BSA/AML Compliance

By now, every residential mortgage lender in this country should know that it must comply with the BSA/AML requirements.  According to the Final Rule issued by FinCEN, effective as of August 13, 2012, all non-bank residential mortgage lenders and originators ("RMLOs") must establish and maintain a comprehensive BSA/AML program and file suspicious activities reports. Non-compliance may result in substantial legal and monetary consequences.

Let's first sample the recent FinCEN enforcement actions against two banks.  Though these enforcement actions are not against RMLOs, the message from the FinCEN is loud and clear.  On September 24, 2013, FinCEN announced a consent order against the defunct Saddle River Valley Bank in Saddle River, New Jersey.  According to the consent order, FinCEN assessed a $4.1 million civil money penalty against Saddle River Valley Bank because FinCEN has determined that the bank failed to: (1) implement an effective BSA/AML program designed to manage its risks; (2) conduct due diligence in its foreign correspondent accounts; and (3) file suspicious activity reports ("SARs").  FinCEN levied a civil penalty of $37.5 million, on September 23, 2013, against TD Bank, N.A. for failing to file SARs related to a Ponzi scheme perpetrated by a Florida lawyer who was a customer of the bank.  Occurring almost concurrently, these two enforcement actions remind financial institutions, lenders, and RMLOs that BSA/AML compliance should be an integral part of each institution's compliance program, just like RESPA, TILA, and ECOA.  

Having seen the consequences of non-compliance with BSA/AML requirements, let's turn to the basics on how to be compliant. A RMLO must develop and implement a written BSA/AML program tailored to prevent itself from facilitating money laundering or from financing terrorist activities.  The BSA/AML program should be approved by the lending institution's senior management, and a copy of it must be made available to FinCEN or its designee, upon request.  The BSA/AML program should, at a minimum include these features: (1) policies, procedures, and internal controls designed in accordance with the risk factors associated with the RMLO’s products and services; (2) a designated compliance personnel to ensure the BSA/AML program’s effective implementation by relevant persons, agents, and brokers; (3) continuous training of appropriate persons regarding their responsibilities under the BSA/AML program; and (4) independent tests and audits by the RMLO or third parties to monitor and maintain the adequacy of the BSA/AML program.

It has been a little over one year since the BSA/AML requirements became mandatory for RMLOs.  With multiple final rules affecting mortgage lending being issued and amended by the CFPB in the past few months, compliance with the BSA/AML is hopefully not on the back burner of any RMLO since FinCEN has demonstrated that it is ready and willing to impose huge civil penalties where non-compliance is found.

Fannie Mae 5% Fee Limits and Real Estate Agent’s Commission

On rare occasions, borrowers might want to pay their real estate agent’s commission in connection with the closing of a mortgage loan. Hence, the question arises—does the fee paid to the real estate agent count against the 5% fee limitation as set forth by Fannie Mae?

First of all, let’s review what the Fannie Mae 5% fee limit is about. In Fannie Mae’s 2012 Selling Guide, B2-1.4-02, it is stated that:

Fannie Mae will not purchase or securitize mortgages if the total points and fees charged to the borrower exceeds [sic] the greater of 5% of the mortgage amount or $1,000 regardless of the party paying the fee.

Points and fees counted against this limitation include:

· Origination fees,

· Underwriting fees,

· Broker fees,

· Finder’s fees,

· Charges imposed by lenders as a condition of making the loan whether they are paid to the lender or a third party [emphasis added]

Points and fees that do not have to be counted against this limitation include:

· Fees paid for actual services rendered in connection with the origination of the mortgage, such as attorneys’ fees, notary’s fees, and fees paid for property appraisals, credit reports, surveys, title examinations and extracts, flood and tax certifications, and home inspections [emphasis added];

· The cost of mortgage insurance;

· The costs of title, hazard, and flood insurance policies;

· State and local transfer taxes or fees;

· Escrow deposits for the future payment of taxes and insurance premiums.

Bona fide discount points […]

In effect, the Selling Guide has specifically stated the fees included and those excluded in determining the 5% limitation. Therefore, whether a particular fee should count against the 5% limitation depends on whether it is included in the definition of “points and fees” as defined in the Selling Guide.

With respect to real estate agent’s commission, this fee is not identified in B2-1.4-02 of the Selling Guide, nor in Fannie Mae’s subsequent clarifications. However, the language in the Selling Guide is instructive in deciding whether restate estate agent’s commission should count against the 5% limitation. As highlighted above, points and fees to count towards the 5% include “charges imposed by lenders as a condition of making the loan […]”. Generally speaking, paying a real estate a commission regarding the real property in question is not a condition of making a mortgage loan; rather, it is a fee that a property buyer would have to pay even in a cash transaction. Therefore, this fee should not count against the 5% limitation, regardless of who pays it.