The Minefields of DRE Audits

By Pamela J. Strickland
California Compliance Consulting

The last few months and even the last year has seen a dramatic increase in the number of audits and office surveys conducted by the DRE. BC (before COVID) the auditors would make an appointment to visit an office, spend a day or two or three in the broker’s office, and go back to their office to write their reports. AC (after COVID), they are working remotely so they can be working on multiple audits simultaneously from their home or their office, via e-mail and conference calls, no travel required. Therefore, they can call out for a lot more audits than previously. I have had up to 3 clients a day called by the same auditor scheduling an audit to
begin within days. No more delaying, no more excuses asking that the auditor come in at a later date. Call, letter, conference call, e-mails and this show is on the road!

Also, there have been more mortgage and servicing companies audited in the last year than has been my usual experience. For the last few years the DRE has been focusing on property management companies, but now they are calling audits on all sorts of licensed activities. Also, there has been a big uptick in broker-controlled escrows being audited.

The following violations are frequently cited by the auditors and you should carefully review your operations to make sure you aren’t making the same mistakes:

  • Delinquent quarterly or annual reports (guaranteed to result in an audit!)
  • Broker of Record/Designated Officer not a signer on the trust account
  • Unlicensed (or not licensed to your company) or unbonded signers on trust account
  • Trust account not properly designated as a trust account
  • Trust account not reconciled
  • Incomplete records for trust accounting
  • Shortages/overages in trust account
  • Rollover of investment on multi-lender loans (allowable on single beneficiary but not on multi-lender)
  • Failure to assign a portion of the note to each property proportionally in cross-collateralized loan
  • Failure to provide proper disclosures (i.e. MLDS, LPDS)
  • Failure to provide complete disclosures (i.e. lack of DRE numbers on CA Addendum to LE)
  • Failure to obtain signatures on disclosures
  • Failure to display DRE number on webpages, business cards, advertising, etc.
  • Incorrect disclosure of regulator (i.e. DFPI vs DRE on Fair Lending Notice)
  • Secret profit/hidden compensation (i.e. not disclosing Analysis Fees on trust accounts or not disclosing points/mileage on credit cards used to purchase reimbursable client expenditures)
  • Incomplete disclosure of broker’s ownership interest in affiliates
  • Inaccurate or incomplete disclosure of broker’s interest in broker-controlled escrow
  • Use of fictitious business names without filing with county/DRE (any variation whatsoever of the licensed name must be filed as a dba prior to use)
  • Failure to file branch office addresses with the DRE
  • Failure to maintain current main office address with the DRE
  • Allowing DRE license to lapse/expire
  • Failure to register Broker-Associates
  • Lack of licensee agreements with Salespersons or Broker-Associates (this is often cited because the broker of record does not have an agreement with his/her licensed spouse)
  • Lack of written office procedures/policies
  • Lack of system to maintain office procedures/policies
  • Incompetent/Insufficient broker supervision (which causes most of the problems cited above)

And, in addition to the aforementioned violations, recently the regulators have been citing licensees for cheating on continuing education classes. This is a very, very serious violation and can lead to extreme fines and penalties. Take the dang classes yourself, don’t cut corners, and learn something in the process!

Pam Strickland is a compliance consultant who does her best to keep brokers out of trouble with the regulators. Knowledge is power and she tries to teach brokers what they need to know. She can be reached via e-mail at pam@pamstrickland.com
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