AI Replaced Me

YOUR COMPLIANCE QUESTION

YouTube

Two weeks ago, you wrote an article titled Will AI Replace Me? When I read it, I was still employed. Well, it's two weeks later, and I have been fired and replaced by an AI bot. I am still in shock. I really did not think my job was in jeopardy. Other people in my company were also fired and replaced by AI bots.

 

Yours is the only compliance firm I have come across that explains the positives and negatives of artificial intelligence. I guess, for me, it is a big negative. I have been in the mortgage world for over twenty years. My main positions were in underwriting, processing, and closing. I have looked around for work, and nobody's hiring. I'll bet those positions are now using AI bots.

 

I don't know what to do next. I'm only forty-five. I have limited savings and a small family. I feel like I'm getting squeezed out of the mortgage industry. A group of us met with our company's COO, and she said the company is moving rapidly toward AI across its origination process. So, it looks like I'm heading for a dead end. It feels like I'm being thrown on a trash heap.

 

What is happening with these AI bots? 

Is it Us (the humans) against Them (the AI bots)?

 

Signed,

Jobless

 

OUR COMPLIANCE SOLUTION

AI POLICY PROGRAM FOR MORTGAGE BANKING™  

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for Freddie Mac Sellers/Servicers. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

Our AI Policy Program consists of the following policies:  

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy  

Contact us for the presentation and pricing! 

 

RESPONSE TO YOUR QUESTION

 

This is a scary time as the world embarks on this new era of AI technology. Unfortunately, unemployment will increase as AI replaces human workers. The change will not be one-for-one. In some cases, it will be far worse, as one AI bot can replace hundreds of humans on a task, especially in loan processing, underwriting, and other operational roles. I'm going to be brutally honest with you: underwriters are among the more commonly cited "at risk" roles in mortgage banking.

 

WILL AI REPLACE YOU

 

In the March 19^th article you cited, Will AI Replace Me?, the concern expressed was from a loan officer. However, I stated the following AI automations that, as implemented, would adversely affect the need for humans, as follows: 

·       AI underwriting engines can now complete the entire initial underwriting process autonomously, approving loans days faster than traditional methods. This process is probably the clearest current example of loan origination being removed entirely from human hands. 

·       Unfortunately, loan processors, underwriting assistants, compliance analysts, escrow coordinators, closing personnel, and data entry clerks are at the intersection I described above, where humans and mimicking humans reside. 

In the March 25^th article, Will AI Reduce Fair Lending Violations?, I noted, in pertinent part, that "AI can streamline underwriting, reduce operational costs, and identify creditworthy applicants that traditional credit scoring methods might overlook." 

SYSTEMIC CHANGE 

The transition is systemic, not particularized to just your company, loan products and services, region, or institutional type. From point of sale to securitization, AI is quickly becoming embedded. AI is already doing a lot of what junior underwriters used to do. And, as you know, Fannie Mae's Desktop Underwriter and similar automated systems have been handling straightforward loan approvals for years. That trend is accelerating due to artificial intelligence.

Will AI Reduce Fair Lending Violations?

YOUR COMPLIANCE QUESTION 

Our company is building an AI engine to monitor for fair lending violations. The AI system is extensive and includes chatbots. It will be integrated into our LOS and several other systems. We are a large mortgage originator and servicer. We use one of the most well-known platforms for loan originating and servicing. The system offers several new AI features. But we ran our own test against the LOS and found that our AI engine is identifying more fair lending issues than the one embedded in the LOS. 

As the company's General Counsel and Chief Risk Officer, I was shocked that building our own AI system could produce better results than a highly rated, well-established LOS. Granted, our AI system is proprietary and reflects our unique compliance needs. Full disclosure: We have been a client of yours for over 15 years, and we have discussed these and other AI findings with your team in order to mitigate compliance risk. 

I wonder if a one-size-fits-all AI integration in the LOS can really be effective, given that fair lending involves many state and federal regulations. We are testing and monitoring our AI integration, but many companies lack the resources we have and will rely on their LOS provider's results. 

Do you think a generic AI system can reduce fair lending violations? 

Signed, 

Risk Averse 

OUR COMPLIANCE SOLUTION 

AI POLICY PROGRAM FOR MORTGAGE BANKING™ 

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for Freddie Mac Sellers/Servicers. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

Our AI Policy Program consists of the following policies: 

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy 

Contact us for the presentation and pricing.  

RESPONSE TO YOUR QUESTION 

Let me begin with my conclusion: there is currently no one-size-fits-all, generic AI system that can be thoroughly relied on to reduce fair lending violations. 

Most companies will rely on originating and servicing platforms that integrate AI into fair lending analytics. Unfortunately, companies are generally liable for AI errors, particularly when AI causes financial losses, safety issues, or provides consumers with false information. Legal responsibility typically falls on the business deploying the technology, even if it properly monitors, tests, or ensures that the AI is fit for fair lending detection. 

Legal and Regulatory Risk 

Put another way, your business is responsible for any misinformation provided by your AI chatbots. As you likely know, there are certain aspects of tort law, like duty of care, that require individuals and entities to act with reasonable care to avoid causing foreseeable harm to others. It forms the basis of negligence claims; if this duty is breached and causes injury, the responsible party may be held liable. 

I have repeatedly said that companies must ensure AI systems are properly trained and monitored to avoid liability for errors caused by biased AI. Although developers may be liable for inherent defects, the business deploying the AI is often responsible for how the system is used. 

If you are going to use AI to detect fair lending, you must be able to identify disparate impact patterns across demographic groups, monitor for "redlining" analogs in digital lending, flag outlier decisions that deviate from modeled norms, and generate audit trails for regulatory review. 

AI is rapidly transforming the mortgage industry, promising increased efficiency, faster decision-making, and improved risk assessment. Still, its integration poses significant challenges related to fair lending compliance, data bias, and transparency. While AI can expand credit access by utilizing alternative data, it risks perpetuating historical biases if models are trained on biased data or utilize "black box" algorithms that make decisions hard to explain.

Will AI Replace Me?

YOUR COMPLIANCE QUESTION 

I have been a loan officer for fifteen years. I am a single mother of two wonderful teenagers. I have also been the breadwinner for 15 years since my husband passed away. I keep reading how AI is going to replace me. 

In the last few weeks, I've read a few articles about how AI is transforming the mortgage world. Part of that transformation looks like I am going to lose my job and be replaced by a computer program. This is so unfair. I have spent all these years building my professional life, and now I feel it is all going to be trashed. 

I heard you speak at a conference recently. You spoke about your new AI Policy Program and answered many audience questions. One of them was about how loan officers, processors, and underwriters are worried about being replaced by AI. I would like you to share your remarks in your newsletter. 

Will AI replace loan officers like me? 

Signed, 

A Human Being 

OUR COMPLIANCE SOLUTION 

AI POLICY PROGRAM FOR MORTGAGE BANKING™ 

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for Freddie Mac Sellers/Servicers. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines.

Our AI Policy Program consists of the following policies: 

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy 

Contact us for the presentation and pricing.  

RESPONSE TO YOUR QUESTION 

REVOLUTION AND EVOLUTION 

There have been many technological revolutions in human history. We are now at the advent of another revolution: the onset of artificial intelligence (AI) technology, a massive, incremental, worldwide expansion of knowledge in computer science dedicated to creating systems capable of performing complex tasks that typically require human intelligence. Each revolution has brought about profound changes in civilizations. Surges in technological development have characterized each revolution. 

From stone-age tools to learning to control fire, from foraging for food to the first agricultural revolution, from replacing bronze with iron, each stage of technical knowledge enabled widespread human development at the cost of some trade-off in the human social experience that had evolved heretofore. The printing press brought about mass production of books, democratizing knowledge and literacy; the scientific revolution shifted knowledge from philosophy to evidence-based insights; new farming techniques led to increased food output, population growth, and urbanization. 

And, of course, we all know of the industrial revolution, where machine-based manufacturing shifted society away from manual labor; this was then followed by the technical revolution, where mass production became deeply entrenched in lived experience, such as the creation of assembly lines, steel-making methodologies, and the application of electricity, internal combustion, and telecommunications. Over the last 100 years, the green revolution has introduced high-yielding crops, industrial fertilizers, and new agricultural technologies, thereby increasing global food production. 

Which Revolution Are We In Now? 

So, where are we now in the scheme of things? 

In my view, we are currently living in the information and digital revolution, but rapidly transitioning to the artificial intelligence revolution. We are living at a time when computers and transistors, the Internet, personal computing, and smartphones are being rapidly replaced by the artificial intelligence revolution, characterized by discoveries such as gene editing, advanced robotics, and nanotechnology.

Freddie Mac Deadline: March 3, 2026 – AI Governance Framework

YOUR COMPLIANCE QUESTION 

We are using your AI Policy Program. Upon receipt, we had it reviewed by our AI committee to determine whether it complies with Freddie's requirements for establishing a comprehensive AI governance framework for AI and Machine Learning. 

I am pleased to report that your AI Policy Program received the committee's approval. It met our checklist based on Freddie's requirements. 

As a Freddie Mac Seller/Servicer, we want to know what the effect would be on us if we had relationship partners that are not in compliance with the AI governance framework.   

What restrictions will Freddie Mac impose on us if our relationship partners do not comply with their AI requirements as of March 3, 2026? 

Signed,

An Anxious Compliance Manager 

OUR COMPLIANCE SOLUTION 

AI POLICY PROGRAM FOR MORTGAGE BANKING™ 

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for the Freddie Mac Seller/Servicer (or "Lender"). Our well-constructed AI Policy Program is a proactive means designed to avoid and mitigate risks associated with Artificial Intelligence and Machine Learning. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

Our AI Policy Program consists of the following policies: 

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy 

Discount offer available until March 3, 2026! 

Contact us for the presentation and pricing. 

OUR RESPONSE TO YOUR QUESTION 

Thank you for using our AI Policy Program. Since its release on October 30, 2025, it has been in considerable demand. 

Our AI Policy Program for Mortgage Banking™, which meets Freddie Mac's AI Governance Framework ("AI Framework"), is the first to provide a set of AI policies dedicated to mortgage banking. 

We had been tracking the GSE formulation of AI requirements for several months. 

On March 11, 2025, Freddie released a formal AI/ML governance framework in its Seller/Servicer Guide ("Guide"), introducing a comprehensive AI Framework for Sellers and Servicers that requires formal policies for the use of artificial intelligence ("AI") and machine learning ("ML"). This update mandated that any AI/ML used in the origination or servicing of Freddie Mac-eligible loans be governed by strict policies. 

On December 3, 2025, Bulletin 2025-16 was issued, clarifying timelines and expectations and stating that AI is no longer optional. In effect, Freddie asserted that implementation is a mission-critical, governed enterprise function. 

The compliance effective date is March 3, 2026. 

After considerable review, research, and drafting, we issued our AI Policy Program on October 30, 2025, thirty-four days before Freddie issued Bulletin 2025-16 on December 3, 2025, and Bulletin 2025-17 issued on December 10, 2025. 

On December 10, 2025, Freddie issued Bulletin 2025-17, which introduced revisions to AI Tools relating to servicing, information security, and Seller/Servicer insurance, with most changes effective on March 3, 2026. 

In the context of the AI Framework, "AI Tools" are any artificial intelligence or machine learning tools used in the loan lifecycle. 

BULLETINS 

Bulletin 2025-16 solidifies the compliance effective date of March 3, 2026, requires Lenders to have a comprehensive governance framework for AI/ML Tools used in loan origination or servicing, and, effective January 1, 2026, Lenders must ensure executive oversight, document AI use cases, ensure fairness, mitigate bias, and manage vendor risk.

Shadow AI in Mortgage Banking

Podcast | Substack

QUESTION 

Everyone in our company received a message from management warning us about the use of Shadow AI. Most of us have never heard of Shadow AI. Next week, a company-wide video session is taking place to learn about it. Attendance is mandatory. 

So, I started reading about it. I found that it involves going to websites like ChatGPT. The management notice says that some of us are going online to AI websites and using them to replace our own knowledge and experience. Until further notice, we have been told not to use ChatGPT and other AI websites. 

A few of us got together to find out how this could affect us. We are underwriters, processors, loan officers, and quality control people. It's just a small group. You have written articles on AI and have AI policies. Please tell us how Shadow AI affects mortgage banking.

How does Shadow AI affect mortgage banking? 

Our Compliance Solution 

We recommend our AI Policy Program for Mortgage Banking. 

A well-constructed AI Policy Program is a proactive means designed to avoid and mitigate risks associated with Artificial Intelligence. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

RESPONSE TO YOUR QUESTION 

Shadow AI is not as spooky as it sounds, but it can adversely impact mortgage banking entities. Our AI Policy Program for Mortgage Banking addresses Shadow AI and many other features of artificial intelligence. Keep in mind that the pace of AI development is brisk, somewhat unstable, and rapid. Updates to policies and procedures are necessary for the foreseeable future. You should expect to see more alerts, notices, updates, and training. 

If you want to learn more about AI and mortgage banking, consider our recent articles on artificial intelligence. 

Shadow AI 

What is Shadow AI? Essentially, it is the unauthorized use of artificial intelligence tools, apps, or features by employees within an organization, bypassing official IT and security oversight, often for productivity gains. Unfortunately, it introduces significant risks, including data leaks, compliance failures, bias, regulatory non-compliance, and intellectual property loss. 

Shadow AI is not "Shadow IT," which is quite a bit different, but, in a way, it is adjacent, because Shadow IT manifests where any technology (for instance, software, hardware, cloud services, and apps) is used by employees without the company's IT department approving it. 

COMPONENTS OF SHADOW AI 

Shadow AI refers to the unauthorized use of AI tools like ChatGPT, Midjourney, Claude, Bard, Microsoft 365 Copilot, Salesforce Einstein, or AI plugins, which create vulnerabilities because these tools are not vetted for corporate security or data policies. In other words, employees may be using these AI tools for various purposes – such as summarizing documents, drafting emails, generating content, providing knowledge, and so forth – although IT has not formally approved their use by employees. 

Sometimes, employees use workarounds by accessing AI tools from their personal accounts. Employees may even use their personal logins for AI services that process company data. 

UNAUTHORIZED USE OF AI 

The potential adverse consequences of unauthorized use of AI tools include data leakage, compliance issues, regulatory and legal problems, lending practices, security vulnerabilities, a lack of control and oversight, and inaccurate or biased output. Shadow AI, therefore, can really hobble a company's risk profile. 

Assuming the best of intentions in using Shadow AI tools, I can understand an employee wanting to be more efficient, but such use bypasses crucial safeguards, turning productivity tools into major security and governance risks for the business. 

Rather than outright banning Shadow AI tools, most organizations address Shadow AI by establishing clear governance, monitoring usage, and providing secure, approved AI alternatives. The focus is usually on striking a balance between innovation and essential security and compliance standards. 

ADVERSE RISKS OF SHADOW AI 

Depending on the Shadow AI tool used, there are numerous risks to mortgage banking, among which are surely the following, as I have mentioned in the aforementioned articles.

AI Credit Score Underwriting

QUESTION 

Thank you for your recent columns on artificial intelligence in mortgage banking. I want to know how to handle credit scores using AI. I am the SVP Operations of a large wholesale lender. We want to include AI in our underwriting. In particular, we want to use it to evaluate a borrower's creditworthiness. However, our legal department has advised us that there are huge privacy issues. 

We do not want to be dependent on the credit reporting agencies for AI information. And we do not want to outsource AI in our credit score underwriting. The AI evaluation methods we discussed with legal have been shut down due to potential privacy violations. 

What are the privacy risks in using AI to determine a borrower's credit score? 

COMPLIANCE SOLUTION 

AI Policy Program for Mortgage Banking 

A well-constructed AI Policy Program is a proactive means designed to avoid and mitigate risks associated with Artificial Intelligence (AI). AI risk management is a key component of responsible development and use of AI systems. Responsible AI practices can help align the decisions about AI system design, development, and use with intended aims and values.

RESPONSE 

The privacy challenges associated with artificial intelligence are enormous, and the risks will only become more and more difficult to mitigate. In our recently issued AI Policy Program for Mortgage Banking, we sought to provide a comprehensive policy framework for using AI in mortgage banking. Indeed, one of the policies in the Policy Program is titled "Artificial Intelligence Credit Underwriting Policy." 

If you need a policy framework for AI, please request information about our Policy Program. 

AI credit score underwriting is an uncharted legal and regulatory territory! 

You will find that most of your legal department's concerns about AI in mortgage lending involve the collection and potential misuse of vast amounts of sensitive personal data, heightened cybersecurity vulnerabilities, and a lack of transparency that can lead to a loss of consumer trust and potential regulatory non-compliance. 

Broadening this out, AI in credit score underwriting stems from the extensive collection of sensitive, alternative data, the potential for unauthorized access and data breaches, and the difficulty in ensuring transparency and consumer control over how personal information is used. 

Whatever you do, you will need to be in lockstep with your legal advisors. This "territory" is dotted with legal minefields! Let's consider these risks. 

AI models require vast amounts of data, often going beyond traditional financial information to include "alternative data" such as geolocation, social media activity, online behavior, transaction histories, and even biometric data. The sheer volume and sensitive nature of this extensive data collection increase the overall risk to consumer privacy. 

Zero in on that data! It can be collected for one purpose but might be used for other, unforeseen purposes without the user's explicit consent. This lack of control over how personal data is processed raises significant privacy issues. From the legal perspective, this amounts to unauthorized use and repurposing. 

The large datasets used to train AI models are attractive targets for cyber attackers. Inadequate security measures or vulnerabilities in third-party vendor systems can lead to data breaches, exposing sensitive personal and financial information and increasing the risk of identity theft or fraud. Data security must be failsafe. 

AI algorithms can analyze seemingly innocuous data to infer highly personal attributes, such as health status, political views, or ethnic origin (a "predictive harm"). From a regulatory perspective, this risk arises from the inference of sensitive Information. In other words, this capability to derive sensitive insights can lead to potential discrimination and privacy infringements. 

Complex AI algorithms can be difficult to explain, even for their developers, creating a Black Box where it is unclear exactly how a specific credit decision was reached. This opacity, its lack of transparency, deprives consumers of understanding why they were denied credit and of exercising their right to an explanation or an appeal. I have written here about the Black Box "model" or "problem". 

Do not assume that so-called "anonymized" data effectively mitigates risk. Even when data is "anonymized," AI can sometimes de-anonymize individuals by cross-referencing various data points, compromising individual privacy.

AI Policy Program for Mortgage Banking

QUESTION 

We need guidance on using artificial intelligence in our mortgage banking and servicing operations. Unfortunately, we have not found anything of much value. As the President and CEO of our company, I have met with our Board for almost a year to discuss governance and the utilization of AI. Being present in all states and territories, we require guidance on both state and federal requirements nationwide. 

Our lawyers provide us with white papers and legal guidance, but we have yet to receive policies based on mortgage banking experience and expertise. The last policy we got from them was basically useless. I'm a lawyer myself, but I don't need citations or case law. Why is it taking so long for professionals to provide us with the guidance we need to ensure compliance with AI-related issues? 

We need your help. For years, we have been following you. Recently, we decided to use your firm to support our compliance department. I spoke to you recently about this AI challenge, and you told me that your team is working on a comprehensive AI policy. I believe you said it would be published this month. Please share your AI policy with the mortgage community. 

What is the policy on artificial intelligence you are offering? 

COMPLIANCE SOLUTION 

Artificial Intelligence Policy Program for Mortgage Banking

ANSWER 

I enjoyed our call. We look forward to working with your compliance personnel. Indeed, we assembled a team of our compliance experts to develop policies and procedures for artificial intelligence. It quickly became clear that one policy would not do. In fact, several policies are needed. We realized that a comprehensive policy program was required, rather than just a single policy. A programmatic structure best meets the compliance demands. 

Today, we are issuing the first set of AI policies and procedures specifically designed for the mortgage banking industry. Consistent with its comprehensive approach, we have structured it as a policy program. Thus, there is a cost-effective base policy, as well as several supporting policies. At no additional cost, we maintain and expand the policy program for the first twelve months, as needed, and extensions are available. Updating is necessary in response to the rapidly changing regulatory environment associated with artificial intelligence. 

A few days ago, we conducted a demonstration for several regulators, examiners, and our money center bank clients. The feedback was enormously encouraging, and we were grateful for their interest. 

Order as soon as possible. There is already considerable demand! We will schedule collaborative support! 

Request Information Form

New Issuance 

Here is the Press Release! 

Outline 

Artificial Intelligence Policy Program for Mortgage Banking™

1.     Artificial Intelligence Policy Program for Mortgage Banking – Overview

2.     Artificial Intelligence Policy – Foundational Guidelines

3.     Artificial Intelligence Workplace Policy

4.     Artificial Intelligence Credit Underwriting Policy

5.     Artificial Intelligence - Do & Do Not Policy

6.     Artificial Intelligence - Ethics Policy

Each of these policies interacts with and complements the others.

It is essential to work with our LCG Compliance Managers to conform the texts to ensure the policies accurately reflect the financial institution's actual use of Artificial Intelligence in its operations.

• Policies are reviewed as stand-alone documents. A consolidated version of the policies is available.

• LCG Compliance Manager support is included in the purchase price of the policy documents.

• LCG will maintain the subject policies and procedures for 12 months from the purchase date.

Every effort will be made to conform the policies to the institution's compliance management system.

Upon reaching the final version, the Master is kept in our encrypted extranet for your use. The Master version is retained in the extranet and updated for substantive changes in applicable laws and Best Practices.

Request Information Form

For additional support or information, please email compliance@lenderscompliance group.com. 

Contact Us via our website.

For more articles on this topic, please visit: Artificial Intelligence.

________________________ 

This article, Artificial Intelligence Policy Program for Mortgage Banking, published on October 30, 2025, is authored by Jonathan Foxx, PhD, MBA, the Chairman & Managing Director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in residential mortgage compliance.

GENIUS Act: Mortgage Banking Ambush

QUESTION 

In your recent article, Cryptocurrency: Risks to Mortgage Banking, you said that you received many inquiries about the GENIUS Act. I was one of those who requested your view. You shared that you would respond to our questions soon. I am writing you again to urge you to offer an article on the GENIUS Act. 

I am a former federal regulator. I read the whole Act. It bothers me that the Act does not adequately protect consumers. And, I am concerned that it adds an element of instability to our banking system. Also, I do not think the mortgage market can be stable if it comes to depend on digital assets. 

So, I am asking you not to wait. I think the GENIUS Act is ambushing the banking sector. We need to know your view of the GENIUS Act since you are an expert in mortgage compliance. Please consider the following questions. 

In layperson's terms, what is the GENIUS Act? 

What are some of the general features of the Act? 

How does the GENIUS Act affect mortgage loans? 

SOLUTION 

CMS Tune-up

RESPONSE 

We received a huge response to the article we published on August 7^th. The article, Cryptocurrency: Risks to Mortgage Banking, sought to answer these two posed questions: 

·       Should cryptocurrency be accepted in lieu of dollars for a down payment on mortgage loans? 

·       How has the Trump Administration supported cryptocurrency? 

Apropos of your being a former federal regulator, in my summary, I wrote:

 

The regulatory uncertainty is extremely concerning. The regulatory environment for crypto-backed mortgages is still evolving and lacks uniformity across jurisdictions. A sudden shift in regulations or government policy regarding digital assets could significantly impact how these loans are structured, taxed, or regulated. 

I'm sure you understand the implications. 

I will provide a brief outline of the GENIUS Act (the acronym of Guiding and Establishing National Innovation for US Stablecoins Act), which was signed into law on July 18, 2025. The hype about it is that it represents the first comprehensive federal legislation in the United States addressing the regulation of stablecoins. 

By the way, I wish Congress would stop naming bills and acts in acronyms. It's really kind of silly. Supposedly, it is done for mnemonic reasons, but I see it more as branding, salesmanship, and maybe practical convenience. While acronyms may be helpful, they can also be misleading. Some acronyms are created to sound good, like the GENIUS Act, even if they don't accurately reflect the content of the bill. I wonder if there's a whole department in Congress set up to devise acronyms for legislation. But let's move on! 

KEY ASPECTS OF THE GENIUS ACT 

Purpose 

Ostensibly, the GENIUS Act is being promoted to foster innovation, maintain the dollar's global standing, and combat illicit activity. 

The Act has the preliminary makings of a potential regulatory framework that provides some clarity to encourage innovation and adoption in the stablecoins industry. But details matter, which I'll get to shortly. 

As to maintaining the US dollar's global standing, if you read my article on cryptocurrency's risk to mortgage banking (cited above), you probably already know my view of this aspiration. By requiring stablecoin reserves to be backed with US dollars and Treasuries, the Act seeks to strengthen the dollar's role as the global reserve currency. However, among other things, the government does not back cryptocurrency accounts and holdings in online wallets. They are not insured by the government like US bank deposits. It is prone to scams, thefts, and cyber hacks. And, there are no organizations that protect against crypto losses. I'm not convinced that the Act overcomes these challenges sufficiently to protect the consumer.

Cryptocurrency: Risks to Mortgage Banking

QUESTION 

My bank's management is deciding whether to accept cryptocurrency in down payments on mortgage loans. We have a large third-party originator channel. These TPOs are both banks and nonbanks, and some of them want to accept cryptocurrency rather than dollars. Frankly, I am very concerned about it. I don't think crypto is stable. 

On top of that, the Trump Administration wants to make crypto a legitimate asset, like the dollar. I believe they want to use it as part of our reserve currency. I know how Bitcoin works. A reliable, inherent standard, such as the GDP or other statistical metrics, does not influence it directly. There's no underlying metric other than market demand. 

As my bank's CFO, I do not feel that cryptocurrency should have the same fungibility as the dollar. I am worried that we are diminishing our reserve currency status. I know your newsletter is widely read and you don't shy from controversy, so I am hoping that your feedback will provide more perspective than all the pros and cons we're hearing in the news. 

Should cryptocurrency be accepted in lieu of dollars for a down payment on mortgage loans? 

How has the Trump Administration supported cryptocurrency? 

SOLUTION 

Policies Tune-up® 

RESPONSE 

Thank you for your kind words. I've been told the newsletter is popular. The subscriber base is very large. As to shying away from controversy, sometimes people would rather go to their silos than consider different viewpoints. Fortunately, based on the feedback, almost all our subscribers are genuinely interested in exploring various perspectives on legal and regulatory compliance. There is a political tint to regulations and legislation that is unavoidable. These do not get promulgated in a vacuum. And, if you're expressing concern, you can be sure that many other individuals are expressing similar concerns, whatever the topic. 

So, I do not shy away from controversy. And I ask you also not to be shy of controversy in your questions and comments. I read every one of them and answer most! 

Let's first discuss whether cryptocurrency is safe versus the dollar. Conceptually, I think it's possible to outline a response based on four categories: backing and regulation, volatility and potential for loss, insurance and consumer protections, and security and scams. This composite may be helpful in establishing a comparison, given that the dollar is a worldwide reserve currency that investors in dollar-denominated assets continually evaluate in terms of the foregoing categories. 

The following sets forth a brief comparative outline. We will provide a table of this outline if you request it here. 

Backing and Regulation 

US Dollar (Fiat Currency) 

The US dollar is a centralized fiat currency, meaning it's issued, backed, and maintained by the government and is considered legal tender. It's regulated by central authorities like the Federal Reserve, which works to minimize inflation and maintain economic stability. It is not backed by a physical commodity such as gold or silver. Instead, its value is derived from the trust and confidence that people place in the issuing government and the stability of the economy it represents. 

Characteristics of a fiat currency are that it is government-issued, not backed by a commodity, its value is based on trust and confidence, it is always a controlled supply, and it is legal tender. 

As I see it, any fiat currency has pros and cons. On the pro side, it offers economic stability, especially by governments and central banks controlling the money supply and interest rates, the goal of which would be to reduce economic downturns. It is flexible, too, because governments can expand or contract the money supply to combat inflation and stimulate economic growth. And, as I said above, it can support international trade, because it facilitates international transactions without necessitating trading partners and countries to stockpile physical commodities like gold to back their currencies. 

Common Red Flags in Money Laundering

QUESTION

I am the COO of a mid-sized lender in the Midwest. We have contacted your firm to do an Anti-Money Laundering Risk Assessment. One of the big issues we have is trying to identify the most common red flags. 

In streamlining our system AML reporting, we are using AI to determine common red flags. Unfortunately, AI is not able to provide real-world data. We need practical experience, which is why I would like you to let me know the kinds of common red flags you find in your audits. 

What are the common red flags for money laundering in mortgage banking? 

SOLUTIONS 

• AML TESTING
• AML TRAINING
• AML RISK ASSESSMENT 
• AML PROGRAM [Written Policy]

RESPONSE 

Since 2003, FinCEN has issued a number of analyses, reports, and advisories regarding emerging trends in mortgage fraud, money laundering, and terrorist financing activity involving residential mortgage loans. 

While FinCEN publishes a list of potential red flags, we often find that our list of activities that could trigger the filing of Suspicious Activity Reports continues to expand. At this point, we have hundreds of such findings. 

Thank you for retaining us to provide the AML Risk Assessment. 

Lenders Compliance Group was the first compliance firm in the country to provide AML audit tests to non-bank residential mortgage lenders and originators. Of course, we have also offered AML audits to banks involved in residential mortgage banking for many years. 

So, by this point, we have rock-solid indicia and identifiers that help us review for AML compliance. There are many common red flags. I am going to provide a half-dozen of them that keep turning up in our audits with the proviso that the list is not comprehensive. 

Activities considered red flags in mortgage banking include: 

(1) A loan secured by pledged assets held by a third party unrelated to the borrower. 

(2) A loan secured by deposits or other readily marketable assets, such as securities, when owned by apparently unrelated third parties. 

(3) A borrower default on a case-secured loan or any loan that is secured by assets that are readily convertible into currency. 

(4) A loan made for, or paid on behalf of, a third party with no reasonable explanation. 

(5) A customer, to secure a loan, purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments. 

(6) A loan that lacks a legitimate business purpose, provides the depository institution with significant fees for assuming little or no risk, or tends to obscure the movement of funds (i.e., loans made to a borrower and immediately sold to an entity related to the borrower). 

It is important to ensure that your system solution requires the reporting of any activity that is suspected of violating a criminal statute. Additionally, the federal money laundering criminal statutes consider money laundering to be the handling of the proceeds of criminal activity, with mortgage fraud considered to be a predicate offense for the money laundering criminal statutes. Mortgage-related criminal activity is a specific predicate offense. 

Jonathan Foxx PhD., MBA
Chairman & Managing Director

Lenders Compliance Group