Fairness Laws and Financial Crime Laws - Chapter 17 Flashcards
Fair Housing Act (FHA)
The fair housing laws and the Fair Housing Act (FHA) were enacted to prohibit discrimination in the financing, sale, and rental of dwellings.
The following are exempt under the Fair Housing Act:
- Owner-occupied buildings with no more than 4 units
- Single family housing sold or rented without the use of a broker if the owner does not own more than 3 such single family homes at a time
- Housing operated by private clubs or organizations that limit the occupancy to members only
The original act was amended in 1989 by the Fair Housing Amendments Act to do the following:
- Prohibit discrimination based on disability or familial status (presence of children under the age of 18 and pregnant women)
- Establish new administrative enforcement tools for HUD attorneys to bring actions before administrative judges on behalf of victims of housing discrimination
- Revise and expand DOJ jurisdiction to bring suit on behalf of victims in federal district courts
The act also contains accessibility provisions for individuals with disabilities. The provisions relate to design and construction on multifamily dwellings built on or after March 13, 1991. Redlining is a prime example of a Fair Housing Act violation.
Any customer or consumer can bring action within 1 year of discovering a violation. Civil and criminal charges may be assessed.
Home Mortgage Disclosure Act - HMDA, Regulation C
The Home Mortgage Disclosure Act (HMDA) was enacted by Congress in 1975 and implemented as Regulation C.
The creation of HMDA came from concerns about credit shortages in specific geographic areas, especially urban neighborhoods. HMDA requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4-unit and multi- family dwellings.
HMDA’s regulatory authority is the CFPB.
HMDA loan data requirements apply to financial institutions such as banks, savings associations, credit unions, and other mortgage lending institutions.
Institutions originating fewer than 100 closed-end mortgage loans in either of the two preceding calendar years will not have to report such data.
Loan data from state chartered or state licensed financial institutions are exempt from HMDA because these institutions are already subject to state disclosure requirements. However, institutions must specifically apply for this exemption2.
How The Home Mortgage Disclosure Act defines a dwelling
The Home Mortgage Disclosure Act defines a dwelling in a fairly broad way. According to HMDA a dwelling is defined as a residential structure. No language is included that an attachment to real property is required. The law lists the following as dwellings covered by HMDA:
• Principal residences
• Second homes and vacation homes
• Investment properties
• Residential structures attached to real property
• Detached residential structures
• Individual condominium and cooperative units
• Manufactured homes or other factory-built homes
• Multifamily residential structures or communities, such as apartment buildings, condominium complexes, cooperative buildings or complexes, and manufactured home communities
The following loan types are excluded from the data collection requirements under HMDA:
- Loans originated or purchased by an entity acting as a fiduciary agent
- Loans on unimproved land
- Temporary loans (bridge or construction)
- The purchase of an interest in a pool of loans (such as mortgage-backed securities)
- The purchase solely of the right to service loans
- Loans acquired as part of a merger3
HMDA requires lending institutions to submit a Loan/Application Register (L/AR) to the CFPB no later than:
March 1st of every year.
A modified L/AR (without application or loan number, application date, and date of action taken) must be available to the public by March 31st.
The L/AR must include the following information:
• The purpose of the loan (home purchase, home improvement, refinancing)
• The type of property involved (single family, multifamily)
• The loan type (conventional loan, FHA loan, VA loan)
• The location of the property
• Information about race, ethnicity, and sex gathered in the URLA’s Section 8: Demographic Information
• The gross income of the borrower(s)
• Whether or not the loan was granted
• If the loan was denied, the reason why it was denied
• Whether the interest rate charged was over a certain threshold
• If the loan was subsequently sold in the secondary market, the purchasing entity4
Civil penalties may be levied for violations of HMDA (bona fide errors are excluded). The L/AR must be retained and available for public inspection for three years.
Homeowners Protection Act - HPA
The Homeowners Protection Act (also known as the PMI Cancellation Act) provides specific provisions that allow homeowners to cancel private mortgage insurance (PMI). It also requires the return of unearned premiums and establishes notification and disclosure requirements. HPA covers conventional mortgage loans that exceed 80% LTV in which the borrower is paying private mortgage insurance (PMI). Please note - we did not say MIP. HPA only covers conventional mortgages and PMI.
HPA is regulated by the CFPB.
The Notice of Right to Cancel PMI disclosure must be provided to the borrower at the time of closing for conventional loans over 80% LTV. The content of this disclosure educates the borrower on how PMI may be canceled upon request or automatically.
The lender and/or servicer must automatically terminate the PMI when the loan’s principal balance reaches 78% of the original value (as long as the borrower is current on mortgage payments). Unlike when the borrower requests cancellation, there is no provision in the automatic termination section of the act that protects the lender against decreasing property value or subordinate liens.
Borrowers may request in writing a cancellation and termination of PMI when the following conditions are met:
- The principal balance of the loan reaches 80% of the original value
- The borrower has a good payment history
- The borrower is able to represent to the mortgage holder that the value of the property has not declined below the original value and certify that the borrower’s equity is not subject to a subordinate lien
For individual actions, actual cost or statuary damages are not to exceed $2000. The borrower must bring action within 2 years of discovering action.
USA PATRIOT Act
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
As a response to the September 11, 2001 terrorist attacks, the U.S. Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
In relation to the mortgage industry, Title III of the act focuses on identity theft and money laundering through financial transactions in support of terrorist activities.
The most important aspects of Title III for mortgage professionals are the required establishment of the following:
- An anti-money laundering program by the lending institution.
- The sharing of information with other financial institutions and law enforcement agencies.
- A customer identification program (CIP) that includes the collection and verification of customer information, including name, date of birth, and social security number; the 5-year maintenance of records after the account is closed; and the notification to customers that their identity must be verified in order to attempt a transaction1. The expectation is that the institution can track the customer’s transaction activity throughout the process and report that activity, if necessary, to the proper agency.
Bank Secrecy Act and Anti-Money Laundering
The Currency and Foreign Transactions Reporting Act is commonly referred to as the Bank Secrecy Act (BSA) or the Anti-Money Laundering Law (AML). BSA/AML requires financial institutions, including mortgage lenders, to report suspicious activity that may indicate money laundering, tax evasion, or other criminal activities. Money laundering is transforming the monetary proceeds derived from criminal activity into funds with an apparently legal source.
Originally created as a method to thwart drug traffickers and tax cheats, BSA/AML gained renewed importance following the September 11, 2001 terrorist attacks. Due to concerns about funding methods terrorists used for their illegal activities, lawmakers amended the rules associated with BSA/AML and related portions of it with the USA Patriot Act.
Anti-Money Laundering Program Requirements
The BSA authorizes the Financial Crimes Enforcement Network (FinCEN) and the Secretary of the Treasury to take measures against financial crimes by requiring financial institutions to implement strict Anti-Money Laundering (AML) programs and other procedures to prevent illegal activities.
An AML program must include the following components to guard against financial crimes:
• Develop internal policies and control systems that ensure compliance with the BSA for record keeping and reporting
• Appoint a compliance officer to oversee the program’s daily operations
• Implement an ongoing training program to train people to detect potential financial crimes
• Perform an independent audit when necessary
Reports Used Under BSA/AML: FINCEN Form 104 Currency Transaction Report (CTR):
A CTR must be filed for each transaction in currency of more than $10,000.
