MortgageInsurance

Companiesof America

Suzanne C. HutchinsonExecutive Vice President

72715thSt., N.W.12th Floor

Washington,D.C.20005(202)393-5566

Fax (202)393-5557

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May 29, 2002

Financial Crimes Enforcement NetworkP.o. Box 39Vienna, VA 22183

Re: Section 352 AMLP Regulations

Dear Sir or Madam:

This letter, on behalf of the MortgageInsurance Companies of America ("MICA"), a tradeassociation that represents the interests ofprivate mortgage insurers throughout the UnitedStates, is in response to the Interim Final Rulepublished in the Federal Register (67 Fed. Reg.21110) on April 29, 2002.

The Interim Final Rule temporarily exemptscertain financial institutions, includinginsurance companies, from the requirement thatthey establish anti-money laundering programsunder the Bank Secrecy Act ("BSA"), 31 U.S.C., 18U.S.C. § 5318(h) (1). This provision was added tothe BSA by Section 352 of the USA PATRIOT Act.For the reasons discussed below, when expectedregulations requiring compliance programs forinsurance companies are issued, we respectfullyrequest that private mortgage insurance companiesbe excluded from the definition of insurance and,consequently, not be required to establish andmaintain.ananti-moneylaunderingprograms.

The Rule states that:

Treasury and FinCEN have not had theopportunity to identify the nature andscope of the money laundering or terroristfinancing risks associated with [theexempt] businesses. The extension of theanti-money laundering program requirementto all the remaining financialinstitutions, most of which have neverbeen subject to federal financialregulation, raises many significantpractical and policy issues. Aninadequate understanding of the affected

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industries could result in poorlyconceived regulations that imposeunreasonable regulatory burdens withlittle or no corresponding anti-moneylaundering benefits.

67 Fed. Reg. at 21112.

We commend the Treasury and FinCEN foracknowledging that the businesses of certainfinancial institutions,do not present the moneylaundering and terrorism'financing risks that theAct is intended to address. In this regard, webelieve that private mortgage insurance companiesshuuld not be required- to establishanti-moneylaundering programs because there is virtually no

-risk of money launderingor terroristfinancingactivities associated with the private mortgageinsurancebusiness. Moreover, there is no need toapply anti-money laundering requirements toprivate mortgage insurers because the customer ofa private mortgage insurance company is not theindividualborrower,but the lender or investor inthe loans, and the mortgage lender is or will besubject to anti-moneylaunderingrequirements.

How Private Mortgage Insurance Works

Private mortgage insurance protects lendersand investors in mortgages with greater than an 80percent loan-to-value ratio against much of theloss if the loans go to default. As a result, itis a significant aid to first-time home buyers andlower income people who are trying to buy a house.These people often do not have the money to make asignificant down payment.

If a borrower is looking for a mortgage withless than a twenty percent down payment the lendergenerally will require that the borrower purchasemortgage insurance. The mortgage insurance cancome from one of the seven private insurerslicensed to do business in the United States orfrom one of the two government program - theFederal Housing Administration or the VeteransAdministration program. There also are some stateprograms which insure low-down payment mortgages.MICA only represents the private companies.

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With private mortgage insurance,the borrowerreimburses the lender for the cost of theinsurance,but has no relationshipor contact withthe private mortgage insurer. If the loan goesinto default, the insurance is paid to the lenderor the holder of or investor in the loan. Inother words, the insured is the bank or mortgagecompany that initiatesthe loan and then generallythe investor in the loan, not the person whoactually pays the premium. In the private sectorthe majority of mortgage loans are purchased bythe two governmentsponsoredenterprises- FannieMae and Freddie Mac. Therefore,they are the primerecipients of a mortgage insurer's claimspayments.

The lender that originates the loan, not theborrower, determines which of the seven privatemortgage insurers to use. These lenders generallyhave a "master policy" with several privatemortgage insurers which sets out the terms andconditions of the insurance. Once the lendercollects all the information. necessary tounderwrite the high-ratio loan and decides tooriginate it, he sends the underwritinginformation to the insurer who reviews it anddecides whether to insure the loan. In many casesthe private mortgage insurer does not even knowthe name or other identifying information aboutthe borrower. If the private mortgage insureragrees to insure the loan he issues a certificateof insurance under the master policy. The insurerdoes not meet the borrower prior to agreeing toinsure the loan nor does the insurer deal with the\Dnr""o',''''''''' ri"""~ng +-hp 1 ~ -Fe:. ~-F +-he ~n~"""-nce n l;C\T

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The only exception to that is that insurerssometimes will seek permission to work withborrowers if their mortgage payments are inarrears to see if they can be brought current.

If the borrower ultimately defaults on theloan, as noted above, the mortgage insurer paysits claim to the investor in the loan. The amount

of the claim includes a set percentage of theoriginal loan amount, unpaid interest and otherexpenses as delineated in the master policy.

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Consequently, the anti-money launderingresponsibilityfor mortgage loans should be withthe bank or mortgage company that deals with theborrower and establishes the account relationshipwith the borrower. Those businesses are, or willbe, subject to the compliance program requirementand other anti-money laundering laws andregulations under the Bank Secrecy Act.

Customer Verification

If private mortgage insurance companies areconsidered insurance companies for purposes of thecompliance program requirerr.ent, it is ourunderstanding that ,:hey also would be subject tocustomer identification requirements underregulations to be issued within the next fewmonths by Treasury pursuant to section 326 of theUSA PATRIOT Act. If private mortgage insurers areincluded in the definition of insurance companies,it must be explicit that the customer verificationrequirement applies to the owner of the policy,i.e., the lender, and not to the borrower. Theregulatory obligations should rest with thefinancial institution lender which has contractual

relationship with the borrower.

Moreover, if Treasury were to requireverification of the identity of the borrower, itwould fundamentallychange the nature of the waythe mortgage insurance industry conducts businessand would impose substantial costs out ofproportion to any conceivable law enforcementbenefit.

Private Mortgage Insurance Shou~d be Exc~uded Fromthe Future Requ~atory Definition of Insurance

As you can see it is hard to imagine how thisbusiness could be improperly utilized for moneylaunderers or terrorist financing. The person whois ultimately responsible for the cost of theinsurance is not the insured. and the insurance

policy has no cash value to a borrower. It is onlyvaluable to the institution that invests in theloan if that loan goes to default.

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Subj ecting private mortgage insurance toregulations requiring them to establish anti-moneylaundering compliance programs, imposes an onerousregulatory burden that would lead to practicaldifficulties and increased costs with little or nocorresponding law enforcement benefits. Theresulting costs would be passed on to the segmentof the home owning public least likely able tobear additional costs of home ownership.

The Interim Final Rule also states that

Treasury and FinCEN have been examining the moneylaundering risks associated with insuranceproducts and will issue in the near future. aproposed rule governing the establishment of anti-money laundering programs by insurance companies.67 Fed. Reg. at 21112. Although it is .appropriatefor certain insurance companies to establish anti-money laundering programs, we believe that itwould be illogical to require private mortgageinsurers to establish such programs for thereasons discussed above. Moreover, if mortgageinsurers are included in the regulatory definitionof insurance company, it is imperative that futureverification regulations and other requirementspecify that the accountholder or customer of themortgage insurer is the policy holder, not theborrower.

We look forward to reviewing and commentingon the forthcoming proposed rule, and we urgeFinCEN to exclude private mortgage insurers fromthe definitionof insurancecompanies for purposesof the complianceprogram regulations.

6~e=1L~s.~za~~ Hutchin~~

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