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An Audit Report on the Department of Savings and Mortgage Lending

August 2009

Report Number 09-049

Overall Conclusion

Due to limitations on the scope of this audit, the State Auditor's Office was unable to determine whether the Department of Savings and Mortgage Lending (Department) is meeting its responsibilities under all applicable statutes, administrative rules, and agency policy. Although auditors performed a limited review of the Department's policies and procedures for examinations and monitoring of state-chartered savings banks and savings and loan associations, it was not possible to determine (1) whether the Department applied these policies and procedures or (2) whether these policies and procedures were effective.

Because the institutions the Department regulates are subject to Federal Deposit Insurance Corporation (FDIC) regulations, all evidence of the Department's examinations, enforcement, and many of its monitoring activities is restricted under federal regulations. Texas Government Code, Section 321.013(e), specifies that the State Auditor's Office may access this information only with the approval of the appropriate federal agency; however, the FDIC did not permit the State Auditor's Office to access this information. The denial of access to certain records limited the scope of the audit (see Appendix 2).

The Department conducts its examinations in conjunction with federal regulators and, as a result, the FDIC's Office of Inspector General may review some of the Department's examination work papers if the FDIC relied upon those as support for an FDIC report. However, the FDIC does not have any oversight authority over the Department.

The Department is a member of the American Council of State Savings Supervisors, a national professional association of state-chartered savings institution regulators. However, this association does not provide any form of oversight, accreditation, or peer review. In addition, effective September 1, 2009, the Department will become a self-directed and semi-independent agency under House Bill 2774 (81st Legislature, Regular Session). As a self-directed and semi-independent agency, the Department will have greater autonomy over its operations. The bill removed the Department from the legislative budgeting process, and its budget will be adopted and approved only by its policy-making div class="aboutText", the Finance Commission of Texas. The bill also requires the State Auditor's Office to contract with the Department to conduct financial and performance audits.

Although auditors were unable to determine whether the Department is meeting its statutory responsibilities, testing that auditors were able to perform identified the following issues:

- The Department does not always perform on-site examinations within the time frames specified on its examination schedule. At a minimum, 10 (26 percent) of the 38 examinations the Department performed between August 2005 and January 2009 did not have examinations performed in a timely manner. The average delay was 59 days.

- The Department does not have documentation supporting that it verified that the examiners it hires are commissioned by the FDIC, the federal Office of Thrift Supervision, or other qualified organizations. Individuals can assert that they are commissioned when they are hired, but the Department was unable to provide evidence that it verifies those assertions.

- The Department does not consistently rotate the examiners or the examiners in charge when it performs examinations of the institutions it regulates. Fifteen (75 percent) of 20 institutions were examined by the same examiners for at least three consecutive years.

- The Department should improve processes to ensure the independence of its examiners. In August 2008, the Department began requiring its examiners to sign an annual acknowledgment that they have read certain policies (including a conflict of interest policy and an outside employment and financial interests policy). However, disclosure of outside employment, business activities, relationships, or financial interests is entirely dependent on the employee.

Auditors communicated other, less significant issues to the Department separately in writing. Auditors also identified a weakness in information technology controls at the Department; however, to minimize the risks associated with disclosure, auditors communicated details regarding that weakness directly to the Department in writing.

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