Director, U.S. Department of the Treasury Financial Crimes Enforcement Network

Darrick Meneken

As published in Scotsman Guide's Residential Edition, February 2010.

In 2009, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) entered the first stage of a potential rule requiring mortgage brokers to report suspicious borrower activity. The initial comment period ended this past August (comments: sctsm.in/augcomt), and FinCEN plans to review feedback, publish a proposed rule and collect more comments before finalizing the rule. Director James H. Freis Jr. talks about the rulemaking and brokers' responsibility to help halt financial crime.

Depository institutions such as banks must submit suspicious-activity reports (SARs) when they suspect fraudulent activity. FinCEN would like to hold mortgage brokers to a similar requirement. Why? Criminals are indifferent to whom they're scamming against. They're going to try to use any weakness in the system. Mortgage brokers are not part of our current regulatory framework. That creates an opportunity for criminals.

What might a rule mandating brokers' assistance in anti-money-laundering and anti-fraud efforts include? The essential elements would be to have policies and procedures in place with respect to your business model [and] to have a designated compliance person, trained staff and a type of independent review to see that you're actually implementing your own policy. The second part would be to have a reporting requirement — SARs. When someone does something that might indicate criminal activity, it would be brokers' obligation to tell us. We would then evaluate those SARs and make them available to law enforcement to help track down and hold accountable criminal actors.

Why should brokers support such a rule? Brokers want the economy to start going again. They want business to pick up among their customers. And they want to protect the reputation of their business model.

FinCEN's incentives are entirely aligned with those. By helping raise standards and keep out criminal actors who would abuse the system, that raises the overall credibility of the most important aspect of the brokerage business model: helping people purchase homes.

Are brokers targeted for fraud more than depository institutions? We don't have the data to give that type of exact view. We do know from experience that when some type of loophole exists, criminals will try to exploit that loophole.

Many areas with a high frequency of fraud also have elevated foreclosure rates. Does this result from loopholes in the foreclosure process or something else? The correlation between fraud and foreclosure is, at least in significant part, because of the fact that the fraud is only uncovered at the time of foreclosure. If someone purchases a home and goes about paying a mortgage, usually you don't have any reason to ask questions. If someone defaults on a mortgage, then you often go back and look at the original application or the loan file. Often as a result of that investigation, you will uncover discrepancies and misrepresentations.

How often do brokers knowingly take part in mortgage fraud? A very small percentage of the brokerage market is bad apples, but they poison the well for everybody.

Darrick Meneken is an associate editor at Scotsman Guide. Reach him at (800) 297-6061 or darrickm@scotsmanguide.com.