The Josefa Group

Tweets, blogs, and many other forms of social media are transforming communications between both individuals and corporations. As this technology evolves, it promises new ways to rapidly reach wide audiences. Technology use advances in a company faster than management can assess the implications of that use. As a result, unexpected consequences of social media may exist that have not been fully addressed by corporate policy. It is recommended that Chief Risk Officers review their models to assure that the risk inherent in online communications is updated for the latest forms of distribution.

Fraud on average costs US companies 7% of their revenue. - 7%! – It is troubling that as economic activity is decreasing, we are finding further increases in fraud. Recently, FBI director Robert Mueller testified before congress that thousands of financial fraud investigations are putting a strain on the FBI's ability to fight other kinds of crimes. It is incumbent upon Chief Risk Officers to address their operational risk models to account for this growing trend.

Budget cuts and reduced staffing are complicating risk management efforts at addressing fraud. Reductions are increasing the likelihood of fraud and invalidating prior models that quantify risk assessment and the cost of mitigation. It is essential that risk managers work closely with other corporate divisions and to call attention to senior management of this evolving trend.

FinCEN has updated its list of Money Service Businesses pursuant to the Bank Secrecy Act. For the complete list see http://www.msb.gov/guidance/msbstateselector.php

The importance of proactively managing the risk inherent in mortgage portfolios is now well understood by all chief risk officers and loan managers. The challenge is to properly assess overall risk in a portfolio, identify credits into risk categories and take the appropriate action on each credit based both upon its category and the particular characteristics of each credit. While the details around this process are beyond the scope of this article, it is clear that targeted data is essential to appropriately manage mortgage risk.

The OCC and OTS is one source of important mortgage data trends. They have now published their Mortgage Metrics Report for the 4^th quarter of 2008. In summary, the report finds:

·         The percentage of performing loans decreased to approximately 90% vs. 93% at the end of the first quarter.

·         The decline in credit quality occurred across all risk categories with the largest percentage jump in prime mortgages

·         For modified loans, re-default rates continue to increase. Consistent with last quarter’s report, re-default rates for loans serviced by third parties are significantly higher than loans held in the servicer’s own portfolio.

·         Newly initiated foreclosures declined for the second consecutive quarter.

For complete details, please see http://files.ots.treas.gov/4820362.pdf

Loan modifications and other remediation have steadily risen as financial institutions try to stem the significant costs related to foreclosure. At the same time, mortgage rescue scams have risen. FinCEN has recently issued guidance to help identify these scams and to highlight suspicious activity reporting. Potential indicators of loan modification/foreclosure scams are:

A homeowner tells the mortgage servicer, perhaps upon receiving an overdue notice, that he/she has been making payments to a party other than the mortgage holder or servicer. The homeowner may have been tricked into signing a quit claim deed for the benefit of the perpetrator of a scam or told to make payments to a third party (in actuality, a con-artist), who will allegedly forward them to the lender.

·         A homeowner says that he/she has hired a third party, perhaps advertised as or alleged to be a “foreclosure specialist” or “mortgage specialist,” to help him/her avoid foreclosure or help renegotiate the terms of his/her mortgage with the lender. This may be suspicious if the homeowner indicates that the third party:

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

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

o   Used aggressive tactics to seek out the homeowner by telephone, e-mail, mail or in person;

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

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

o   Claimed the process will be quick with relatively little information and paperwork required from the homeowner;

o   Offered to buy the house and then rent it back to the homeowner;

o   Falsely claimed to be affiliated with the government. (Perpetrators of scams often use names or symbols that mimic federal and state programs or falsely suggest that they offer legal services or are affiliated with an attorney or law firm); or

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

·         A homeowner says he/she paid someone to assist in getting help from the right Federal affordable housing program.

·         A homeowner maintains that he/she does not need to pay a mortgage because the loan contract is invalid, or the customer attempts to pay with a bogus sight draft, Federal Reserve Bank/Treasury letter, or check that accesses a “Treasury Direct Account.” Such homeowners may be committing fraud or may have been duped by individuals who claim government-related contracts are illegitimate. Other homeowners may have unsuspectingly paid for illegitimate or bogus pay-off documents.

For complete text of the guidance see http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a001.pdf

The Financial Crimes Enforcement Network (FinCEN) recently issued an educational pamphlet to inform depository institution customers about currency transaction reporting (CTR) requirements. The pamphlet, Notice to Customers: A CTR Reference Guide, uses plain language to explain CTR reporting requirements and a financial institution’s obligations under the Bank Secrecy Act.

See http://www.fincen.gov/whatsnew/pdf/CTRPamphletBW.pdf for the guide.

In a report to congress, the General Accounting Office has reported that the significant increase in SAR’s over the period of 2000 to 2007 is attributed primarily to the use of automated systems and the impact of enforcement actions and Civil Monetary penalties. A third factor “defensive SAR filing” was cited by institutions wherein they have filed SARS that may not have been necessary for fear of regulatory criticism. The report recommends that Secretary of the Treasury direct the Director of FinCEN to further develop and document its strategy to fully incorporate certain GAO-identified practices to enhance and sustain collaboration among federal agencies into the form change process and distribute that documentation to all stakeholders.

The complete report can be found at http://www.gao.gov/new.items/d09226.pdf

Fidelity National Information Services has agreed to acquire Metavante Technologies. The combined entity will create the world’s largest provider of comprehensive integrated payment and core processing services. For further details, please see:

http://finance.yahoo.com/news/Fidelity-National-Information-prnews-14811567.html