Why FinCEN has pressed pause on new reporting rules
New reporting rules were set to go into effect on March 1, as required by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
The new regulation was going to require a report to be filed if these four requirements were met: the property is residential, the buyer is not obtaining financing, the buyer is an entity (such as an LLC or trust), and there are no applicable exemptions.
However, there was an additional note that could impact mortgage brokers. If the lender used does not report suspicious transactions to FinCEN, and it meets the other requirements, the transaction would need to be reported as well. This could apply to hard money lenders and some smaller non-QM lenders.
But conflict in the courts has put all of this on hold, with cases in two states producing opposite rulings. Now, FinCEN has put the new reporting on hold until it gets sorted out by the courts.
Jay Beitel (pictured top), mortgage attorney and partner at Polunsky Beitel Green, said two courts, one in Texas and the other in Florida, both led by judges appointed by President Donald Trump, came to completely different conclusions.
“The first one was in Florida in February, and the plaintiff was claiming that the real estate reporting regulation that FinCEN implemented and that went into effect on March the first was not properly authorized under the Bank Secrecy Act, and therefore they shouldn't have to comply with it,” Beitel told Mortgage Professional America. “In Florida, the federal district court held that the rule was within the statutory language that it targets transactions that are suspicious and are relevant to potential violations of law. So essentially, they upheld the rule.”
“Well, 30 days later, in March, there was a case in federal district court in Texas where the plaintiffs essentially claimed the identical issues. And the court said the fact that some bad actors have conducted non-financed real estate transactions does not make such transactions categorically suspicious. So the court in Texas said no, the rule does not fall within the authority of the Bank Secrecy Act, it isn't authorized to impose such a requirement, and it vacated the rule.”
FinCEN steps in
Typically, rulings within a court circuit only apply within that specific circuit. This could mean that without FinCEN intervention, those in the Florida circuit’s jurisdiction would have to continue this reporting, while those in the Texas one would not. So FinCEN put the new rules on hold until this gets sorted out.
“I think there’s still an issue about to what degree a federal district court in one circuit can impose a ruling that applies to everybody else, because typically, their rules only apply to matters within their circuit,” Beitel said. “Normally, the next step would be that they would appeal the decision. The losing party would appeal the decision to the appellate court in that circuit, which, at this point in time, hasn't happened.
“Then you get a ruling from a higher court saying, ‘Yeah, that's the right decision,’ or ‘It's a wrong decision.’ If the appellate court in the Florida circuit says, ‘Yes, the court was 100% right, the rule is perfect,’ and you have an appellate court in the Texas circuit saying, ‘Oh no, our court was exactly right,’ you could have federal appellate courts ruling essentially on the exact same subject matter and come to a different answer.”
When these sorts of things happen, they often eventually make their way through the courts and up to the Supreme Court.
“It's also ripe for the Supreme Court to hear an appeal where you have two federal appellate courts with diametrically opposed opinions,” Beitel said. “It's ripe for the Supreme Court to hear it to say which one's right and which one's wrong.”
What brokers need to know
For now, the additional reporting requirements for those parties have been put on hold. So brokers shouldn’t expect any changes to any closing that might involve an entity not getting traditional financing.
“FinCEN published an amendment to the rule, or guidance under the rule that said, ‘Because this case was handed down, people who would normally be a reporting party are not obligated to report while this ruling is in effect,’” Beitel said. “Reporting persons are not currently required to file real estate reports with FinCEN and are not subject to liability if they fail to do so while the order remains in effect. So FinCEN, kind of by default, said they would apply it across the country.”
Beitel said the new reporting is extensive because of all the information required by FinCEN. So this will be a break for those required to report, and could be a break for mortgage brokers who might have had to try to chase down some of this information.
“This thing is broad, and it cuts across everything,” he said. “You’ve got to do it in many, many transactions. And quite frankly, it's somewhat oppressive. They’ve got to report a lot of details on the parties to the transactions, including their street address and their tax identification number. Also, FinCEN put out a Q&A on explaining the obligation requirements under the rule.
“One of the questions presented was, ‘If I'm the person that has to do the reporting, what happens if I can't get the information from the parties if they don't cooperate? FinCEN says you have an obligation to report the information required, and if the person isn’t cooperating, if they don't give it to you, too bad. You either have to provide the information, or maybe you just shouldn't handle the transaction.”
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