Why one attorney says the Texas ruling reins in FinCEN's "blank check" powers
A federal court struck down a new Financial Crimes Enforcement Network's (FinCEN) residential real estate reporting rule on March 19, handing a victory to title companies and real estate professionals who had been bracing for significant new compliance obligations.
The rule would have required reporting on non-financed residential transfers, meaning cash purchases, to entities and trusts. Judge Jeremy Kernodle of the Eastern District of Texas vacated it in its entirety, finding that FinCEN had exceeded its statutory authority under the Bank Secrecy Act. FinCEN filed an appeal to the Fifth Circuit on May 11.
A separate challenge brought by Fidelity National Financial went the other way. A federal court in Florida sided with FinCEN in that case. With two circuits now pointing in different directions, a Supreme Court showdown is increasingly likely.
Luke Wake (pictured top), an attorney in Pacific Legal Foundation's Separation of Powers practice, is working on the Texas case. He said the story does not end with the specific rule. It is about how much authority FinCEN believes it has over every financial institution in the country, mortgage brokers included.
"Under FinCEN's view of their authority, it's basically limitless," Wake told Mortgage Professional America. "They, under their view, can require reporting on anything if they think it will help law enforcement. And the government will never say it's not helpful for law enforcement to have more information."
Giving FinCEN a “blank check”
The rule that was struck down required reporting whenever residential property was transferred to an LLC or trust without traditional mortgage financing. The rule was designed to combat money laundering through real estate. Cash buyers who use LLCs or trusts are harder to trace, and FinCEN has been pushing for greater transparency in that space for years.
Wake said the problem was not the goal but the legal theory FinCEN used to get there. The Bank Secrecy Act gives the Secretary of the Treasury authority to require reporting of "suspicious" transactions, and FinCEN reads that word as an open invitation to flag any transaction the Secretary decides might be worth investigating.
Kernodle did not buy it.
"His opinion says no, you can't just interpret 'suspicious' as basically an empty vessel to be filled with whatever meaning the Secretary of the Treasury wants," Wake said. "It actually has to be objectively suspicious. And so that's a significant decision limiting otherwise open authority for the Secretary of the Treasury to create other rules that would be problematic."
Why brokers should be watching
For now, the reporting obligation is off. But Wake said brokers should not treat that as the end of the story.
Mortgage brokers are classified as financial institutions under the Bank Secrecy Act. That means FinCEN already has authority over them, and any expansion of how that authority is interpreted flows directly to the broker channel. If the Fifth Circuit reverses Kernodle's decision and endorses FinCEN's view that it can define "suspicious" however it chooses, the implications extend well beyond title companies reporting cash buyers.
"The specific question in front of the court is about how we interpret the specific provision of the Bank Secrecy Act," Wake said. "And that provision has implications really for any financial institution, which mortgage brokers are going to be counted as."
The scope of the concern goes further still. Under FinCEN's own reading of its authority, it can deem any business a financial institution and require reporting on any category of transaction it decides might yield useful leads.
"There's sort of a larger concern raised in this case about the fact that the Secretary of the Treasury and FinCEN are interpreting their authority as just basically a blank check to require reporting on any kind of transaction where the government thinks it might be useful to have more information," Wake said. "The government would love to have perfect knowledge of everyone's transactions all the time."
Wake said that concern falls hardest on small operations. A one- or two-person brokerage cannot absorb new compliance obligations the way a large institution can, and small brokers are exactly the kind of business PLF is in the habit of representing.
Wake also noted that the rule was already causing concrete harm before it was vacated. It was creating delays in residential closings, including transactions that had nothing to do with cash buyers. Even financed buyers were affected indirectly when sellers on their side of the transaction ran into compliance problems.
Pacific Legal Foundation has argued 18 cases before the Supreme Court, and Wake said they are ready to add another if the appeal goes that way.
"There's definitely potential that this could work its way up to the Supreme Court," he said. "And certainly, at Pacific Legal Foundation, we're in the business of arguing cases all the way to the Supreme Court if that's what it takes."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
