Anti-Money Laundering Program – Some Key Questions

QUESTION

We are unsure of a few anti-money laundering issues. We know that you probably come across some of these issues all the time in your AML testing. Please enlighten us on how to deal with these questions.

1. After the filing of one or more SARs, what do we do if law enforcement contacts us requesting more specific information about the suspicious activity or requesting supporting documentation, and also if a law enforcement agency tells us that it does not intend to investigate the matter reported on the SAR?
2. Do we file the SAR on activity deemed to be suspicious even when a portion of the activity occurs outside of the United States or the funds involved in the activity originated from outside the United States?
3. Should we close an account (i.e., a loan application), if we identify suspicious activity?
4. How do we decide to extend the SAR filing period passed the 30-day rule requirement?
5. What should be done during an AML Program test?

ANSWER

Over the years our AML tests and risk assessments have given us considerable insight into the FinCEN requirements for residential mortgage lenders and originators. 

Your questions are good and reflect the concerns of many financial institutions. Here follows some guidance responsive to your questions.

1. If conduct continues for which a SAR has been filed, companies should report continuing suspicious activity with a SAR being filed at least every 90 days, even if a law enforcement agency has declined to investigate or there is the knowledge that an investigation has begun. Moreover, the information contained in a SAR that one law enforcement agency has declined to investigate may be of interest to other law enforcement agencies, as well as supervisory agencies.
2. Although foreign-located operations of U.S. companies are not required to file SARs, a financial institution may wish to file a SAR with regard to suspicious activity that occurs outside the United States that is so egregious that it has the potential to cause harm to the entire organization.
3. Closing a customer account as the result of the suspicious activity is a determination to make in light of the information available. Filing a SAR, on its own, should not necessarily be the basis for terminating a customer relationship. Rather, a determination should be made with the knowledge of the facts and circumstances giving rise to the SAR filing, as well as other available information that could tend to impact on such a decision. When faced with this decision, it may be advisable to include the organization's counsel, as well as other senior staff, in such determinations.
4. SAR rules require that a SAR is filed no later than 30 calendar days from the date of the initial detection of the suspicious activity, unless no suspect can be identified, in which case, the time period for filing a SAR is extended to 60 days. The fact that a review of customer activity or transactions is determined to be needed is not necessarily indicative of the need to file a SAR, even if a reasonable review of the activity or transactions might take an extended period of time. The time to file a SAR starts when the financial institution, in the course of its review or on account of other factors, reaches the position in which it knows, or has reason to suspect, that the activity and/or transactions under review meet one or more definitions of suspicious activity.
5. The AML Program test should provide a fair and unbiased appraisal of each of the required elements of the anti-money laundering program, including its Bank Secrecy Act (“BSA”) policies, procedures, internal controls, recordkeeping and reporting functions, and training. The test should consider internal controls and transactional systems and procedures to identify problems and weaknesses and, if necessary, recommend to management appropriate corrective actions. The test also should cover all anti-money laundering program actions taken by – or defined as part of the responsibility of – the designated compliance officer, including a determination of the level of money laundering risks faced by the business, the frequency of BSA anti-money laundering training for employees, and the adoption of procedures for implementation and oversight of program-related controls and transactional systems. A risk rating should be provided to assess continuity over time.

Jonathan Foxx

Managing Director

Lenders Compliance Group

List of Settlement Service Providers

QUESTION

We are a lender with a question about the list of settlement service providers. We permit our borrowers to shop for settlement services. Since we permit shopping for settlement service providers, do we have to provide any written list for these companies?

ANSWER

A creditor is required to provide a written list of the settlement service providers for which the creditor permits the consumer to shop for providers. Furthermore, a creditor may permit a consumer to shop for a settlement service provider if it permits the consumer to select the provider of the service, subject to reasonable requirements.

But, the written list requirement does not apply if the creditor does not permit the consumer to shop for any of the settlement services.

If a creditor permits a consumer to shop for a settlement service it requires, the written list must identify at least one available provider of that service and must state that the consumer may choose a different provider for that service. [TRID Rule under RESPA Regulation X; see TILA Regulation Z § 1026.19(e)(1)(vi)]

The CFPB has clarified that the creditor who permits a consumer to shop for settlement services must identify the settlement services required by the creditor for which the consumer is permitted to shop. The purpose of this revision was to clarify that the disclosure need not include all settlement services that may be charged to the consumer, but must include at least those settlement services required by the creditor for which the consumer may shop. [Revised Comment 19(e)(1)(vi)-2, July 7, 2017]

The CFPB also clarified that the creditor must identify settlement service providers, available to the consumer, for the settlement services required by the creditor for which a consumer is permitted to shop. For instance, if a creditor requires a consumer to purchase lender’s title insurance and the creditor permits the consumer to shop for lender’s title insurance, the creditor must disclose the lender’s title insurance on the Loan Estimate and at least one provider of the required settlement service, on the written list, capable of coordinating or performing the services necessary to provide the required lender’s title insurance. The list must include sufficient information to allow the consumer to contact the provider, such as the name under which the provider does business and the provider’s address and telephone number. [Revised Comment 19(e)(1)(vi)-4, July 7, 2017]

The creditor may identify on the list providers of services for which the consumer is not permitted to shop, provided the creditor clearly and conspicuously distinguishes those services from the services for which the consumer is permitted to shop. The list may accomplish this by placing the services under different headings.

It is worth noting that the Federal Register preamble to the July 2017 (supra) amendments states that a creditor is not required to provide a detailed breakdown of all related fees that are not themselves required by the creditor but that may be charged to the consumer, such as a notary fee, title search fee, or other ancillary and administrative service needed to perform or provide the settlement service required by the creditor. The same principle applies to the disclosure of services on the Loan Estimate.

The CFPB believes that a complete breakdown could lead to information overload and hinder the consumer’s ability to shop. However, a creditor must be sure that these fees, if excluded from the Loan Estimate, do not cause the sum of all charges subject to exceed the 10 percent threshold. [See § 1026.19(e)(3(ii)]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Rationale for Anti-Steering Prohibition

QUESTION

We are a wholesale lender with offices throughout the United States. Our third-party originators, all mortgage brokers, are required to meet the non-steering guidelines to prevent steering. But our debate is about what is in the interest of the borrower. Some brokers are telling us that the anti-steering rules may not be in their borrowers’ interest. We need a rationale to respond to them. What does it mean when a loan is in the interest of the borrower?

ANSWER

In order to determine whether a transaction is in the consumer’s interest, it must be compared to other possible loan offers available through the originator, if any, for which the consumer was likely to qualify at the time that the transaction was offered to the consumer. In effect, the applicable regulation clearly requires that the originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36I(e)(1)-2.i)]

The steering prohibition does not require a loan originator to direct a consumer to the transaction that will result in a creditor paying the least amount of compensation to the originator. However, if the loan originator reviews possible loan offers available from a significant number of creditors with which the originator regularly does business, and the originator directs the consumer to the transaction that will result in the least amount of creditor-paid compensation for the loan originator, the requirements of steering prohibition are deemed to be satisfied. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36(e)(1)-2.ii)]

For instance, when an originator determines that a consumer likely qualifies for a loan from Creditor A that has a fixed rate of 4%, but the originator instead directs the consumer to a loan from Creditor B that has a fixed rate of 4.5%, if the originator receives more in compensation from Creditor B than the amount that would have been paid by Creditor A, the steering prohibition is violated unless the higher rate loan is in the consumer’s interest. 

What constitutes the determination of being in the consumer’s interest is a dispositive factor. For example, a higher rate loan might be in the consumer’s interest if the lower rate loan has a prepayment penalty or if the lower rate loan requires the consumer to pay more in up-front charges that the consumer is unable or unwilling to pay or finance as part of the loan amount. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36(e)(1)-3)]

Jonathan Foxx

Managing Director

Lenders Compliance Group

Quit Claim and Closing Disclosures

QUESTION

We have a loan where the husband is buying the property as his sole and separate property. His wife is signing the Deed of Trust as to her homestead interest, but she is not on the loan and she will quit claim all other interest in the property. I have two questions: (1) Does it matter if her name is on the purchase contract? (2) Do we have to have her sign the Closing Disclosure?

ANSWER

First, since ownership of property means that a person holds a “bundle of rights,” a spouse who is not a “party” to the loan can sign a deed of trust encumbering less than all of the rights they may have in the property, including their homestead interest, and can also quit claim to the other spouse any and all other rights they may have in the property. The spouse who is not a “party” to the loan need not, and should not, sign the promissory note.

Likewise, since the property is being purchased by only the husband as his sole and separate property, his wife need not sign the purchase contract.

However, the better practice would be for the respective roles in the transaction of each of the spouses to be spelled out clearly in the purchase contract and to have both of them sign the contract; for instance, reciting the fact that they are husband and wife, but specifying that the property is being purchased only by the husband as his sole and separate property and that this is all acceptable and agreed to by the wife. That way, it is clear what the parties’ intentions are. This is particularly important in community property states, such as California, where property acquired during marriage is legally presumed to be held jointly by husband and wife unless the parties clearly express a contrary intention.

In the transaction you describe, depending on the laws of the state in which the transaction takes place, and the requirements of the title company, this may also eliminate the need for the wife to sign a deed of trust encumbering her “homestead interest,” since the contract would make it clear that she has no interest whatsoever in the property being acquired and, hence, no interest to encumber by a deed of trust.   

Second, with respect to your question about the Closing Disclosure, if a person encumbers all or part of any interest they may have in a parcel of real property by signing a deed of trust, that person is usually deemed by the laws of most states to be a “guarantor” or “surety” of the loan obligation, even if they do not sign the promissory note.  Thus, for example, California Civil Code §2787 provides in pertinent part:

“The distinction between sureties and guarantors is hereby abolished. The terms and their derivatives, wherever used in this code or in any other statute or law of this state now in force or hereafter enacted, shall have the same meaning as defined in this section. A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor. …” (Emphasis added.)

Here, on the facts given, the wife is not supposed to be an “obligor” on the loan and title is supposed to be held only by the husband as his sole and separate property. But the facts also specify that the wife will be signing a deed of trust encumbering her homestead interest. To the extent that makes her a “guarantor” or “surety,” the determination of whether or not she is entitled to receive a Closing Disclosure depends on whether the transaction is or is not “rescindable.”

In that regard, Section 1026.17(d) of Regulation Z provides in pertinent part:

“…If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. If the transaction is rescindable under § 1026.23, however, the disclosures shall be made to each consumer who has the right to rescind.” (Emphasis added.)

Section 1026.23 of Regulation Z provides in pertinent part:

“In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. …”

The official interpretation § 1026.23 states:

“Multiple consumers. When two consumers are joint obligors with primary liability on an obligation, the disclosures may be given to either one of them. If one consumer is merely a surety or guarantor, the disclosures must be given to the principal debtor. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under § 1026.23, although the disclosures required under § 1026.19(b) need only be provided to the consumer who expresses an interest in a variable rate loan program. When two consumers are joint obligors with primary liability on an obligation, the early disclosures required by § 1026.19(a), (e), or (g), as applicable, may be provided to any one of them. In rescindable transactions, the disclosures required by § 1026.19(f) must be given separately to each consumer who has the right to rescind under § 1026.23. In transactions that are not rescindable, the disclosures required by § 1026.19(f) may be provided to any consumer with primary liability on the obligation. See §§ 1026.2(a)(11), 1026.17(b), 1026.19(a), 1026.19(f), and 1026.23(b).” (Emphasis added.)

Here, since only the husband is acquiring title as his sole and separate property, and the wife is not “on the loan,” but at most a surety or guarantor, and since this is not a “rescindable” transaction under §1026.23 because it is a purchase money loan, which is exempt as a “residential mortgage transaction” under §1026.23(f)(1) and 1026.2(a)(24), the Closing Disclosure need only be given to the husband, who is the consumer “primarily liable” on the loan and the “principal debtor.”

Michael R. Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group