FED SURPRISES ANALYSTS – RATES TO REMAIN LOW THROUGH 2014

January 26, 2012 Leave a Comment

In a move that can only be described as “out of left field,” the Federal Reserve’s Open Markets Committee (or FOMC) released a post-meeting statement yesterday indicating that it would keep the target fed-funds rate around 0.00% – 0.25% through the end of 2014 in order to keep the economy growing.  This is an absolutely unprecedented statement, as it looks forward three years.  As you might expect, both U.S. Treasury and mortgage-backed securities (MBS) rallied hard, and we ended up closing up about 50bps on the day in the MBS market.  Prior to the announcement, the Fed had indicated that rates would remain low through the middle of 2013.

WHY THIS?  WHY NOW?

The Fed has indicated that there are “significant downside risks” to the U.S. economy in the months ahead, specifically in the areas of unemployment and (no surprise to any of you) housing.  Additionally, Europe remains the 800-pound gorilla in the room, with all eyes on Greece as it yet again tries to negotiate concessions from its creditors to avoid a “hard default.”  As I’ve been saying for almost a year now, it is a virtual certainty that Greece will experience some sort of default – whether soft (lenders voluntarily accepting a “haircut” in Greek debt) or hard (a refusal to make interest payments).  In fact, it looks now like that default may come as early as March.  If it is a hard default, that will trigger payments to investors under insurance contracts (known as “credit default swaps” or “CDS”).  Couple the payments that will have to be made on the CDS by the policy issuers (largely banks) with the losses incurred by institutional investors (also banks) not receiving interest payments on the defaulted debt, and we have a high likelihood of the entire European banking system being thrown into crisis and the world – including the United States – being thrown back into recession. 

Even if Greece manages to renegotiate its debt again this time, eventually the austerity measures may lead its citizens to vote out the current government and replace it with one that will default on the debt, take the country off the euro and end up back on the drachma (which carries with it a whole different set of pain points, but that’s beyond the scope of this post).  Should the world manage to weather the storm that is Greece, the specter of Spain’s problems (and Portugal’s and Italy’s too) looms on the horizon.  In other words, the headwinds are great and the Fed recognizes that.

Interestingly, much is being made of this morning’s positive economic news that durable goods orders jumped much higher than expected last month.  This is the latest in a string of reports that may lead some to conclude that we’re almost to the “happy days are here again” point.  Unfortunately, new home sales dropped again, making 2011 the worst year on record, AND the index of leading economic indicators (indicators of future economic activity), although improved, fell significantly short of expectations.  I still remain cautiously optimistic (economically) in the short term, but the leading economic indicators are a key piece of the puzzle to keep focused on in the upcoming months.  If today’s reading wasn’t just a “blip” and we see a downward trend, that will indicate that the U.S. economy is beginning to slow.

WHAT NEXT?

I’m sure that many of the originators reading this post are excited about the drop in rates that they saw on rate sheets over the past 36 hours – as well they should be!  However, I would strongly advocate that you use caution when advising borrowers regarding rate locks.  It’s only natural that borrowers hear the news about the Fed and think that mortgage rates are going to plunge; most borrowers don’t realize that the Fed does not control mortgage rates.  I am of the opinion that we won’t see much further of a decline in mortgage rates UNLESS Greece (or Spain) starts the default chain-reaction across the Atlantic. Then all bets are off. 

Although I do believe that default will come – at least to Greece – it is impossible to say when it will occur.  While floating shouldn’t hurt borrowers in the short term because there’s not really much that would lead to a spike in rates at the current time, don’t advise a borrower to float and postpone closing, waiting for that extra 1/4 of a point in rate.  It simply doesn’t make sense from my perspective; why sacrifice an unprecedented low rate and postpone real-dollar savings in the hope that you just might – maybe – see a 1/4 better over the next few weeks or months?  Remember the old Wall Street adage: “bulls make money, bears make money, pigs get slaughtered.”

Now, let’s go find a client and sell a home or a loan!

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President Obama to Make ‘Recess Appointment’ of Richard Cordray to Head CFPB

January 4, 2012 Leave a Comment

Move has widespread impact for mortgage bankers and brokers.

As was widely expected, the president today announced that former Ohio Attorney General Richard Cordray will be appointed to the position of Director of the Bureau of Consumer Financial Protection (or “CFPB” – Consumer Financial Protection Bureau) while Congress is on recess.  The appointment is intended to circumvent a filibuster that was being staged by 42 senators who wanted to see changes made to the underlying Dodd-Frank legislation before allowing a vote on Cordray’s confirmation. 

What does this mean? My CE students already know.

Those of you who took my continuing education course in 2011 are intimately familiar with both Cordray and the CFPB and understand more than most that this move is NOT an insignificant one.  Without an official director, the CFPB could not utilize many of the powers that were granted to the agency in the Dodd-Frank legislation.  Now that Cordray will be taking the reins of the organization, the CFPB will be able to wield its full power – including supervisory authority over non-bank originators (i.e. mortgage banks and brokers) and rulemaking authority that will impact these businesses (i.e. most of you reading this post).  This move also paves the way for the CFPB to issue the new combined GFE/TIL disclosure that has been in development for the past year, as well as a redesigned HUD-1 settlement statement.  Expect to see those rolled out over the next few months, with a final implementation date later in the year.  Also, we should expect to see a mortgage loan originator “duty of care” rule issued soon as well, clarifying our responsibilities to safeguard borrowers from harm.  I have no advance knowledge of what that will look like, but I will certainly share the critical points with you when it is released.

Possible bump in the road.

There is one minor detail that may pose a bit of a bump in the road for Cordray: Congress is not officially in recess.  The Constitution prohibits either chamber from recessing for longer than three days without the consent of the other chamber.  In this case, the House of Representatives objected to the Senate going into recess, which triggered a series of “pro-forma” sessions where one member of Congress opens and closes a session (of an empty House of Representatives) once every three days.   There are some constitutional questions surrounding this appointment, but Congress has no grounds to challenge this in court.  Any challenge to the appointment’s constitutionality would have to be made by an individual or organization directly affected by the CFPB.  Some members of Congress indicated earlier this morning that they thought such a challenge would be forthcoming.  While this may be true, it will take time, and there is no guarantee of the eventual result. 

Get your house in order – NOW!

The bottom line is, those of you in compliance or ownership positions at non-bank lenders and brokers would be wise to ensure that your business practices are free of unfair, deceptive and abusive acts and practices (UDAAP) and that you’re ready to adapt to any significant changes that may be coming down the pipe.  I also strongly recommend that you obtain a copy of the CFPB’s “Supervision and Examination Manual” to give you a strong reference point for the items that the CFPB will be looking for when conducting examinations of companies (audits).   This is doubly true for any of you who are engaged in servicing loans.

Happy new year to all, and be sure to continue watching this space for updates on critical issues that will affect you in the future.  Happy originating!

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EXTENSION OF PAYROLL TAX CUT CONTAINS A HIKE IN MORTGAGE FEES

December 23, 2011 2 Comments

It’s official!  Congress has passed a two-month extension of the payroll tax cut that was initially implemented to put more money in the hands of consumers each week.  Unfortunately, the extension is funded by a hike in the fees that Fannie and Freddie charge banks for the government guarantee that’s now on all of the mortgage-backed securities (MBS) they issue.  Two brief comments before I leave for the holiday:

  1.  This is the first time in history that a fee has been placed on mortgage originations to fund something completely unrelated to the mortgage market.  As such, this is effectively a new TAX and not a fee, as they call it in the bill.
  2. Does Congress really think that banks are going to be the ones paying this fee? As Paul Muolo over at Origination News so eloquently put it, “If they do, maybe Santa will come sliding down their chimneys in two days.”  All this does is raise the cost of purchasing or refinancing a home, and it comes just at the time that the news from the housing market isn’t all doom and gloom. Merry Christmas, homeowners!  You just got stuck paying for someone else’s Christmas gifts…

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No CE = No renewal, MBS Trackers and the FDIC goes after BROKERS?!

August 18, 2011 Leave a Comment

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Consumer Financial Protection Bureau – the Birth of a Regulator

August 12, 2011 Leave a Comment

A few weeks ago, amidst much fanfare, the Consumer Financial Protection Bureau (CFPB) assumed some level of regulatory authority over, well, pretty much the entire financial sector of the U.S. economy.  The reaction from most of the media has been one of fawning delight, as evidenced by this column that appeared on WalletPop.com back in May and this column by Gail MarksJarvis that appeared in the Chicago Tribune.  Indeed, a simple Google search for “Consumer Financial Protection Bureau” returns almost 2 million hits and, if my random sampling of articles is statistically valid, roughly 70% of the Literati are convinced that sliced bread has found some competition in the “best things” category.

It is certainly true that many banks are indeed ‘scared’ – a fact that the media pundits gleefully celebrate, as though a regulatory entity striking fear into the heart of the institutions that are charged with financing our hopes and dreams somehow makes things better for consumers.  Sorry, Charlie, but that is simply not true, and for evidence of that, look no farther than the announcement made by MetLife last week that it would sell its banking business to avoid CFPB regulation.  Lest you believe this is some sort of isolated incident, MetLife is joining its brethren insurers Hartford Financial Services Group and Allstate in divesting depository business. There are likely more firms to follow as the CFPB issues the expected myriad of new regulations necessary to implement other Dodd-Frank reforms over the next few months. 

Unfortunately for senior citizens, MetLife is currently one of the nation’s leading lenders in reverse mortgages – a product designed for the 62-and-older-crowd to help manage life expenses on a fixed income.  Most of the large “money center” banks have already shut down their reverse mortgage divisions, meaning that the result of MetLife’s announcement may be that funding for this necessary loan product becomes more difficult to find.  One must assume that limiting consumer choice for the elderly was NOT one of the goals of Dodd-Frank and, by extension, the CFPB. So let’s call this a real-world example of unintended consequences.

Here are some other possible unintended consequences arising out of the CFPB, as I see them:

  • Traditional mortgage loans may become much more difficult to obtain as a result of the Qualified Residential Mortgage (QRM) being so restrictively defined as to exclude a large portion of the loans actually written in the last two years.  Loans with terms falling outside the QRM definition will be subject to risk-retention requirements that will lower banks’ tier-one capital ratios and increase their administrative and compliance costs, leading to questions as to whether they will be willing to make these loans at all.
  • Mortgage, auto and consumer loan products may become more expensive for consumers as a result of restrictions that Dodd-Frank placed on debit card fees paid by retailers to banks.  Banks rely on these fees to pay for expansion and maintenance of their vast debit card networks and other overhead costs.  Restricting collection of such fees means that banks will have to compensate with increased fees and rates on their other products.
  • Mortgage, auto and consumer loan products may become more expensive for consumers as a result of banks’ increased regulatory compliance expenses.  Compliance costs for companies in the financial sector, whether or not they are depository institutions, have skyrocketed over the past two years as regulators at both the federal and state levels have implemented a series of laws designed to curb lending practices that the marketplace had already largely eliminated on its own.  More regulations and the addition of a new regulator with new reporting and examination procedures will only add to these costs.

Please don’t misunderstand; I’m not saying that the CFPB is without its positives.  For example, it has already been working behind the scenes to create simplified mortgage forms designed to merge the confusing Good Faith Estimate and Truth-in-Lending disclosures into one easy-to-follow document.  Consumers and mortgage professionals alike have been clamoring for this for a long time, and I am encouraged by what the CFPB has designed.  I am also encouraged that they have actually made the effort to solicit (and listen to!) input from the mortgage industry in the design process, making it far less likely that the result of the process will be an unworkable document with compliance consequences that extend outside the document itself, like the last GFE revision was.

Bottom line – in my opinion, the CFPB should tread very lightly in promulgating new regulations.  In order to be successful, they need to keep in mind that protecting the consumer from “unfair, deceptive and abusive acts and practices” does NOT mean the same thing as preventing the consumer from making his or her own decisions for fear that they will end up being bad ones.  They also must be cognizant of the fact that, regardless of the portrait that the media paints, the financial sector was really NOT an “unregulated wildwest” before the Dodd-Frank legislation.  In many cases, stated goals can be accomplished with minor tweaks to existing regulations instead of sweeping new ones intended as punitive to the very financial institutions that the government is pressuring to increase lending and save the larger economy from another downturn.

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Could This Bill Jeopardize the Illinois Housing Recovery?

April 8, 2011 Leave a Comment

Good afternoon Chicago Real Estate, Mortgage and Appraisal professionals!  I don’t know how many of you follow the Chicago Tribune’s Home Selling Guide, but there was an important piece posted online this morning.  The article discusses proposed legislation in Springfield that would mandate that appraisers NOT use a judicial (foreclosure) sale as a comparable in residential real estate appraisals for a period of 12 months.

The article, written by Mary Ellen Podmolik, can be found here.


Why is this important?

Simple.  At first blush, this may seem to the average real estate and mortgage professional like a good thing.  I mean, which one of us hasn’t had issues with an appraisal or two (or 42) since 2007?  In a down market like the one we’re experiencing, a natural reaction would be to support any measure that purports to remove one of the biggest obstacles standing in the way of our transactions.  However, it is critical that, should the legislation advance (which, I will admit is somewhat unlikely considering it’s been in the rules committee since January), real estate professionals speak with a unified voice against it.  In my classes and presentations, I’ve often referred to the “law of unintended consequences,” and it is in full effect here.  In my own frequently not-too-humble opinion, this bill won’t help things in the Illinois housing market.  In fact, it will likely have quite the opposite effect.

How could this bill jeopardize the Illinois housing recovery?

The problem is twofold.

  1. The bill ignores the free market and the law of supply and demand.  In some areas the majority of comparable sales are judicial!  To ignore them is to ignore a neighborhood trend that any buyer, acting in his or her own best interest, would not ignore.  Investors, who are beginning to enter the market again, would continue to make the same offers for properties – many of which are short-sales or already bank-owned.  Their offers would NOT in many cases be accepted (especially on short-sales) because the appraisals would (falsely) indicate that the market value of the property was much higher than the offering price.  Underwriters and bank loss-mitigation employees alike are already nervous about short-sale transactions that drastically over-appraise as indication of a potential “flop-sale.”* This would essentially stop home sales across the state in many depressed areas.  Sales that DO occur will have a high likelihood of involving uneducated buyers who may be being taken advantage of by unscrupulous professionals.  In other words, the very transactions that state and local governments across the United States have been trying to stop since 2008.
  2.  This legislation would have massive negative consequences even in areas that are NOT rife with foreclosures.  It would make every Illinois property INELIGIBLE for Fannie, Freddie, FHA, VA and USDA financing because Illinois appraisers would be required by statute to completely disregard USPAP guidelines!  (USPAP stands for the Uniform Standards for Professional Appraisal Practice, which are the guidelines that all appraisers are required to follow in appraising all “federally-related mortgage loans”.)  USPAP already addresses these issues by providing that appraisers must give weight to distressed sales in their valuations when those sales are common for the area and have a direct impact on the value of the subject property.

I would be very surprised if this bill ends up on Governor Quinn’s desk, but stranger things have happened, and we must keep a watchful eye to avoid a possible complete shutdown of the residential real estate market in the State of Illinois.

*A flop sale occurs when a buyer, generally in collusion with an industry expert, makes a short sale offer that appears to be supported by a broker price opinion, but in reality the value is much higher than the BPO indicates.  The transaction closes and the buyer then proceeds to sell the property at the true fair market value, making a large profit at the expense of the bank who would not have approved the short-sale if it had all the facts.

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LO Compensation: In the Wake of the Rulings

April 7, 2011 Leave a Comment


I’ve thus far refrained from comment on the LO Compensation lawsuit issues, mainly because the situation was so fluid.  However, I have been asked by a few folks to write a bit on it now that the rule is reality, at least for the time being, so here goes.  As you’ve no doubt heard by now, a 3-judge panel from the U.S. Court of Appeals for the District of Columbia Circuit has dissolved the stay that was issued on March 31st, paving the way for the immediate implementation of the Federal Reserve’s Rule on LO Compensation.  You can find a copy of the order (on the requisite letterhead complete with flowery, official looking font) here. 

No surprise.

For the record, I (along with pretty much everyone in the industry) don’t like the rule.  I believe it’s bad for the very consumers that it is ostensibly supposed to help.   As I’ve said to pretty much every class I’ve taught since the rule was published in the Federal Register in September – any rule that has the effect of limiting consumer choice can’t be good for consumers!  Choice breeds competition, competition breeds lower prices.  It’s true for every product on the market today, INCLUDING mortgages.  Many of the brightest minds in the industry have astutely pointed out that the rule will have the unintentional consequence of reducing transparency in mortgage transactions by merely changing the flow of money behind the scenes, and that doesn’t serve consumers either.

All of that doesn’t matter.

The problem is, speaking ONLY from a procedural perspective; the initial decision by Judge Beryl Howell (which you can find here) appears solidly grounded in law.  This decision rejected the NAMB’s and NAIHP’s motions for temporary restraining order and injunction which would have delayed enforcement of the rule until a decision is reached on the merits of NAMB’s and NAIHP’s lawsuits.   I know that many people have seized upon the fact that Judge Howell stated in her order that the NAMB and NAIHP were unlikely to succeed at trial as evidence that she must be inherently biased against the industry.  Now, I love conspiracy theories too – probably more than most – but I simply don’t see one here.  In any request for an injunction, the petitioners must prove that irreparable harm will occur if the injunction is not granted AND that they are likely to succeed on the merits when the actual lawsuit in question goes to trial.  Judge Howell acknowledges that the NAMB proved that its members will suffer harm, but she was required to decide whether NAMB and NAIHP are likely to prevail in the end.  Based on the limited information available to her now (compared to the full body of evidence that would be made available during a full discovery process and, ultimately, at trial), Judge Howell explains in clear terms that the petitioners failed to show that they are likely to win.

Here’s why that is, unfortunately, true:

Under well-established administrative law supported by U.S. Supreme Court decisions specifically addressing the Fed’s enforcement of TILA (and cited extensively by Judge Howell), parties seeking to invalidate an administrative rule must show that the rule was either issued outside the scope of authority of the agency or that it was issued in an “arbitrary and capricious” manner.  In plain English – if the Federal Reserve Board wishes to issue a rule that will fundamentally change the mortgage industry and threaten consumer choice, they have the right to do so as long as they have been authorized by Congress to do so, think it through first and follow the appropriate procedures.  In my opinion, the fact that the Fed has previously issued rules on this subject, and proceeded to withdraw them, worked against the industry.  It served to show that the rule was thoroughly thought out before being implemented and, therefore, is not arbitrary.  The system worked as it was designed to work, we’ve just been on the wrong end of it thus far.

On to the good news!

Remember, there are still a lot of people out there who need money.  Loan originators sell money, AND there are over 60% fewer of us selling that money now than in 2005.  The sky may feel like it is falling, but you can still make money!  Additionally, despite the denial of the injunction, there is still a chance that the current NAMB/NAIHP lawsuits will succeed, OR that some future suit will be successful.  I’ve said from the beginning that there are multiple ways to challenge this rule in court.  One argument to be made is that Congress wrote the Dodd-Frank legislation so broadly that its intent cannot be determined and, therefore, the law is invalid. (Remember, this issue is likely to be revisited by the new Consumer Financial Protection Bureau under authority of that statute.)  Regulatory agencies do NOT have the power to legislate and that is essentially what they are doing here as a result of Congress’ failure to do so.  I agree with those finding that there are Constitutional arguments to be made as well.  The bottom line is that any new arguments will take money to make – money that is in short supply right now.  The NAMB and NAIHP are seeking all the help they can get to continue the fight.  If you are motivated to support their arguments on behalf of your industry, get involved!  Then go out and find a new client.  Yes, a new rule is in place, but the fundamentals are still the same: YOU still control your own destiny. YOU still control your own client base.  YOU still control your own income.  Carpe Diem – SEIZE THE DAY!

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FHA’s Loss is MBA’s Gain

March 16, 2011 Leave a Comment

Peter Citera - Real Estate InstituteIt was announced yesterday that current FHA Chief, David Stevens, will leave the agency at the end of this month to head the Mortgage Bankers Association.  Those of you that have been following the goings-on in the industry since the subprime debacle (and who hasn’t) will know that David is a strong and competent leader who has successfully guided the FHA through the toughest market in history.  A huge increase in market-share coupled with a huge increase in default rate is a challenge that no sane mortgage lending executive would want to face, yet David tackled the Agency’s problems head-on.  While the dragon is not yet slain – FHA still has some substantial money issues with the mutual mortgage insurance fund – the program is certainly on much more sound footing now than when Stevens took over in 2009, and he deserves credit for righting the ship.

Yes, there have been bumps in the road.  Those of you who have followed me throughout 2010 know that I believe that the MIP changes, though necessary, could have been better handled.  There was no sound logic to the April 2010 decision to raise the upfront MIP to 2.25% in a declining market rife with foreclosures, especially considering that the UFMIP is nearly always financed and, at the time of the policy change, the purchase market was artificially inflated due to the homebuyer tax credit.  It was a knee-jerk reaction to a huge problem that was not well thought out, proving that crisis decisions do not generally breed good policy.

The October reduction in the UFMIP, coupled with an increase in the annual MI, was the logical solution from the start as it generates much more predictable revenue growth and has the added benefit of not raising the size of an insurance payout upon borrower default.  Be that as it may, at the end of the day, it is through Stevens’ leadership that the FHA has managed to remain well-positioned as the product of choice in a still-uncertain mortgage lending world.  I wish him the best as he assumes the position of industry advocate at the MBA.  Godspeed, David – now more than ever the industry needs a well-respected voice advocating for prudence, temperance and tact in an increasingly restrictive regulatory environment.

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44 Days Until R-1366 is a R-EALITY

February 15, 2011 Leave a Comment

 

You might be asking yourself, “Has this guy finally flipped his lid?  R-1366?  Sounds like an experimental drug – this is supposed to be a MORTGAGE blog.”  My friends, R-1366 could indeed be viewed as an experiment – one that will reshape the residential home finance industry and possibly bring large chunks of it to its knees.  You’re probably already familiar with it by its trade name – the Loan Originator Compensation Rule.

I discussed the LO Compensation Rule at length in a previous post the day after it was released, so I’m not going to rehash it in this post.  However, in case you haven’t been following the biggest story in the industry since the collapse of the subprime market, you can catch up with the details here.  The bottom line is that there are multiple legal interpretations on how this rule will affect businesses and LOs – on what is legal and what is not legal – and to date the government has provided minimal guidance to help the industry understand how to remain compliant.

There is some good news, however.  As I write this, representatives of the National Association of Mortgage Brokers are on Capitol Hill testifying in hearings on the implementation of the Dodd-Frank bill.  Additionally, the House Financial Services Committee issued its oversight plan for this session of Congress and has included a hearing on loan officer compensation.  The committee has stated that it has some concern that the “rules will have an adverse impact on small businesses who originate mortgage loans and their ability to remain in business.”  While this is just a hearing on the rule, it is good news and a big step in the right direction.  It shows that an organized call to action can have some effect.  NAMB will be in Washington on March 14 and 15 holding its 2011 Legislative and Regulatory Conference, which will include a day of advocacy on Capitol Hill.  Many concerned mortgage professionals will be present to make their voices heard.

Now, regardless of what happens with the Fed rule, there WILL still be opportunities in the mortgage business.  People will always need money, and money is what we sell.  Even if the compensation rule goes into effect with no changes, those of us still in the mortgage business are in a good position.  Under the new rule, however, where you work will become just as important as how you work.  The truth is that you have 44 days until the way you earn a living changes.  Yes, there are continuing efforts to delay or overturn the rule, but you cannot count on them being successful.  Do you understand your employer’s upcoming compensation plan? Does your employer even have a plan?  Do your employer’s lenders and/or investors have a plan?  If so, do you know what those plans are?  Now is the time to ask the tough questions well in advance of April 1.  No one else is going to look out for your business or your income if you don’t.

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AML and SARs and FinCEN, OH MY!

January 24, 2011 Leave a Comment

Bank Secrecy Act Could Soon Apply To Mortgage Bankers and Brokers

Just when you thought you had enough new regulations to keep your compliance department busy through the next presidential election, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued proposed rules that would extend the Anti-Money Laundering (AML) and Suspicious Activity Report (SAR) provisions in the Bank Secrecy Act (BSA) to non-depository mortgage bankers and brokers – in other words, you.
The Bank Secrecy Act has long required depository institutions and other cash-intensive businesses like casinos to aid Treasury’s efforts to prevent money laundering, reduce fraud and eliminate the funding of terrorist organizations in various ways.  Most common are requirements for these institutions to maintain and follow an “anti-money laundering” plan designed to detect transactions that are attempting to use money obtained through illegal activities in financial transactions, thereby making it appear to be legitimate, and notifying Treasury and the FBI of suspicious transactions through the filing of a standardized form called a “suspicious activity report.”

Are You At Risk?
FinCEN has determined that there is a “significant risk” of money laundering and terrorism funding occurring in residential mortgage transactions involving non-bank lenders – mortgage bankers and brokers.  In the proposed rule, which was issued on December 2, 2010, FinCEN would require all mortgage bankers and brokers to develop an anti-money laundering plan “designed to prevent the company from being used to facilitate money laundering or the financing of terrorist activities.”  To be compliant, each company’s plan must assess the ways they are at risk for being victimized and put controls in place to address those risks.  Additionally, each company would be required to designate a compliance officer that would be in charge of administering and updating the program as risks change.  Firms would also be responsible for educating and training staff in following the plan.  Finally, every mortgage bank and broker would be mandated to “independently test the program on a periodic basis” to ensure that it is adequate and functional.  This proposed rule would also require mortgage companies to file a Suspicious Activity Report on “every transaction of $5,000 or more that they determine to be suspicious.” 

Your Bottom Line Impact
While certainly a noble goal, I can see how some of these additional compliance requirements will increase operating overhead costs for mortgage companies.  Compliance with the Suspicious Activity Report requirement should not be overly difficult or time-consuming.  The vast majority of non-depository firms still operating in the mortgage market already have intensive anti-fraud measures in place.  Simply adding the additional step of formally reporting suspicious transactions should not require a lot of procedural change at these companies.  The Anti-Money Laundering requirement however, could have a direct and meaningful impact to the bottom line.  Development, maintenance and testing of an AML program will require a significant investment of both time and money.  Many of the companies in the residential mortgage industry are small businesses that need to focus on originating loans to survive this housing downturn and may not be able to afford to spend more time on compliance.  Remember, these companies have already been required to develop and maintain a data security plan under the Gramm-Leach-Bliley Act AND an identity theft prevention plan under the Red Flags Rule of the FACT Act.  If this trend continues, we’ll have plans in place to deal with every eventuality that can potentially arise in a mortgage transaction, but possibly no business to apply those plans to.

Don’t Miss Your Chance To Weigh-In
Public comment for this proposed rule will close at 11:59 PM on February 7, 2011.  If you wish to view the actual text of the rule and comment on how it will affect the industry, you may do so at www.regulations.gov.  Simply search for Docket Number FINCEN-2010-0001.  Happy writing!

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