FinCEN Requires Title Company Reporting in California – and Clarifies Applicability
Tuesday, September 20, 2016
The Financial Crimes Enforcement Network (FinCEN) issued Geographic Targeting Orders (GTOs) for a number of U.S. housing markets, including San Diego, Los Angeles, San Francisco, San Mateo and Santa Clara Counties, effective for 180 days that began on August 28, 2016. The GTOs require title insurance underwriters to identify the names of natural persons behind companies that are used to pay all-cash purchases above a certain dollar amount for high-end residential real estate. Only transactions valued at $2M and above will trigger the GTO reporting requirements for the newly named California markets.
CLTA Executive Vice President, Craig Page, stated that “CLTA will be doing everything we can to provide our members with the information and means they need to properly comply with FinCEN’s new reporting requirements for several counties in the state. As an industry, we understand the importance of FinCEN’s efforts to target money laundering and the illegal purchase of real property and will assist FinCEN any way we can.”
Recently, FinCEN provided verbal clarification to the American Land Title Association on a number of frequently asked questions related to the joint-CLTA/ALTA webinar on the GTOs. As discussed in the webinar in detail (available to CLTA members in recorded format here), the GTOs affect specific transactions within several California counties. Amongst the verbal answers provided by FinCEN are the following:
- Q - Multiple buyers. If a purchase is being made by an individual buyer and a corporate entity as tenants in common and would otherwise meet the GTO thresholds is it a covered transaction? Does this answer change if the corporate buyers portion of the equity in the real estate is less than the reporting threshold?
A - The trigger for GTO reporting is whether at least one of the purchasers is a legal entity. This is true even if the legal entity will own a minority or de minimis stake in the property.
- Q - Business Trusts. If a business trust (like a NY or DE trust that are common for mortgage securitizations), considered legal entities for purposes of the GTO?
A - No trusts of any kind are included in the definition of a legal entity under the GTO.
- Q - Refunded deposits. If an entity pays their earnest money in a business check but this check is later refunded to the purchaser who then wires the entirety of the purchase price into the deal is it a covered transaction?
A - If a check is exchanged by the buyer at any point in the transaction then the transaction will trigger II.A.2.iv. FinCEN recommends calling with specific fact patterns but said it is easier just to disregard the refund for purposes of analysis.
- Q - 1031 exchanges. Does the GTO cover residential properties that are obtained as part of a 1031? This comes up since 1031s are for investment and business purposes and usually involve residential real estate only when it’s for investment purposes.
A - The mere fact it’s a 1031 transaction does not impact the determination on whether a transaction is covered by the GTO.
- Q - Vacant lots. Does the GTO cover the purchase of a vacant lot? What if it is going to be used in the construction of a home?
A - The answer hinges on whether the vacant land could be considered residential under the GTO definition. If the industry would treat it as residential for other purposes (like TILA or RESPA compliance if there was a loan) then that can be informative. FinCEN encourages calling them with specific fact patterns when you encounter one of these transactions and may provide additional clarity if the industry sees a number of common versions of vacant land transactions.
As always, CLTA strongly recommends that underwritten title companies, independent escrow companies and real estate professionals consult directly with the title insurance companies with which they do business to discuss the title insurer’s precise expectations and protocols associated with FinCEN reporting.
Further clarifications are expected from FinCEN as they clear through a backlog of questions. CLTA will keep its members apprised of new information as it is received. For the latest information on FinCEN GTOs relating to CLTA members visit the CLTA's FinCEN resource page here.