SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteThe Importance of Escrow Payment Recipient Name Matching to Avoid Wire Fraud Harm

February 12, 2020
It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

Yesterday the Federal Reserve Chairman Jerome Powell testified in front of the US House  Financial Services Committee about monetary policy generally, however he was asked an interesting question during his appearance by  Representative Brad Sherman (D-CA).

Rep. Sherman inquired why the Federal Reserve does not establish a payee name matching requirement to prevent wire transfer fraud when wires are criminally misdirected to parties who are not the intended recipient.

Thus if a lender directs that proceeds of a mortgage loan be sent to “John Doe” yet during the closing process an offshore hacker intercepts email communications and substitutes wire instructions so that the wire is sent to “ABC Co. Ltd.” instead, why is the wire even approved?

We know that many banks do verification on incoming wires.  I have had a few wires held up or rejected when the sender misspelled my name or the name of my company.  Why wouldn’t name matching rules be implemented for outgoing wires as well?

While we cannot manage the Federal Reserve name matching rules, here at Secure Insight we do go beyond just verifying that wire instructions were previously used or that they simply match an account at a US bank in the Federal Reserve system.  Our analysts verify that the name on every account matches the name of the vetted and verified account holder, and when there is a discrepancy between what was presented to us and public records (licenses, insurance, bonds, corporate filings we require a written explanation and additional evidence of ownership before the account is posted in an business profile and cleared for our lender to send outgoing wires.

Wire fraud is the single largest risk to banks (and most consumers) today.  It is a multi- billion dollar crime epidemic. While we go along way to make sure our client’s only wire to trusted accounts, and have successfully supervised millions of loan transactions without a wire fraud loss, we encourage the Federal Reserve to examine the issue of payee name matching as an additional and critical component to overall wire fraud deterrence.

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