State servicer examiners run trust account audits on a recurring cycle, and the procedure follows a consistent pattern across jurisdictions. The pattern below reflects the Conference of State Bank Supervisors examination framework as adopted by California, Texas, New York, Washington, and Florida — the five major private-lending states. A servicer who understands the pattern can pass any examination with no findings.

How does an examination engagement start?

The state regulator issues a pre-examination letter listing the request items: the trust account framework documentation, the most recent twelve months of reconciliations, the unapplied aging reports, the borrower complaint log, the external auditor report, and a list of authorized signers on the trust account. The servicer has fifteen to thirty business days to assemble the package. A servicer that misses the deadline starts the examination with an examiner who is already concerned.

What workpapers does the examiner pull first?

The examiner pulls three workpapers on day one. First, the written reconciliation procedure — confirming a procedure exists and names roles, cadence, and sign-offs. Second, the most recent month-end reconciliation worksheet — confirming the three-way tie holds. Third, the bank account agreement — confirming the account is titled as a trust account and the signers are limited to authorized personnel.

What is the bank statement walk?

The examiner selects a recent month and walks every credit on the bank statement back to a borrower sub-ledger entry, and every debit back to a borrower disbursement or note-holder remittance. A credit that does not trace to a borrower is a commingling indicator. A debit that does not trace to a disbursement is a control failure. The walk takes a full day per examined month.

What does the unapplied funds review uncover?

The examiner pulls the unapplied aging report and tests every item aged past thirty days. The test is binary: either the item has a documented disposition with a target close date, or it does not. The aged unapplied threshold varies by state examination manual. Above the line, the examiner expects a corrective action plan.

What goes into the borrower complaint analysis?

The examiner pulls the borrower complaint log and tests for complaints involving payment application, payoff discrepancies, or trust account balances. Each tested complaint is walked back to the underlying transaction. A pattern of trust-account complaints without documented resolutions is a finding category on its own — even when the underlying reconciliations tie.

What are the eight finding categories?

Across the five major lending states, the examination workpapers surface eight recurring finding categories. The list below is sequenced roughly by frequency.

1. Stale reconciling items. Outstanding checks or deposits in transit aged past policy thresholds without disposition.
2. Missing borrower sub-ledger. Control balance that does not decompose into individual borrower balances.
3. Aged unapplied funds. Items past ninety days without a documented owner and target close date.
4. Inadequate segregation of duties. One person controls posting, disbursing, and reconciling.
5. Commingling. Operating funds deposited to the trust account, even temporarily.
6. Missing reviewer sign-off. Reconciliations without independent reviewer signature.
7. No written procedure. Reconciliation performed without a current documented procedure.
8. Untrained personnel. Staff performing reconciliation without documented training or competency review.

What does a clean examination look like?

A servicer who passes with no findings produces three artifacts inside one business day: a current written procedure, twelve months of signed reconciliations with zero stale items, and an unapplied aging report with no item past sixty days. The examiner observes the daily cash discipline in action, tests the segregation of duties, and walks one month of the bank statement. The exit interview lasts an hour and produces no corrective action plan.

Frequently Asked Questions

What is the typical examination cycle length?

Eighteen months to four years, depending on state and on the servicer’s risk profile. A servicer with a prior finding sits on a shorter cycle until the corrective action plan closes formally.

What is the most-cited finding across states?

Stale reconciling items. The finding recurs in California DFPI, Texas SML, and Washington DFI examination workpapers as the single most frequent observation. Counsel a servicer to review the prior-month reconciliation reconciling-items log before signing the current-month reconciliation.

Does an external CPA review narrow the scope of a state examination?

Yes, in most states. An external review under AICPA agreed-upon-procedures lets the examiner rely on the CPA’s workpapers for the period covered, narrowing the on-site scope and shortening the engagement. Consult qualified counsel on how a specific state treats auditor reliance under its examination manual.

What is the consequence of a commingling finding?

A documented commingling event is a basis for license revocation in every state that licenses servicers. In some states it carries criminal exposure. A servicer who self-identifies and self-reports a near-miss before an examiner finds it is treated less severely than a servicer whose finding surfaces in the examination.

Sources

• Regulation X, 12 C.F.R. §1024.36 (information requests); §1024.38(c) (record retention). Consumer Financial Protection Bureau, Regulation X.
• California Financing Law, Cal. Fin. Code §22000 et seq. California Department of Financial Protection and Innovation.
• Texas Administrative Code, 7 TAC Chapter 80 (Mortgage Servicer Registration). Texas Department of Savings and Mortgage Lending.
• 3 NYCRR Part 419 (Mortgage Servicer Business Conduct Rule). New York Department of Financial Services.
• Washington Consumer Loan Act, RCW 31.04. Washington Department of Financial Institutions.
• Conference of State Bank Supervisors — examiner workpaper templates. Conference of State Bank Supervisors.
• AICPA Audit Guide — Depository and Lending Institutions. American Institute of CPAs.

Related Topics

• Trust Account Reconciliation Essentials for Note Servicers
• Impound and Escrow Account Basics for Private Mortgage Lenders
• Creating Repeat Deal Flow: How Servicing Builds the Pipeline
• Borrower Workout Paths That Preserve Value
• Usury and State-Level Rules: A Private Lender’s Compliance Guide
• Selling Notes: Pricing and Yield for Private Lenders and Sellers