Elder Financial Abuse: Prevention and Remedies

I have written about elder financial abuse, and I will keep writing about it until stops.[i]

It is unfathomable to me that schemes to defraud the elderly are so pervasive. These seniors are attractive targets for financial exploitation. They are taken advantage of by scam artists, financial advisors, family members, friends, acquaintances, caregivers, home repair contractors, real estate firms, residential mortgage loan originators, credit repair companies, stock brokers, accountants, lawyers, collection agents, appraisers, fiduciaries, guardians, unscrupulous professionals and business people (or those posing as such), pastors, annuity salespersons, and doctors.

It is not news at this point that financial exploitation is a common form of elder abuse and that only a small fraction of incidents is reported to federal, state, or local enforcement authorities, despite persistent efforts by private companies and government agencies to slow its growth. 

Predator and Victim

Why target the elderly? Because older adults often have retirement savings, accumulated home equity, or other assets. Combine those factors with a likelihood of eventual physical or mental impairments, a range of cognitive disabilities, emotional decline, isolation, loneliness, health problems, loss of a partner, family, or friend – all contributing to being vulnerable to financial exploitation and scams – and the result is a feeding frenzy to obtain ill-gotten gains!

Financially abused elders, are susceptible to exploitation for numerous reasons. They are often frail, and the predators assume that frail victims will not survive long enough to follow through on legal interventions, or that they will not make convincing witnesses. Severely impaired individuals are also less likely to take action against their abusers, as a result of illness or embarrassment. The elderly are likely to have disabilities that make them dependent on others for help. These "helpers" or new “best friends” may have access to homes and assets, and may exercise significant influence over the older person. Many elderly people are not financially sophisticated or are unfamiliar with modern technology involving money management.

Family and friends may prey on the elderly. Statistically, ninety (90%) percent of abusers are family members or trusted others! A younger family member might fear that the older family member will get sick and use up savings, depriving the abuser of an inheritance. Or, the abuse is rationalized, believing that the predator stands to inherit assets, and thus feels justified in taking what is thought to be "almost" or "rightfully" due. Then there are the family members who have negative feelings toward siblings or other family members whom they want to prevent from acquiring or inheriting the older person's assets. Or, friends and family who have had a negative relationship with the older person feel a sense of "entitlement." And, certainly, there are close relations who have substance abuse, gambling, or financial problems, which tempt them to defraud and financially abuse the elderly family member.[ii]

What happens when an elderly person is financially abused? The devastation is deep, broad, and painful. These are some typical outcomes: loss of trust in others; loss of security; depression; feelings of fear, shame, guilt, anger, self-doubt, remorse, worthlessness; financial destitution; inability to replace lost assets through employment; inability to hire an attorney to pursue legal protections and remedies; becoming reliant on government ‘safety net’ programs; inability to provide for long term care needs; and, loss of the primary residence.[iii] 

Regulatory Responses

For many years, the Financial Crimes Enforcement Network (“FinCEN”) has kept track of very specific instances of elder abuse relating, for instance, to mortgage fraud. Importantly, it issues periodic advisories that offer statistics as well as outlines of new scams. My firm monitors FinCEN’s statistics and issuances, and we provide the findings in our newsletters, articles, and compliance alerts, and we place relevant documents and issuances in our website library.[iv]

It is important to mention that elder financial abuse includes the Red Flags associated with identity theft. Therefore, the twenty-six Red Flags offered in the Interagency Guidance, through the Federal Trade Commission, are a resource.[v]

The Consumer Financial Protection Bureau uses its Office of Financial Protection for Older Americans to provide information and tools to avoid the financial exploitation of the elderly. Additionally, the agency has been carefully considering regulatory ways and means to curtail such financial abuse. Indeed, it has moved to the forefront in developing strategies to communicate that the Gramm-Leach-Bliley Act (“GLBA”) does not prohibit companies from reporting suspected elder financial exploitation, which I will discuss in some detail in the following section.[vi]

In this article, I will outline how the GLBA furthers the protection of the elderly from financial abuse. I will also provide an outline of some Red Flags as well as ways to increase public awareness about elder financial abuse. Understanding the ways and means available to provide consumer financial protection will help to end the plundering of the elderly. 

Using the Gramm-Leach-Bliley Act

On September 24, 2013, certain federal regulatory agencies issued guidance (“Guidance”) to clarify that the privacy provisions of the Gramm-Leach-Bliley Act (“GLBA”) generally permit financial institutions to report suspected elder financial abuse to appropriate authorities.[vii] Because the GLBA’s privacy provisions generally require a financial institution to notify consumers and give them an opportunity to opt out before providing nonpublic personal information to a third party, the Guidance seeks to clarify that it is generally acceptable under the law for financial institutions to report suspected elder financial abuse to appropriate local, state or federal agencies.

The federal agencies that have collaborated to issue the clarification Guidance, entitled Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, are the Federal Reserve System (“FRB”), Commodity Futures Trading Commission (“CFTC”, issuing as Staff Guidance), Consumer Financial Protection Bureau (“CFPB”), Federal Deposit Insurance Corporation (“FDIC”), Federal Trade Commission (“FTC”), National Credit Union Administration (“NCUA”), Office of the Comptroller of the Currency (“OCC”), and Securities and Exchange Commission (“SEC”). The purpose of the issuance is to provide guidance to financial institutions with respect to clarifying the applicability of privacy provisions of the GLBA, specifically regarding the reporting of suspected financial exploitation of older adults.

Mortgage Fraud: Data Confirms Spike in 2006-2007

The Financial Crimes Enforcement Network (FinCEN) has released an analysis of Mortgage Fraud SAR Filings in Calendar Year 2012. The report was issued on August 20, 2013. This publication updates FinCEN’s prior Mortgage Loan Fraud (MLF) assessments examines Suspicious Activity Report (SAR) filings from January through December 2012 (CY 2012).

The report provides new information on the volume of SAR filings, geographic locations of subjects, and other filing trends in CY 2012. Tables covering non-geographic aspects are compared with filings from corresponding periods in2011. A section provides updated statistics on foreclosure rescue-related SARs during 2012, and filers’ voluntary use of the new FinCEN SAR e-filing report for voluntary mortgage fraud reporting through March 31, 2013.

This article offers an outline of the FinCEN report. Please visit our Library to download it.

IN THIS ARTICLE

MLF SAR Filings by Year SAR Received, 2001-2012

Mortgage Loan Fraud (MLF) SARs
Time Elapsed from Activity Date to Reporting Date

Number of Mortgage Loan Fraud SAR Filings by Year
with and without the Term “Repurchase” in Narrative

Mortgage Loan Fraud SAR Subjects - Top 20 States and Territories

Foreclosure Rescue Scams

Number of Mortgage Loan Fraud SAR Filings by Year
with Term “Foreclosure Rescue” in Narrative, 2003-2012

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MLF SAR Filings by Year SAR Received, 2001-2012

FinCEN’s data on suspected mortgage fraud shows that reports declined 25% in 2012  (from 92,561 to 69,277) as compared to the previous year. The past three years of suspected mortgage fraud suspicious activity reports (MLF SARs), if counted by the date they were received by FinCEN, accounted for approximately 46% of the past decade’s mortgage fraud SARs.

We take this to mean that filing increases or decreases are not necessarily indicative of overall increases or decreases in MLF activities over a bracketed period, as the volume of SAR filings in any given period does not directly correlate to the number or timing of suspected fraudulent incidents in that period.

However, one of the inherent features of mortgage fraud is that the suspicious activity associated with it is often only recognized and reported years after loan origination, after a review of origination documents is prompted by a loan default, repurchase demand, or other factors. As a result, many mortgage fraud SARs are filed much later than the date that the suspicious activity actually began. Thus, in 2012, 57% of SARs reported mortgage loan fraud (MLF) activities that started more than 5 years before the SAR was filed.

FinCEN: Accountant and Elder Abuse

We have been keeping track of FinCEN's SAR Activity Review – Trends, Tips & Issues virtually from its inception.

In its just issued May 2013 report, FinCEN provides new information regarding two areas of importance:

1) The Suspicious Activity Report (SAR) filing patterns related to elder financial exploitation before and after the publication of FinCEN's Advisory to Financial Institutions on Filing Suspicious Activity Reports Regarding Elder Financial Exploitation ("Advisory"), in February 2011, and

2) An analysis of trends related to SAR filings involving accountants and involving insider abuse within depository institutions.

In this newsletter, I would like to provide you with some insights regarding each of these areas of concern reviewed in the FinCEN report, with a brief review of elder abuse trends and a much more extensive review of suspicious financial activity involving accountants.*

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Elder Abuse - Trends
Accountant Abuse - The Gatekeeper
Sampling the Data
Separating the Wheat from the Chaff
Accountants Abuse - Trends
Conclusion
Library

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Elder Abuse - Trends

A comparison of the filing rates pre- and post-advisory of SARs with narratives containing the two key search phrases “elder financial exploitation” and “elder financial abuse,” shows a very significant increase in relevant filings post-Advisory.

Between March 1, 2011, and August 31, 2012, filers submitted 7,651 total SARs, a 382 percent increase from the 12-month period prior to the release of the Advisory during which filers completed 1,589 relevant SARs. Post-Advisory filing trends showed continued increases in filing incidences. 

SARs generally reported patterns of financial exploitation perpetrated by a relative or caregiver against elderly victims. Narratives most frequently described the perpetrator coercing or cajoling the victim into completing financial transactions that benefited the perpetrator at the expense of the victim.

There are reported instances where the perpetrator reportedly abused a power of attorney over the victim’s account.

Furthermore, so-called "sweetheart scams" were on the rise. A “sweetheart scam” involves the fraudster feigning romantic intentions towards a victim, thus gaining the victim’s affection. The perpetrator then uses the goodwill engendered to defraud the victim. This fraud may impact the victim’s financial accounts and/or identity security, and may even cause the victim to unwittingly facilitate financial fraud against others on the perpetrator’s behalf.

An increased trend in elder financial abuse was noted in the 18 month period after the issuance of the Advisory. Depository Institutions filed 6,026 elder financial exploitation-related SARs in this period. FinCEN determined that institution filers identified “abuse by a relative or caregiver” as the most reported months post-Advisory.

Monthly post-Advisory filing numbers indicate that filers continued to increase their submissions of SARs related to elder financial exploitation more than a year and a half after issuance of the Advisory. FinCEN reports that this trend suggests that many filers have incorporated FinCEN’s elder financial exploitation guidance into their AML monitoring programs. Sample narratives showed filers checked “Other” most often as the characterization of suspicious activity when describing suspicious transactions involving elderly customers.

Most narratives described the perpetrator engaged in identity theft, misuse of position or self-dealing, check kiting, counterfeit checks, or embezzlement/theft, to defraud elderly victims. Many SAR narratives revealed that filers were careful to assess suspicious transactions, often questioning an elderly customer if his transactions appeared out of character. These precautions usually spared the filer and the customer any significant losses.

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FinCEN: SAR Narrative, PowerPoint, and Mortgage Loan Fraud

On September 18, 2012 FinCEN held an Informational Webinar regarding the new FinCEN Suspicious Activity Report (SAR).

The corresponding, full PowerPoint presentation of the recorded version of this Webinar is available HERE.

For those interested in actually viewing the Webinar, HERE is the link to the FinCEN webpage.

Recently, FinCEN issued two important reports (available in our Library): 

- SAR Activity Review – Trends, Tips & Issues (Issue 22)

- Mortgage Loan Fraud Update - Suspicious Activity Report Filings in 2nd Quarter 2012 

The first report offers significant insight and guidance in monitoring suspicious activity, and the second report provides important insights regarding SAR filings related to mortgage loan fraud. For years we have worked with our bank clients on auditing their SAR filings and AML compliance, and I can vouch for the practical advantages of reading these on-going FinCEN reports to enhance your risk management responsibilities.

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IN THIS ARTICLE

SAR Narrative: "5 W's and the How"

Mortgage Loan Fraud - Statistics and Charts

Foreclosure Rescue Scams on the Rise

California: Highest 2012-Q2 Foreclosure Rescue SARs

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SAR Narrative: "5 W's and the How"

In the recent SAR Activity Review, sections are provided that outline the basic aspects toward filing a SAR. In particular, the section  on writing an effective SAR Narrative is important to consider.

FinCEN rightly states that the narrative "is a critical part of the SAR because it is where the filer can summarize and provide a more  detailed description of the activity being reported." For that reason, it is essential that the narrative be clear, complete and thorough.

This section of the FinCEN report offers the "5 W's" that I have written about extensively as a way to develop the SAR narrative. (See, for instance, my magazine article, Anti-Money Laundering Program - Preparation is Protection, August 2012.)

Our clients have learned  how to use this narrative method. The FinCEN report does not mention the "How" narrative that I have advocated - and which I will discuss below. In my view, the Anti-Money Laundering Program should have an appendix devoted exclusively to the SAR Narrative procedures, especially outlining  the "5 W's and the How" method of writing it.

The narrative must be clear, complete and thorough and the method I advocate is an effective means toward accomplishing these  goals.

FinCEN's outline is rather brief, so I will provide a much more extensive set of action steps for you to follow.

The following are the "5 W's" method provided by FinCEN, after which I will add some remarks about narrating the "How".

Who is conducting the suspicious activity?

While one section of the SAR form calls for specific suspect information, the narrative should be used to further describe the suspect or suspects, including occupation, position or title within the business, and the nature of the suspect’s business(es). If more than one individual or business is involved in the suspicious activity, identify all suspects and any known relationships amongst them in the Narrative Section.

While detailed suspect information may not always be available (i.e., in situations involving non-account holders), such information should be included to the maximum extent possible. Addresses for suspects are important: filing institutions should note not only the suspect’s primary street addresses, but also, other known addresses, including any post office box numbers and apartment numbers when applicable. Any identification numbers associated with the suspect(s) other than those provided earlier are also beneficial, such as passport, alien registration, and driver’s license numbers.

What instruments or mechanisms are being used to facilitate the suspect transaction(s)?

An illustrative list of instruments or mechanisms that may be used in suspicious activity includes, but is not limited to, wire transfers, letters of credit and other trade instruments, correspondent accounts, casinos, structuring, shell companies, bonds/notes, stocks, mutual funds, insurance policies, travelers checks, bank drafts, money orders, credit/debit cards, stored value cards, and/or digital currency business services. Specific suspect identifying information is provided in the relevant Suspicious Activity Report for RMLO filings.

In addition, a number of different methods may be employed for initiating the negotiation of funds such as the Internet, phone access, mail, night deposit box, remote dial-up, couriers, or others. In summarizing the flow of funds, always include the source of the funds (origination) that lead to the application for, or recipient use of, the funds (as beneficiary).

In documenting the movement of funds, identify all account numbers at the financial institution affected by the suspicious activity and when possible, provide any account numbers held at other institutions and the names/locations of the other financial institutions, including MSBs and foreign institutions involved in the reported activity.

When did the suspicious activity take place?

If the activity takes place over a period of time, indicate the date when the suspicious activity was first noticed and describe the duration of the activity. Filers will often provide a tabular presentation of the suspicious account activities (transactions in and out).

While this information is useful and should be retained, do not insert objects, tables, or pre-formatted spreadsheets when filing a SAR.

These items may not convert properly when keyed in or merged into the SAR System. Also, in order to better track the flow of funds, individual dates and amounts of transactions should be included in the narrative rather than just the aggregated amount.

Anti-Money Laundering Program–Preparation is Protection

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, recently finalized regulations (Final Rule) requiring non-bank Residential Mortgage Lenders and Originators (RMLOs) to establish an Anti-Money Laundering Program (AML Program) and file Suspicious Activity Reports (SARs), as FinCEN requires of other types of financial institutions.[i]

FinCEN issued these regulations defining non-bank residential mortgage lenders and originators as loan or finance companies for the purpose of requiring them to establish AML Programs and report suspicious activities under the Bank Secrecy Act (BSA).

The effective compliance date for the Final Rule is August 13, 2012.[ii]

For additional background information, this article may be read in conjunction with my March 2012 article in this publication, entitled Anti-Money Laundering Debuts for Nonbanks.[iii]

FinCEN may impose civil monetary penalties for non-compliance with its regulations, including a penalty for each suspicious activity reporting violation, so compliance with the SAR regulations should be considered mandatory on the part of responsible management.[iv]

BSA authorizes the Treasury to issue regulations requiring financial institutions, including any “loan or finance company” to keep records and file reports that are deemed to 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.”

In the supplementary information to the Final Rule, the term loan or finance company “can reasonably be construed to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Some loan and finance companies extend personal loans and loans secured by real estate, mortgages and deeds of trust, including home equity loans.”

The following constitutes these categorical definitions recognized by FinCEN:

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. 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 SEC or the CFTC, any GSE regulated by the FHFA, any federal or state agency or authority administering mortgage or housing assistance, fraud prevention or foreclosure prevention programs, or an individual employed by a loan or finance company or financial institution. A loan or finance company is not a financial institution as defined in these regulations.

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.

Residential Mortgage Originator – The person accepting a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan.

Residential Mortgage Loan – The loan that is secured by a mortgage, deed of trust or other equivalent consensual security interest on:

· A residential structure that contains 1-4 units, including (if used as a residence) an individual condominium unit, cooperative unit, mobile home or trailer; or

· Residential real estate upon which such a structure is constructed or intended to be constructed.

FinCEN interprets the term “loan or finance company” under the BSA to include any non-bank residential mortgage lenders and originators (i.e., “mortgage companies,” mortgage bankers or lenders,” and “mortgage brokers”) in the residential mortgage business sector.

In this article, I will provide a brief overview of but a few of the many salient features that should be expected in every AML Program.* To give you an idea of the size and complexity of a well-constructed AML Program, my firm’s AML Program is well over fifty pages – which consists of a policy statement and numerous appendices for applicable procedures. This should give you some idea of the depth and detail needed for properly implementing AML compliance. The absence of or any inaccuracies in required program components may indicate a defective policy and procedures – the very tools needed to assist in detecting and preventing money laundering or other illegal activities conducted through mortgage banking conduits.

Interview: Anti-Money Laundering Program for Nonbanks

Monday, August 13, 2012, marks the commencement of the Anti-Money Laundering Program.

Specifically, this is the effective date for implementing the regulatory compliance requirements for Residential Mortgage Lenders and Originators (RMLOs).

From August 13, 2012 forward, RMLOs must have established an Anti-Money Laundering Program (AML Program) and, as required, file Suspicious Activity Reports (SARs).  

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued regulations earlier this year that require RMLOs to establish AML Programs and report suspicious activities under the mandates of the Bank Secrecy Act.

For additional background information, please refer to my March 2012 article, entitled Anti-Money Laundering Debuts for Nonbanks. *

This month, I am publishing yet another article on AML compliance, this time the subject is about drafting the Anti-Money Laundering Program. The article is entitled Anti-Money Laundering Program - Preparation is Protection. When published, I will notify you and send you the download link.

INTERVIEW: ANTI-MONEY LAUNDERING COMPLIANCE

Recently, I was interviewed by Paul Donohue, the Founder of Abacus Mortgage Training and Education, for his highly-regarded Abacus Mortgage Mastery Series.

I discussed at considerable length the many compliance features and guidelines of the Anti-Money Laundering Program. We had a detailed and engaging discussion about anti-money laundering as it relates to RMLOs.

I suggest that you listen to this interview, because it covers a broad range of issues and will help you to be prepared for implementing FinCEN's Anti-Money Laundering Program for RMLOs.

There are two ways for you to listen to the interview:

• Listen to the full Interview.
  • Click the Interview button on our website.

• Download the full interview (MP3) to save for future reference and AML training plans. 
  • Click the MP3 button on our website.

INTERVIEW

Anti-Money Laundering Compliance

CLICK

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

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.*

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IN THIS ARTICLE

Smelling a RAT

The Scheme

The Mark

SARs to the Rescue

Bilking a Bank

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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.

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

Anti-Money Laundering Debuts for Nonbank Mortgage Companies

A new era in filing requirements is about to begin.* For the first time, the Financial Crimes Enforcement Network, known as “FinCEN,” will require nonbank mortgage lenders and originators to implement an Anti-Money Laundering program (“AML Program”) and file Suspicious Activity Reports (“SARs”) for certain loan transactions.[i] FinCEN is establishing this AML program in accordance with the Bank Secrecy Act (“BSA”).[ii] The guidelines relating to the AML requirement become effective on April 16, 2012, and the AML Program’s effective compliance date is August 13, 2012.[iii] The AML program and SAR filing regulations, which I will refer to as “FinCEN’s rule,” are considered to be “the first step in an incremental approach to implementation of regulations for the broad loan or finance company category of financial institutions.”[iv]

The Bank Secrecy Act defines the term "financial institution" to include, in part, a loan or finance company. This terminology, however, can reasonably be construed to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Thus, nonbank residential mortgage lenders and originators, and mortgage brokers, are grouped into the "loan or finance company" category.[v] However, the term ‘‘loan or finance company’’ is actually not concisely defined in any FinCEN regulation, and there is no legislative history on the term itself. Nevertheless, FinCEN is applying this term to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. [vi] Therefore, residential mortgage lenders and originators (“RMLOs”) are covered by the scope of the ‘‘loan or finance company’’ term. I will use the acronym “RMLO” in this article, inasmuch as my principal focus herein relates to residential mortgage lenders and originators.

FinCEN can issue regulations requiring financial institutions to keep records and file reports that are determined to 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. Federally regulated depository institutions have been required to have AML Programs,[vii] and now, as of the aforementioned effective compliance date, RMLOs must also comply with FinCEN’s regulations relating to implementing an AML Program and the filing of SARs.

Over the last few years,[viii] FinCEN has issued studies and analyses that used SARs to discover suspected mortgage fraud and money laundering that involved both banks and residential mortgage lenders and originators.[ix] According to FinCEN, these reports “underscore[d] the potential benefits of AML and SAR regulations for a variety of businesses in the primary and secondary residential mortgage markets.”[x]

Residential mortgage lenders and originators, the RMLOs, are considered to be the primary providers of mortgage finance, and have a unique position with respect to direct contact with the consumer. Thus, they are presumably able to assess and identify money laundering risks and fraud.[xi] At this time, FinCEN is not proposing a definition of “loan or finance company’’ that would encompass other types of consumer or commercial finance companies, or real estate agents and other entities involved in real estate closings and settlements.

In this article, I am going to unpack the AML Program for you in a way that will give you some familiarity with its scope, while perhaps also making its implementation a bit less daunting than it might otherwise seem to be. Nevertheless, many RMLOs will find that setting up the AML Program will be a challenging endeavor. Information, issuances, and relevant documentation are available in the FinCEN section of my firm’s website Library.

Please keep in mind that, as is the case with many applications of legal and regulatory compliance, there are aspects and nuances that will require recourse to a competent risk management professional to obtain comprehensive guidance and reliable information.[xii]

AML Program

Residential mortgage lenders and originators, the RMLOs, are required to establish an AML Program that includes, at a minimum:

(1) Development of internal policies, procedures, and controls.

(2) Designation of a compliance officer.

(3) Ongoing employee training program.

(4) Independent audit function to test for compliance.

To effectuate the AML Program, FinCEN has given a definition of an RMLO that is broad in scope and covers most nonbank residential mortgage originators.

The AML Program covers any business that, on behalf of one or more lenders, accepts a completed mortgage loan application, even if the business does not in any manner engage in negotiating the terms of a loan. Also covered are businesses that offer or negotiate specific loan terms on behalf of either a lender or borrower, regardless of whether they also accept a mortgage loan application.

Note that the word “accept” is intended to differentiate the FinCEN rule from the SAFE Act. FinCEN is ensuring that persons who either accept an application or offer or negotiate the terms of a loan are covered. Furthermore, the AML rule applies to residential mortgage originators, regardless of whether they receive compensation or gain for acting in that capacity.

FinCEN: Fraud and Mortgage Rescue Schemes

The Financial Crimes Enforcement Network (FinCEN) has just released its 20th issue of the SAR Activity Review - Trends, Tips, and Issues. The publication provides information about SARs and Remote Deposit Capture risks, Organized Retail Crime, Health Care Fraud, Elder Financial Exploitation, and more.

Of particular interest is a section devoted to the U.S. Trustee Program's (USTP) civil enforcement activity targeting bankruptcy-related mortgage fraud and mortgage rescue schemes. The USTP is a unit in the Department of Justice (DOJ) responsible for overseeing the administration of bankruptcy cases and private trustees. In that capacity, it also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

In this SAR Activity Review, USTP provides information regarding its role in combating these schemes, and, importantly, provides tips to financial institutions on detecting such unlawful activity.

The following outline provides:

• A Brief statement
• Financial Consultant Schemes (Red Flags)
• Sale-Lease Back and Property Transfer Schemes (Red Flags)
• Reverse Mortgage Schemes
• Library – Download Issuance

A Brief Statement

Bankruptcy-related mortgage fraud and mortgage rescue schemes use know how to exploit the federal bankruptcy court system.

Perpetrators of mortgage foreclosure rescue fraud schemes use these courts as a means to defraud vulnerable consumers in jeopardy of losing their homes to foreclosure or eviction.

Here's a strategy used by perpetrators:

1) The filing of a bankruptcy case triggers an automatic stay.
2) This filing then immediately stops all collections actions.

Point 1: Perpetrators often take advantage of the automatic stay, using it to give consumers the impression that the perpetrators' false promises of saving their homes are true since collection activities cease - at least temporarily.

Point 2: In some of these schemes, perpetrators use the courts by recommending to consumers that they file bankruptcy to eliminate their unsecured debt and thereby position themselves to buy back their houses as part of a sale-lease back scheme.

Point 3: Sometimes the perpetrators themselves file bankruptcy to discharge the debt they incurred as part of their mortgage fraud schemes. 

Financial Consultant Schemes

• This is the most common mortgage rescue frauds encountered in bankruptcy. In this scenario, the perpetrators falsely tell desperate homeowners that, for a fee, they can help the homeowners save their homes by working with their lenders to stop foreclosure and modify or refinance their loans. Perpetrators identify homeowners through advertising on TV, on radio, in local newspapers, or on the Internet; through connections with churches and other affinity-based ethnic groups; or through foreclosure lists available from local governmental agencies. Homeowners are told to make their mortgage payments to the perpetrators or are required to pay the perpetrators a monthly consulting fee, or both. Of course, the perpetrators do not contact the lenders. Instead, they file serial fraudulent bankruptcy cases in the homeowners' names, sometimes without the homeowners' knowledge or consent, to use the automatic stay to stop the foreclosure.
• Here's a variation: homeowners are directed by the perpetrators to quitclaim fractional interests in their homes to fictitious individuals or businesses. Bankruptcy cases are then filed serially in the names of the fictitious individuals or businesses to continue the operation of the automatic stay. A third variation involves the perpetrators transferring fractional interests to unsuspecting individual debtors with pending bankruptcy cases without their knowledge or consent. Under any of these scenarios, because collection activity has been suspended, homeowners mistakenly believe that the perpetrators have fulfilled their false promises, and the homeowners' continue to pay the perpetrators.

Red Flags

Mortgage payments stop being made.

Mortgage payments abruptly stop with no contact from the homeowner and/or default occurs on the mortgage within a month or two after the loan is made.

The foreclosure process is stayed by a bankruptcy filing.

The filing of the bankruptcy case may be in tandem with the sudden failure to make regular mortgage payments.

The debtor in the bankruptcy case that stayed the foreclosure is not the borrower.

The debtor does not disclose a fractional interest and/or other ownership in real property in his/her bankruptcy documents.

Failure to disclose such interests may indicate a fractional interest or property transfer scheme.

Serial bankruptcy cases are filed and/or numerous lenders file motions seeking relief from the automatic stay to proceed with foreclosure and/or eviction actions.

Where the perpetrators file serial bankruptcy cases, especially those involving fractional interest schemes, financial institutions should expect to see other lenders filing motions seeking relief from the bankruptcy automatic stay as well.

Sale-Lease Back and Property Transfer Schemes

• In this scheme, the perpetrator gains control of an individual's home and skims real or manufactured equity from the property. The perpetrator tells the homeowner that the home can be saved by selling it to a third-party purchaser chosen by the perpetrator - also known as a "straw purchaser" - and then renting it back from the purchaser for an amount less than the homeowner's current mortgage payment. Frequently the perpetrator promises that the homeowner can buy the home back within a certain period of time at the same price at which it was sold, thus protecting the homeowner's "equity." (In some schemes, the perpetrator persuades the homeowner to file bankruptcy in order to repair the homeowner's credit and place the homeowner in a better position to obtain financing to buy back the home.)
• The perpetrators of these schemes profit by gaining control of the properties and obtaining fraudulent loans in the straw purchasers' names based on inflated appraisals of the properties' value. The inflated sales price creates a significant amount of "fake" equity that the perpetrators take through fees that are included in the closing payoffs. Moreover, the perpetrators may arrange to have any remaining sales proceeds signed over to them, rather than to the homeowners. The straw purchasers usually receive some money at closing for each property purchased. Eventually the straw purchasers file bankruptcy to discharge the mortgage debt incurred in their names. Usually, they do not disclose payments received at closing in their bankruptcy documents. In the end, the homeowners lose their homes.
• A version of this scheme involves renters. Homeowners desperate to sell their homes are persuaded to "sell" their property to the perpetrators based on false promises that the perpetrators will obtain new loans to pay off the homeowners' existing mortgages. The perpetrators do not get financing, but instead put renters in the properties and collect the rents. No mortgage payments are made and the financial institutions are not notified of the title transfer. To further the scheme, the perpetrators may file incomplete serial bankruptcy cases in the homeowners' and/or renters' names without their knowledge or consent for purposes of obtaining the automatic stay to stop the collection actions.
  

Mortgage Fraud Report: Upward Trend

The Financial Crimes Enforcement Network (FinCEN) has reported in its Second Quarter 2011 Analysis of mortgage loan fraud suspicious activity reports (MLF SARs) that financial institutions filed 29,558 MLF SARs in the second quarter of 2011 up from 15,727 MLF SARs reported in the same quarter of 2010.

The report, issued on September 28, 2011, shows the continuation of the upward trend in mortgage fraud.

We have reported on FinCEN's MLF SARs analyses.

A large majority of the MLF SARs examined in the second quarter involved mortgages closed during the height of the real estate bubble.

In other words, these SARs are filed on activity that occurred more than two years ago. Many SARs are being filed because financial institutions are uncovering fraud as they sift through defaulted mortgages.

Upward Spike

The upward spike in second quarter MLF SAR numbers is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Omitting these particular submissions, 2011 Q2 MLF SAR numbers would be down 3% from the prior year.

FinCEN noted that 81% of the MLF SARs filed during the quarter involved suspicious activities that occurred before 2008, and 63% involved suspicious activities that occurred four or more years ago. For both 2011 Q2 and 2010 Q2 filings, a majority of reported activities took place between 2006 and 2008.

The report contains a section on reported mortgage fraud activities 90 or fewer days old, with emphasis on so-called "debt elimination" scams, identity theft, Social Security Number (SSN) fraud, and false statements.

2011 Q2 Sample SAR Statistics
Suspicious Activities Described by Filers

The FinCEN report shows the following areas of fraud:

• Misrepresenting income, occupancy, debts assets
• Debt elimination scams
• Scams involving the fraudulent use of social security numbers
• Identity theft
• False statements and false documents
• Fraud involving short sales and appraisals
• Forged rescission of notice of default
• Advance fee scams
• Buy and bail schemes
• Money laundering

Mortgage Loan Fraud SAR Filings
Relative to All SAR Filings

In 2011 Q2, filers submitted 29,558 Mortgage Loan Fraud SARs (MLF SARs), an 88% increase over the previous year.

The total number of all SARs filed in 2011 Q2 increased by 16%.

And 15% of all SARs filed in 2011 Q2 indicated MLF as an activity characterization, up from 9% in 2010 Q2.

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FinCEN: Mortgage Loan Fraud Update
 
Suspicious Activity Report Filings  
In 2nd Quarter 2011  
September 28, 2011

FinCEN: Elder Abuse - Red Flags

On February 22, 2011, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to assist the financial industry in reporting instances of financial exploitation of the elderly, a form of elder abuse.

Financial institutions can alert appropriate authorities to suspected elder financial exploitation. We have previously provided notification about the increase in elder abuse in financial transactions. And FinCEN has notified the public about this upward trend, using SARs as an important method to identify this form of financial exploitation.

There are important RED FLAGS relating to financial exploitation of the elderly, and we provide a list below and suggest appropriate action to implement them. 

FinCEN's Advisory states:

• In the instances where elderly individuals experience declining cognitive or physical abilities, they may find themselves more reliant on specific individuals for their physical well-being, financial management, and social interaction.

• Although anyone can be a victim of a financial crime such as identity theft, embezzlement, and fraudulent schemes, certain elderly individuals may be particularly vulnerable.

SUSPICIOUS ACTIVITY

Financial institutions may become aware of persons or entities:

Perpetrating illicit activity against the elderly through monitoring transaction activity that is not consistent with expected behavior of elderly customers.

ILLICIT ACTIVITY

Financial institutions should evaluate indicators of potential financial exploitation in combination with other red flags and expected transaction activity being conducted by or on behalf of the elder. Additional investigation and analysis may be necessary to determine if the activity is suspicious.

RED FLAGS

Erratic or unusual banking transactions, or changes in banking patterns:

• Frequent large withdrawals, including daily maximum currency withdrawals from an ATM;

• Sudden Non-Sufficient Fund activity;

• Uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds;

• Debit transactions that are inconsistent for the elder;

• Uncharacteristic attempts to wire large sums of money;

• Closing of CDs or accounts without regard to penalties.

Interactions with customers or caregivers:

• A caregiver or other individual shows excessive interest in the elder's finances or assets, does not allow the elder to speak for himself, or is reluctant to leave the elder's side during conversations;

• The elder shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to a caretaker;

• The financial institution is unable to speak directly with the elder, despite repeated attempts to contact him or her;

• A new caretaker, relative, or friend suddenly begins conducting financial transactions on behalf of the elder without proper documentation;

• The customer moves away from existing relationships and toward new associations with other "friends" or strangers;

• The elderly individual's financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual;

The elderly customer lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters.

ACTION

A financial institution's Identity Theft Prevention Program - Red Flags (Program) should be updated immediately to include red flags that may indicate the financial exploitation of elderly customers.

• Although the subject FinCEN issuance does not specifically require revision to the Identity Theft Prevention Program - Red Flags, the 26 Red Flags listed in 12 CFR Part 41, Supplement A to Appendix J are not meant to be comprehensive, and assume all applicable federal laws and regulations.
• The Program's goal is to detect and identify Red Flags, and establish, implement, maintain, and update reasonable policies and procedures to identify, detect, and mitigate identity theft through a financial institution's own efforts and those of its loan originators, affiliates, and third party vendors.
• A component of the Program is to ensure that it is updated, as needed and as appropriate to the specific financial institution, to reflect changes in the law, changes to the risks to customers, and to the safety and soundness of the financial institution from identity theft. 
• Since forms of identity theft can occur in the financial exploitation of the elderly, it is important to update the Program for red flags involving such financial exploitation immediately.

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Advisory to Financial Institutions on Filing Suspicious Activity Reports
Regarding Elder Financial Exploitation
FIN-2011-A003
February 22, 2011

FinCEN: 7% Increase in Mortgage Fraud

On December 14, 2010, the Financial Crimes Enforcement Network (FinCEN) released two mortgage fraud reports entitled Mortgage Loan Fraud SAR Filings, which together cover the first six months of 2010.

One report covers January through March 2010, and the other covers April through June 2010.

For previous announcements on this subject, please visit the Compliance ALERTS section of our Archive.

Taken together the reports show that suspicious activity reports (SARs) indicating mortgage loan fraud (MLF) climbed 7%, rising to 35,135 in the first half of 2010 compared with 32,926 in the first half of 2009.

In part, the increase is being attributed to increased attention to older loans spurred by repurchase demands.

In the first quarter of 2010, 78% of reported activities occurred more than two years prior to filing, compared with 44% in the same period of 2009, showing a continued focus on loans originated from 2006 to 2008.

First Quarter

Second Quarter

Key Findings

References to bankruptcy in SARs have steadily increased, rising to 7% of MLF SAR filings in 2010, compared to 1% in 2006 and 2007.

SAR reports referencing "short sale" and "broker price opinion" appeared 827 times and 41 times in SARs respectively during the first quarter of 2010. (Short sales and broker price opinions mentioned in SARs are sometimes associated with a particular type of flipping scheme known as "flopping." Flopping occurs when a foreclosed property is sold at an artificially low price to a straw buyer, who quickly sells the property at a higher price and pockets the difference.)

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FinCEN: Suspicious Activity Report Filings from January 1-March 31, 2010, Mortgage Loan Fraud Update, December 2010
FinCEN: Suspicious Activity Report Filings from April 1-June 30, 2010, Mortgage Loan Fraud Update, December 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FinCEN: Proposes Non-Bank Lenders File SARs

On December 6, 2010, the Financial Crimes Enforcement Network (FinCEN) proposed a requirement that non-bank residential mortgage lenders and originators, just like other types of financial institutions, establish anti-money laundering (AML) programs and comply with suspicious activity report (SAR) regulations. The requirements are provided in a Notice of Proposed Rulemaking.

The Bank Secrecy Act (BSA) authorizes the Treasury 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." The subject proposed rulemaking regarding residential mortgage lenders is derived from that authority.

At this time, the only mortgage originators that are required to file SARs are banks and insured depository institutions.

According to FinCEN, analyses of SARs in FinCEN's mortgage fraud reports show that non-bank mortgage lenders and originators initiated many of the mortgages that were associated with SAR filings.

The Notice of Proposed Rulemaking intends to provide prevention of mortgage fraud, including such activities as false statement, use of straw buyers, fraudulent flipping, and even identity theft associated with mortgage borrowing. These illegal activities, and others, have been identified in information provided by SARs.

This Notice of Proposed Rulemaking was informed by comments received following an Advanced Notice of Proposed Rulemaking (ANPRM) issued last year on July 21, 2009.
Comments: Due 30 days after publication in the Federal Register.

Lenders Compliance Group provides a robust and comprehensive risk assessment for auditing SARs. If you would like to prepare for the SARs filing requirements and/or provide independent testing and monitoring for compliance, please contact us.

Minimum Requirements

(1) Policies and Procedures: 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 must:

(i) Include provisions for complying with the applicable requirements of Subchapter II of Chapter 53 of Title 31, United States Code ("Records and Reports on Monetary Instruments Transactions"),

(ii) Integrate the company's agents and brokers into its anti-money laundering program, and

(iii) Obtain all relevant customer-related information necessary for an effective anti-money laundering program.

(2) Compliance Officer: 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.

(3) Training: 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:

(i) Directly training such persons or

(ii) 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) Independent Testing: provide for independent testing to monitor and maintain an adequate program, including:

(i) Testing to determine compliance of the company's agents and brokers with their obligations under the program.

(ii) Determining that the scope and frequency of the testing is commensurate with the risks posed by the company's products and services.

NOTE: Such testing may be conducted by a third party or by any officer or employee of the loan or finance company.

(5) Compliance: compliance is subject to examination by FinCEN or its delegates, under the terms of the Bank Secrecy Act. Failure to comply with the requirements may constitute a violation of the Bank Secrecy Act.

(6) Effective date: an anti-money laundering program that complies with the all requirements must be implemented on or before the later of six (6) months from the effective date of the regulation, or six (6) months after the date a loan or finance company is established and becomes subject to the requirements.

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FinCEN: Anti-Money Laundering Program and Suspicious Activity Report
Filing Requirements for Residential Mortgage Lenders and Originators
Notice of Proposed Rulemaking (12/6/10)

FinCEN: Advance Notice of Proposed Rulemaking
Federal Register, Vol. 74, No. 138 (7/21/09)

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FinCEN: 2009 Mortgage Loan Fraud

On July 30, 2010, the Financial Crimes Enforcement Network (FinCEN) released its 2009 Mortgage Loan Fraud (MLF) study which found the number of mortgage fraud suspicious activity reports (SARs) filed in 2009 grew 4 percent compared with the number of mortgage fraud SARs filed in 2008.

FinCEN also reported that just looking at the fourth quarter of 2009, mortgage fraud SAR filings increased 6 percent over the same period in 2008.

Consistent with recent years, 9 percent of all SARs filed in 2009 indicated MLF as an activity characterization. However, looking at just the fourth quarter, this proportion rose to 11 percent.

In addition to the increase in SAR-MLF filings, the analysis shows an increase in the prevalence of post origination loan reviews by a variety of mortgage market businesses other than mortgage lenders, such as mortgage loan purchasers, providers of mortgage insurance, insurance certificates.

The importance of quality control reviews through in-house or third-party auditors skilled in detecting potential mortgage fraud or misrepresentations is an important tool.

Highlights

The report also lists where MLF SARs are most common by state, by county, and by metropolitan area (MSA). The following table shows the Metropolitan Statistical Areas with the most SAR MLF filings and the number of mortgage loan fraud SARs that were filed in 2009.

The volume of SAR filings in any given period does not directly correlate to the number or timing of suspected fraudulent incidents in that period.

The numbers reported show when the suspicious activity was reported even if the activity occurred prior to 2009. FinCEN's data indicates that almost 75 percent of mortgage loan fraud SARs report suspicious activity that occurred more than one year prior to filing the SAR.

Foreclosures, repurchases, insurance investigations, and enforcement actions appear in SAR narratives as contributing factors to the ultimate discovery and reporting of suspicious activities.

Further Review

This report and related studies should be taken together with May's report entitled Loan Modification and Foreclosure Rescue Scams - Evolving Trends and Patterns in Bank Secrecy Act Reporting, released in June and which examines early results from FinCEN's April Advisory, Guidance to Financial Institutions on Filing Suspicious Activity Reports regarding Loan Modification/Foreclosure Rescue Scams in order to gain a detailed understanding of loan modification and foreclosure rescue scams.

Both of these reports are on our website.

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Mortgage Loan Fraud Update - Suspicious Activity Report Filings from October 1, 2009 to December 31, 2009. FinCEN: July 2010
7/31/10

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.