Page 40 Summer 2019 Points of Interest Mortgage Industry Information, Opinions & Tips am actually sitting with the DRE auditor as I type this column (she can’t see my screen)andI’mgoingtotrytogiveyoua play-by-playoftheviolationssheisfinding and the citations she is citing. Hold on, it isn’t going to be pretty, unfortunately. First and foremost, she has now spent three (3!) days trying to reconcile the trust accountthatwasalreadyreconciledbythe broker’sCPA. Tomakemattersworse,there was bank fraud from outside hackers and a change of banks (the original bank was acquiredbyanotherbank)duringtheaudit period. Everyadjustmentthatwasmadeby theCPAtoaccountforthesetwoeventshas been questioned by the auditor to make sure they adhered to DRE requirements (and, unfortunately, some of the ways the CPA made the adjustments met generally accepted accounting requirements but not the DRE’s strict requirements for trust accounting). Even though the CPA showed the trust account as IN BALANCE, the auditor is insisting that the account is $5,000short. Thisstillhasn’tbeenresolved, but we are working fervently to show her that it isn’t short. The confusion and perceived shortage was caused by the unfortunate timing of the changed banks and hackers, which makes it hard to show the DRE the absolute linear paper trail that they demand. Next,shestartedworkingonspecificloans (chosen at random) and asked the broker to choose a construction loan for her to The Horror of a Hard-Money Audit review (which is unusual, since the auditor usually picks the loans to review, but since this is a “routine” audit as opposed to an investigative/complaint driven audit, she let the broker choose the construction loan and she chose the rest from the list of paid off loans from the last year). After discussing with the broker in his office with the door closed and the auditor not in attendance the fact that a DRE broker cannot originate a construction loan with a principal amount of over $2,500,000 (until and unless the pending legislation is approved to raise that limit), we began to reviewhisconstructionloansclosedduring the audit period. Fortunately, this broker was well aware of the $2,500,000 limit and noneofhisconstructionloansviolatedthat provision of the law (as you can imagine, there are brokers I have encountered who are unaware of the limitation). Once we provided a copy of the construction loan, the first thing she noticedwasthattherewasnofundcontrol company holding the construction funds, but that the broker had opened a single usetrustaccountfortheholdback. Itwasa multi-lenderloanandtheruleisthatthere isnothresholdforholdbackinthebroker’s trust account (single use or otherwise) for anyamountofholdback(eventhoughona single-bene loan the broker can hold back upto$100,000). Thefundcontrolcompany handled the inspections and approved the draws, but the broker controlled the funds. This is a big hurdle that we are still trying to get over. She noted that there were rollovers from the investors into this loan, even though there was nothing in writing from the investors to allow the broker to hold the funds from a paid off loan to roll into this loan AND the fact that no rollovers are allowed on multi-lender loans. The only time an investor’s money can be held past the 25 days by regulation is in the case of a single investor who wants to roll over their payoff into another loan that is identified in writing (loan amount and property address). The new bank that the trust accounts are now held in has Analysis Accounts, which means that bank fees are offset by the depositsintheaccount(eithereliminating orreducingthechargestothebroker). This isallowed,aslongasthereisadisclosurein writingsignedbyeachinvestororincluded intheloanservicingagreementdisclosing thefactthatthebrokerreceivesthisbenefit from the bank. She asked for proof of this disclosure, which we provided. She asked for copies of the signature cards for the full audit period (18 months) for all bank accounts from both banks. Luckily,theirbankprovidedthese,asmost banks DO NOT agree to provide copies of signature cards. This creates a problem,