A private lender selecting a servicer — or auditing the servicer already on the relationship — needs ten questions answered before signing or renewing. The answers below match what NSC produces in a vetting conversation. A servicer who cannot answer with documentation in hand is not ready to hold a lender’s capital. Consult qualified counsel on state-specific licensing and trust account requirements before changing any servicing arrangement.

What state licenses does the servicer hold?

State servicer-license rules drive the trust account framework. A servicer should list every state where it holds a license — California Finance Lender, Texas Mortgage Servicer Registration, New York Part 419, Washington Consumer Loan Act, Florida Chapter 494, and parallels in other states — with the license number and the most recent examination date for each.

When was the most recent state examination?

The examination date and the examination outcome — passed, corrective action plan in flight, finding closed — tell the lender whether the servicer is operating inside the state’s expectations. A servicer in the middle of a corrective action plan is not a disqualifier, but the plan should be transparent and the close date defined.

Can the servicer produce last month’s three-way reconciliation?

The single best test a lender can run. A real servicer produces the signed reconciliation, the bank statement, the trial balance, and the disposition log inside one business day. A servicer who cannot produce them — or who produces them without signatures, without disposition notes, or with stale reconciling items — does not have the control framework the lender needs.

Who reviews the reconciliation?

The reviewer must be independent of cash posting and disbursements. The lender should ask for the org chart that shows the reviewer’s reporting line, and for sample signed reconciliations from the prior three months. A small servicer who uses an external part-time reviewer counts — independence is the test, not headcount.

What is the policy for unapplied funds past thirty days?

The policy should name the resolver, the cadence of review, and the threshold for escalation. The lender should ask for the current unapplied aging report — count of items past thirty days, sixty days, and ninety days — and for the disposition log showing how prior aged items were closed.

How does the servicer handle commingling near-misses?

The right answer is that the servicer has zero near-misses because the operating account and the trust account are at different signing authorities, with funds-flow controls that prevent crossing. The wrong answer is “we caught it before the state did.” A servicer with a commingling near-miss history is a servicer one bad day away from a finding.

Who is the external auditor?

A licensed CPA firm engaged on an annual basis, producing either a financial statement audit, a SOC report, or an agreed-upon-procedures engagement scoped to the trust account framework. The lender should ask for the most recent report and confirm the engagement covers trust account procedures specifically, not the servicer’s financials only.

What is the daily cash discipline?

Receipts batched and deposited each business day, prior-day deposits cleared at the bank, NSF returns posted on receipt, unapplied items logged within twenty-four hours of identification. A servicer who batches receipts weekly or who clears bank-side activity less than daily has a control gap that surfaces in the next examination.

How are reconciliations archived?

A signed reconciliation worksheet, the source bank statement, the trial balance, and the disposition log are archived together for the longest retention period required across the states the servicer holds licenses in. The lender should be able to request a specific month’s reconciliation and receive it inside one business day, indefinitely.

What metrics appear in the monthly lender servicing report?

Three-way tie status, count of reconciling items past policy threshold, aged unapplied balance, total trust account balance, escrow analysis exceptions, and any reportable borrower complaints. The lender should not have to ask for these metrics — they should appear on the standard monthly report.

Frequently Asked Questions

What is the single fastest red flag to spot?

A servicer who cannot produce last month’s signed three-way reconciliation inside one business day. The control either exists and is documented, or it does not. There is no middle ground.

Should a lender request the bank account agreement?

Yes. The account must be titled as a trust or fiduciary account, the signing authorities should be limited and named, and the depository should be a federally insured institution. The agreement is one-page evidence the account is set up correctly.

How does a lender verify ongoing compliance after transfer?

The monthly servicing report should surface the three-way tie status and any examination activity. The lender retains the right under the servicing agreement to request reconciliations on demand. Annual review of the external auditor report — and any state examination summaries the servicer is permitted to share — closes the loop.

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