Thursday, May 24, 2012

CFPB's Flatland Fee

Kicked in the gut by a "flat fee" proposal, the already winded mortgage industry seems to be barely able to catch its breath from the CFPB's recent lurching toward yet another vaguely expected and somewhat ill-defined nostrum.*
The pattern replays itself time and again: first the news, followed by the rulemaking proposal, which is then given a brief period for public acquiescence or remonstrance; and then inevitably the final rule, which is much like the initial proposal. Early on, industry associations issue a Call to Action!
Alas, when the Federal Register publishes the effective compliance date, everybody falls in line and scrambles to adjust. Sometimes, a few organizations even threaten litigation, though, when tried, litigating has not thus far brought about much satisfaction.
Exactly what is this Flat Fee debacle?
Let's take a peek at this flatland mystery.
On the day that the CFPB announced the Flat Fee - along with a wish list of other proposals - the New York Times explained the CFPB's position in this way:
"Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan.
Those fees are sometimes referred to as origination points and are disclosed in a blizzard of documents and fees that most home buyers face at closing. But they can easily be confused with the upfront discount points that borrowers often pay to secure a lower interest rate."
The May 9, 2012 article came accoutered with Richard Cordray's observation that "Mortgages today often come with so many different types of fees and points that it can be hard to compare offers ... We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them."
It is not as if we did not see this coming. We did! At least those of us compliance nerds, wonkishly spending time around our own wonkish types, rubbing elbows with regulators, lobbyists, agencies officials, congressional staff, industry associations, and everything in between.
Still, keeping it real, even when we know that something unpleasant is coming, nevertheless a sense of disbelief is often provoked when the day of reckoning finally arrives.  
The Flat Fee, which I shall henceforth call the Flatland Fee, has now emerged from its gestational limbo.
In its announcement of May 9, 2012, wearisomely titled in the manner of a 17th century dogmatic text "CONSUMER FINANCIAL PROTECTION BUREAU CONSIDERS RULES TO SIMPLIFY MORTGAGE POINTS AND FEES - Rules Would Bring Greater Transparency to the Mortgage Market" (caps in the original), the CFPB stated that its recipe for "transparency" is to:
"Ban Origination Charges that Vary with the Size of the Loan:
Brokerage firms and creditors would no longer be allowed to charge origination fees that vary with the size of the loan. These 'origination points' are easily confused with discount points. Instead, under the rules the CFPB is considering, brokerage firms and creditors would be allowed to charge only flat origination fees."
Let me broaden this statement out for you:
The CFPB will allow the consumer a choice of paying discount points in creditor-paid transactions only if: (1) the points actually result in a "minimum reduction" in the interest rate for each point paid; and (2) the lender also offers the option of a no discount point loan. (At this time, the CFPB actually provides no details for the correlation between "minimum reduction" and the interest rate.)
The CFPB would allow a consumer to pay up-front origination fees in creditor-paid transactions only if it is a flat amount that does not vary with the size of the loan (and if it is not compensation to the individual loan originator).
According to the CFPB, this proposal is supposed to "preserve consumers' choices while increasing transparency."
Pursuant to Dodd-Frank the CFPB must convene a small business panel, consisting of consumers and industry representatives, the purpose of which is to determine the effects of new regulations on financial institutions subject to the new requirements.
The CFPB will be sharing with these small businesses an overview of the proposals under consideration and a list of questions for input. After its review, the panel's participants are supposed to provide feedback to the panel on the proposals the CFPB is considering and suggest alternatives. At the conclusion of its review, the panel will issue a report to the CFPB that summarizes this feedback. And, from that point on, the CFPB is expected to consider the panels findings when formulating the proposed rule.
The CFPB will publish a Notice of Proposed Rulemaking in the next few months, followed by a formal public comment period.
The rule will be finalized by January 21, 2013.
Seems simple enough. What could go wrong?

Thursday, May 10, 2012

The SAR catches a RAT

Can a SAR catch a RAT?
In its just released review of Suspicious Activity Report (SAR) trends, tips, and issues, FinCEN included a brief, but illustrative statement about how a SAR filing eventually led to an indictment obtained in a "Cash Back" Mortgage Fraud Scheme.
It is interesting to take note of this example of how proper application of FinCEN's Anti-Money Laundering requirements for residential mortgage lenders and originators may lead to reducing mortgage fraud.
Let's look at some good compliance and investigative work and find out how the SAR caught a RAT.*
Smelling a RAT
The Scheme
The Mark
SARs to the Rescue
Bilking a Bank
Smelling a RAT
The case had its origins in a review of SARs conducted by a specialized mortgage fraud task force. The task force then launched an investigation that led to charges against two individuals.
The defendants were charged with engaging in a scheme to defraud mortgage lenders in connection with residential real property purchases.
Not only was the SAR a critical component of uncovering the perpetrators, but also a would-be filed Currency Transaction Report (CTR) on one of the individuals further caused concern, triggering yet another SAR filing, because in addition to the SAR that initiated the case, the second SAR reported how the defendant became "very upset" when he learned that a CTR would be filed because of a series of transactions.
The Scheme
Here's how the scheme worked:
(1) One of the defendants acted as the recruiter, finding various individuals, including straw and nominal purchasers, to purchase more than 15 residential real estate properties.
(2) The recruiter orchestrated the purchase transactions while the second defendant, a mortgage broker, brokered the mortgage loans through his mortgage company.
(3) Although the buyers provided the mortgage broker with legitimate personal information, this defendant made false representations on the loan applications in regard to income, employment, and intent to occupy the residences.
The Mark
But there's more.
The criminal complaint described in detail the defendants' efforts to defraud lenders through the straw buyers, including controlling all aspects of the purchases and the accounts.
The indictment in the case charged that fraudulent or false representations were made in obtaining 100% mortgage financing, including misstatements about the purchasers' monthly income, intent to occupy the property, and existing liabilities.
In each transaction, the purchase price was above (!) the true market price of the property.
An amount approximately equal to the difference between the purchase price and the true market price was then diverted as "cash back" at the close of each escrow to a bank account for a corporation.
SARs to the Rescue
As part of the scheme, these credits, which ranged from almost $42,000 to more than $137,000, were concealed from the mortgage lenders by the mortgage broker.
The mortgage broker, through his control over the corporation's bank account, used the fraudulently obtained funds for various purposes, including extensive cash withdrawals.
The SARs uncovered the perpetrators, as follows:
(1) A SAR review team identified a SAR filed on an associate of one of the defendants.
(2) Because the SAR listed mortgage loan fraud as the suspected violation type, the team referred the SAR to a mortgage fraud task force. The filer noted that the associate apparently misrepresented information on loan applications that were not performing. Also noted was the fact that the second defendant had acted as the loan agent and broker of record on the loans.
(3) Through research, the institution found that the associate had purchased several additional properties, with mortgage loans that totaled at least $450,000 for each purchase. The same title company closed all sales involved in the fraud.
(4) Eventually investigators found several additional SARs, including one with a nine page narrative describing activity on more than 17 individuals and businesses associated with the scheme.
(5) Investigators included many of the details described in the SARs in a criminal complaint and in the indictment charging both defendants with fraud.
Bilking a Bank
The losses caused by the defendants' conduct exceeded $2,500,000.
The defendants pleaded guilty to mail fraud and structuring currency transactions with a financial institution to evade the filing of CTRs.
* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group