Should Involvement of Third Party Debt Consultants Trigger SAR Requirements?

The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:

Should Involvement of Third Party Debt Consultants Trigger SAR Requirements?

By: Robert Rutkowski, Partner

In April of 2009, and again in June of 2010, the Financial Crimes Enforcement Network (“FinCEN”) issued advisories on foreclosure rescue scams. Particularly telling in these advisories are the elements of suspicious activity by the third party that is involved with your member. FinCEN states that “This may be suspicious if the homeowner indicates that the third party:

• Charged up front fees for foreclosure rescue or loan modification services;

• Accepted up front payment only by official check, cashier’s check or wire transfer;

• Used aggressive tactics to seek out the homeowner by telephone, email, mail or in person;

• Pressured the homeowner to sign paperwork he/she did not have an opportunity to read thoroughly or that he/she didn’t understand;

• Guaranteed to save the home from foreclosure or stop the foreclosure process “no matter what”;

• Claimed the process would be quick with relatively little information and paperwork required from the homeowner;

• Offered to buy the house then rent it back to the homeowner;

• Falsely claimed to be affiliated with the government…or

• Instructed the homeowner not to contact the lender, a lawyer or financial counselor.”

FinCEN identifies many other types of red flags in the advisories. However, in my opinion, it is a first to see FinCEN characterize a third party counseling service’s involvement as practically a per se Suspicious Activity Report (“SAR”) event. In other words, the mere fact that your member has engaged the services of a (most likely) shady mortgage counselor triggers your requirement to file a SAR.

I am in no way being critical of FinCEN for taking this approach, in fact, I even applaud it. There is very little that a third party can do other than refinance a loan to help a member that can’t make mortgage payments. I should be more precise and state that there is very little that a third party can do for a fee:  there are in some jurisdictions, non-profit organizations that offer real help and assistance to people who are behind in their mortgages. That is not what FinCEN is looking for here. FinCEN is looking for suspicious activity related to third parties that are doing harm instead of providing the help that they promise. 

While FinCEN does not take this analysis a step further and apply it to third party debt consultants in general, I think it should. Third party debt consultants take money from people which could otherwise be used to settle with the original lender. These third party consultants then attempt to negotiate payments on behalf of the borrower. While in some cases the third party may in fact provide some value, in many instances, the borrower is taken advantage of just like in the foreclosure rescue scam that FinCEN has identified. In the future, I would not be surprised to see FinCEN come out against debt consolidation and debt consultant services that fail to provide real value. I could see FinCEN classifying this type of “consultation” offered to credit union members as a SAR event as well. 

Robert Rutkowski is the Manager Partner of WWR’s Credit Union and Corporate & Financial Services Groups, part of WWR’s Consumer Collections. He can be reached at (216) 739-5004 or rrutkowski@weltman.com.

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