how frequently,
to what extent, and for compliance with
32 See,
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what laws and regulations loan or
finance companies are examined by
various state or other regulators and
whether such examination processes
may be relied on or otherwise used to
help in examination for compliance
with the BSA.
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II. Section-by-Section Analysis
A. Definition of Loan or Finance
Company
Section 103.11(ddd) defines the key
terms used in the proposed rules. The
definitions reflect FinCEN’s
determination that the term ‘‘loan or
finance company’’ should be limited, at
this time, to residential mortgage
lenders and originators, 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. The definition of a loan or
finance company includes entities that
engage in activities within the United
States, whether or not through an agent,
agency, branch or office, and does not
include banks or entities registered with
and functionally regulated or examined
by the Securities and Exchange
Commission or the Commodity Futures
Trading Commission. Additionally, a
loan or finance company does not
include an individual employed by a
loan or finance company or other
financial institution.
Residential mortgage lender is defined
as ‘‘[t]he 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 definition specifically
excludes an individual who finances the
sale of their own dwelling or real
property.
Residential mortgage originator is
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.’’
Residential mortgage loan is defined
as any loan ‘‘that is secured by a
mortgage, deed of trust, or other
equivalent consensual security interest’’
on a 1-to-4 family residential structure
or real estate on which a residential
structure will be built. This definition is
intended to encompass any loan secured
by residential real property, regardless
of whether the borrower is purchasing
the residential real property as a
primary residence, vacation home or
investment, is refinancing a purchase-
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money mortgage loan to obtain a more
favorable rate and/or terms, or is
obtaining a mortgage loan for another
purpose, such as debt consolidation or
mobilization of home equity. For this
definition, residential real property is
intended to be a broad category,
including condominiums, co-ops,
mobile homes intended to be used as
dwellings, vacation homes, and time
shares.
Comment is specifically invited on
whether the above definitions are
appropriate in light of money
laundering risks in the industry and the
strategic and policy goals set forth in
this notice and in the 2003 and 2009
ANPRMs. Comment also is specifically
invited on whether the final rule also
should require agents and brokers of
residential mortgage lenders and
originators, or any subsets of agents or
brokers, to adopt AML programs and
report suspicious transactions. Finally,
comment is specifically invited on
whether the proposed definition of
‘‘residential mortgage loan’’ manifests
with adequate clarity FinCEN’s stated
intent for the definition.
B. Reports of Suspicious Transactions
Section 103.14(a) 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 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 financial institutions.
Section 103.14(a)(1) contains the
general statement of the obligation to
file reports of suspicious transactions.
The obligation extends to transactions
conducted or attempted by, at, or
through a loan or finance company. The
rule also contains a provision in section
103.14(a)(1) designed to encourage the
reporting of transactions that appear
relevant to violations of law or
regulation, even in cases in which the
rule does not explicitly so require, for
example in the case of a transaction
falling below the $5,000 threshold in the
rule.
Section 103.14(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
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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.33
A determination as to whether a
report 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 associated with existing or
potential customers are referenced in
previous FinCEN reports on mortgage
fraud and money laundering in the
residential and commercial real estate
sectors.34 However, the means of
commerce and the techniques of money
laundering 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 guidance,
training programs, and governmentindustry information exchange so that
implementation of any new AML
program and SAR reporting regulations
can be implemented by covered
businesses in as flexible and cost
efficient way as possible, while
protecting the sector and the financial
system as a whole from fraud, money
laundering and other financial crimes.
Section 103.14(a)(3) provides that the
obligation to identify and to report a
suspicious transaction rests with the
loan or finance company involved in the
transaction. However, where more than
one loan or finance company, or another
financial institution with a separate
suspicious activity reporting obligation,
is involved in the same transaction, only
one report is required to be filed,
provided it contains all relevant facts
and each institution maintains a copy of
the report and any supporting
documentation.
The proposed rule is intended to
require that a loan or finance company
evaluate customer activity and
33 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.
34 See note 21, supra.
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relationships for fraud, money
laundering and other financial crime
risks, and design a suspicious
transaction monitoring program that is
appropriate for the particular loan or
finance company in light of such risks.
Section 103.14(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. Supporting
documentation relating to each SAR is
to be collected and maintained
separately by the loan or finance
company and made 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 BSA, or any state regulatory
authority that examines the loan or
finance company for compliance with
state law requiring compliance with the
BSA,35 upon request. Because
supporting documentation has been
deemed to have been filed with the
SAR, these parties are consistent with
those parties to whom a SAR may be
disclosed as discussed in the rules of
construction, below. For situations
requiring immediate attention, loan or
finance companies are to telephone the
appropriate law enforcement authority
in addition to filing a SAR.
Section 103.14(c) provides that filing
loan or finance companies must
maintain copies of SARs and the
underlying related documentation for a
period of five years from the date of
filing. As indicated above, supporting
documentation is to be made available
to FinCEN and the prescribed law
enforcement and regulatory authorities,
upon request.
Section 103.14(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 proposed rule or is filed
voluntarily).36 Thus, the section
requires that a SAR and information that
would reveal the existence of that SAR
35 State regulatory authorities are generally
authorized by state law to examine for compliance
with the BSA in one of two ways: (1) The law
authorizes the state authority to examine the
institution for compliance with all Federal laws and
regulations generally or with the BSA explicitly, or
(2) the law requires a financial institution to comply
with all Federal laws and regulations generally or
with the BSA explicitly, and authorizes the State
authority to examine for compliance with the State
law. An institution may provide SAR information
to a state regulatory authority meeting either
criterion.
36 See 31 U.S.C. 5318(g)(2).
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(‘‘SAR information’’) be kept
confidential and not be disclosed except
as authorized within the rules of
construction. The proposed 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 that examines the
loan or finance company for compliance
with state law requiring compliance
with the BSA.37 This confidentiality
provision also does not prohibit the
disclosure of the underlying facts,
transactions, and documents upon
which a SAR is based, 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.38
Section 103.14(d)(2) incorporates the
statutory prohibition against disclosure
of SAR information, other than in
fulfillment of their 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 by
a non-governmental entity for nonpublic information 39 or for use in a
private legal proceeding, including a
request under 31 CFR 1.11.40
Section 103.14(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).
37 See
note 38, supra.
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. To date, no such guidance has been
issued for the loan or finance industry.
39 For purposes of this rulemaking, ‘‘non-public
information’’ refers to information that is exempt
from disclosure under the Freedom of Information
Act.
40 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 103.14(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 rule may constitute a violation of the
BSA and the BSA regulations.
Section 103.14(g) provides that the
new SAR requirement applies to
transactions occurring after the later of
six months from the effective date of a
final rule or the establishment of a
business entity subject to the rules.
C. Anti-Money Laundering Program
Section 103.142(a) 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. The
program must be in writing and must be
approved by senior management. A loan
or finance company’s written program
also must be made available to FinCEN
upon request. The minimum
requirements for the AML program are
set forth in section 103.142(b). Beyond
these minimum requirements, however,
the proposed rule is intended to give
loan or finance companies the flexibility
to design their programs to mitigate
their own enterprise-specific risks.
Section 103.142(b) sets forth the
minimum requirements of a loan or
finance company’s AML program.
Section 103.142(b)(1) requires the AML
program to 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, customers, distribution
channels, and geographic locations. As
explained above, a loan or finance
company’s assessment of customerrelated information, such as methods of
payment, is a key component to an
effective AML program. Thus, a loan or
finance company’s AML program must
ensure that the company obtains all the
information necessary to make its AML
program effective. Such information
includes, but is not limited to, relevant
customer information collected and
maintained by the loan or finance
company’s agents and brokers. The
specific means to obtain such
information is left to the discretion of
the loan or finance company, although
FinCEN anticipates that the loan or
finance company may need to amend
existing agreements with its agents and
brokers to ensure that the company
receives necessary customer
information. For purposes of making the
required risk assessment, a loan or
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finance company must consider all
relevant information.
Policies, procedures, and internal
controls also must be reasonably
designed to ensure compliance with
BSA requirements. Loan or finance
companies may conduct some of their
operations through agents and thirdparty service providers. Some elements
of the compliance program may best be
performed by personnel of these
entities, in which case it is permissible
for a loan or finance company to
delegate contractually the
implementation and operation of those
aspects of its AML program to such an
entity. Any loan or finance company
that delegates responsibility for aspects
of its AML program to an agent or a
third party, however, remains fully
responsible for the effectiveness of the
program, as well as ensuring that
compliance examiners are able to obtain
information and records relating to the
AML program.
Section 103.142(b)(2) requires that a
loan or finance company designate a
compliance officer to be responsible for
administering the AML program. A loan
or finance company may designate a
single person or committee to be
responsible for compliance. The person
or persons should be competent and
knowledgeable regarding BSA
requirements and money laundering
issues and risks, and should be
empowered with full responsibility and
authority to develop and enforce
appropriate policies and procedures.
The role of the compliance officer is to
ensure that (1) the program is
implemented effectively; (2) the
program is updated as necessary; and
(3) appropriate persons are trained and
educated in accordance with section
103.142(b)(3).
Section 103.142(b)(3) requires that a
loan or finance company provide for
education and training of appropriate
persons. Employee training is an
integral part of any AML program. In
order to carry out their responsibilities
effectively, employees of a loan or
finance company (and of any agent or
third-party service provider) with
responsibility under the program must
be trained in the requirements of the
rule and money laundering risks
generally so that red flags associated
with existing or potential customers can
be identified. Such training may be
conducted by outside or in-house
seminars, and may include computerbased training. The nature, scope, and
frequency of the education and training
program of the loan or finance company
will depend upon the employee
functions performed. However, those
with obligations under the AML
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program must be sufficiently trained to
carry out their responsibilities
effectively. Moreover, these employees
should receive periodic updates and
refreshers regarding the AML program.
Section 103.142(b)(4) requires that a
loan or finance company provide for
independent testing of the program on
a periodic basis to ensure that it
complies with the requirements of the
rule and that the program functions as
designed. An outside consultant or
accountant need not perform the test.
The review may be conducted by an
officer, employee or group of
employees, so long as the reviewer is
not the designated compliance officer
and does not report directly to the
compliance officer. The frequency of the
independent testing will depend upon
the loan or finance company’s
assessment of the risks posed. Any
recommendations resulting from such
testing should be implemented
promptly or reviewed by senior
management.
Section 103.142(c) states that
compliance with the AML program
requirements will be determined by
FinCEN or its delegates, under the terms
of the BSA.
III. Proposed Location in Chapter X
As discussed in a previous Federal
Register Notice,41 FinCEN is separately
proposing to remove part 103 of chapter
I of title 31, Code of Federal
Regulations, and add the reorganized
contents of part 103 as new parts 1000
to 1099 (‘‘chapter X’’). If the notice of
proposed rulemaking for chapter X is
finalized, the changes in the present
proposed rule would be reorganized
according to the proposed Chapter X.
The planned reorganization will have
no substantive effect on the regulatory
changes herein. The regulatory changes
of this specific rulemaking would be
renumbered according to the proposed
Chapter X as follows:
(a) 103.11 would be moved to
1010.100;
(b) 103.14 would be moved to
1029.320; and
(c) 103.142 would be moved to
1029.210.
IV. Regulatory Flexibility Act
When an agency issues a rulemaking
proposal, the Regulatory Flexibility Act
(‘‘RFA’’) requires the agency to ‘‘prepare
and make available for public comment
an initial regulatory flexibility analysis,’’
which will ‘‘describe the impact of the
proposed rule on small entities.’’ 42
Section 605 of the RFA allows an
41 73
42 5
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agency to certify a rule, in lieu of
preparing an analysis, if the proposed
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 proposed rule will
apply:
For the purpose of arriving at an
estimated number of residential
mortgage lenders and originators,
FinCEN is relying on information
gathered from various public sources,
including major trade associations and
associations of government regulators.
Estimates based on this data suggest that
as of 2010 there are approximately
31,000 qualifying entities in the United
States, down from approximately 42,000
in 2009. FinCEN also referred to
information gathered from the NAICS
codes,43 which lists loan and finance
companies as NAICS codes 522292
(Real Estate Credit) and 522310
(Mortgage and Nonmortgage Loan
Brokers). The U.S. Census Bureau
estimated there were about 36,275
entities in these classifications in 2002.
However, these classifications include
services that are outside of those
provided by loan and finance
companies (i.e. bank lenders), so the
number of loan or finance companies to
which this proposed rule is applicable
could be significantly less. Within this
classification, those entities that have
less than 7 million dollars in gross
revenue are considered small. FinCEN
estimates that 95% of the affected
industry is considered a small business,
and that the proposed regulation would
affect all of them.
Description of the projected reporting
and recordkeeping requirements of the
proposed rule:
The proposed rule would require loan
and 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
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and to detect and report suspicious
transactions.44
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AML Program Requirement in General
The proposed rule would not impose
significant burdens on loan and finance
companies. These companies may build
on their existing risk management
procedures and prudential business
practices to ensure compliance with this
rule. FinCEN and other agencies have
issued substantial guidance on the
development of AML programs and SAR
reporting requirements.45 Most loan and
finance companies subject to the
proposed rule would not need to obtain
more sophisticated legal or accounting
advice than that already required to run
their businesses. Residential mortgage
lenders and originators undertake
thorough 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
would be expected in any programs to
prevent money laundering and detect
and report suspicious transactions.
FinCEN seeks 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.
Finally, FinCEN believes that the
flexibility incorporated into the
proposed rule would permit each loan
or finance company to tailor its AML
program to fit its own size and needs.
In this regard, FinCEN believes that
expenditures associated with
establishing and implementing an AML
44 See, e.g., Form 1003 Uniform Residential
Mortgage Application, available at https://
www.efanniemae.com/sf/formsdocs/forms/pdf/
sellingtrans/1003.pdf or https://
www.freddiemac.com/uniform/doc/
form_65_urla_7_05.doc.
45 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, https://www.fincen.gov/
statutes_regs/guidance/html/
narrativeguidance_webintro.html; Guidance—
Suggestions for Addressing Common Errors Noted
in Suspicious Activity Reporting, Oct. 10, 2007,
https://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),
https://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., https://www.fincen.gov/
statutes_regs/guidance/html/
narrativeguidance_webintro.html. See also notes 13
and 21, supra.
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program will be commensurate with the
size and risk profile of a loan or finance
company. If a loan or finance company
is small or does not engage in high risk
transactions, therefore, the burden to
comply with the proposed rule should
be minimal. FinCEN estimates that the
impact of this requirement would not be
significant.
Suspicious Activity Reporting
The proposed rule would require loan
and finance companies to report on
transactions of $5,000 or more which
they determine to be suspicious. Loan
and finance companies have not been
previously required to comply with
such a requirement under regulation.
However, as noted above, most loan and
finance companies, in order to remain
viable, have in place policies and
procedures to prevent and detect fraud.
Such anti-fraud measures should assist
loan and finance companies in reporting
suspicious transactions. Many loan and
finance companies already voluntarily
report suspicious transactions and fraud
through entities such as the Loan
Modification Scam Prevention
Network.46 Additionally, loan and
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 such companies
already use will, after this proposed
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.47 Therefore, FinCEN
estimates that the burden of the SAR
filing requirements for loan and finance
companies would be low.
Certification
The additional burden proposed by
the rule would be a requirement to
maintain an AML program and a SAR
filing requirement. As discussed above,
FinCEN estimates that the impact from
46 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 U.S. Department of Housing and
Urban Development (HUD), U.S. Department of
Justice, the U.S. Treasury Department, the Federal
Bureau of Investigation, and state Attorneys General
offices, as well as leading non-profit organizations
from across the country. See https://
www.preventloanscams.org/.
47 See Form 1003 Uniform Residential Mortgage
Application, available at https://
www.efanniemae.com/sf/formsdocs/forms/pdf/
sellingtrans/1003.pdf or https://
www.freddiemac.com/uniform/doc/
form_65_urla_7_05.doc.
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76685
these requirements would not be
significant. Accordingly, FinCEN
certifies that the proposed rule would
not have a significant impact on a
substantial number of small entities.
Questions for Comment:
1. Please provide comment on any or
all of the provisions in the proposed
rule with regard to (a) the impact of the
provision(s) (including any benefits and
costs), if any, in carrying out
responsibilities under the proposed rule
and (b) what less burdensome
alternatives if any, FinCEN should
consider.
2. Please provide comment regarding
whether the AML program and SAR
reporting requirements proposed in this
rule would require entities to gather any
information not already gathered as part
of the due diligence, underwriting, and
compliance process and provide
specific examples of such information.
V. Paperwork Reduction Act Notices
The collection of information
contained in this proposed rule is being
submitted to OMB for review in
accordance with the Paperwork
Reduction Act of 1995 (‘‘PRA’’).48
Comments on the collection of
information should be sent (preferably
by fax (202–395–6974)) to Desk Officer
for the Department of the Treasury,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Paperwork Reduction Project
(1506), Washington, DC 20503 or by the
Internet to
OIRA_submission@omb.eop.gov, with a
copy to the FinCEN by mail. Comments
on the collection of information should
be received by February 7, 2011.
In accordance with the requirements
of the PRA,49 and its implementing
regulations, 5 CFR part 1320, the
following information concerning the
collection of information is presented to
assist those persons wishing to
comment on the information collection.
The information collections in this
proposal are contained in 31 CFR 103.14
and 31 CFR 103.142.
AML program for loan and finance
companies:
AML programs for loan and finance
companies (31 CFR 103.142). This
information would be required to be
retained pursuant to 31 U.S.C. 5318(h)
and proposed 31 CFR 103.142. The
collection of information would be
mandatory. The information collected
would be pursuant to 103.142 and
would be used by examiners to
48 44
U.S.C. 3507(d).
44 U.S.C. 3506(c)(2)(A).
49 See
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determine whether loan and finance
companies comply with the BSA.
Description of Recordkeepers: Loan
and finance companies as defined in 31
CFR 103.11(ddd).
Estimated Number of Recordkeepers:
31,000.
Estimated Average Annual Burden
Hours per Recordkeeper: The estimated
average annual burden associated with
the recordkeeping requirement in
proposed 31 CFR 103.142 is three hours.
Estimated Total Annual
Recordkeeping Burden: FinCEN
estimates that the annual recordkeeping
burden would be 93,000 hours.
This burden 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 and finance companies. The new
total burden will 94,200 hours.
SAR filing for loan and finance
companies.
SARs for loan and finance companies
(proposed 31 CFR 103.14). This
information would be required to be
provided pursuant to 31 U.S.C. 5318(g)
and 31 CFR 103.14. This information
would be 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 proposal
would increase the number of
recordkeepers by 31,000.
Description of Recordkeepers: Loan
and finance companies as defined in 31
CFR 103.11(ddd).
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 103.14 is 2 hours per report, and
FinCEN estimates that, on average, one
report per filer will be filed per year.
Estimated Total Annual
Recordkeeping Burden: The proposal
would increase the estimated annual
burden by 62,000, consisting of one
hour for report completion and one hour
for required recordkeeping.
This is a new requirement that will
require a new OMB Control Number
1506–XXXX.
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.
Questions for Comment:
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1. We seek comments on FinCEN’s
three-hour recordkeeping estimate for
the establishment of AML programs by
loan and finance companies; whether
this estimate is too low; and, if so, an
estimate that better reflects industry
practices. We also ask commenters to
provide an estimate of costs associated
with establishing these AML programs,
especially with regards to systems and
labor costs.
2. We seek comment on FinCEN’s
two-hour estimate for annual SAR
filings by loan and finance companies
and whether this estimate is too low.
We also ask commenters to provide an
estimate of costs associated with the
SAR filing requirement.
VI. Executive Order 12866
It has been determined that this
proposed rule is a significant regulatory
action for purposes of Executive Order
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 proposed
regulation, FinCEN has determined that
it is not required to prepare a written
statement under section 202.
List of Subjects in 31 CFR Part 103
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, part 103 of title 31 of the
Code of Federal Regulations is proposed
to be amended as follows:
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PART 103—FINANCIAL
RECORDKEEPING AND REPORTING
OF CURRENCY AND FINANCIAL
TRANSACTIONS
1. The authority citation for part 103
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.
2. Add new § 103.11(ddd) to read as
follows:
§ 103.11
Meaning of terms.
*
*
*
*
*
(ddd) 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 (ddd), 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, or an individual
employed by a loan or finance company
or financial institution under this part.
(1) Residential mortgage lender or
originator. For purposes of this part:
(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 that takes a residential mortgage
loan application and offers or negotiates
terms of a residential mortgage loan for
compensation or gain.
(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
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(B) Residential real estate upon which
such a structure is constructed or
intended to be constructed.
(2) [Reserved]
3. Add new § 103.14 to subpart B to
read as follows:
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§ 103.14 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
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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 the FinCEN in accordance
with the instructions to the SAR.
(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 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
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76687
supporting documentation available 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 that examines the
loan or finance company for compliance
with state law requiring compliance
with the BSA 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 that examines the
loan or finance company for compliance
with state law requiring compliance
with the BSA; or
(2) The underlying facts, transactions,
and documents upon which a SAR is
based, including disclosures to another
financial institution, or any director,
officer, employee, or agent of a financial
institution, for the preparation of a joint
SAR; or
(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
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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, to a nongovernmental entity 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) Applicability date. This section
applies to transactions initiated after an
anti-money laundering program
required by section 103.142 of this part
is required to be implemented.
4. Add new § 103.142 to subpart I to
read as follows:
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§ 103.142 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
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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.
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(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) Effective date. A loan or finance
company must develop and implement
an anti-money laundering program that
complies with the requirements of this
section on or before the later of six
months from the effective date of the
regulation, or six months after the date
a loan or finance company is established
and becomes subject to the requirements
of this section.
5. Amend § 103.170 as follows:
a. Remove paragraph (b)(1)(ii).
b. Redesignate paragraphs (b)(1)(iii)
through (b)(1)(x) as paragraphs (b)(1)(ii)
through (b)(1)(ix) respectively.
Dated: December 2, 2010.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement
Network.
[FR Doc. 2010–30765 Filed 12–8–10; 8:45 am]
BILLING CODE 4802–10–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 117
[Docket No. USCG–2010–0612]
RIN 1625–AA09
Drawbridge Operation Regulation; Isle
of Wight (Sinepuxent) Bay, Ocean City,
MD
Coast Guard, DHS.
Notice of proposed rulemaking.
AGENCY:
ACTION:
The Coast Guard proposes to
change the regulations that govern the
operation of the US 50 Bridge over Isle
of Wight (Sinepuxent) Bay, mile 0.5, at
Ocean City, MD. This proposed rule will
require any mariner requesting an
opening in the evening hours during the
off-season, to do so before the tender
office has vacated for the night. The
proposed change will ensure draw
tender availability for every scheduled
opening. The Coast Guard also proposes
to change the waterway location from
Isle of Wight Bay to Isle of Wight
(Sinepuxent) Bay. This waterway is
known locally as both Isle of Wight Bay
and Sinepuxent Bay.
DATES: Comments and related material
must reach the Coast Guard on or before
February 7, 2011.
ADDRESSES: You may submit comments
identified by docket number USCG–
SUMMARY:
E:\FR\FM\09DEP1.SGM
09DEP1
]]>Agencies
[Federal Register Volume 75, Number 236 (Thursday, December 9, 2010)]
[Proposed Rules]
[Pages 76677-76688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-30765]
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DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AB02
Financial Crimes Enforcement Network: Anti-Money Laundering
Program and Suspicious Activity Report Filing Requirements for
Residential Mortgage Lenders and Originators
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: FinCEN, a bureau of the Department of the Treasury
(``Treasury''), is issuing proposed rules 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: Written comments on this notice of proposed rulemaking
(``NPRM'') must be submitted on or before February 7, 2011.
ADDRESSES:
FinCEN: You may submit comments, identified by Regulatory
Identification Number (RIN) 1506-AB02, by any of the following methods:
Federal E-rulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. Include 1506-AB02 in
the submission. Refer to Docket Number FINCEN-2010-0001.
Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include 1506-
AB02 in the body of the text. Please submit comments by one method
only. Comments submitted in response to this NPRM will become a matter
of public record. Therefore, you should submit only information that
you wish to make publicly available.
Inspection of comments: Public comments received electronically or
through the U.S. Postal Service sent in response to a notice and
request for comment will be made available for public review as soon as
possible on https://www.regulations.gov. Comments received may be
physically inspected in the FinCEN reading room located in Vienna,
Virginia. Reading room appointments are available weekdays (excluding
holidays) between 10 a.m. and 3 p.m., by calling the Disclosure Officer
at (703) 905-5034 (not a toll-free call).
FOR FURTHER INFORMATION CONTACT: The FinCEN regulatory helpline at
(800) 949-2732 and select Option 6.
SUPPLEMENTARY INFORMATION:
I. 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 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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A. Anti-Money Laundering Programs
Financial institutions are required to establish anti-money
laundering (``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.\5\
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.'' \6\
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\5\ 31 U.S.C. 5318(h).
\6\ Public Law 107-56 Sec. 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'').
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The BSA defines the term ``financial institution'' to include, in
part, ``a loan or finance company.'' \7\ On April 29, 2002, and again
on November 6, 2002, FinCEN temporarily exempted this category of
financial institution, among others, from the requirement to establish
an AML program.\8\ The purpose of the temporary exemption was to enable
Treasury and FinCEN to study the exempted categories of institutions
and to consider the extent to which AML requirements should be applied
to them, taking into account their specific characteristics and money
laundering vulnerabilities.
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\7\ 31 U.S.C. 5312(a)(2)(P).
\8\ See 31 CFR 103.170; 67 FR 21113 (Apr. 29, 2002), as amended
at 67 FR 67549 (Nov. 6, 2002) and corrected at 67 FR 68935 (Nov. 14,
2002).
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The statutory mandate that all financial institutions establish an
anti-money laundering program is a key element in the national effort
to prevent and detect money laundering and the financing of terrorism.
This NPRM proposes to apply the AML program requirement to companies
performing specified services in connection with residential mortgages.
This would put these institutions on par with depository institutions
performing such services in this respect.\9\
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\9\ See 31 CFR 103.120.
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B. Suspicious Activity Reporting Programs
With the enactment of 31 U.S.C. 5318(g) in 1992,\10\ Congress
authorized the Secretary to require financial institutions to report
suspicious transactions. As amended by the USA PATRIOT Act, subsection
(g)(1) states:
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\10\ 31 U.S.C. 5318(g) 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 (the Money Laundering Suppression Act), 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.
The Secretary may require any financial institution, and any
director, officer, employee, or agent of any financial institution,
to report any suspicious transaction relevant to a possible
---------------------------------------------------------------------------
violation of law or regulation.
There has been a regulatory gap between the BSA's coverage of
depository institutions and residential mortgage lenders and
originators in that the latter are currently not subject to BSA
requirements, the Suspicious Activity Report (``SAR'') foremost among
them. Imposing a SAR requirement would address this regulatory gap.
Moreover, a SAR requirement would potentially expand the kinds of
activities being reported to FinCEN's BSA database, thereby giving our
regulatory and law enforcement partners a more complete picture, both
on a systemic and case-specific level, of
[[Page 76678]]
mortgage-related financial crimes. In these and other respects,
residential mortgage lenders and originators may assume an increasingly
crucial role in government and industry efforts to protect consumers,
mortgage finance businesses, and the U.S. financial system from money
laundering and other financial crimes.
C. Regulatory Background
On April 10, 2003, FinCEN issued an advance notice of proposed
rulemaking (``ANPRM'') regarding AML requirements for ``persons
involved in real estate closings and settlements'' (``2003
ANPRM'').\11\ The 2003 ANPRM noted that the BSA had no definition of
the term ``persons involved in real estate closings and settlements;''
that FinCEN had not had occasion to define the term in a regulation;
and that the legislative history of the term provided no insight into
how Congress intended the term to be defined.
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\11\ See 68 FR 17569 (Apr. 10, 2003). This category of financial
institution is listed at 31 U.S.C. 5312(a)(2)(U).
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The 2003 ANPRM noted that real estate transactions could involve
multiple ``persons'' (i.e., individuals and business entities),
including: real estate agents, banks, mortgage banks, mortgage brokers,
title insurance companies, appraisers, escrow agents, settlement
attorneys or agents, property inspectors, and other persons directly
and tangentially involved in property financing, acquisition,
settlement, and occupation. The 2003 ANPRM further noted that persons
involved in real estate transactions, and the nature of their
involvement, could vary with the contemplated use of the real estate,
the nature of the rights to be acquired, or how these rights were to be
held, e.g., for residential, commercial, portfolio investment, or
development purposes.
The 2003 ANPRM also expressed FinCEN's views as to guiding
principles that should be considered in defining persons involved in
real estate closings and settlements. Any definitions or terms that
define the scope of the rule should consider: (1) Those persons whose
services rendered or products offered in connection with a real estate
closing or settlement can be abused by money launderers; (2) those
persons who are positioned to identify the purpose and nature of the
transaction; (3) the importance of various participants to successful
completion of the transaction, which may suggest that they are well
positioned to identify suspicious conduct; (4) the degree to which
professionals may have very different roles, in different transactions,
which may result in greater exposure to money laundering; and (5)
involvement with the actual flow of funds used in the transaction.\12\
FinCEN has not issued any additional notices regarding persons involved
in real estate closings and settlements since the 2003 ANPRM. FinCEN
has, in the interim, continued its research and analysis related to the
various categories of financial institutions exempted in 2002.
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\12\ See 68 FR 17569, 17570 (Apr. 10, 2003).
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In view of increasing concern among regulators, law enforcement,
and Congress over abusive and fraudulent sales and financing practices
in residential mortgage markets, FinCEN has undertaken a number of
strategic, outreach, and law enforcement support initiatives and
analytical reports related to mortgage fraud.\13\
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\13\ See Mortgage Fraud (a listing of FinCEN's mortgage fraud
related initiatives) https://www.fincen.gov/mortgagefraud. See also,
remarks of James H. Freis, Jr., Director, FinCEN, delivered at the
ABA/ABA Money Laundering Enforcement Conference, Oct. 13, 2009 (the
``Initiatives Speech''), https://www.fincen.gov/news_room/speech/html/20071022. See also, remarks of Timothy Geithner, Secretary,
U.S. Department of the Treasury, on ``The Financial Fraud
Enforcement Task Force'', Nov. 17, 2009, https://www.fincen.gov/whatsnew/html/20091117.
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On July 21, 2009, FinCEN issued an ANPRM entitled ``Anti-Money
Laundering Program and Suspicious Activity Report Requirements for Non-
Bank Residential Mortgage Lenders and Originators.'' \14\ The 2009
ANPRM expressed FinCEN's inclination to develop AML and SAR program
regulations for a specific subset of loan and finance companies: non-
bank residential mortgage lenders and originators.\15\ The 2009 ANPRM
suggested that any new rules likely would contain standards and
requirements analogous to those currently applicable to federally
regulated depository institutions.\16\
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\14\ 74 FR 35830 (July 21, 2009) (``2009 ANPRM'').
\15\ Id. See also note 7, supra. In this case, and throughout
this NPRM, the term ``residential mortgage originator'' is defined
to include, among other persons, entities commonly referred to as
brokers in the residential mortgage sector.
\16\ See 74 FR at 35831.
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D. Key Issues Related to Proposed AML and SAR Regulations for
Residential Mortgage Lenders and Originators
With this NPRM, FinCEN is proposing an incremental approach to
implementation of AML and SAR regulations for loan and finance
companies that would focus first on those business entities that are
engaged in residential mortgage lending or origination and are not
currently subject to any AML or SAR program requirement under the BSA.
Residential mortgage lenders and originators (e.g., independent
mortgage loan companies and mortgage brokers) 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 them from the abuses of financial crime. FinCEN believes
that new regulations requiring residential mortgage lenders and
originators to adopt AML programs and report suspicious transactions
would augment FinCEN's initiatives in this area. Among other benefits,
such regulations would complement efforts underway by these companies
to comply with the nationwide licensing system and registry under
development since the passage of the Secure and Fair Enforcement for
Mortgage Licensing Act of 2008 (``SAFE Act'').\17\ As mortgage
companies and brokers implement systems and procedures to comply with
the SAFE Act, there will be opportunities for them to review and
enhance their educational and training programs to ensure that
employees are able to identify and deal with fraud, money laundering,
and other financial crimes appropriately.
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\17\ See Title V of Division A of the Housing and Economic
Recovery Act of 2008, Public Law 110-289, 122 Stat. 2810 (2008),
codified at 12 U.S.C. 5101, et seq.
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In the 2009 ANPRM, FinCEN sought public comment on a wide range of
issues, including: (1) The incremental approach to the issuance of
regulations for loan and finance companies that would initially affect
only those businesses engaged in residential mortgage lending or
origination; (2) how any such regulations should define businesses
engaged in residential mortgage lending or origination; (3) the
financial crime and money laundering risks posed by such businesses;
(4) how AML programs for such businesses should be structured; (5)
whether such businesses should be covered by BSA requirements other
than the AML program requirement and the SAR reporting requirement; and
(6) whether certain businesses or transactions should be exempted from
AML program or SAR reporting requirements. By issuing this NPRM, FinCEN
again requests comments on these issues, this time in the context of a
specific proposed regulation, as well as on the matters addressed
below.
FinCEN received twelve comments on the 2009 ANPRM: one from the
U.S. Department of Justice; five from trade associations; one from a
Federal credit
[[Page 76679]]
union; one from a mortgage company; one from a U.S. Senator; and three
from individuals writing on their own behalf.\18\ The 2009 ANPRM sought
information on a number of key issues related to the possible
implementation of AML and SAR program regulations for the sector.
---------------------------------------------------------------------------
\18\ Comments to the 2009 ANPRM are available for public viewing
at https://www.regulations.gov.
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1. Risks of Mortgage Fraud and Money Laundering
As noted in the 2009 ANPRM and the 2003 ANPRM, the residential real
estate sector may be vulnerable at all stages of the money laundering
process. Money laundering is a process by which the illicit origin of
funds is obscured, and a plausible legitimate origin often
substituted.\19\ The crime of money laundering is defined, in part,
with respect to the proceeds of specific unlawful ``predicate''
activities. Both mortgage fraud and the act of laundering mortgage
fraud proceeds are crimes, and both are destructive to consumers,
individual businesses and the financial system as a whole. Despite the
relative illiquidity of most real estate assets, money launderers have
used residential mortgage transactions--fraudulently and legitimately
structured--to disguise the proceeds of crime.
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\19\ There are three general stages of money laundering:
placement, layering, and integration. The ``placement'' stage is the
stage at which funds from illegal activity or funds intended to
support illegal activity are first introduced into the financial
system. Money laundering ``layering'' involves the distancing of
illegal funds from their criminal source through the creation of
complex layers of financial transactions. ``Integration'' occurs
when illegal funds are made to appear to have been derived from a
legitimate source.
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In recent years, a significant percentage of SARs filed with FinCEN
have reported suspected fraud schemes involving real estate lenders,
brokers, agents, appraisers, and other businesses associated with real
estate finance and settlements.\20\ FinCEN studies also have shown the
connection between businesses involved in mortgage fraud and other
suspected financial crimes.\21\
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\20\ See Advisory to Financial Institutions on Filing Suspicious
Activity Reports Regarding Home Equity Conversion Mortgage Fraud
Schemes, Apr. 2010, https://www.fincen.gov/statutes_regs/guidance/htm/fin-2010-a005.html ; Mortgage Loan Fraud Update, Feb. 2010,
https://www.fincen.gov/news_room/nr/pdf/20100218.pdf; Filing Trends
in Mortgage Loan Fraud, Feb. 2009, https://www.fincen.gov/news_room/nr/pdf/20090225a.pdf; Mortgage Loan Fraud: an Update of Trends Based
upon Analysis of Suspicious Activity Reports, Apr. 2008, https://www.fincen.gov/news_room/rp/files/MortgageLoanFraudSARAssessment.pdf; Suspected Money Laundering in
the Residential Real Estate Industry, Apr. 2008, https://www.fincen.gov/news_room/rp/files/MLR_Real_Estate_Industry_SAR_web.pdf; Money Laundering in the Commercial Real Estate
Industry; Dec. 2006, https://www.fincen.gov/news_room/rp/reports/pdf/CREassessment.pdf; Mortgage Loan Fraud: An Industry Assessment
Based Upon Suspicious Activity Report Analysis, Nov. 2006, https://www.fincen.gov/news_room/rp/reports/pdf/mortgage_fraud112006.pdf.
\21\ See Mortgage Loan Fraud Connections with Other Financial
Crime: An Evaluation of Suspicious Activity Reports Filed by Money
Services Businesses, Securities and Futures Firms, Insurance
Companies and Casinos, Mar. 2009, https://www.fincen.gov/news_room/rp/files/mortgage_fraud.pdf.
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There was broad agreement among the comments submitted on the 2009
ANPRM that the risks of fraud and other financial crimes, including
money laundering, are substantial in the non-bank mortgage finance
sector and 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. A few comments stated that the
primary risk in the sector is mortgage fraud, and that the risk of
money laundering, specifically, is lower than for fraud. Such comments
notwithstanding, the proceeds of any mortgage fraud have a high
likelihood of being laundered through other financial institutions
subject to the BSA, either directly in conjunction with the granting of
the mortgage loan and related settlement transactions or at a later
stage in conjunction with the placement, layering or integration of
proceeds connected with the mortgage fraud.\22\ FinCEN requests
comments that address the experience of the residential mortgage
lending sector with money laundering and fraud schemes generally.
FinCEN specifically requests information regarding the existence of any
safeguards in the sector to guard against fraud, money laundering, and
other financial crime, and the applicability of such safeguards to the
development of AML and SAR reporting programs.
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\22\ Id.
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2. An Incremental Approach to the Sector: Starting With Residential
Mortgage Lenders and Originators
As is the case with the term ``persons involved in real estate
closings and settlements,'' the term ``loan or finance company'' is not
defined or discussed in any FinCEN regulation, and there is no
legislative history on the term. The term, however, could conceivably
extend to any business entity that makes loans to or finances purchases
on behalf of consumers and businesses. Loan and finance companies
originate loans and leases to finance the purchase of consumer goods
such as automobiles, furniture, and household appliances. They also
extend personal loans and loans secured by real estate mortgages and
deeds of trust, including home equity loans. They supply short- and
intermediate-term credit for such purposes as the purchase of equipment
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.\23\
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\23\ The North American Industry Classification System
(``NAICS'') classifies approximately 10 types of mortgage finance
related businesses and professions and over 60 other businesses,
professions and institutions (e.g., consumer and commercial finance
companies, pawnshops, auto finance, equipment leasing, personal
credit companies, industrial loan companies and government sponsored
enterprises) as primarily engaged in consumer and commercial lending
and finance. NAICS was developed as the standard for use by Federal
statistical agencies in classifying business establishments for the
collection, analysis, and publication of statistical data related to
the business economy of the U.S. NAICS was developed under the
auspices of the Office of Management and Budget (``OMB''), and
adopted in 1997.
---------------------------------------------------------------------------
Comments submitted on the 2009 ANPRM expressed general support for
an incremental approach. One commenter emphasized that the sector has
been the primary focus of recent government-wide law enforcement anti-
fraud programs. Another commenter expressed the view that most if not
all state regulators of mortgage companies likely would support
FinCEN's proposal. While the comments expressed general support for an
incremental approach, there also was some concern voiced about limiting
the scope of the rules to residential mortgage lenders and originators
at this time. A few commenters cautioned that FinCEN should not delay
implementation of rules for other consumer and commercial finance
companies and one commenter urged FinCEN to implement such requirements
for persons involved in real estate closings and settlements.
Arguably, the absence of rules for these 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 to other
consumer and commercial finance businesses. As noted in the 2009 ANPRM,
FinCEN is inclined to defer regulations for commercial real estate
finance businesses and other types of consumer and commercial finance
businesses until further research and analysis can be conducted to
enhance our understanding of the number and kinds of businesses in
their sector, their business operations and money laundering
vulnerabilities. For the same
[[Page 76680]]
reasons, FinCEN is not inclined at this time to propose rules for real
estate agents and other persons involved in real estate closings and
settlements.
FinCEN will continue to study a range of consumer and commercial
finance companies with a view toward determining the extent to which it
is appropriate to expand the scope of the definition of loan or finance
company proposed in this NPRM in a future rulemaking. FinCEN seeks
general comment on the application of AML program and SAR regulations
to other loan and finance companies. FinCEN requests comment on how new
AML and SAR program requirements could be integrated into existing
compliance and anti-fraud programs of such companies.
3. Scope of the Rules; Loan or Finance Company
As noted above, ``Loan or Finance Company'' is a term that could
encompass many categories of entities. At this time, FinCEN is only
addressing residential mortgage lenders and originators, but future
rulemakings may include other types of loan or finance companies. A
loan or finance company does not include banks or persons registered
with and functionally regulated or examined by the Securities and
Exchange Commission or the Commodity Futures Trading Commission, all of
which are already subject to AML program and SAR reporting
requirements. Additionally, a loan or finance company does not include
an individual employed by a loan or finance company or other financial
institution. FinCEN does not seek to obligate individuals, but rather
businesses, including sole proprietorships, because enterprise wide
anti-money laundering programs are more effective and reduce
duplicative efforts.
4. Scope of the Rules; Residential Mortgage Lender or Originator
The challenge for FinCEN in drafting rules is that most real estate
finance--both residential and commercial--involves complex transactions
and multiple parties whose roles are not always readily discernable by
the titles and terms used to describe them in generally accepted
business practices or under applicable licensing and registration
regimes. The primary mortgage market in the United States is
fragmented, and even simple real estate finance transactions may
involve one or more parties that may originate, fund, broker, purchase,
transfer, service, securitize, or insure the mortgage loan.
Additionally, the market is fragmented between different types of
entities, some of which are already regulated financial institutions,
such as banks, and some of which are small independent entities, such
as many mortgage brokers.
FinCEN believes that the views, assumptions and guiding principles
noted in the 2003 ANPRM are equally relevant to the development of AML
program and SAR reporting regulations for residential mortgage lenders
and originators. In the 2009 ANPRM and the 2003 ANPRM, FinCEN stated
that AML obligations should be applicable to those persons that
``conduct the activities that place them in the best position to
identify the nature of the transaction, recognize suspicious activity,
and prevent misuse of their services for money laundering and other
financial crimes.'' \24\ This activity-based approach focuses on the
nature of the activity conducted and its primary function in a
particular residential mortgage transaction, rather than on the name or
title ascribed to the person facilitating the transaction.
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\24\ 2009 ANPRM, 74 FR at 35833.
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Comments on the 2009 ANPRM reflected broad agreement that the
definitions should be crafted so that the rules encompass an
appropriate range of key non-bank residential mortgage lenders and
originators. FinCEN seeks comment on which participants involved in
non-bank residential mortgage finance are in a position where they can
effectively identify and guard against fraud, money laundering, and
other financial crimes. Commenters may, among other things, address
both the extent to which various participants have access to
information regarding the nature and purpose of the transactions at
issue and the importance of the participants' involvement to successful
completion of the transactions. Comments are welcome from those
involved centrally in the residential mortgage finance process (i.e.,
those who may act as an agent for some or all of the parties and are
responsible for reviewing the form and type of payment, as well as
being aware of the parties to the mortgage transaction), and those who
view their involvement as more peripheral. FinCEN seeks comment
specifically on whether FinCEN should adopt the definitions of
``residential mortgage lender,'' ``residential mortgage originator,''
and ``residential mortgage loan'' set forth in the proposed regulation
at 103.11(ddd).\25\
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\25\ As noted in the 2009 ANPRM, several definitions in current
federal law (e.g., definitions of ``mortgage lending business'' and
``loan originator'') may be useful references for comments on the
scope of the proposed regulations. See 74 FR at 35833.
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5. Scope of the Rules; Entities Not Covered by the Definitions
The proposed definitions do not include natural persons and certain
businesses and transactions, described below.\26\ FinCEN therefore
requests comment on whether the definitions used should be wider or
narrower in scope to include or exclude any specific types of
residential mortgage lenders or originators or any specific category of
mortgage finance customer or transaction. Two commenters on the 2009
ANPRM expressed the view that any new rules should not recognize or
permit any exemptions or exceptions. Consistent with FinCEN's
perspective on the issue, several comments submitted on the 2009 ANPRM
suggested that any exemptions FinCEN considers should take into account
and balance the risks of money laundering against the implementation
and compliance costs and obligations likely to be borne by this sector.
FinCEN endeavors to balance and take into account the benefits of the
regulations (including the prevention and detection of money laundering
and other financial crimes, as well as the value to law enforcement and
regulatory agencies of additional data on suspected financial crimes)
against the implementation and compliance costs and obligations likely
to be borne by the industry.
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\26\ The proposed regulations apply to businesses, including
sole proprietorships, not individuals. Thus, for example,
individuals covered by the SAFE Act definition of ``loan
originator,'' 12 U.S.C. 5102(3)(A)(ii), would not be covered by the
proposed regulations.
---------------------------------------------------------------------------
One comment submitted on the 2009 ANPRM stated that individuals in
seller-financed transactions should be excluded from the scope
definitions, or exempt from the rules. FinCEN agrees, and this NPRM
proposes exemptions for individuals financing the sale of their own
real estate. Two comments on the 2009 ANPRM suggested that persons
conducting a de minimis number of transactions--as few as one and as
many as five were suggested--should be carved out of the scope
definitions or exempt. At this time, FinCEN does not intend to propose
an exemption for a person that conducts or facilitates a relatively low
volume of mortgage finance transactions if the person nonetheless falls
within the definition of residential mortgage lender or originator.
FinCEN intends the proposed regulations to reflect the distinction
between a seller-financed transaction (which typically involves family
members or friends in a one-time transaction) and a person that is
[[Page 76681]]
primarily engaged in the mortgage finance business but for business
reasons or changes in markets, competition or other factors, conducts
relatively few transactions within a given period.
The proposed definitions also do not include those persons that are
solely responsible for administrative functions that support or
facilitate residential mortgage finance transactions. FinCEN requests
comment on whether it is necessary for FinCEN to provide a specific
exemption for persons performing administrative support functions. Such
an exemption would be consistent with the SAFE Act, which recognizes an
administrative support exemption or carve-out from the definition of
``loan originator.'' \27\ FinCEN seeks comment on whether other
specific businesses or transactions should be excluded from the
definition of loan or finance company.
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\27\ See 12 U.S.C. 5102(3)(A)(ii).
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Comments regarding the scope of the definitions should be designed
to enable FinCEN to evaluate the risks of money laundering, the
potential value to law enforcement, and other relevant factors. FinCEN
also seeks suggestions on how FinCEN may craft clearly delineated
categories of included and excluded businesses or transactions.
6. Structure and Elements of AML and SAR Regulations
The 2009 ANPRM stated FinCEN's inclination to propose AML and SAR
rules that have similar reporting standards, thresholds, and procedures
to those set forth in AML and SAR regulations for other industries. The
proposed AML and SAR rules contain essentially the same standards and
requirements as the existing BSA rules for other financial
institutions.
FinCEN has promulgated SAR reporting regulations for a number of
financial institutions that have AML program requirements, including:
mutual funds, insurance companies, futures commission merchants and
introducing brokers in commodities, banks, brokers or dealers in
securities, money services businesses, and casinos.\28\
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\28\ See 31 CFR 103.15-103.21.
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In applying the AML program requirements to residential mortgage
lenders and originators, FinCEN must consider the extent to which the
standards for AML programs are commensurate with the size, location,
and activities of such persons.\29\ FinCEN recognizes that while large
businesses are engaged in mortgage finance, businesses in this industry
may also include smaller companies or sole proprietors. FinCEN thus
seeks comment on any particular concerns smaller businesses may have
regarding the implementation of AML and SAR reporting programs.
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\29\ See note 6, supra.
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FinCEN believes that AML programs will complement the anti-fraud
and general compliance programs that residential mortgage lenders and
originators have established to comply with the SAFE Act and other
Federal and State laws and protect their own business operations. Many
residential mortgage lenders and originators may be able to integrate
risk-based AML reporting programs into existing enterprise-wide, anti-
fraud, and compliance programs in a complementary manner that utilizes
efficiencies and commonalities and enhances the effectiveness of a
business's compliance measures. As noted, these businesses also may
have procedures in place to prevent fraud, which they may be able to
integrate into their AML programs.\30\ FinCEN seeks comment on how the
programs and practices that residential mortgage lenders and
originators have in place to prevent mortgage fraud and other illegal
activities may be applicable to the development of AML and SAR
programs.
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\30\ See Initiatives Speech, page 4.
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Accordingly, in this NPRM, FinCEN proposes AML and SAR regulations
applicable to residential mortgage lenders and originators that contain
similar reporting standards, thresholds, and procedures to those set
forth in AML and SAR regulations for other industries. As FinCEN has
emphasized in its recent reports on mortgage loan fraud trends, SARs
provide a valuable tool for regulatory and law enforcement agencies
seeking to isolate specific instances of potential criminal activity
for further investigation, and to identify emerging money laundering
and terrorism financing trends.\31\ The due diligence necessary for
financial institutions to detect and report known or suspected
suspicious activity greatly reduces vulnerability to the abuses of
money laundering and terrorist financing.
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\31\ See Filing Trends in Mortgage Loan Fraud, Feb. 2009, page
1, https://www.fincen.gov/news_room/nr/pdf/20090225a.pdf.
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In response to the 2009 ANPRM, one law enforcement agency stated
that the absence of SAR data from the sector has impeded law
enforcement analysis of mortgage fraud and related crimes. Several
comments agreed that SARs provide important, timely information to help
investigate and prosecute financial crimes and that mortgage lenders
should be required to file SARs. Three major trade associations stated
that mortgage lenders and originators are in a unique position to
identify and report mortgage-related money laundering and fraud.
Several commenters urged FinCEN to propose only AML and SAR program
requirements for the sector at this time. Because FinCEN believes an
incremental approach is appropriate, FinCEN defers proposing additional
BSA regulations for the sector at this time, including Currency
Transaction Report (CTR) requirements. Entities subject to this
regulation would still have to file Form 8300 for transactions
involving the receipt of more than $10,000 in currency. However, FinCEN
may determine, after further research, that additional BSA regulations
may be appropriate for this sector. FinCEN seeks comment on whether it
should consider other BSA regulations in addition to AML program and
SAR requirements.
FinCEN seeks general comment regarding the impact of the proposed
new rules, specifically: (1) The impact of AML or SAR regulations on
business operations, profitability, growth and practices; (2) the
impact of AML or SAR regulations or other BSA regulations on consumers
seeking to obtain residential mortgages; (3) the effectiveness of
examining for and enforcing compliance with any such regulatory
requirements; and (4) the advisability of establishing some minimum
transaction threshold value or annual volume threshold below which some
or all regulatory requirements would not apply. We also solicit comment
on the value to law enforcement and regulatory agencies of the proposed
regulations. Comments on all aspects of the NPRM are welcome, and we
encourage all interested parties to provide their views.
7. Consideration of Examination Authority
Generally, the Internal Revenue Service has been delegated the
authority to examine for BSA compliance purposes those regulated
entities without a Federal functional regulator with broad supervisory
authority.\32\ FinCEN seeks 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. FinCEN also seeks comment on how frequently, to what extent,
and for compliance with
[[Page 76682]]
what laws and regulations loan or finance companies are examined by
various state or other regulators and whether such examination
processes may be relied on or otherwise used to help in examination for
compliance with the BSA.
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\32\ See, e.g., 31 CFR 103.56(b)(8).
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II. Section-by-Section Analysis
A. Definition of Loan or Finance Company
Section 103.11(ddd) defines the key terms used in the proposed
rules. The definitions reflect FinCEN's determination that the term
``loan or finance company'' should be limited, at this time, to
residential mortgage lenders and originators, 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. The definition of a loan or finance company
includes entities that engage in activities within the United States,
whether or not through an agent, agency, branch or office, and does not
include banks or entities registered with and functionally regulated or
examined by the Securities and Exchange Commission or the Commodity
Futures Trading Commission. Additionally, a loan or finance company
does not include an individual employed by a loan or finance company or
other financial institution.
Residential mortgage lender is defined as ``[t]he 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 definition
specifically excludes an individual who finances the sale of their own
dwelling or real property.
Residential mortgage originator is 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.''
Residential mortgage loan is defined as any loan ``that is secured
by a mortgage, deed of trust, or other equivalent consensual security
interest'' on a 1-to-4 family residential structure or real estate on
which a residential structure will be built. This definition is
intended to encompass any loan secured by residential real property,
regardless of whether the borrower is purchasing the residential real
property as a primary residence, vacation home or investment, is
refinancing a purchase-money mortgage loan to obtain a more favorable
rate and/or terms, or is obtaining a mortgage loan for another purpose,
such as debt consolidation or mobilization of home equity. For this
definition, residential real property is intended to be a broad
category, including condominiums, co-ops, mobile homes intended to be
used as dwellings, vacation homes, and time shares.
Comment is specifically invited on whether the above definitions
are appropriate in light of money laundering risks in the industry and
the strategic and policy goals set forth in this notice and in the 2003
and 2009 ANPRMs. Comment also is specifically invited on whether the
final rule also should require agents and brokers of residential
mortgage lenders and originators, or any subsets of agents or brokers,
to adopt AML programs and report suspicious transactions. Finally,
comment is specifically invited on whether the proposed definition of
``residential mortgage loan'' manifests with adequate clarity FinCEN's
stated intent for the definition.
B. Reports of Suspicious Transactions
Section 103.14(a) 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 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 financial institutions.
Section 103.14(a)(1) contains the general statement of the
obligation to file reports of suspicious transactions. The obligation
extends to transactions conducted or attempted by, at, or through a
loan or finance company. The rule also contains a provision in section
103.14(a)(1) designed to encourage the reporting of transactions that
appear relevant to violations of law or regulation, even in cases in
which the rule does not explicitly so require, for example in the case
of a transaction falling below the $5,000 threshold in the rule.
Section 103.14(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.\33\
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\33\ 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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A determination as to whether a report 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
associated with existing or potential customers are referenced in
previous FinCEN reports on mortgage fraud and money laundering in the
residential and commercial real estate sectors.\34\ However, the means
of commerce and the techniques of money laundering 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 guidance, training programs,
and government-industry information exchange so that implementation of
any new AML program and SAR reporting regulations can be implemented by
covered businesses in as flexible and cost efficient way as possible,
while protecting the sector and the financial system as a whole from
fraud, money laundering and other financial crimes.
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\34\ See note 21, supra.
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Section 103.14(a)(3) provides that the obligation to identify and
to report a suspicious transaction rests with the loan or finance
company involved in the transaction. However, where more than one loan
or finance company, or another financial institution with a separate
suspicious activity reporting obligation, is involved in the same
transaction, only one report is required to be filed, provided it
contains all relevant facts and each institution maintains a copy of
the report and any supporting documentation.
The proposed rule is intended to require that a loan or finance
company evaluate customer activity and
[[Page 76683]]
relationships for fraud, money laundering and other financial crime
risks, and design a suspicious transaction monitoring program that is
appropriate for the particular loan or finance company in light of such
risks.
Section 103.14(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. Supporting documentation
relating to each SAR is to be collected and maintained separately by
the loan or finance company and made 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 BSA, or any state regulatory authority that
examines the loan or finance company for compliance with state law
requiring compliance with the BSA,\35\ upon request. Because supporting
documentation has been deemed to have been filed with the SAR, these
parties are consistent with those parties to whom a SAR may be
disclosed as discussed in the rules of construction, below. For
situations requiring immediate attention, loan or finance companies are
to telephone the appropriate law enforcement authority in addition to
filing a SAR.
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\35\ State regulatory authorities are generally authorized by
state law to examine for compliance with the BSA in one of two ways:
(1) The law authorizes the state authority to examine the
institution for compliance with all Federal laws and regulations
generally or with the BSA explicitly, or (2) the law requires a
financial institution to comply with all Federal laws and
regulations generally or with the BSA explicitly, and authorizes the
State authority to examine for compliance with the State law. An
institution may provide SAR information to a state regulatory
authority meeting either criterion.
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Section 103.14(c) provides that filing loan or finance companies
must maintain copies of SARs and the underlying related documentation
for a period of five years from the date of filing. As indicated above,
supporting documentation is to be made available to FinCEN and the
prescribed law enforcement and regulatory authorities, upon request.
Section 103.14(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 proposed rule or is filed
voluntarily).\36\ Thus, the section requires that a SAR and information
that would reveal the existence of that SAR (``SAR information'') be
kept confidential and not be disclosed except as authorized within the
rules of construction. The proposed 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 that examines the loan or finance company for compliance with
state law requiring compliance with the BSA.\37\ This confidentiality
provision also does not prohibit the disclosure of the underlying
facts, transactions, and documents upon which a SAR is based, 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.\38\
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\36\ See 31 U.S.C. 5318(g)(2).
\37\ See note 38, supra.
\38\ 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. To date, no such guidance has been issued for
the loan or finance industry.
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Section 103.14(d)(2) incorporates the statutory prohibition against
disclosure of SAR information, other than in fulfillment of their
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 by a non-
governmental entity for non-public information \39\ or for use in a
private legal proceeding, including a request under 31 CFR 1.11.\40\
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\39\ For purposes of this rulemaking, ``non-public information''
refers to information that is exempt from disclosure under the
Freedom of Information Act.
\40\ 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 103.14(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).
Section 103.14(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 rule may
constitute a violation of the BSA and the BSA regulations.
Section 103.14(g) provides that the new SAR requirement applies to
transactions occurring after the later of six months from the effective
date of a final rule or the establishment of a business entity subject
to the rules.
C. Anti-Money Laundering Program
Section 103.142(a) 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.
The program must be in writing and must be approved by senior
management. A loan or finance company's written program also must be
made available to FinCEN upon request. The minimum requirements for the
AML program are set forth in section 103.142(b). Beyond these minimum
requirements, however, the proposed rule is intended to give loan or
finance companies the flexibility to design their programs to mitigate
their own enterprise-specific risks.
Section 103.142(b) sets forth the minimum requirements of a loan or
finance company's AML program. Section 103.142(b)(1) requires the AML
program to 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,
customers, distribution channels, and geographic locations. As
explained above, a loan or finance company's assessment of customer-
related information, such as methods of payment, is a key component to
an effective AML program. Thus, a loan or finance company's AML program
must ensure that the company obtains all the information necessary to
make its AML program effective. Such information includes, but is not
limited to, relevant customer information collected and maintained by
the loan or finance company's agents and brokers. The specific means to
obtain such information is left to the discretion of the loan or
finance company, although FinCEN anticipates that the loan or finance
company may need to amend existing agreements with its agents and
brokers to ensure that the company receives necessary customer
information. For purposes of making the required risk assessment, a
loan or
[[Page 76684]]
finance company must consider all relevant information.
Policies, procedures, and internal controls also must be reasonably
designed to ensure compliance with BSA requirements. Loan or finance
companies may conduct some of their operations through agents and
third-party service providers. Some elements of the compliance program
may best be performed by personnel of these entities, in which case it
is permissible for a loan or finance company to delegate contractually
the implementation and operation of those aspects of its AML program to
such an entity. Any loan or finance company that delegates
responsibility for aspects of its AML program to an agent or a third
party, however, remains fully responsible for the effectiveness of the
program, as well as ensuring that compliance examiners are able to
obtain information and records relating to the AML program.
Section 103.142(b)(2) requires that a loan or finance company
designate a compliance officer to be responsible for administering the
AML program. A loan or finance company may designate a single person or
committee to be responsible for compliance. The person or persons
should be competent and knowledgeable regarding BSA requirements and
money laundering issues and risks, and should be empowered with full
responsibility and authority to develop and enforce appropriate
policies and procedures. The role of the compliance officer is to
ensure that (1) the program is implemented effectively; (2) the program
is updated as necessary; and (3) appropriate persons are trained and
educated in accordance with section 103.142(b)(3).
Section 103.142(b)(3) requires that a loan or finance company
provide for education and training of appropriate persons. Employee
training is an integral part of any AML program. In order to carry out
their responsibilities effectively, employees of a loan or finance
company (and of any agent or third-party service provider) with
responsibility under the program must be trained in the requirements of
the rule and money laundering risks generally so that red flags
associated with existing or potential customers can be identified. Such
training may be conducted by outside or in-house seminars, and may
include computer-based training. The nature, scope, and frequency of
the education and training program of the loan or finance company will
depend upon the employee functions performed. However, those with
obligations under the AML program must be sufficiently trained to carry
out their responsibilities effectively. Moreover, these employees
should receive periodic updates and refreshers regarding the AML
program.
Section 103.142(b)(4) requires that a loan or finance company
provide for independent testing of the program on a periodic basis to
ensure that it complies with the requirements of the rule and that the
program functions as designed. An outside consultant or accountant need
not perform the test. The review may be conducted by an officer,
employee or group of employees, so long as the reviewer is not the
designated compliance officer and does not report directly to the
compliance officer. The frequency of the independent testing will
depend upon the loan or finance company's assessment of the risks
posed. Any recommendations resulting from such testing should be
implemented promptly or reviewed by senior management.
Section 103.142(c) states that compliance with the AML program
requirements will be determined by FinCEN or its delegates, under the
terms of the BSA.
III. Proposed Location in Chapter X
As discussed in a previous Federal Register Notice,\41\ FinCEN is
separately proposing to remove part 103 of chapter I of title 31, Code
of Federal Regulations, and add the reorganized contents of part 103 as
new parts 1000 to 1099 (``chapter X''). If the notice of proposed
rulemaking for chapter X is finalized, the changes in the present
proposed rule would be reorganized according to the proposed Chapter X.
The planned reorganization will have no substantive effect on the
regulatory changes herein. The regulatory changes of this specific
rulemaking would be renumbered according to the proposed Chapter X as
follows:
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\41\ 73 FR 66414 (Nov. 7, 2008).
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(a) 103.11 would be moved to 1010.100;
(b) 103.14 would be moved to 1029.320; and
(c) 103.142 would be moved to 1029.210.
IV. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') requires the agency to ``prepare and make
available for public comment an initial regulatory flexibility
analysis,'' which will ``describe the impact of the proposed rule on
small entities.'' \42\ Section 605 of the RFA allows an agency to
certify a rule, in lieu of preparing an analysis, if the proposed
rulemaking is not expected to have a significant economic impact on a
substantial number of small entities.
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\42\ 5 U.S.C. 603(a).
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Estimate of the number of small entities to which the proposed rule
will apply:
For the purpose of arriving at an estimated number of residential
mortgage lenders and originators, FinCEN is relying on information
gathered from various public sources, including major trade
associations and associations of government reg
