Mortgage Industry Information, Opinion & Tips
DRE Audits and You: Part 1
What Triggers It, What Happens Next
You receive the call from a DRE auditor or a letter from a Special Investigator, and after your heart rate returns to something that approximates normal, you start wondering: “Why me? What caused this? Now what?”
There are several things that can cause a DRE audit or a visit/letter from a Special Investigator. The most likely is a complaint from a member of the public. That public consists of borrowers, past employees, competitors, lenders, investors, appraisers … you get the picture here: anyone who knows you or knows about your company. Another trigger can come from the fact that your threshold reports (quarterly or annual) are filed late, filed incorrectly, or include negatives or suspicious looking activities. When the reports are reviewed by the Mortgage Loan Activities section and potential problems are found (or their letters to you regarding incomplete or absent filings are ignored), you can expect a call from the auditor to follow. In my experience, the chance of getting a “random” audit without a triggering complaint is unlikely.
Of course, you want to know “Who ratted me out?” You may never know. The auditor often has no idea where the complaint originated and, if he or she does know, they don’t have to tell you. Sometimes you will instinctively know, and other times you will discover the reason just from the questions that are asked or the files that are chosen. If the audit results in an accusation, your attorney will find out through the discovery phase. But, at the end of the day, it really doesn’t matter where it came from … you still have to go through the process!
If the Department determines that a Special Investigator should take a look at your operations prior to or instead of sending in an auditor, the visit is referred to as a “Broker Office Survey.” The Special Investigator (or Investigators, since sometimes up to four will come together!) will visit your office, ask questions about your operation, and review transaction files, salesperson contracts and trust account information (not a full-blown audit, more like a simple review to look for irregularities). The Special Investigator will likely ask for specific information about a particular transaction and may ask for your affidavit explaining the circumstances of the transaction. An office visit such as this is usually a few hours at most. This can end in a Corrective Action Letter (CAL), a Cite and Fine or even lead to an accusation, but it can also end in the Special Investigator shaking your hand and thanking you for your time and cooperation and that’s the end of that.
If, however, the appointment is made by an auditor, you should expect a complete routine or investigative audit. This is hardly ever a one-day visit, and can actually take many days over several weeks or even months. I recall one Northern California audit that started in August and ended in December (well, it was the same year, fortunately!). At the hearing in front of the Administrative Law Judge (ALJ) many months later and after the accusation was filed, the attorney for the broker who was the subject of this audit cross-examined the DRE auditor on the stand and said “Sir, you were in my client’s office from August to December. You listed 13 items that he did wrong. Surely, during that time, you found hundreds of things that he was doing right. Where are those listed?” Without missing a beat, the auditor said “I wasn’t there to find what he was doing right, I was there to find what he was doing wrong.” Ouch.
The auditor checks salesperson and broker-associate contracts, commission agreements, supervision policies and procedures, transaction files, bank signature cards, bank statements, bank reconciliations, and asks question after question about your company, its ownership and business practices.
In future columns, I will go into each part of the audit process in more detail. Stay tuned.
Pam Strickland is a compliance consultant who helps DRE brokers prepare for and survive DRE audits and office surveys. She can be reached at firstname.lastname@example.org.