[Federal Register: July 28, 2005 (Volume 70, Number 144)]
[Rules and Regulations]
[Page 43625-43628]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jy05-1]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
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[[Page 43625]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of Federal Housing Enterprise Oversight
12 CFR Part 1731
RIN 2550-AA31
Mortgage Fraud Reporting
AGENCY: Office of Federal Housing Enterprise Oversight, HUD.
ACTION: Final rule.
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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is
issuing a final regulation that sets forth safety and soundness
requirements with respect to mortgage fraud reporting in furtherance of
the supervisory responsibilities of OFHEO under the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992.
EFFECTIVE DATE: August 29, 2005.
FOR FURTHER INFORMATION CONTACT: Isabella W. Sammons, Deputy General
Counsel, telephone (202) 414-3790 (not a toll-free number); Office of
Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. The telephone number for the Telecommunications
Device for the Deaf is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
Background
Title XIII of the Housing and Community Development Act of 1992,
Pub. L. 102-550, titled the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) established
OFHEO as an independent office within the Department of Housing and
Urban Development to ensure that the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) (collectively, the Enterprises) are adequately
capitalized and operate safely and soundly in compliance with
applicable laws, rules, and regulations. To carry out its statutory
responsibilities, OFHEO may, among other things, require an Enterprise
to submit reports.\1\
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\1\ 12 U.S.C. 4514.
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On February 25, 2005, OFHEO published for comment a proposed
regulation, at 70 FR 9255, which set forth proposed safety and
soundness requirements with respect to mortgage fraud reporting. The
30-day comment period was extended until April 4, 2005.\2\ All comments
received have been made available to the public in the OFHEO Public
Reading Room and also posted on the OFHEO Web site at http://www.OFHEO.gov
.
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\2\ 70 FR 15018 (March 24, 2005).
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Comments Received
Comments were received from the Inspector General for the Office of
Housing and Urban Development; the Mortgage Asset Research Institute, a
subsidiary of ChoicePoint Services Inc.; the Mortgage Bankers
Association, a national association representing the real estate
finance industry; the National Association of Mortgage Brokers; Freddie
Mac; Fannie Mae; the Consumer Mortgage Coalition, a trade group of
national residential mortgage lenders, servicers and service providers;
AMCO, a valuation management firm; and various private citizens. All
comments were taken into consideration. A discussion of the significant
comments as they relate to the proposed sections of the regulation
follows.
Purpose and Scope
Several commenters questioned the necessity for a regulation
expressly requiring reporting of mortgage fraud and possible mortgage
fraud and the benefits of such reporting to the Enterprises and the
mortgage industry. Two commenters recommended that OFHEO consider
alternative approaches, such as reliance on private industry
``ineligible'' lists.
The purpose of the regulation is to set forth safety and soundness
requirements and expectations with respect to the reporting of mortgage
fraud in furtherance of the supervisory responsibilities of OFHEO, that
is, ensuring the safe and sound operations of the Enterprises. OFHEO
must gain timely information on actual or possible mortgage fraud to
assure that adequate internal controls and systems exist to protect the
Enterprises from risks associated with such fraud. The information
provided will be the subject of review by the examination force of
OFHEO, as well as other appropriate OFHEO offices. The information will
assist OFHEO in assessing internal controls, security efforts,
management of risks, including reputation risk, and other factors
relevant to the safe and sound operation of the Enterprises. The
oversight by OFHEO of programs to detect and avoid mortgage fraud will
provide public understanding of the expectation that the Enterprises
will remain vigilant in resisting fraudulent practices and should have
a deterrent effect. OFHEO will develop a process for sharing of
information it acquires with law enforcement authorities, while
assuring that the Enterprises do not encounter liability issues.
The Federal Bureau of Investigation (FBI) indicated in Financial
Crimes Report to the Public (May 2005) that combating significant
mortgage fraud is an FBI priority because mortgage lending and the
housing market have a significant overall effect on the nation's
economy.\3\ The FBI explained that:
\3\ http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1
.
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A significant portion of the mortgage industry is void of any
mandatory fraud reporting. In addition, mortgage fraud in the
secondary market is often underreported. Therefore, the true level
of mortgage fraud is largely unknown. The mortgage industry itself
does not provide estimates on total industry fraud. Based on various
industry reports and FBI analysis, mortgage fraud is pervasive and
growing.
In combating mortgage fraud, the FBI noted that it works actively to
investigate such fraud and has been fostering relationships and
partnerships with the mortgage industry, including the Enterprises.
While OFHEO has no authority to ``police'' the mortgage industry for
fraud or to prosecute mortgage fraud, OFHEO has noted that the
Enterprises, as part of the financial system, should operate in a
manner to deter fraud and thereby assist in system-wide efforts to make
mortgage fraud an unattractive avenue for corrupt individuals or
institutions.
The Enterprises currently investigate and maintain information on
mortgage
[[Page 43626]]
fraud and possible mortgage fraud. A formal reporting requirement to
OFHEO will focus Enterprise efforts on ensuring that internal policies,
procedures, and training programs are in place to minimize the risks
from mortgage fraud. No evidence exists that a formal reporting
requirement will create or increase burdens on the Enterprises. The
Enterprises currently investigate fraud or possible fraud, report fraud
to law enforcement authorities, and provide reports to OFHEO as
required; this regulation contemplates such routine reporting to OFHEO.
Additionally, no evidence exists that a formal reporting requirement
will require the mortgage industry as a whole to take on additional
burdens. The Enterprises currently, when fraud is suspected, inquire of
seller-servicers and others about business transactions and practices.
Furthermore, law enforcement authorities have reported that much of the
fraud involving secondary market parties relates to institutional
fraud, not individuals seeking to secure financing. Thus, Enterprise
efforts to report on possible or actual mortgage fraud should have no
regulatory burden for the mortgage finance industry as the Enterprises
already conduct due diligence in dealing with seller-servicers and
others in the mortgage finance system.
For the reasons set forth above and because of law enforcement
reports of an increasing incidence of mortgage-related fraud--and the
potential impact of such fraud on Enterprise profits, liquidity and
reputation--OFHEO has determined to issue the mortgage fraud reporting
regulation.
Definition of the Terms ``Mortgage Fraud'' and ``Possible Mortgage
Fraud.''
As proposed, the term ``mortgage fraud'' would be defined under
Sec. 1731.2 to mean a material misstatement, misrepresentation, or
omission relied upon by an Enterprise to fund or purchase--or not to
fund or purchase--a mortgage, mortgage backed security, or similar
financial instrument. The term would include, but not be limited to,
identification and employment documents, mortgagee or mortgagor
identity, and appraisals that are fraudulent. The term ``possible
mortgage fraud'' would be defined to mean that an Enterprise has cause
to believe that that mortgage fraud is occurring or has occurred.
OFHEO received a few comments on the definition of the term
``mortgage fraud.'' One commenter noted that the definition treats all
mortgage-backed securities (MBS) as equivalent to mortgages for
purposes of mortgage fraud, whether issued or guaranteed by an
Enterprise or whether issued or guaranteed by a third party. The
commenter explained that MBS issued and guaranteed by a third party may
present securities fraud issues, but not mortgage fraud issues, and
requested that the definition make clear that it covers only MBS issued
or guaranteed by an Enterprise. Two other commenters requested that the
definition should include the concept that the material misstatement,
misrepresentation, or omission be ``knowingly made'' or ``intentionally
made.''
OFHEO has revised the definition of the term ``mortgage fraud'' to
clarify that it covers MBS issued or guaranteed by an Enterprise. OFHEO
does not believe that it is necessary to include the concept that the
material misstatement, misrepresentation, or omission be ``knowingly
made'' or ``intentionally made.'' Such language goes to the definition
of fraud that is well established, as opposed to the definition of a
particular type, that is, fraud related to mortgages. In addition,
benchmarks or ``triggers'' for providing information to OFHEO, as
discussed below, will be developed as the reporting requirements are
implemented.
The term ``possible mortgage fraud'' was proposed to be defined to
mean that an Enterprise has cause to believe that mortgage fraud may be
occurring or has occurred. Some commenters recommended that OFHEO
should provide guidance, through regulation or through guidance
documents, as to triggers and level of verification, otherwise the
definition, they argued, is too broad. OFHEO agrees and will provide
guidance, as requested, as to these and related matters as part of the
implementation of the reporting requirements.
One commenter recommended that the definition should include the
element of good-faith judgment on the part of the Enterprise. Another
commenter recommended that the definition should include the element of
reasonable or justifiable cause to believe that mortgage fraud may be
occurring or has occurred. OFHEO agrees that the definition should be
modified to include ``reasonable cause'' and has clarified the
definition of the term ``possible mortgage fraud'' accordingly.
Unsafe and Unsound Conduct
Proposed Sec. 1731.3 would provide that an Enterprise may not
require the repurchase of or may not decline to purchase a mortgage,
mortgage backed security, or similar financial instrument because of
possible mortgage fraud without promptly reporting to the Director
under Sec. 1731.4. One commenter requested that this section should
clearly state that it does not prohibit the Enterprises from declining
purchases or requiring repurchases if the Enterprises are properly
reporting mortgage fraud or possible mortgage fraud. OFHEO agrees, and
has clarified the language of Sec. 1731.3 accordingly.
Reporting Time-Period
As proposed, Sec. 1731.4 would set forth the procedures for
reporting fraud and possible mortgage fraud to OFHEO. OFHEO would issue
implementation instructions with respect to reporting such fraud.
Section 1731.4 also would provide that if a situation requires the
immediate attention of OFHEO, an Enterprise would report immediately by
telephone or electronic communication.
A few commenters recommended that the proposed four-day
notification period was too short and recommended either a 30-day
period or that notification be ``prompt.'' OFHEO agrees that a
requirement for ``prompt reporting'' would permit flexibility in
addressing different situations and changing needs in the
implementation of the reporting requirement and has modified the
definition accordingly to remove the fixed time period and will address
notification requirements as part of the implementation of the rule.
The requirement for immediate reporting, when appropriate, remains.
One commenter recommended that the reporting requirement should not
be retroactive and apply only to mortgages purchased or not purchased
six months after the effective date of the regulation. OFHEO did not
propose and does not intend that the regulation have retroactive
application; OFHEO will work with the Enterprises for an effective
transition while the Enterprises develop and implement or enhance
reporting systems.
Non-Disclosure and Safe Harbor
As proposed, the section would prohibit the disclosure of reporting
mortgage fraud or possible mortgage fraud to the parties connected with
such fraud without the prior written approval of the Director. The
proposed section expressly stated that the requirement would not
prevent an Enterprise from disclosing or reporting such fraud pursuant
to legal requirements, including reporting to appropriate law
enforcement authorities.
One commenter expressed a concern that the proposed section would
discourage the Enterprises from reporting fraud; another argued that
the Enterprises should be required to report fraud to law enforcement
authorities.
[[Page 43627]]
The Enterprises already have the authority to report fraud to law
enforcement; the major focus of concern of the proposed regulation is
the need to make routine reporting of possible mortgage fraud to OFHEO
and for OFHEO to take actions regarding such possible fraud. Another
commenter recommended the addition of a clarification that the
requirement of this section does not limit the Enterprise from
reporting fraud to a third party or from taking any legal or business
action it may deem appropriate, including an action involving the party
or parties connected with the mortgage fraud or possible mortgage
fraud. OFHEO agrees that this clarification is useful and has modified
the section accordingly.
A few commenters addressed ``safe harbor'' concerns, in that the
safe harbor provisions of the Bank Secrecy Act would not apply to the
Enterprises reporting of mortgage fraud to OFHEO, and leave the
Enterprises vulnerable to liability should OFHEO refer an Enterprise
report to another government agency. OFHEO recognizes the liability
concerns; nevertheless, OFHEO will continue to provide information on
mortgage fraud to appropriate authorities while addressing concerns
related to the absence of an explicit safe harbor.
Except with respect to the clarifications of the proposed language
as noted above, OFHEO has determined to issue the regulation as
proposed.
Regulatory Impact
Executive Order 12866, Regulatory Planning and Review
The regulation is not classified as an economically significant
rule under Executive Order 12866 because it would not result in an
annual effect on the economy of $100 million or more or a major
increase in costs or prices for consumers, individual industries,
Federal, state, or local government agencies, or geographic regions; or
have significant adverse effects on competition, employment,
investment, productivity, innovation, or on the ability of United
States-based enterprises to compete with foreign-based enterprises in
domestic or foreign markets. Accordingly, no regulatory impact
assessment is required. Nevertheless, the proposed regulation was
submitted to the Office of Management and Budget for review under other
provisions of Executive Order 12866 as a significant regulatory action.
Executive Order 13132, Federalism
Executive Order 13132 requires that Executive departments and
agencies identify regulatory actions that have significant federalism
implications. A regulation has federalism implications if it has
substantial direct effects on the states, on the relationship or
distribution of power between the Federal Government and the states, or
on the distribution of power and responsibilities among various levels
of government. The Enterprises are federally chartered corporations
supervised by OFHEO. The regulation would require reporting of mortgage
fraud to OFHEO. It would not affect in any manner the powers and
authorities of any state with respect to the Enterprises or alter the
distribution of power and responsibilities between Federal and state
levels of government. It would in no way limit the authority of any
state to take actions for violations of its laws. Therefore, OFHEO has
determined that the regulation has no federalism implications that
warrant the preparation of a Federalism Assessment in accordance with
Executive Order 13132.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. Such an analysis need not be
undertaken if the agency has certified that the regulation will not
have a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the
proposed regulation under the Regulatory Flexibility Act. The General
Counsel of OFHEO certifies that the regulation would not be likely to
have a significant economic impact on a substantial number of small
business entities because it would be applicable only to the
Enterprises, which are not small entities for purposes of the
Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 1731
Administrative practice and procedure, Government sponsored
enterprises.
0
For the reasons stated in the preamble, part 1731 is added to chapter
XVII, title 12 of the Code of Federal Regulations to read as follows:
PART 1731--MORTGAGE FRAUD REPORTING
Sec.
1731.1 Purpose and scope.
1731.2 Definitions.
1731.3 Unsafe and unsound conduct.
1731.4 Procedures for reporting.
1731.5 Internal controls, procedures, and training.
1731.6 Supervisory action.
Authority: 12 U.S.C. 4513(a) and 4513(b)(1), (2), and (7).
Sec. 1731.1 Purpose and scope.
The purpose of this section is to set forth safety and soundness
requirements with respect to the reporting of mortgage fraud in
furtherance of the supervisory responsibilities of OFHEO under the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992
(12 U.S.C. 4501 et seq.).
Sec. 1731.2 Definitions.
For purposes of this part--
(a) Director means the Director of OFHEO, or his or her designee.
(b) Enterprise means the Federal National Mortgage Association or
the Federal Home Loan Mortgage Corporation.
(c) Mortgage fraud means a material misstatement,
misrepresentation, or omission relied upon by an Enterprise to fund or
purchase--or not to fund or purchase--a mortgage, including a mortgage
associated with a mortgage-backed security or similar financial
instrument issued or guaranteed by an Enterprise. Such mortgage fraud
includes, but is not limited to, a material misstatement,
misrepresentation, or omission in identification and employment
documents, mortgagee or mortgagor identity, and appraisals that are
fraudulent.
(d) OFHEO means the Office of Federal Housing Enterprise Oversight.
(e) Possible mortgage fraud means that an Enterprise has a
reasonable belief, based upon a review of information available to the
Enterprise, that mortgage fraud may be occurring or has occurred.
Sec. 1731.3 Unsafe and unsound conduct.
An Enterprise may not require the repurchase of or may not decline
to purchase a mortgage, mortgage backed security, or similar financial
instrument because of possible mortgage fraud without promptly
reporting to the Director under Sec. 1731.4. An Enterprise may decline
such purchase or require such repurchase if it is reporting mortgage
fraud or possible mortgage fraud in accordance with Sec. 1731.4.
[[Page 43628]]
Sec. 1731.4 Procedures for reporting.
(a) Procedures for reporting. (1) Prompt report. An Enterprise
shall report promptly mortgage fraud or possible mortgage fraud in
writing to the Director in such format and under such notification
procedures as prescribed by OFHEO. The report shall describe the
mortgage fraud or possible mortgage fraud in detail sufficient under
OFHEO guidance. The Enterprise, at the sole discretion of the Director,
may be required to provide additional or continuing information in
connection with such mortgage fraud.
(2) Immediate report. In addition to reporting in writing under
paragraph (a)(1) of this section, in any situation requiring immediate
attention by OFHEO, an Enterprise shall report the mortgage fraud or
possible mortgage fraud to the Director by telephone or electronic
communication.
(b) Retention of records. An Enterprise shall maintain a copy of
any report submitted to the Director and the original or business
record equivalent of any supporting documentation for a period of five
years from the date of submission.
(c) Nondisclosure. An Enterprise may not disclose, without the
prior written approval of the Director, to the party or parties
connected with the mortgage fraud or possible mortgage fraud that it
has reported such fraud under this part. This restriction does not
prohibit an Enterprise from--
(1) Disclosing or reporting such fraud pursuant to legal
requirements, including reporting to appropriate law enforcement or
other governmental authorities; or
(2) Taking any legal or business action it may deem appropriate,
including any action involving the party or parties connected with the
mortgage fraud or possible mortgage fraud.
(d) Acceptance of other forms. The Director may, upon written
notice to each Enterprise, accept reports of mortgage fraud or possible
mortgage fraud in formats promulgated by any Federal agency that has
jurisdiction over the reporting of mortgage fraud or possible mortgage
fraud by the Enterprises.
(e) No waiver of privilege. An Enterprise does not waive any
privilege it may claim under law by reporting mortgage fraud or
possible mortgage fraud under this part.
Sec. 1731.5 Internal controls, procedures, and training.
An Enterprise shall establish adequate and efficient internal
controls and procedures and an operational training program to assure
an effective system to detect and report mortgage fraud or possible
mortgage fraud under this part.
Sec. 1731.6 Supervisory action.
Failure by an Enterprise to comply with Sec. Sec. 1731.3, 1731.4,
and 1731.5 may subject the Enterprise or the board members, officers,
or employees thereof to supervisory action by OFHEO under the Federal
Housing Enterprises Safety and Soundness Act of 1992 (12 U.S.C. 4501 et
seq.), including but not limited to, cease-and-desist proceedings and
civil money penalties.
Dated: July 25, 2005.
Stephen A. Blumenthal,
Acting Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 05-14957 Filed 7-27-05; 8:45 am]
BILLING CODE 4220-01-P