Mortgage servicers face AML obligations that are distinct from those of originators - and often less well understood. Here's what the BSA requires for the servicing function and where most servicer programs fall short.
Mortgage servicers - companies that collect payments, manage escrow accounts, and handle default servicing on behalf of loan owners - are subject to BSA AML program requirements as non-bank financial institutions. The servicing function creates specific money laundering risks that differ from origination: payment patterns that don't match the borrower's financial profile, unusual payoff activity, and the use of mortgage payments to layer illicit funds through the financial system.
The most significant AML risk in mortgage servicing is unusual payment activity. Borrowers who make large lump-sum payments that are inconsistent with their documented income, who pay off loans early with funds from unverified sources, or who make payments from multiple accounts or third parties are exhibiting patterns that warrant enhanced scrutiny. Your transaction monitoring program must be designed to identify these patterns and escalate them for review.
Escrow account management creates specific AML obligations around the handling of funds. Servicers that manage escrow accounts for tax and insurance payments must have procedures for identifying unusual activity in those accounts - large deposits from unexpected sources, requests for unusual disbursements, or patterns that don't match the property's tax and insurance obligations. These patterns are less common than payment-related red flags, but they do occur and must be addressed in your monitoring program.
Default servicing - the management of delinquent loans, foreclosures, and short sales - creates additional AML considerations. Short sale transactions, in particular, can be used to facilitate money laundering through the real estate market. Servicers that manage significant default portfolios should have specific procedures for reviewing short sale transactions for AML red flags, including unusual buyer profiles, all-cash purchases, and transactions that don't reflect market value.
For mortgage servicers that also originate loans, the AML program must address both functions. The risks of origination and servicing are different, and a program designed primarily for origination may have significant gaps in its coverage of the servicing function. A comprehensive risk assessment that addresses both functions is the starting point for a servicer AML program that satisfies examination standards.
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Regulatory Compliance Advisor · Soflo Consulting
Specializes in BSA/AML program development and compliance training for regulated businesses nationwide - from community banks and fintech startups to real estate professionals and money services businesses.
View all articles by Marcus ReidKey Takeaways
- 1Mortgage servicers face distinct AML risks from originators - unusual payment patterns are the primary concern
- 2Large lump-sum payments, early payoffs, and third-party payments are key monitoring red flags
- 3Escrow account management requires specific procedures for identifying unusual fund activity
- 4Default servicing and short sales create additional AML considerations that must be addressed in the program
- 5Programs designed primarily for origination often have significant gaps in servicing function coverage
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