Mortgage Broker Bonds: Arizona

Last time, we reviewed one of the most difficult states to obtain a bond in, Pennsylvania. Today, we will be going over requirements for Arizona, one of the easiest states to get a good bond rate in. In fact, one could use the Arizona mortgage broker bond as a litmus test for future states. If a principal ends up in a high risk program in Arizona, they can be quite certain they will receive high risk quotes for future states as well.

Current Market: The Arizona mortgage broker bond is without a doubt, one of the easiest mortgage broker bonds to obtain a good rate for. If a principal obtains a high rate in the state of Arizona, they will see the same nationwide; it is a reflection of them being a high risk, not the bond.

Bond Amount: A $15,000 if there are any non-institutional investors or a $10,000 surety bond is required if investors are only institutional investors.

Bond Form: The bond form is agreeable with bonding companies. We still have yet to come across a surety that is not willing to write the Arizona bond. It has cancellation and aggregate language that most bonding companies require. There is nothing out of the ordinairy that would cause a surety to decline an applicant due to the language of the guarantee.

Additional State Requirements: The Arizona State Banking Department handles Mortgage Broker Licenses in Arizona. The department excels in assisting the consumer while not interferring with the mortgage brokers more than necessary. Just as 17 other states, a physical office in Arizona is required for all brokers. Brokers must be Arizona residents, both when they apply and during the full term of their license. The applicant must attend a class and pass the state examination, which includes a $50 fee. Applicants must pay $800 to apply plus $29 for the FBI to process their fingerprints. The state requires experience in the industry for at least three out of the last five years, personal financial statement, copies of licenses (if applicable) with other states.

Special Programs: We offer an exclusive “Instant Approval Online Program” for this particular bond. The application takes less than five minutes to complete and the quote is given to you immediately, online. You can access the program at: Mortgage Broker – Instant Approval Online Program

The Arizona mortgage broker bond is on the opposite spectrum of the Pensylvania bond when it comes to sureties willing to write the bond. The state requires the proper education to make the bonding companies feel secure with guaranteeing a business. The bond form also has language agreeable to the bonding companies. If an applicant obtains a high rate for an Arizona mortgage broker bonds, they can be sure they will see the same in other states, as it is a reflection of their risk and not the current surety bond market for this particular bond.

Mortgage Broker Bonds: Pennsylvania

This is the first of our series, “Mortgage Broker Bonds: State By State”. We decided to start with Pennsylvania, as it is our home state and also one of the most difficult states to get approved for. Below we will discuss the current bond market for this particular bond, the amount required, specifics of the bond guarantee (bond form), additional state requirements, and where you can obtain this difficult to place bond.

Current Market: In general, the current surety bond market is quite conservative. The Pennsylvania mortgage broker bond is in its own league when it comes to difficulties in placing a bond. Our agency knows the surety bond industry almost inside and out, specifically mortgage broker bonds. To our knowledge, we are the only agency nationwide to offer the the Pennsylvania bond with no collateral required. Even more incredible, credit score is not an issue when it comes to approval. As long as the principal does not have a bankruptcy or tax lien in the past 7 years, unpaid collections, or a civil judgment placed against them (ever), they are approved.

Bond Amount: The state requires a $100,000 bond, which is on the high end compared to most other states. The size of the bond also makes it difficult for the typical bond producer to approve the average client. (The bond is only required for brokers that collect funds prior to a loan closing.)

Bond Form: The Pennsylvania mortgage broker bond form scares many bonding companies away from the bond. The bond form is quite different, even from a quick glance. One will quickly notice the bond form is 8 pages rather than the average 1-2. The form does have the standard cancellation and aggregate language required by most sureties, but there are other downfalls. The bond form gives the state a lot of control in the event of a claim, which scares away most bonding companies. Fortunately, we are appointed with a surety that realizes that mortgage broker bonds are somewhat of a lower risk in general, as they are not actually lending the funds.

Additional State Requirements: Mortgage brokers that are going to process first mortgages must pay a licensing fee of $500 and a $200 renewal fee. Second mortgage broker licenses also require a $500 fee and requires a separate application with different requirements. Six hours of continuing education and training are needed each year. The broker must also submit national and Pennsylvania criminal record checks (including fingerprint cards). Similar to many bonding companies the state will also want to see a resume of previous work experience in the field. Proof that the company telephone lines are in the broker’s name is also required. The broker has to keep their main place of business in Pennsylvania.

Special Programs: We offer an exclusive “Instant Approval Online Program” for this particular bond. The application takes less than five minutes to complete and the quote is given to you immediately, online. You can access the program at: Mortgage Broker – Instant Approval Online Program

The Pennsylvania mortgage broker bond is arguably one of the most difficult to place commercial bonds out there. JW Surety Bonds writes more new mortgage broker bonds than any other agency nationwide. This allows us to place our applicant under a bulk program that benefits our clients greatly. Visit the Mortgage Broker Bond Section of the Surety Bond Forums if you have any questions regarding any of our services.

Time To Rethink Surety Bond Underwriting

Traditional surety bond underwriting does not allow for any losses. In other words, applicants are only suppose to be approved for a bond if the underwriter believes there will be no claims. This differs from insurance underwriting, as a loss is expected and is built into the premium. Higher risk applicants are usually declined or asked to post 100% collateral with the bond. The surety bond market is starting to see some change in how bonds are underwritten. However, these forward thinking sureties are in the minority and are difficult for the average principal to find.

As stated above, according to traditional surety underwriting bonds are suppose to be written as a service fee, not insurance. Therefore, there are not suppose to be any claims expected, as it is not built into the premium. Unfortunately, the suretyship guidelines are not reality and losses do occur, even the most conservative bonding companies.

Surety bonds have been around for quite some time and we know that losses are inevitable no matter how good the underwriting is. If losses are inevitable, then why not change the underwriting philosophy? If a principal is considered to be a higher risk, then a higher premium rate should be applied. This thinking goes against traditional surety underwriting as losses would then be built into the premium.

I can’t say that approving surety bonds to high risk clients at a higher rate is a new idea. In fact, we have been working with bonding companies that have successfully written high risk surety bonds for years. The rates are roughly 10-15 times higher for commercial bonds, but are usually still the best alternative for most that fall under the program. I can honestly say that we have seen little claims under the high risk programs. Definitely no where near 5-15 times as many as a standard market. Therefore, the sureties writing these programs are making out quite well for themselves. The few bonding companies have a monopoly on higher risk applicants, as there few sureties willing to take the risk of new surety guidelines, especially after the fall of the soft market.

Sureties writing higher risk contract bonds are even more rare. Bond approvals for five year contracts are unheard of these days, for most. Fortunately, there are some contract bonding companies willing to break the mold of traditional suretyship and take larger risks than the ridiculous expectation of a 0% loss. Similar to the high risk commercial bonds, higher risk contracts (ie long contracts) will see increased rates. Surprisingly, the sureties willing to write the higher risk contract bonds do not have losses greater than their peers. The average loss ratio of our out of the box thinking contract bonding companies is 14.35%, lower than many conservative sureties. Once again, they have a monopoly on the market, as very few are willing to write these “hazardous” bonds.

Often, our agency is contacted by surety underwriters that want our business. They are well aware that we are a high volume agency that has a diverse range of accounts and they want a piece of the pie. We rarely get appointed with new sureties, as most offer the same as their competition. If they are going to try to increase their book of business they will have to think outside of conventional underwriting and rate guidelines. Why would we set our clients up with a surety that is the same as every other market out there? What they need to do is find market segments that are not overwhelmed with other sureties offering identical programs. Contact us if you are an open minded underwriter looking to expand your book of business. We have set up numerous programs that have been successful for quite some time. The programs are successful because unlike the higher risk bonds approved in the soft market of the past, they are approved with higher premium rates, which offset the cost of claims.

It is time that the surety industry wakes up and realizes that a 0% loss is not obtainable. Stop underwriting in the same fashion simply because it is the way business has been done for years. Forward thinking sureties are capitalizing an entire market segment; it is time the high risk segments become diverse with more bonding companies.

Looking Beyond Surety Bond Rates

Usually the first question when a consumer is looking to purchase something is, “What will it cost?”. While cost is obviously important, it is not the only factor that should be considered when purchasing anything, including surety bonds. There are several items you should focus on as well, including, but not limited to: the service of the agency writing the bond, the financial strength of the surety, renewal requirements, and potential for additional surety credit.

Agency Service: An agency that lacks good customer service will be the cause many headaches. I can’t tell you how many accounts we have that left their previous agent in search of better service. I have heard horror stories of people still waiting to receive their bond weeks after they sent in payment. In our eye service that slow is unacceptable. We take pride in our turn around time, as it is the quickest in the industry. We offer instant online approval on many classes of business, while our competition may take a week just to give you a firm quote. When it comes to service, you often get what you pay for. That is not to say JW Surety Bonds is more expensive than the competition, usually the opposite is true due to our exclusive programs.

Surety Financial Strength: Bonding companies financial strength are given letter grades by AM Best. If you are in the market for a contract bond, see if the contract requires a surety with a specific letter grade. The bond is not worth the paper it is printed on if it does not meet the contract specifications. Whether you are looking for contract or commercial bonds, it is a good idea to check to see if the surety is on the Federal Treasury List. The T-List states all of bonding companies acceptable to the federal government. Typically, the first year premium of a bond is fully earned. This means there is no refund if you cancel a bond after issuance. It is vital that you check if a bond is acceptable to the obligee prior to sending in payment.

Renewal Requirements: Bonding companies differ when it comes to bond renewals. Some will request updates on the account, including, but not limited to: business financial statements, personal financial statements, and credit reports. Providing the updates is not only a nuisance for the principal, but also a potential problem. If any of the required updates do not meet the bonding companies guidelines the bond will be canceled, even if you have been with the surety for years. Other sureties will automatically renew the bond without reviewing anything. This is quite an advantage, as there is no annoyance of providing the surety with updates. The greatest advantage is the ability to have a bad year without being dropped, or taking a large owner draw without the surety complaining about a year end net loss.

Potential For Additional Bonds: In general, bonding company underwriting guidelines are rather similar. However, if you compare a more conservative company’s underwriting guidelines to a surety that is hungry for new accounts, the difference can be night and day. Some bonding companies will not write a principal if an owner has under 700 credit, while another surety will allow credit as low as 615 and still provide competitive rates. Due to the volume our agency produces, we can actually offer some classes of business at a standard rate, regardless of credit. The conservative bonding companies will often have low rates due to their strict underwriting and low claim rates. Unfortunately, a downfall of a conservative bonding company is that they also have lower total bonding capacity limits for each particular account than a liberal surety. your potential for additional bonds is important if you are looking to expand your company in a way that will require additional bonds. Our agencies exclusive programs also allow for pre-approval for your bonding needs, a nice comfort to have.

As with anything you purchase, there is more to a bond than simply the cost. Basing your decision simply on cost could present you with service problems or even worse, purchasing a bond that is not acceptable to the obligee. Renewal requirements and total bonding capacity limitations could create problems down the road and are something to discuss with your bond producer.

Discounts For Multiple Surety Bonds

Every now and then I get a call from a new client asking how much of a discount they will receive for obtaining multiple bonds. I immediately know the conversation will take a bit longer than usual, as I will have to explain what surety bonds are in order for them to understand why they will not obtain a discount for placing multiple bonds.

Surety bonds are not an investment bond, rather they are a three party (principal, obligee, and surety) guarantee. We will use an example (using mortgage brokers) to make it easier to understand. The state (obligee) the mortgage broker is operating in requires that a surety bond be filed to guarantee the mortgage broker’s performance per the states rules and regulations on the industry. The mortgage broker (principal) goes to a bond producer to write a bond backed by a Federally approved bonding company (surety). If the broker triggers a claim the surety will pay the claim to the state department handling the brokers license. The bonding company will then look to the mortgage broker for repayment of the claim and expenses incurred.

As you can see from our example above, a surety bond should be thought of as a type of credit. The principal pays a service charge (premium) to the surety for their financial backing. Traditional surety underwriting will not approve a bond for a client that does not financially qualify for it on paper. Since suretyship is truly another form a credit, risk increases as the principal’s credit gets maxed out. Therefore, a bonding company may increase rates as the principal maxes out their surety credit. New companies or companies with poor business financial statements will have less surety credit available to them.

I do not want to give the wrong impression that bonding companies never give special treatment or lower rates to larger accounts. If a surety feels that a principal is a very low risk, the underwriter may write a bond he/she normally would not (i.e. bond form with risky language) so they can write all of the principal’s bonds. However, this is usually only done for very financially strong principals. Contract bond rates can be reduced for large accounts that bid and are awarded jobs often. The same can not be said for commercial surety.

A good bond producer will have a variety of surety markets to place all of your bonding needs. A diversity of markets allows the producer to place bonds with bonding companies that prefer a specific line of business or even specific bond form.

If you are a principal calling a bond producer, don’t ask how much of a discount there is for multiple bonds. Ask approximately how much surety credit you qualify for, as rates will only increase as you reach your surety credit limitations.

Commercial Bonds: Obtain The Lowest Rate (Part 2 of 2)

In the first part of this article, we reviewed what bonding companies typically look at when reviewing an applicant. In this installment, we will talk about what you can do to better your situation to become less of a risk and in turn lower your bond premium.

General Bond Application: For the most part, there is little you can do to lower your rate or increase your chances of approval when it comes to the bond application. You will want to complete this form as completely and accurately as possible. If any information is left blank, the approval will be delayed.

Business Financial Statement: Your business financial statements are usually the most heavily weighted item when a surety underwrites a bond. There are a number of things you can do when preparing your year end business financial statement to make it the most attractive to a surety company. For one thing, utilizing the services of a Certified Public Accountant will give your financials more credibility (In-house financials are accepted for smaller bond amounts, but may not get you the lowest rate). Often, the figures on your balance sheet are only as strong as the individual that prepares them. You want a very clean and clear presentation of your business and it’s financial picture. Bonding companies prefer statements prepared on an accrual basis, with full notes and disclosures. The accrual method gives the underwriter the best picture of your company’s financial strength.

There are several important elements a surety will want to review within your business financial statement. These elements all should be maximized as much as possible to ensure the greatest amount of suretyship allowed to you and your company:

    1) Working Capital: This is the quick equation of all of the current assets subtracted by all the current Liabilities. This gives a rough working capital position which indicates the business’s ability to pay bills and shows a snapshot of the liquidity of the entity. This is where most companies struggle, and is also where most sureties will look for a weak spot. You can keep your working capital strong by staying on top of your accounts receivable, thus making them cash. In addition, making sure that payables are taken care of and most importantly that there are not any unnecessary inter-company loans.

    2) Limiting Shareholder/Employee Loans: This seems like a nice way to lend either yourself money, or employees in some instances however, what you do not know is that surety companies look very unfavorably upon these receivables. If an underwriter sees an account receivable in the amount of $XX,XXX – that figure is immediately discounted in it’s entirety. The reason for this is quite obvious, the company may never see that receivable back from the officer, in fact many times it simply keep growing. Thus making an unrealistic account receivable account.

    3) Owners Equity Draws: The biggest evil is the fiscal year end owner draw of capital. This needs to be balanced out delicately. If your company is thriving and you are able to pull sums of money for yourself at year end, you need to ask yourself, “How can this affect my surety bond(s)?”. It is always wise to speak to your bond agent about equity draws at year end as many bonding companies require a minimum about of equity in your company depending on how much bonded liability you have. In a perfect world, a surety would like to see a customer add to his corporate balance sheet year after year. Even if it is small gains year after year.

In short, there are many other items that can affect your companies eligibility for bonds and suretyship. These tricks to the trade mentioned above are a great start to keeping you and your company on track in the strange world of surety bonds.

Resume: If the surety is requiring a resume of the owner(s), be sure to make it as professional looking as possible. Do not submit a hand written fax that has limited information. The more confidant you can make the underwriter, the more likely you will obtain an approval at a lower rate.

Personal Financial Statement: Just like everything else on your bond applications, the personal financial statement should be accurate. Do not inflate numbers, as bonding companies will verify information from time to time. If they find any inaccurate or false information they will more than likely decline you for lack of trust. Keep in mind the surety is being paid to guarantee the performance of your business, so they need to feel confidant in doing so. Bonding companies are always more comfortable writing bonds for principals with home ownership. If you have the money are currently renting, your bond premium is another good reason to own a home rather than rent.

Personal Credit: Credit report flaws are the most common culprit for a principal being put into a high risk program. Fortunately, many of the problems can be resolved rather quickly. However, for some issues only time or new ownership can alleviate the situation.

    1) Bankruptcy: A principal is stuck in a high risk program if a bankruptcy is not discharged for 7 years or more. The only way to lower the rate is to either wait it out or change the ownership of the company. Just be sure the new owner has a flawless credit report if you go through all of the trouble of changing the ownership.

    2) Tax Lien: An unpaid tax lien is just about as bad as a bankruptcy. If the tax lien is paid over 3 years ago a few sureties will consider you for a standard program. Most will consider an applicant for a standard program after the lien is 7 years old (if paid). Once again to get out of a high risk program, the only options will be to wait for time to pass or change the ownership.

    3) Civil Judgment: If the judgment is not satisfied, a surety will place the applicant in the same program that someone with a bankruptcy would be in. A principal with a satisfied civil judgment will still be written in a standard market by some bonding companies, depending on the circumstances. If you know you have a judgment on your credit report, include a description of what happened; it could keep you in a standard market.

    4) Unpaid Collection: An unpaid collection could put an applicant in the same high risk program someone with a bankruptcy would fall under. Fortunately, if a collection is paid the principal is in good shape again. Most bonding companies will except a letter stating the collection is satisfied from the collection agency or entity the money is owed to. If you have an unpaid collection, pay it, it could save you thousands on your bond premium.

    5) Late Child Support: Without a doubt, late child support is the worst item a surety can see on a credit report. High risk programs won’t even touch these applicants. Bonding companies do not want to guarantee businesses if the owner(s) refuse to or can not support their own children. There is little one can do in this situation short of resolving the child support issues and moving on from there.

Credit scores can be raised rather quickly for some. Your score will be lowered if your available credit is low, meaning you are making use of your credit. Paying off credit cards and other forms of credit can quickly raise a score a great amount. Credit inquires should be kept to a minimum, as too many can also lower a score. Most bonding companies want to see scores over 650, with lower rates that go down as scores increase. Therefore, you will want to do everything you can to get your score as high as possible.

Bond Form: Unfortunately, there is a little one can do to resolve the problem of a risky bond form (See part 1 of 2 of this article for what makes a risky bond form). Obligees will rarely allow any changes to their forms. However, obligees will revise their bond forms from time to time and have language added that is agreeable to sureties. If you are required to obtain a bond with risky language, you should complain to the obligee, as your bond is probably costing you more than it should.

An applicant must meet all of the above criteria in order to obtain the lowest rate. An applicant may fall into a high risk program if any single owner of a company does not meet the underwriting guidelines as described above. Do what you can to become less of a risk, as the commercial surety bond market does not have much of a middle ground when it comes to rates; applicants are generally either in the 1-3% category or 15%, quite a large difference.