OFHEO recommends Bank Secrecy Act be expanded to GSEs
By MortgageDaily.com staff
3/11/2005

The government seeks to make it a crime to present fraudulent information on loans purchased by Fannie Mae and Freddie Mac. The move, along with a recommendation that the two secondary mortgage giants be required to promptly report possible fraud, was the result of Fannie's failure to pass on information about fraud loans Ginnie Mae previously purchased.

The recommendations were made Thursday by the Office of Federal Housing Enterprise Oversight general counsel Alfred Pollard in a testimony before the House Financial Services Subcommittee on Investigations.

The Bank Secrecy Act, which originally focused on government access to bank information and expanded to include anti-money laundering efforts, requires banks to provide information such as suspicious or actual mortgage fraud to regulators, but does not explicitly cover the government sponsored enterprises, according to Pollard's written testimony.

OFHEO recently proposed a regulation that would require the Fannie Mae and Freddie Mac to report in a timely manner any litigation matters against them, and possible or actual fraud prior to requiring repurchase or refusing to purchase a mortgage, mortgage backed security or other financial instruments. The regulation would also require that the GSEs create training programs and operating systems necessary to meet those obligations.

Such requirements would "lead to earlier intervention to avoid fraud and permit OFHEO to move expeditiously to introduce needed changes to Enterprise operations," Pollard said.

OFHEOs proposal followed a federal judge's order requiring Fannie to forfeit $6.5 million in ill-gotten gains it alleged received when it knowingly allowed First Beneficial Mortgage to sell bogus loans to Ginnie Mae.

Pollard suggested that Congress may want to expand the Act's list of other institutions that fit under the reporting requirement to explicitly include the GSEs.

The general counsel also informed Congress that OFHEO is still reviewing the First Beneficial case to determine whether Fannie Mae's operations in 1998 and 1999, when the First Beneficial incident occurred, "were excessively decentralized and uncontrolled, lacked adequate reporting and quality control, failed to distinguish functions between business development and problem workouts and generally did not hold regional offices sufficiently accountable."

Additionally, Pollard said the regulator is also examining whether Fannie personnel involved with First Beneficial may have qualified the company as an approved seller-servicer, but failed to take effective and timely action to remedy deficiencies discovered or end their relationship. "At present we have no indication that the regional office reported on their dealings to headquarters, which in turn would have been expected to provide such information to OFHEO," he said.

Samuel Smith, Fannie's vice president of single family operations, also testified before Congress Thursday, according to The Wall Street Journal.

"Looking back upon the First Beneficial case with the benefit of 20/20 hindsight, there is no doubt that there are things we could have done differently," Smith reportedly said. "As the case of First Beneficial highlights for us, Fannie Mae can do more to improve its practices on a continual basis to prevent losses from mortgage fraud to the company, its partners and the public."

The Bank Secrecy Act also protects financial institutions that mistakenly report suspicious activity from lawsuits by the party providing the information, according to Pollard's testimony.

While the GSEs may not be the target of a large number of fraudulent transactions, due to the size of their transactions, one fraudulent event "is a risk that merits action regardless of numbers," Pollard said.

The general counsel also recommended that Congress consider enhancing the Act by extending criminal provisions to those who defraud Fannie and Freddie.

Smith asked that such legislation include a safe harbor to shield GSEs from legal liability when they report suspected fraud, the Journal reported.

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