Risk assessments are becoming increasingly crucial for mortgage lenders, especially with the latest FinCEN proposal that could soon mandate such practices across all financial institutions.

The proposed rule introduces risk assessments as a "sixth pillar" of AML/CFT compliance, making it clear that every bank, credit union and mortgage lender, must identify and evaluate specific risks related to money laundering and terrorist financing.

For mortgage lenders, this means more than just ticking regulatory boxes. It's about understanding how loan origination can expose them to financial crime risks. Mortgage lenders would be required to integrate these risk assessments into their internal policies and procedures, ensuring that their AML/CFT programs are not only compliant but also dynamic and responsive to changing risk landscapes.

Under the proposed rule, mortgage lenders must consider various inputs when conducting their risk assessments. This includes national AML/CFT priorities set by FinCEN and the Department of Treasury, as well as an in-depth evaluation of their specific business activities. The results should guide the development of tailored policies and controls that effectively mitigate identified risks.

Like what? Well, as a loan originator, you have lots of people and entities that refer business to you. What kind of diligence are you doing to evaluate them? With regard to the Realtors that send you business, you may say, “well, none.” OK, that’s one response. And you are probably right that this referral source may not be a party you are legally required to do KYC on.

But consider this: these risk assessments are not a one-time task. The proposed rule emphasizes the need for ongoing review and updates. So if you catch a Realtor trying to sneak an investor property by you as owner-occupied, do you perform EDD, or Enhanced Due Diligence, on the next loan? Mortgage lenders must be prepared to adjust their compliance programs as new risks emerge, ensuring that their efforts remain robust and relevant.

For mortgage lenders, adopting this enhanced risk assessment process can lead to stronger compliance, better protection against financial crimes, and ultimately, a more resilient business. As the industry awaits the finalization of these proposed rules, mortgage lenders should begin evaluating their current risk assessment processes and preparing for potential changes.