When Congress passed the Patriot Act in late 2001, many Americans agreed it was a good idea. The legislation was written to identify foreign and domestic terrorists by tracking the movements of those funding them. As a result, most of the Act’s new regulatory powers were given to the U.S. Dept. of the Treasury. Most people thought this was a good thing, since the Patriot Act was intended to track only the financial assets of terrorists.
Back then, a lot of us didn’t realize that the Treasury Dept. also oversees every mortgage finance transaction that takes place within the U.S. The result? Certain homeowners, post-Patriot Act, are now required to produce additional documentation when obtaining a mortgage.
In most real estate deals, lenders are required to verify that a homeowner has enough reserves to cover two months’ worth of mortgage payments. Essentially, the bank must be able to prove that there’s an “emergency fund” in case the homebuyer falls on rough times so he can cover the mortgage payment(s) until he gets back on his feet financially. Prior to Patriot Act intervention, the way to verify this was by producing bank statements showing a closing balance large enough to meet the lender’s requirement.
In the past, providing a bank statement was the end of the story and the loan underwriting process continued. Not so anymore. Under the Patriot Act, there can and often is much more to it. The Act requires lenders to verify the source of any and all large deposits on each financial statement. Most lenders - including some I’ve spoken to recently in Southwestern Illinois - interpret this as meaning any deposit greater than $500-$1,000, if it looks to be out of the norm of the deposits typically being made into a mortgage applicant’s account. Whether the deposit was a wedding or birthday gift, a company bonus, a rent check or repayment of a loan, lenders are required to ask the applicant to provide a brief explanation of each deposit - as well as verification of the source of each.
If a mortgage applicant is tempted to think the loan officer or his institution is being picky in doing the asking, they’re not. Bank officers face civil fines of $500 to $10,000 per occurrence and criminal penalties of $10,000 and five years in prison to $500,000 and 10 years in prison if knows or intentionally looks the other way from a mortgage applicant who is a money launderer.
This topic came to light for three reasons. First, the Patriot Act in general has been in the headlines for months, in connection with the NSA and alleged spying. Secondly, I researched and wrote two financial industry regulatory reform stories in this August IBJ edition, during which I had the chance to learn how complex indeed the mortgage industry continues to become (see pages 1 and 10). And thirdly, I am personally in the final stretch of closing on a mortgage loan (with no hitches and with superb customer service - thank you, First Clover Leaf Bank and senior lender Scott Gruber). But that’s where - in the mound of required paperwork - I noticed the Patriot Act Disclosure Form and called to inquire about it.
I’m staunchly in support of eradicating our nation’s terrorists and the individuals and organizations who fund them. But I’m thinking that when it comes to the section of the Act governing money laundering, for the sake of spurring home buying here and elsewhere, we could stand to increase the threshold of proof beyond $500-$1,000. As an average Joe looking from the outside in, I can’t really see that amount indicating a serious incidence of potential money laundering - but I can see that low of a deposit amount occurring enough that having to document it (and paying others to verify it) could potentially bog down enough loan underwritings, closings, etc. to wreak havoc on a system that’s doing its best to recover.