Navigating the complexities of regulatory compliance in the mortgage industry can be daunting, especially when faced with an upcoming state examination. These examinations are not just routine checks; they are thorough reviews of your compliance practices, potentially exposing overlooked areas.
Understanding the examination process and preparing adequately can significantly alleviate stress and ensure a smooth experience. Let's dive into what you can expect and how best to prepare for a state examination, starting with a scenario you might find all too familiar.
The Unexpected Notification
Has this ever happened to you? You receive a letter from a state licensing agency and learn that your business will be the subject of a state examination in the coming months. Yay! This is not exactly unexpected, especially if you are a non-bank mortgage lender with dozens of state agency lending licenses.
It’s like driving down the road minding your own business when a law enforcement vehicle suddenly appears behind you. You start thinking, “OMG what did I do? Are my tags updated? Did I roll through that stop sign too fast? Yeah, that’s it. Ah, geez…”
All the preparation in the world cannot entirely eliminate that inevitable pit in your stomach as you wonder: “What requirement did I miss in that state?” Rest assured, such concerns are common in the mortgage industry—you're not alone.
Breaking Down the State Examination Process Step by Step
State exams are a case of “when,” not “if,” so you should always be ready. For fun, let's delve into the key aspects of the state examination process. Keep these steps in mind as you prepare.
1. Assessing the Initial Notification
First is the notification, which serves as your official alert that an examination is forthcoming. It's crucial to read this document carefully to determine whether an affirmative response is required.
If it is, respond promptly and accurately to set the right tone for the examination process.
2. Navigating Pre-Exam Documentation and Requests
After the initial notification, you'll receive a request for pre-examination documentation. This usually includes corporate information, relevant documents, and sometimes a request for a list of loans.
Following this, expect to submit specific loan files. It's crucial to organize these documents meticulously and ensure they're complete, as they form the basis of the examination's initial review.
3. Understanding the Examination and Exit Interview
The examination itself is the next crucial phase. Examiners will thoroughly review your submitted documentation and assess compliance practices.
Remember, an exam is not just an evaluation but a dynamic dialogue. Examiners often identify issues, and they expect you to discuss the facts and circumstances surrounding any potential findings.
This is your chance to clarify any misunderstandings, engage in meaningful discussions about your operations, and demonstrate how your processes effectively comply with regulations, addressing any concerns raised during the exam.
4. Finalizing the Official Exam Report
Once the examination concludes, you’ll receive the official final report detailing all exam findings.
Upon reviewing this report, you will be expected to provide a formal response outlining any corrective actions you plan to implement to address each finding. However, it’s important to be assertive when necessary.
If you disagree with any findings—perhaps due to a different interpretation of the law or a misunderstanding of your operations—it’s crucial to engage the examiner. Respectfully request their feedback to clarify any discrepancies.
You might find yourself in detailed discussions with the examiner to fully understand each point and negotiate appropriate remedial actions. These conversations are key to ensuring that both parties reach a mutual understanding of the issues and agree on the solutions.
5. Responding to the Report
Finally, the process culminates with your formal response to the state examiner. In this response, you will address each finding individually, outlining the corrective measures your institution plans to implement or, if applicable, providing a rationale to contest any findings.
Clarifying the Scope and Parameters of Your Examination
Now that the process is clear, let’s review some of the finer points.
The exam will look back a certain number of years, so keep that in mind when providing documentation and loan lists. All documentation should fall within the exam period as stated in the Notice of Examination––not outside of it.
Consider the license under which you are being examined. In some states, a lender may hold more than one license, so be sure that the documents and loan lists reflect only those that fall under that license.
Consider the reach of the license itself. For example, if the scope of the license does not cover commercial or business purpose loans, then it is unlikely that those loans will be subject to the examination.
Effective Strategies for Managing Examination Documentation
Assess document and information requests when you receive them and determine if you can reasonably provide them before the deadline indicated in the pre-examination letter.
If you can, proceed to meet that deadline. However, if you lack resources to gather the information because of your workload, or the request requires you to develop a special report your system cannot currently support, then consider requesting an extension.
Coordinate Your Team
It is best to notify management about the exam notification as soon as you receive it. It’s also a good idea to designate the internal team that will work on compiling the requested materials, loan lists, exhibits, etc.
Establish the team coordinator and primary point of contact with the examiners. This coordinator may be the compliance officer or someone compliance-adjacent, such as the licensing manager.
Ensure that the coordinator knows when they should direct an examiner’s question to another person in the company and can call on that person (or persons) to provide all resources necessary for the examiner to complete the exam.
Best Practices for On-Site Examination Preparation
For on-site exams, have the room and building access determined ahead of the examiner’s arrival.
Consider creating a spreadsheet to track requests and the response to each of those requests. Identify when and how the request was satisfied. Include a description or a link to a copy of the documents or information submitted to the examiner.
Use the examiner's secure method of file exchange. If none is provided, ensure your IT department has set up a safe method of transmission.
With any hard-copy documents, ensure they’re provided securely, retrieved, and secure at the end of each day. If providing system access, ensure IT provides proper read-only access, limited to the areas of the system applicable to the exam.
Interpreting and Responding to the Final Report
When engaging with the state examiner during the examination process, it is best to be concise and focus on their requests and dialogue. Examiners prefer to stay within the exam’s scope at all times. Offering information or documents that are outside the examiner’s intended scope is not recommended.
Receiving the final report and reading the official findings can be unsettling. Just remember that the findings are not the end of the world.
Even the most well-staffed, perfectly run operations will experience findings in most exams. It is crucial to review these findings carefully to ensure they accurately reflect relevant legal and regulatory requirements and to confirm that the evaluated practices truly represent your operation’s actions.
After all, examiners aren’t perfect, and it is possible that they have misapplied the law or regulation or applied them against acts and practices that do not reflect your operations.
Ensuring Full Post-Examination Compliance
When the exam is complete, the final report is issued with findings, and you have submitted your final response to those findings, it is not over.
Now you must ensure the remedial actions you promised to take actually happen. Review your policies and procedures and see if you should update them to reflect the remedial processes you committed to in your final response to the examination report.
It’s also a good idea to check in a few months later to see if the remedial processes are in place and solve the issues that triggered the finding.
Pro Tips for Smooth Examinations
Here are some additional pro tips to keep exam anxiety at bay:
Get ahead of the exam. Look at the state’s prior exams, understand the findings in those exams, and see if those have been resolved. If you find deficiencies in your operation while preparing for the exam, fix them immediately before the actual examination begins. Examiners look favorably on lenders who self-identify and resolve an issue without the examiner pointing it out to them.
Research industry examination trends. Using things like the CFPB’s Supervisory Highlights report and similar sources from other state and federal agencies, track which areas seem to be the “hot button” for examiners. Also, it might be good to create or find a group of similarly situated compliance professionals to compare notes and with whom to have open discussions. Recent trends include AML/BSA audits, cybersecurity, record retention (related to cybersecurity), and the Fair Credit Reporting Act (FCRA).
Stay confident during the exam. Examiners typically gauge the compliance strength of a company by how they respond to findings. If you can complete a remedial solution DURING the exam, examiners typically look very favorably on that.
Fix past problems quickly and reliably to avoid being flagged again. State examiners are not amused when they uncover a repeat finding. Repeated issues suggest to examiners that you may not take compliance seriously enough. This can result in stricter oversight and harsher consequences.
It’s not a witch hunt. They are not out to get you. State examinations are routine checks to ensure compliance with regulations, not targeted attacks on your business. Understanding this can reduce anxiety around the process and help you approach the exam focused on constructive compliance rather than defense.
When in doubt, ask the state examiner. Clear communication is vital in any regulatory process. If you're uncertain about any aspect of the examination, asking the examiner for clarification is the best course of action. This proactive approach can help prevent misunderstandings and ensure you meet all requirements.
Get Expert Exam Guidance from Loan Risk Advisors
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Don't navigate the intricacies of state examinations alone. Reach out to our team of dedicated compliance professionals who can provide personalized guidance and support every step of the way.
Contact us now to ensure your operations are up to standard and beyond reproach. Let's work together to turn regulatory challenges into opportunities for excellence.
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