A private lender vetting or auditing a servicer can establish the quality of its trust account framework from ten questions. If each answer comes with documentation in hand, the controls are sound. If answers stall or arrive without proof, the environment is not ready to hold your capital. Consult qualified counsel 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. An incomplete or outdated license list is a structural warning, not a paperwork gap.

When was the most recent state examination?

The examination date and outcome — passed, corrective action plan in progress, finding closed — tell the lender whether the servicer is operating inside the state’s expectations. A corrective action plan in progress is not an automatic disqualifier, but the plan should be transparent, the close date defined, and the finding’s scope disclosed without prompting. A servicer who cannot produce examination history is not ready for the relationship.

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

This is the single best test a lender can run. A servicer with proper controls produces the signed reconciliation, the bank statement, the trial balance, and the disposition log inside one business day. A servicer who cannot deliver those four documents — or who delivers them without signatures, without disposition notes, or with reconciling items that have been open for months — does not have the control framework the lender needs. The control either exists and is documented, or it does not.

Who reviews the reconciliation?

The reviewer must be independent of cash posting and disbursements. Ask for the org chart showing the reviewer’s reporting line and for signed reconciliations from the prior three months. A small servicer who uses an external part-time reviewer qualifies — independence is the test, not headcount. A reviewer who also processes payments is a conflict the state examiner will flag at the next examination.

What is the policy for unapplied funds past thirty days?

The policy should name the resolver, the cadence of review, and the escalation threshold. 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. A servicer without a written policy is running this function on institutional memory, which does not survive turnover or a state examination.

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 held at different institutions with separate signing authorities and 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 one bad day away from a finding — and the lender whose capital is in the account bears the exposure.

Expert Take

The commingling question separates servicers who have built the control environment from servicers who are managing around the absence of one. A trust account at a separate institution with separate signatories is structural protection. A policy document promising not to commingle is not. Ask to see the bank account agreement — the account title, the signing authorities, and the depository — not the policy manual.

Who is the external auditor?

The answer should name a licensed CPA firm engaged annually, producing either a financial statement audit, a SOC report, or an agreed-upon-procedures engagement scoped specifically to the trust account framework. Ask for the most recent report and confirm the engagement covers trust account procedures — not only the servicer’s general financials. An auditor who has not examined the trust account framework has not tested what matters to the lender.

What is the daily cash discipline?

Receipts batched and deposited each business day. Prior-day deposits confirmed at the bank. NSF returns posted on receipt. Unapplied items logged within twenty-four hours of identification. A servicer who batches receipts weekly or clears bank-side activity less than daily has a control gap that surfaces in state examinations — and often in the lender’s monthly report before that.

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 every state where the servicer holds a license. The lender should be able to request any specific month’s reconciliation and receive it inside one business day regardless of how far back the request goes. A servicer who cannot retrieve older records has not maintained them — the archive is the proof, not the promise.

What metrics appear in the monthly lender servicing report?

Three-way tie status, count of reconciling items past the policy threshold, aged unapplied balance, total trust account balance, escrow analysis exceptions, and any reportable borrower complaints. These metrics belong on the standard monthly report without the lender having to ask. A servicer who produces them only on request has not operationalized the reporting — the lender ends up performing the servicer’s quality control function, which is the arrangement in reverse.

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.

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