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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2007

I Will Survive This Audit

Learn five tips for how to respond when a banking-department examiner comes knocking

Imagine this scenario: The banking department sends you a letter that says it will be examining your books and records. You’ve never been through an audit before and don’t know what to expect or how to prepare.

Here are five tips to help you survive the audit:

1. Appoint one person in your company to be the point person for the audit. This person should have the authority to get personnel to respond to requests for books, records and borrower files. The point person also should be senior enough to know everything about the company’s finances.

2. Hire outside experts to help. These can including a lawyer who understands mortgage-industry compliance issues and a quality-control expert for borrower files. They will know what information is needed and whether your quality-control program complies with state statutes and regulations.

The lawyer should also have expertise in mortgage licensing, state laws about advertising, unfair practices, Real Estate Settlement Procedures Act issues and financial compliance. The quality-control expert should review your written procedures and borrower files.

3. Assemble the requested documentation in advance. You typically will have two weeks from the time you are notified about the audit until the day the examiner comes. The exception is the surprise audit, which typically occurs when there is a suspected violation of the state’s laws or regulations.

To prepare, your point person should ensure that the company complies with state and federal mortgage laws. This will include checking individual borrower files to ensure that all required disclosures are signed, that the proper denial letters are in the declined files and that any required application logs and disbursement journals are maintained.

The point person also should review the company’s financial statements to ensure that they are the same versions as those submitted to the banking department. The statements should show that the company has the required minimum net worth.

4. Ensure that the point person, lawyer and quality-control expert are available to answer the examiner’s questions on the day of the audit. If your office is in the same state as the banking department, the audit likely will occur at your office. If you have multiple state licenses, you may be asked to ship the files to the banking department. Some states’ examiners, however, will travel to your office and bill you for the time it takes to conduct the audit plus the examiner’s travel expenses. You don’t get to choose.

If the audit is in your office, the examiner likely will need a room with a telephone and access to a copier. The examiner will work alone but likely will have questions for the point person during the audit. If the point person doesn’t know the answer to a question, the lawyer or quality-control expert should be contacted.

5. Have the point person take written notes when receiving the exit report. When examiners finish the audit, they will have an exit interview with the point person. The point person should keep written notes about everything that the examiner says about the audit, including the day and time of the audit and the examiner’s name.

The banking department will send a written report of the examiner’s audit. The point person should ensure that the examination report matches the notes taken during the exit interview. If the examination report contains deficiencies, the point person should contact the banking department for more details.

The first audit your company undergoes is the most nerve-wracking because you don’t know what to expect. When you are prepared, however, you can feel more secure that you will pass with flying colors.


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