Trends in Audit Findings

I’m often asked what the CalBRE (soon to be DRE again) is looking for and finding when they are auditing brokers. After being licensed for over 38 years and having offered my compliance consulting services for the past 25 odd years, I’ve found that little has changed in the way of audit findings. What I have seen, however, is an uptick in the fines and accusations. Very seldom does an audit end with no findings (but it does happen) and more times than not an accusation is filed and the broker is faced with the cost of the audit and the legal fees to defend their license. You need to make sure you are prepared for the inevitable day that you get the dreaded call from the auditor or Special Investigator telling you that they are coming to pay a visit.

First and foremost the problems occur in the trust accounting arena. Many brokers think they have a trust account when in reality they only have a regular bank account. There are large banks that one would think offer trust accounts, but once you ask the right questions you realize that their charter doesn’t even allow real estate broker trust accounts in California. Oh, the retail account rep at the bank will assure you that they are opening a trust account, but many times they have no idea what they are talking about. In reality, there are very few banks that offer true trust accounts. Make sure that yours is one! Also, many brokers who should have a trust account don’t even think or bother to open one. And, still more troubling, there are brokers who simply deposit trust funds into their regular operating account. If you are handling third party funds (appraisal fees, credit report fees, rents or security deposits for fee-based property management, loan payments or fundings for loan servicing, for example), you need a trust account. You need to make sure that the right people sign on the account, that the account is in the right name, and that it balances daily and is reconciled to the CalBRE requirements on a monthly basis. Easier said than done, but oh so necessary.

Reporting of business activities to the CalBRE is another area where many brokers fall short. I have been assured by the CalBRE that they are upping their auditing and accusation filings on those brokers who meet the reporting requirements but are neglecting to report. Multi-lender notification (for originations or servicing), threshold notification (for originations or servicing), quarterly and annual reports (for trust accounting, loan origination and escrow activities) are all being monitored and if you aren’t reporting you should do so at once.

Self-dealing has been cited more and more as a violation recently. The act itself might not be a violation (unless you are self-dealing with multi-lenders, which is a no-no), but not reporting it is sure to be cited. If you are using investor money for your own transactions (even if it is a corporation or LLC in which you are an owner or member), you must send a letter and the unsigned LPDS to the Mortgage Lending Activities section of the CalBRE at least 24 hours before funding.

And then we get to the old favorites: Not providing the MLDS within 3 days of the application (on ALL loans), not having the LPDS executed prior to the funding, using the wrong LPDS (i.e. 851-A instead of 851-B on Sale of Existing Note), having the MLDS or LPDS signed electronically (must be “personally” signed), incorrect or incomplete Loan Servicing Agreement, improper fund control for construction loans, not having filed branch office locations with the CalBRE, using fictitious business names that have not been filed with the CalBRE, and unlicensed activities. Additionally, leaving lender/borrower/broker funds in the trust account for more than 25 days, not depositing trust checks within 3 days (or 1 day for escrow trust), or having more than $200 of broker funds in the account for bank fees are common violations.

If you recognize yourself in any of the above, take care of it right away. If you don’t know how, ask or do the research. You worked hard for that license … let us help you keep it!

Pam Strickland is a licensed broker and consultant who strives to help brokers and companies stay in compliance and pass a CalBRE audit. She can be reached at pam@pamstrickland.com.