Mortgage Industry Information, Opinions & Tips

DRE Audits and You: Part 2
What to Expect on the First Day

First day, you say? Doesn’t an audit take just ONE day? Well, no, not by a long shot. Unlike typical DRE audits in past years, it will probably take anywhere from three days to several weeks. As I’ve written before, some audits can take months to complete. DRE supervisors now encourage auditors to spend more time “in the field” and the number of days auditors spend in brokers’ offices has increased substantially over the years. An auditor generally isn’t in your office every single day, but having both the opening interview and the exit interview held on the same day is extremely rare.

The first step is the opening interview during which the auditor goes over a worksheet of questions that the broker will be asked to answer. The broker doesn’t need to be alone with the auditor, by the way, and can request the presence of staff or an outside counsel or consultant. Questions on the worksheet include the type of business conducted by the broker/ corporation, the ownership of the business, and the volume of business closed in the last 12 months. This group of questions gives the auditor a snapshot view of the business and helps him/her determine the scope of the audit.

There will be an exchange of business cards between the broker and the auditor and the auditor will check to see if the broker’s DRE license number (and NMLS number, if applicable) is on the card. He/she will also check to see that the number(s) are no smaller than the smallest font used on the  rest of the card. It is important that the Broker of Record has a business card and that any non-licensed employees do not have titles or DRE numbers on cards which imply that they may be doing work which requires a license. It is also important to make sure that the company name and address match those filed with the DRE.

At this time the auditor will ask if there are any trust accounts being used by the company. If so, the auditor will want to see a certified copy of the signature card(s) for the trust account(s). He/she will check to see that the account is in the name of the broker (corporation or dba), is in a California chartered bank, is non-interest bearing and a non-analysis account (or if it is an analysis account, that is fully disclosed to the investor/borrower), is designated as a Trust Account, and that the Designated Officer/ Broker of Record is a signer on the account as “broker, as trustee.” Any other signers on the trust account must be either licensed by the DRE as a Salesperson or a Broker-Associate under contract to the broker or an employee of the broker who has an acceptable fidelity bond in the maximum amount of monies held in the account at any time. These additional signers must also have a written agreement with the broker allowing them to sign on the trust account.

Next, the auditor will ask for all contracts with Salespersons or Broker-Associates working for the broker/corporation (note that the broker is no longer required to keep copies of agents’ licenses). For either a Salesperson or a Broker-Associate, the original contract/commission agreement must also be retained at the main office. It is important to note that these contracts and commission agreements must be personally signed by both the Designated Officer/Broker and the individual Salesperson or Broker-Associate.

The auditor will request a log of transactions that closed during the period of the audit (which could be 6 months to 3 years, with 1 year being the most common). He/she will choose the transaction files for review.

The review could consist of any number of files and I’ve seen from 5 to 60 chosen, depending on the size of the company and the scope of the audit.

And, lastly, but by far most importantly, the auditor will review the Trust Account(s). This generally takes the majority of the auditor’s time, not only during his/her time at the broker’s office but can also require additional work by the auditor back at the DRE’s offices. In the next column, we will delve further into trust account audit details.

Pam Strickland is a compliance consultant who helps DRE brokers prepare for and survive DRE audits and office surveys. She can be reached at pam@pamstrickland.com.