The three-way reconciliation is the discipline that proves a servicer’s trust account is whole. The procedure below is a twelve-step framework that every operations team should run monthly, with a daily cash-movement sub-procedure layered on top. A reviewer who is independent of cash posting signs off on each completed reconciliation.

Step 1 — Pull the depository month-end statement

Download or retrieve the trust account statement for the period being reconciled. The statement is the system of record for the bank-side balance. Confirm the account number on the statement matches the trust account designation in the servicer’s general ledger.

Step 2 — Adjust the bank balance for outstanding items

Identify outstanding checks — those issued but not yet cleared — and deposits in transit — those recorded but not yet credited. Compute the adjusted bank balance: statement balance, less outstanding checks, plus deposits in transit, plus or minus any bank-side error or correction.

Step 3 — Pull the trust ledger control balance

From the servicer’s general ledger, extract the control account balance for the trust fund as of the same cutoff date. The control balance is the sum of every receipt and disbursement posted to the trust fund through the month-end close.

Step 4 — Run the sub-ledger trial balance

Generate a trial balance report from the loan servicing system that lists every loan record and its unapplied, escrow, and suspense balance. Sum the trial balance to a control total. The control total is the third number in the three-way tie.

Step 5 — Compare the three numbers

Lay the adjusted bank balance, the trust ledger control balance, and the sub-ledger trial balance total on a single tie-out worksheet. When the three agree to the penny, proceed to documentation. When any one of them disagrees, proceed to gap analysis.

Step 6 — Diagnose the gap by pair

A bank-vs-ledger gap signals a posting error or a timing item. A ledger-vs-sub-ledger gap signals an unposted borrower-level entry. A bank-vs-sub-ledger gap with a clean control ledger signals a journal entry without an offsetting borrower posting — the commingling signature. The pair that disagrees points at the category of error.

Step 7 — Trace the gap to a transaction

Walk the prior-month reconciling items, the current-month journal entries, and the current-month cash receipts and disbursements until a specific transaction explains the gap. Document the transaction reference, the date, and the dollar amount.

Step 8 — Correct the error at the point of origin

Post the correcting entry at the level where the error originated — borrower sub-ledger, control account, or bank reconciliation. Re-run the tie-out worksheet. When the three numbers now agree, document the correction. When they still do not, return to Step 6.

Step 9 — Document reconciling items with disposition

Every reconciling item — outstanding check, deposit in transit, timing difference — is logged on the reconciliation worksheet with an item reference, an age, and a disposition note. Items aged past the policy threshold are assigned to a named resolver with a target close date.

Step 10 — Capture preparer signature and date

The preparer signs and dates the completed reconciliation worksheet. The signature certifies that the procedure was followed, the gap was either zero or resolved, and the reconciling items were captured.

Step 11 — Independent reviewer signature

A reviewer who is independent of cash posting and disbursements reviews the worksheet, examines the supporting documentation, and signs and dates. The reviewer’s signature is the second control — without it the reconciliation is incomplete.

Step 12 — Archive and report

The signed reconciliation, the supporting worksheets, the bank statement, the trial balance, and the disposition log are archived in the servicer’s document repository with retention set to the longest applicable state requirement. A summary metric — three-way ties, reconciling items count, aged unapplied balance — is included in the monthly lender servicing report.

Frequently Asked Questions

How long should the procedure take each month?

A well-run small servicer completes the twelve-step reconciliation in one to three business days for a portfolio under five thousand loans. The reviewer sign-off adds a half-day. Reconciliations that drag past two weeks signal that the daily cash discipline has gaps.

What tools support the procedure?

Most loan servicing systems produce the trial balance report natively. A general-ledger system produces the control balance. A spreadsheet workbook ties the three numbers together. Larger servicers run a dedicated reconciliation platform; smaller servicers run the workbook with a documented template.

What happens when the three numbers do not tie at month-end close?

The operations team does not move to other workstreams until the gap is found and explained. State examiners treat an unresolved month-end gap as a material control failure regardless of dollar amount.

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