Financial crimes unit wants direct reports from Fannie, Freddie on mortgage fraud

The government unit charged with protecting against financial crime is proposing that Fannie Mae and Freddie Mac streamline the way it detects money laundering and other suspicious activity.

The Financial Crimes Enforcement Network (FinCEN), within the Treasury Department, announced Thursday it had proposed new rules for how Fannie and Freddie detect fraud and pass it on to the proper authorities — an attempt to speed up response time and allow for greater protection.

Under the current system, the government-sponsored enterprises report any suspected fraud to their regulator, the Federal Housing Finance Agency (FHFA), who then passes it along to FinCEN if warranted. Under the new proposal, the FHFA would be taken out of the equation, and Fannie and Freddie would report potential fraud directly to the proper authority.

The shift comes amid widespread dissatisfaction about the way mortgages have been handled by various servicers in the wake of the subprime mortgage crisis that resulted in banks having to handle huge amounts of foreclosures, including not only fraud but sloppy paperwork made emblematic by the "robosigning" of thousands of documents. State attorneys general are currently trying to hash out a broad settlement with some of the nation's largest servicers.

Fighting mortgage loan fraud has been one of FinCEN's "highest priorities" in the last five years.

“This action is another step to help restore the integrity of the mortgage market,” said FinCEN Director James H. Freis, Jr.  “Providing law enforcement with quicker access to data about potential financial crimes will help them better hold illicit actors accountable for mortgage fraud and other scams.”

FHFA Acting Director Edward DeMarco gave his blessing to the potential new arrangement, calling it a "positive step" that would streamline the process and help support law enforcement trying to crack down on mortgage fraud.

The new proposal comes two days after the U.S. sued one of the nation's largest mortgage brokers, Allied Home Mortgage, alleging it profited by skirting compliance rules and pushing risky mortgages — the government claims that one-third of the 112,324 mortgages originated by Allied from 2001 through 2010 defaulted, according to Bloomberg.

“Allied has profited for years as one of the nation’s largest FHA lenders by engaging in reckless mortgage lending and a 'culture of corruption,' flouting the requirements of the FHA mortgage insurance program, and repeatedly lying about its compliance,” the U.S. said in the complaint. “In the past decade, Allied has originated loans out of hundreds of branches it never disclosed to HUD.”

The proposed rules are now open to public comment for the next 60 days.

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