From the Field - Common Exam Findings

The following are some of the common violations our exam teams in each industry found during examinations in the last quarter:

MSB Programs
Mortgage Originations – Mortgage Broker
Mortgage Originations – Consumer Loan
Mortgage Servicing
Escrow Agent

MSB Programs

Tangible Net Worth – Examiners cited increased failures to maintain sufficient tangible net worth. Licensees must maintain tangible net worth in amounts required under RCW 19.230.060 and WAC 208-690-060. RCW 19.230.010(28) defines tangible net worth as “the physical worth of a licensee, calculated by taking a licensee's assets and subtracting its liabilities and its intangible assets, such as copyrights, patents, intellectual property, and goodwill”.

Permissible Investments – Examiners cited continued failures to prepare monthly reports about permissible investments (PI). Licensees must prepare monthly reports about PI that include the calculation of average daily transmission liability (ADTL) as required under RCW 19.230.170(c) and WAC 208-690-085. Licensees must prepare and maintain monthly PI reports in order to demonstrate adequate PI as required under RCW 19.230.200 and RCW 19.230.210. The Department provides model PI and ADTL forms for licensees’ use on the agency’s website.

(Note: Washington licensees must prepare and maintain monthly PI reports in addition to quarterly PI reports required by the NMLS Money Services Business Call Reports.)

Registration of Money Services Business – Examiners cited continued failures to timely re-register, or renew registrations with the Financial Crimes Enforcement Network (FinCEN). Licensees must maintain registration with FinCEN as required under WAC 208 690-210 and 31 CFR 1022.380.

Information Security Programs – Examiners cited continued failures to develop, implement, and maintain adequate written information security (IS) programs as required under WAC 208-690-240 and 208-690-250. Licensees must maintain IS programs appropriate to the company’s operations to protect electronic systems and the information stored. WAC 208-690-250 requires IS programs to meet the requirements of the federal Safeguards Rule implementing the Gramm-Leach-Bliley Act under 16 CFR 314.

Documentation of Management Oversight – Examiners noted several incidents of licensees not preparing or maintaining documentation of management’s oversight and decision making. This documentation includes, but may not be limited to; board of directors meeting minutes, corrective action plans, and management succession plans. This information provides the Department insight into the safety and soundness of a licensee’s business operations. The Department conducts examinations and investigations to discover regulatory violations of statute and unsafe and unsound practices under RCW 19.230.130. Therefore, licensees are encouraged to maintain thorough documentation of management’s oversight to validate regulatory compliance and safe and sound operations.

Mortgage Originations – Mortgage Broker

Mortgage Broker examinations during the second quarter of 2020 continue to reveal the same common violations including failure to develop a compliant AML program, failure to provide updated rate lock agreements for extensions, and the below items:

Mortgage Call Report - Even though the Department allowed an extra 30 days to file Mortgage Call Reports there continue to be late filers, and the numbers reported continue to show inaccuracies. Licensees should assign this reporting to someone who is detail oriented, and have a second person review the call report before filing.

Loan Officer Compensation Plans - Examiners are seeing compensation plans that pay the loan originator a percentage of the broker compensation, which is a term of the loan and not allowed by Regulation Z. Loan officers are allowed to be paid a percentage of the loan amount. Brokers may receive varying compensation levels with their respective wholesale lenders. Paying the loan originator a percentage of compensation provides an incentive to steer borrowers to the wholesale lender paying the most broker compensation. In many cases the lender paying the highest compensation will not be the most advantageous lender for the borrower. Mortgage Brokers have a fiduciary relationship with the borrower per RCW 19.146.095, which means you must act in the best interests of the borrower.

One violation that is not common appeared during the second quarter – providing falsified borrower disclosures to the Department. Not providing a required disclosure is a violation but will not, in and of itself, lead to enforcement actions, unless there is a history of repeat violations.

Providing a falsified document is a serious violation that undermines the foundation of a licensees’ ability to conduct business (see RCW 19.146.005). This violation is always referred to enforcement. It may cause fines and penalties and even lead to license revocation.

Mortgage Originations – Consumer Loans

Licensing Processing and Underwriting Supervisors - Any manager who is the day-to-day operational supervisor of loan processors or underwriters must hold a license. The license can be from any state. Examiners continue to identify day-to-day supervisors of underwriters and process that do not hold a loan originator license.

Develop Supervisory Plans - WAC 208-620-301(6) requires that licensed managers must prepare and maintain written supervisory plans for the employees they supervise. Plans must include the number of employees supervised, their physical locations, how the supervisor will adequately supervise employees not in the same location as the supervisor, and the type and volume of work performed by the supervised employees. Examiners routinely identify plans that do not contain all required elements.

Maintain Records - WAC 208-620-520 requires licensees to maintain records for a minimum of three years after making the final entry, or the period of time required by federal law. Examiners routinely identify documents and disclosures missing from loan files that should be maintained as part of the record.

Mortgage Loan Servicing

There are no common mortgage servicing violations in the second quarter besides failure to file an accurate annual assessment. Examiners are just beginning to look at the 2019 annual reports filed earlier this year, and hope accuracy has improved.

One interesting wrinkle we discovered was “interim servicing.” This is when a lender intends to sell a mortgage servicing released but boards the loan to their servicing system until it is sold. Usually the lender/servicer will collect one or less payments before the loan is sold and another entity begins long-term servicing. Interim servicing is not reportable to the Department as “servicing.” Rather it is reportable as in the “portfolio.” We have added a column to the examination list of servicing files to capture servicing retained versus servicing released.

Escrow Agent

Escrow agents continue to exhibit satisfactory overall compliance. The most common violations in the second quarter of 2020 remain the same as the first quarter of 2020.

Settlement Statement Procedures - Examinations revealed clerical errors on lender prepared Closing Disclosures, most commonly identifying the escrow fee as being paid to a title company. Though the Closing Disclosure is the lender’s responsibility, the best practice for escrow agents is to notify the lender of any errors on their Closing Disclosures.

Update Information Security Program - WAC 208-680-532 provides the minimum standards for an Information Security Program, including that it be evaluated for possible updates at least annually. Even if the annual risk assessment does not lead to changes, it must be documented in the agent’s books and records.

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