FinCEN Real Estate Reporting Rule Struck Down: What It Means for Upcoming Closings

The U.S. District Court for the Eastern District of Texas vacated FinCEN’s new Residential Real Estate Rule on March 19. The rule created reporting requirements for certain non-financed transfers of residential real property where ownership is transferred to an entity or trust (subject to specified exceptions).

Just a few weeks after the rule’s reporting obligations took effect on March 1, Judge Jeremy Kernodle found that FinCEN exceeded its statutory authority under the Bank Secrecy Act. Judge Kernodle granted summary judgment for the plaintiff and vacated the rule under the Administrative Procedure Act. This decision comes after two other federal courts in Florida and Texas upheld the rule as statutorily authorized and constitutional.

With the rule vacated, FinCEN’s Geographic Targeting Order (GTO) program is restored as the primary mechanism for gathering information in real estate transactions. While the GTO program creates similar reporting requirements for non-financed real estate transactions, it is much more limited in scope than the rule. It only applies to transactions in selected geographic areas and includes specific minimum price thresholds.

Following the court’s decision, FinCEN posted a notice on its website stating:

“[i]n light of a federal court decision, reporting persons are not currently required to file real estate reports with FinCEN and are not subject to liability if they fail to do so while the order remains in force.”

By tying compliance to the continued effect of the court’s order, this notice language has led many to anticipate further judicial review of Judge Kernodle’s decision. That, in turn, has raised the practical question of whether the reporting requirements will apply to real estate transactions closed during this period if the rule is later reinstated.

Given the rapid developments in this area, it is prudent for reporting persons to continue collecting the information that would have been required under the rule for a Real Estate Report. Reporting persons can then respond efficiently if reporting obligations are reinstated.

We will continue to monitor developments relating to the rule. If you have questions about the impacts of this recent decision, please reach out to Joe Reimer, Jeff Tomlinson, Trevor Haynes, Gavin Curley or any member of the Phelps business and real estate teams.