[Federal Register Volume 70, Number 144 (Thursday, July 28, 2005)]
[Rules and Regulations]
[Pages 43625-43628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14957]



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  Federal Register / Vol. 70, No. 144 / Thursday, July 28, 2005 / Rules 
and Regulations  

[[Page 43625]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1731

RIN 2550-AA31


Mortgage Fraud Reporting

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Final rule.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
issuing a final regulation that sets forth safety and soundness 
requirements with respect to mortgage fraud reporting in furtherance of 
the supervisory responsibilities of OFHEO under the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992.

EFFECTIVE DATE: August 29, 2005.

FOR FURTHER INFORMATION CONTACT: Isabella W. Sammons, Deputy General 
Counsel, telephone (202) 414-3790 (not a toll-free number); Office of 
Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The telephone number for the Telecommunications 
Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. 102-550, titled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) established 
OFHEO as an independent office within the Department of Housing and 
Urban Development to ensure that the Federal National Mortgage 
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac) (collectively, the Enterprises) are adequately 
capitalized and operate safely and soundly in compliance with 
applicable laws, rules, and regulations. To carry out its statutory 
responsibilities, OFHEO may, among other things, require an Enterprise 
to submit reports.\1\
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    \1\ 12 U.S.C. 4514.
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    On February 25, 2005, OFHEO published for comment a proposed 
regulation, at 70 FR 9255, which set forth proposed safety and 
soundness requirements with respect to mortgage fraud reporting. The 
30-day comment period was extended until April 4, 2005.\2\ All comments 
received have been made available to the public in the OFHEO Public 
Reading Room and also posted on the OFHEO Web site at http://www.OFHEO.gov.
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    \2\ 70 FR 15018 (March 24, 2005).
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Comments Received

    Comments were received from the Inspector General for the Office of 
Housing and Urban Development; the Mortgage Asset Research Institute, a 
subsidiary of ChoicePoint Services Inc.; the Mortgage Bankers 
Association, a national association representing the real estate 
finance industry; the National Association of Mortgage Brokers; Freddie 
Mac; Fannie Mae; the Consumer Mortgage Coalition, a trade group of 
national residential mortgage lenders, servicers and service providers; 
AMCO, a valuation management firm; and various private citizens. All 
comments were taken into consideration. A discussion of the significant 
comments as they relate to the proposed sections of the regulation 
follows.

Purpose and Scope

    Several commenters questioned the necessity for a regulation 
expressly requiring reporting of mortgage fraud and possible mortgage 
fraud and the benefits of such reporting to the Enterprises and the 
mortgage industry. Two commenters recommended that OFHEO consider 
alternative approaches, such as reliance on private industry 
``ineligible'' lists.
    The purpose of the regulation is to set forth safety and soundness 
requirements and expectations with respect to the reporting of mortgage 
fraud in furtherance of the supervisory responsibilities of OFHEO, that 
is, ensuring the safe and sound operations of the Enterprises. OFHEO 
must gain timely information on actual or possible mortgage fraud to 
assure that adequate internal controls and systems exist to protect the 
Enterprises from risks associated with such fraud. The information 
provided will be the subject of review by the examination force of 
OFHEO, as well as other appropriate OFHEO offices. The information will 
assist OFHEO in assessing internal controls, security efforts, 
management of risks, including reputation risk, and other factors 
relevant to the safe and sound operation of the Enterprises. The 
oversight by OFHEO of programs to detect and avoid mortgage fraud will 
provide public understanding of the expectation that the Enterprises 
will remain vigilant in resisting fraudulent practices and should have 
a deterrent effect. OFHEO will develop a process for sharing of 
information it acquires with law enforcement authorities, while 
assuring that the Enterprises do not encounter liability issues.
    The Federal Bureau of Investigation (FBI) indicated in Financial 
Crimes Report to the Public (May 2005) that combating significant 
mortgage fraud is an FBI priority because mortgage lending and the 
housing market have a significant overall effect on the nation's 
economy.\3\ The FBI explained that:

    \3\ http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1.
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    A significant portion of the mortgage industry is void of any 
mandatory fraud reporting. In addition, mortgage fraud in the 
secondary market is often underreported. Therefore, the true level 
of mortgage fraud is largely unknown. The mortgage industry itself 
does not provide estimates on total industry fraud. Based on various 
industry reports and FBI analysis, mortgage fraud is pervasive and 
growing.

In combating mortgage fraud, the FBI noted that it works actively to 
investigate such fraud and has been fostering relationships and 
partnerships with the mortgage industry, including the Enterprises. 
While OFHEO has no authority to ``police'' the mortgage industry for 
fraud or to prosecute mortgage fraud, OFHEO has noted that the 
Enterprises, as part of the financial system, should operate in a 
manner to deter fraud and thereby assist in system-wide efforts to make 
mortgage fraud an unattractive avenue for corrupt individuals or 
institutions.
    The Enterprises currently investigate and maintain information on 
mortgage

[[Page 43626]]

fraud and possible mortgage fraud. A formal reporting requirement to 
OFHEO will focus Enterprise efforts on ensuring that internal policies, 
procedures, and training programs are in place to minimize the risks 
from mortgage fraud. No evidence exists that a formal reporting 
requirement will create or increase burdens on the Enterprises. The 
Enterprises currently investigate fraud or possible fraud, report fraud 
to law enforcement authorities, and provide reports to OFHEO as 
required; this regulation contemplates such routine reporting to OFHEO. 
Additionally, no evidence exists that a formal reporting requirement 
will require the mortgage industry as a whole to take on additional 
burdens. The Enterprises currently, when fraud is suspected, inquire of 
seller-servicers and others about business transactions and practices. 
Furthermore, law enforcement authorities have reported that much of the 
fraud involving secondary market parties relates to institutional 
fraud, not individuals seeking to secure financing. Thus, Enterprise 
efforts to report on possible or actual mortgage fraud should have no 
regulatory burden for the mortgage finance industry as the Enterprises 
already conduct due diligence in dealing with seller-servicers and 
others in the mortgage finance system.
    For the reasons set forth above and because of law enforcement 
reports of an increasing incidence of mortgage-related fraud--and the 
potential impact of such fraud on Enterprise profits, liquidity and 
reputation--OFHEO has determined to issue the mortgage fraud reporting 
regulation.

Definition of the Terms ``Mortgage Fraud'' and ``Possible Mortgage 
Fraud.''

    As proposed, the term ``mortgage fraud'' would be defined under 
Sec.  1731.2 to mean a material misstatement, misrepresentation, or 
omission relied upon by an Enterprise to fund or purchase--or not to 
fund or purchase--a mortgage, mortgage backed security, or similar 
financial instrument. The term would include, but not be limited to, 
identification and employment documents, mortgagee or mortgagor 
identity, and appraisals that are fraudulent. The term ``possible 
mortgage fraud'' would be defined to mean that an Enterprise has cause 
to believe that that mortgage fraud is occurring or has occurred.
    OFHEO received a few comments on the definition of the term 
``mortgage fraud.'' One commenter noted that the definition treats all 
mortgage-backed securities (MBS) as equivalent to mortgages for 
purposes of mortgage fraud, whether issued or guaranteed by an 
Enterprise or whether issued or guaranteed by a third party. The 
commenter explained that MBS issued and guaranteed by a third party may 
present securities fraud issues, but not mortgage fraud issues, and 
requested that the definition make clear that it covers only MBS issued 
or guaranteed by an Enterprise. Two other commenters requested that the 
definition should include the concept that the material misstatement, 
misrepresentation, or omission be ``knowingly made'' or ``intentionally 
made.''
    OFHEO has revised the definition of the term ``mortgage fraud'' to 
clarify that it covers MBS issued or guaranteed by an Enterprise. OFHEO 
does not believe that it is necessary to include the concept that the 
material misstatement, misrepresentation, or omission be ``knowingly 
made'' or ``intentionally made.'' Such language goes to the definition 
of fraud that is well established, as opposed to the definition of a 
particular type, that is, fraud related to mortgages. In addition, 
benchmarks or ``triggers'' for providing information to OFHEO, as 
discussed below, will be developed as the reporting requirements are 
implemented.
    The term ``possible mortgage fraud'' was proposed to be defined to 
mean that an Enterprise has cause to believe that mortgage fraud may be 
occurring or has occurred. Some commenters recommended that OFHEO 
should provide guidance, through regulation or through guidance 
documents, as to triggers and level of verification, otherwise the 
definition, they argued, is too broad. OFHEO agrees and will provide 
guidance, as requested, as to these and related matters as part of the 
implementation of the reporting requirements.
    One commenter recommended that the definition should include the 
element of good-faith judgment on the part of the Enterprise. Another 
commenter recommended that the definition should include the element of 
reasonable or justifiable cause to believe that mortgage fraud may be 
occurring or has occurred. OFHEO agrees that the definition should be 
modified to include ``reasonable cause'' and has clarified the 
definition of the term ``possible mortgage fraud'' accordingly.

Unsafe and Unsound Conduct

    Proposed Sec.  1731.3 would provide that an Enterprise may not 
require the repurchase of or may not decline to purchase a mortgage, 
mortgage backed security, or similar financial instrument because of 
possible mortgage fraud without promptly reporting to the Director 
under Sec.  1731.4. One commenter requested that this section should 
clearly state that it does not prohibit the Enterprises from declining 
purchases or requiring repurchases if the Enterprises are properly 
reporting mortgage fraud or possible mortgage fraud. OFHEO agrees, and 
has clarified the language of Sec.  1731.3 accordingly.

Reporting Time-Period

    As proposed, Sec.  1731.4 would set forth the procedures for 
reporting fraud and possible mortgage fraud to OFHEO. OFHEO would issue 
implementation instructions with respect to reporting such fraud. 
Section 1731.4 also would provide that if a situation requires the 
immediate attention of OFHEO, an Enterprise would report immediately by 
telephone or electronic communication.
    A few commenters recommended that the proposed four-day 
notification period was too short and recommended either a 30-day 
period or that notification be ``prompt.'' OFHEO agrees that a 
requirement for ``prompt reporting'' would permit flexibility in 
addressing different situations and changing needs in the 
implementation of the reporting requirement and has modified the 
definition accordingly to remove the fixed time period and will address 
notification requirements as part of the implementation of the rule. 
The requirement for immediate reporting, when appropriate, remains.
    One commenter recommended that the reporting requirement should not 
be retroactive and apply only to mortgages purchased or not purchased 
six months after the effective date of the regulation. OFHEO did not 
propose and does not intend that the regulation have retroactive 
application; OFHEO will work with the Enterprises for an effective 
transition while the Enterprises develop and implement or enhance 
reporting systems.

Non-Disclosure and Safe Harbor

    As proposed, the section would prohibit the disclosure of reporting 
mortgage fraud or possible mortgage fraud to the parties connected with 
such fraud without the prior written approval of the Director. The 
proposed section expressly stated that the requirement would not 
prevent an Enterprise from disclosing or reporting such fraud pursuant 
to legal requirements, including reporting to appropriate law 
enforcement authorities.
    One commenter expressed a concern that the proposed section would 
discourage the Enterprises from reporting fraud; another argued that 
the Enterprises should be required to report fraud to law enforcement 
authorities.

[[Page 43627]]

The Enterprises already have the authority to report fraud to law 
enforcement; the major focus of concern of the proposed regulation is 
the need to make routine reporting of possible mortgage fraud to OFHEO 
and for OFHEO to take actions regarding such possible fraud. Another 
commenter recommended the addition of a clarification that the 
requirement of this section does not limit the Enterprise from 
reporting fraud to a third party or from taking any legal or business 
action it may deem appropriate, including an action involving the party 
or parties connected with the mortgage fraud or possible mortgage 
fraud. OFHEO agrees that this clarification is useful and has modified 
the section accordingly.
    A few commenters addressed ``safe harbor'' concerns, in that the 
safe harbor provisions of the Bank Secrecy Act would not apply to the 
Enterprises reporting of mortgage fraud to OFHEO, and leave the 
Enterprises vulnerable to liability should OFHEO refer an Enterprise 
report to another government agency. OFHEO recognizes the liability 
concerns; nevertheless, OFHEO will continue to provide information on 
mortgage fraud to appropriate authorities while addressing concerns 
related to the absence of an explicit safe harbor.
    Except with respect to the clarifications of the proposed language 
as noted above, OFHEO has determined to issue the regulation as 
proposed.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    The regulation is not classified as an economically significant 
rule under Executive Order 12866 because it would not result in an 
annual effect on the economy of $100 million or more or a major 
increase in costs or prices for consumers, individual industries, 
Federal, state, or local government agencies, or geographic regions; or 
have significant adverse effects on competition, employment, 
investment, productivity, innovation, or on the ability of United 
States-based enterprises to compete with foreign-based enterprises in 
domestic or foreign markets. Accordingly, no regulatory impact 
assessment is required. Nevertheless, the proposed regulation was 
submitted to the Office of Management and Budget for review under other 
provisions of Executive Order 12866 as a significant regulatory action.

Executive Order 13132, Federalism

    Executive Order 13132 requires that Executive departments and 
agencies identify regulatory actions that have significant federalism 
implications. A regulation has federalism implications if it has 
substantial direct effects on the states, on the relationship or 
distribution of power between the Federal Government and the states, or 
on the distribution of power and responsibilities among various levels 
of government. The Enterprises are federally chartered corporations 
supervised by OFHEO. The regulation would require reporting of mortgage 
fraud to OFHEO. It would not affect in any manner the powers and 
authorities of any state with respect to the Enterprises or alter the 
distribution of power and responsibilities between Federal and state 
levels of government. It would in no way limit the authority of any 
state to take actions for violations of its laws. Therefore, OFHEO has 
determined that the regulation has no federalism implications that 
warrant the preparation of a Federalism Assessment in accordance with 
Executive Order 13132.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
proposed regulation under the Regulatory Flexibility Act. The General 
Counsel of OFHEO certifies that the regulation would not be likely to 
have a significant economic impact on a substantial number of small 
business entities because it would be applicable only to the 
Enterprises, which are not small entities for purposes of the 
Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1731

    Administrative practice and procedure, Government sponsored 
enterprises.

0
For the reasons stated in the preamble, part 1731 is added to chapter 
XVII, title 12 of the Code of Federal Regulations to read as follows:

PART 1731--MORTGAGE FRAUD REPORTING

Sec.
1731.1 Purpose and scope.
1731.2 Definitions.
1731.3 Unsafe and unsound conduct.
1731.4 Procedures for reporting.
1731.5 Internal controls, procedures, and training.
1731.6 Supervisory action.

    Authority: 12 U.S.C. 4513(a) and 4513(b)(1), (2), and (7).


Sec.  1731.1  Purpose and scope.

    The purpose of this section is to set forth safety and soundness 
requirements with respect to the reporting of mortgage fraud in 
furtherance of the supervisory responsibilities of OFHEO under the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 
(12 U.S.C. 4501 et seq.).


Sec.  1731.2  Definitions.

    For purposes of this part--
    (a) Director means the Director of OFHEO, or his or her designee.
    (b) Enterprise means the Federal National Mortgage Association or 
the Federal Home Loan Mortgage Corporation.
    (c) Mortgage fraud means a material misstatement, 
misrepresentation, or omission relied upon by an Enterprise to fund or 
purchase--or not to fund or purchase--a mortgage, including a mortgage 
associated with a mortgage-backed security or similar financial 
instrument issued or guaranteed by an Enterprise. Such mortgage fraud 
includes, but is not limited to, a material misstatement, 
misrepresentation, or omission in identification and employment 
documents, mortgagee or mortgagor identity, and appraisals that are 
fraudulent.
    (d) OFHEO means the Office of Federal Housing Enterprise Oversight.
    (e) Possible mortgage fraud means that an Enterprise has a 
reasonable belief, based upon a review of information available to the 
Enterprise, that mortgage fraud may be occurring or has occurred.


Sec.  1731.3  Unsafe and unsound conduct.

    An Enterprise may not require the repurchase of or may not decline 
to purchase a mortgage, mortgage backed security, or similar financial 
instrument because of possible mortgage fraud without promptly 
reporting to the Director under Sec.  1731.4. An Enterprise may decline 
such purchase or require such repurchase if it is reporting mortgage 
fraud or possible mortgage fraud in accordance with Sec.  1731.4.

[[Page 43628]]

Sec.  1731.4  Procedures for reporting.

    (a) Procedures for reporting. (1) Prompt report. An Enterprise 
shall report promptly mortgage fraud or possible mortgage fraud in 
writing to the Director in such format and under such notification 
procedures as prescribed by OFHEO. The report shall describe the 
mortgage fraud or possible mortgage fraud in detail sufficient under 
OFHEO guidance. The Enterprise, at the sole discretion of the Director, 
may be required to provide additional or continuing information in 
connection with such mortgage fraud.
    (2) Immediate report. In addition to reporting in writing under 
paragraph (a)(1) of this section, in any situation requiring immediate 
attention by OFHEO, an Enterprise shall report the mortgage fraud or 
possible mortgage fraud to the Director by telephone or electronic 
communication.
    (b) Retention of records. An Enterprise shall maintain a copy of 
any report submitted to the Director and the original or business 
record equivalent of any supporting documentation for a period of five 
years from the date of submission.
    (c) Nondisclosure. An Enterprise may not disclose, without the 
prior written approval of the Director, to the party or parties 
connected with the mortgage fraud or possible mortgage fraud that it 
has reported such fraud under this part. This restriction does not 
prohibit an Enterprise from--
    (1) Disclosing or reporting such fraud pursuant to legal 
requirements, including reporting to appropriate law enforcement or 
other governmental authorities; or
    (2) Taking any legal or business action it may deem appropriate, 
including any action involving the party or parties connected with the 
mortgage fraud or possible mortgage fraud.
    (d) Acceptance of other forms. The Director may, upon written 
notice to each Enterprise, accept reports of mortgage fraud or possible 
mortgage fraud in formats promulgated by any Federal agency that has 
jurisdiction over the reporting of mortgage fraud or possible mortgage 
fraud by the Enterprises.
    (e) No waiver of privilege. An Enterprise does not waive any 
privilege it may claim under law by reporting mortgage fraud or 
possible mortgage fraud under this part.


Sec.  1731.5  Internal controls, procedures, and training.

    An Enterprise shall establish adequate and efficient internal 
controls and procedures and an operational training program to assure 
an effective system to detect and report mortgage fraud or possible 
mortgage fraud under this part.


Sec.  1731.6  Supervisory action.

    Failure by an Enterprise to comply with Sec. Sec.  1731.3, 1731.4, 
and 1731.5 may subject the Enterprise or the board members, officers, 
or employees thereof to supervisory action by OFHEO under the Federal 
Housing Enterprises Safety and Soundness Act of 1992 (12 U.S.C. 4501 et 
seq.), including but not limited to, cease-and-desist proceedings and 
civil money penalties.

    Dated: July 25, 2005.
Stephen A. Blumenthal,
Acting Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 05-14957 Filed 7-27-05; 8:45 am]
BILLING CODE 4220-01-P