[Federal Register Volume 75, Number 236 (Thursday, December 9, 2010)]
[Proposed Rules]
[Pages 76677-76688]
From the Federal Register Online via the Government Publishing 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: http://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 http://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
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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) http://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''), http://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, http://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.
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\18\ Comments to the 2009 ANPRM are available for public viewing
at http://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, http://www.fincen.gov/statutes_regs/guidance/htm/fin-2010-a005.html ; Mortgage Loan Fraud Update, Feb. 2010,
http://www.fincen.gov/news_room/nr/pdf/20100218.pdf; Filing Trends
in Mortgage Loan Fraud, Feb. 2009, http://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, http://www.fincen.gov/news_room/rp/files/MortgageLoanFraudSARAssessment.pdf; Suspected Money Laundering in
the Residential Real Estate Industry, Apr. 2008, http://www.fincen.gov/news_room/rp/files/MLR_Real_Estate_Industry_SAR_web.pdf; Money Laundering in the Commercial Real Estate
Industry; Dec. 2006, http://www.fincen.gov/news_room/rp/reports/pdf/CREassessment.pdf; Mortgage Loan Fraud: An Industry Assessment
Based Upon Suspicious Activity Report Analysis, Nov. 2006, http://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, http://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.
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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.
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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, http://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 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.
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\43\ See note 24, supra.
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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
[[Page 76685]]
and to detect and report suspicious transactions.\44\
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\44\ See, e.g., Form 1003 Uniform Residential Mortgage
Application, available at https://www.efanniemae.com/sf/formsdocs/forms/pdf/sellingtrans/1003.pdf or http://www.freddiemac.com/uniform/doc/form_65_urla_7_05.doc.
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AML Program Requirement in General
The 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.
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\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, http://www.fincen.gov/statutes_regs/guidance/html/narrativeguidance_webintro.html; Guidance--
Suggestions for Addressing Common Errors Noted in Suspicious
Activity Reporting, Oct. 10, 2007, http://www.fincen.gov/statutes_regs/guidance/html/SAR_Common_Errors_Web_Posting.html;
Guidance--Suspicious Activity Report Supporting Documentation, June
13, 2007 (FIN-2007-G003), http://www.fincen.gov/statutes_regs/guidance/html/Supporting_Documentation_Guidance.html. The SAR
Activity Review--Trends, Tips and Issues (Issue 16), Oct. 2009,
Section 4, Law Enforcement Suggestions When Preparing Suspicious
Activity Reports, p. 45., http://www.fincen.gov/statutes_regs/guidance/html/narrativeguidance_webintro.html. See also notes 13
and 21, supra.
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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 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.
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\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 http://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 http://www.freddiemac.com/uniform/doc/form_65_urla_7_05.doc.
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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 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
[email protected], with a copy to the FinCEN by mail.
Comments on the collection of information should be received by
February 7, 2011.
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\48\ 44 U.S.C. 3507(d).
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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.
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\49\ See 44 U.S.C. 3506(c)(2)(A).
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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
[[Page 76686]]
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:
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:
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 Sec. 103.11(ddd) to read as follows:
Sec. 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
[[Page 76687]]
(B) Residential real estate upon which such a structure is
constructed or intended to be constructed.
(2) [Reserved]
3. Add new Sec. 103.14 to subpart B to read as follows:
Sec. 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 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 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
[[Page 76688]]
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 non-
governmental 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 Sec. 103.142 to subpart I to read as follows:
Sec. 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 activities. The program must
be approved by senior management. A loan or finance company shall make
a copy of its anti-money laundering program available to the Financial
Crimes Enforcement Network, or its designee upon request.
(b) Minimum requirements. At a minimum, the anti-money laundering
program shall:
(1) Incorporate policies, procedures, and internal controls based
upon the loan or finance company's assessment of the money laundering
and terrorist financing risks associated with its products and
services. Policies, procedures, and internal controls developed and
implemented by a loan or finance company under this section shall
include provisions for complying with the applicable requirements of
subchapter II of chapter 53 of title 31, United States Code and this
part, integrating the company's agents and brokers into its anti-money
laundering program, and obtaining all relevant customer-related
information necessary for an effective anti-money laundering program.
(2) Designate a compliance officer who will be responsible for
ensuring that:
(i) The anti-money laundering program is implemented effectively,
including monitoring compliance by the company's agents and brokers
with their obligations under the program;
(ii) The anti-money laundering program is updated as necessary; and
(iii) Appropriate persons are educated and trained in accordance
with paragraph (b)(3) of this section.
(3) Provide for on-going training of appropriate persons concerning
their responsibilities under the program. A loan or finance company may
satisfy this requirement with respect to its employees, agents, and
brokers by directly training such persons or verifying that such
persons have received training by a competent third party with respect
to the products and services offered by the loan or finance company.
(4) Provide for independent testing to monitor and maintain an
adequate program, including testing to determine compliance of the
company's agents and brokers with their obligations under the program.
The scope and frequency of the testing shall be commensurate with the
risks posed by the company's products and services. Such testing may be
conducted by a third party or by any officer or employee of the loan or
finance company, other than the person designated in paragraph (b)(2)
of this section.
(c) Compliance. Compliance with this section shall be examined by
FinCEN or its delegates, under the terms of the Bank Secrecy Act.
Failure to comply with the requirements of this section may constitute
a violation of the Bank Secrecy Act and of this part.
(d) 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 Sec. 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