Examinations (also known as Audits)

You get a letter out of the blue from the state Banking Department. They are coming in about 2-3 weeks to review your books, records and files. What do you do?

Most of my clients first panic. An examination seems to trigger the same reaction as a tax audit. Most people who receive a notice of a tax audit call their accountant. Most of the mortgage brokers/lenders out there never call for help. They figure they will muddle through it. And sometimes they do. But, sometimes the examination costs them serious dollars.

The letter announcing the examination is accompanied by a list of the books and records that they want to examine and a questionnaire to be answered. A point person should be designated for the examination. This person should be someone who is familiar with all aspects of the licensee and familiar with the laws and regulations of the state that is conducting the examination. At this point, outside help should be retained to assist and give expert advice with respect to how to get through an examination. The books and records to be examined should be retrieved from storage immediately and reviewed by the point person. Typically, the examination will look at closed borrower files, files in your pipeline, and files from borrowers that have had their applications denied. All of the files to be examined should have all of the required documents with the appropriate signatures in them. The point person should also collect the company books and records that will be examined and review them in advance to ensure that there are no surprises. If the state requires a minimum net worth, make sure that all financial statements show the required net worth. If the examination requires proof of surety or fidelity bonds, make sure you have your copies in your files and in full force and effect. Have the questionnaire completed well in advance of the examination and if you have retained expert help, have them review the questionnaire before you give it to the examiner.

The examination could take place in your office or in the banking department’s office, with you sending them the files. It will take a few days for the examiner to review all of the books and records that were requested. The point person must make himself/herself available to answer follow-up questions or provide more documentation, if requested.

Make sure the point person and the principal of the company attend the exit interview when the examination is complete. Take notes of what was said and keep the notes. You will be receiving a written report of the results of the examination. Sometimes the findings in the written report differ from the oral exit interview. That is when your notes from the exit interview could be very important. If the examiner found problems with your books and records, you must make the changes that are required. And you must indicate to the banking department that the problems that were found will never happen again.