Union Wage & Welfare Bonds: Difficult To Place

Union Wage & Welfare Bonds have become increasingly difficult to place over the years. What is it about this bond class that is scarring away so many bonding companies? In order to answer this question, we must first learn what a wage & welfare bond guarantees. In this article, you will read about what wage & welfare bonds are, and why they are so difficult to place. We will also review some tips for obtaining a wage & welfare bond.

What is a wage & welfare bond?:
A wage & welfare bond (also known as a union wage bond) guarantees the payment of union dues. This means the bond is a type of financial guarantee. If the principal fails to pay union dues for a given time period, the union can file a claim on the bond and collect their dues. Each union has their own specific bond language and union dues. Therefore, a separate wage & welfare bond is needed for each union requiring one.

Why are bonding companies hesitant to write wage & welfare bonds?:
Bonding companies took a major hit during the turn of the millennium. A domino effect brought on the end of the “soft market”. Numerous bonding companies closed their doors for good, some were downgraded to junk status (no longer allowing them to issue bonds), and the remaining became much more conservative in their underwriting. Bonds with historically higher loss ratios were no longer being issued as freely. In particular, many financial guarantee bonds were all but a thing of the past (unless 100% collateral was provided). Wage and welfare bonds, a type of financial guarantee bond, is one of the few financial guarantee bonds still being written. These days, bonding companies that are still willing to write them do so at higher rates than other bond types.

Tips on obtaining wage & welfare bonds:
The end of the “soft market” made it much more difficult to place a wage and welfare bond. However, this does not mean they are no longer being written. Being that these bonds are more difficult to place than a typical commercial bond, one should look to an agency that specializes in bonding. Your average property and casualty agent will not have the proper surety bond markets in order to properly place the bond (which is why many broker the business to a bond only agency). You may want to read, “What Makes A Good Surety Bond Producer” to help you find an agency that will meet your needs.

A wage & welfare bond is a type of financial guarantee, a bond class that has become harder to place since the end of the “soft market”. Many financial guarantee bonds are no longer being written due to their loss ratios, but wage & welfare bonds are fortunately still being written. The bonds are more difficult to place than in the past, and should be written by an agency that specializes in surety bonding, otherwise you risk an increased rate or even worse, declination.

Saving Money Using Surety Bonds

Surety bonds can look like a more expensive alternative to posting an irrevocable letter of credit. However, if you look deeper into the costs of each, it is clear surety bonds are the obvious choice. In this article we will review view an example to demonstrate the cost differences between the two. We will also go into depth on how a bank makes money off of a letter of credit versus how a bonding company makes money off of issuing a bond. After you have read this article you will want to make use of your surety credit whenever possible, as there are numerous benefits over letters of credit.

What is a letter of credit and how do they work?:
An irrevocable letter of credit (ILOC) is a letter addressed by a bank guaranteeing the account holder is “good for” a certain amount of funds. The letter of credit is held by the obligee. In the event of a claim, the obligee can draw on the funds held by the letter of credit. In order to ensure the account holder actually has the funds available to pay for a potential claim, a bank usually freezes the full amount of the ILOC in cash. In other words, if you need a $300,000 ILOC, then the bank usually holds onto the full $300,000, not allowing you to touch the funds until the ILOC is released.

What are surety bonds and how do they work?:
A surety bond is a three party agreement involving a principal (the party obtaining the bond), an obligee (the party requiring the bond of the principal), and a surety (the carrier backing the bond). The principal pays a service charge for the surety to guarantee performance. The principal makes use of the surety’s financial strength rather than having a bank hold onto their assets. Collateral is only required in high risk scenarios.

The REAL costs of letters of credit and surety bonds:
Often, people will argue that a letter of credit is less expensive than a surety bond and are therefore the better choice. However, people who believe this are not looking at the big picture. Lets take a look at a $100,000 example. An ILOC generally costs about 1%, or $1,000 a year. A typical surety bond rate in a standard market is about 1-3%, or $1,000 to $3,000 a year. When you just look at the up front costs, a bond is either the same or more than the ILOC. In order to make a true comparison, one must look at the real costs of an ILOC. Remember, a letter of credit requires you to tie up the full amount in cash where a bond typically requires no collateral. If you were to invest the capital you freed up by using a bond in a money market account you could currently make anywhere from 3-4%, or $3,000 to $4,000. This makes it so the true cost of a letter of credit raises to about $4,000 to $5,000 a year.

If you qualify, a surety bond is clearly a better choice over a letter of credit. A surety bond frees up capital that a letter of credit would otherwise tie up. Increased liquidity from surety bond use make day to day operations run smoother. A surety bond may seem to be the same price or more expensive at first look. Looking deeper, it is quite clear that a surety bond not only gives you more liquidity, but also at a cheaper price.

Surety Bonds: Inside & Out

The Surety Bond Blog has been around for almost two years now. Articles have been written on everything from the basics, to information on specific bonds. We do our best to organize all of the information in a easy to find manor, but we realize that it may be difficult for someone new to bonds to know what article to read first. This article will review everything you need to know to obtain the basic foundation of suretyship. Rather than repeating information, we will list what articles should be read.

First, we must learn what a surety bond is. The average person has never heard about surety bonds. Usually, people that think they know what a surety bond is, mistake it for insurance. Therefore, you should appropriately start at the beginning, with the articles, “What is a surety bond?” and “Surety Bonds, Not Insurance“. Once you learn about what a surety bond is, you will need to read, “Why do I need a surety bond?“. The combination of the above three articles should give you an idea of basic surety bond concepts.

Next, we must learn about the different categories of surety bonds. Each category is underwritten differently. Therefore, each category has different application requirements. To learn more about the main surety bond categories and their sub-categories read the article, “Surety Bond Categories“.

Now we have a foundation of what surety bonds are and the different types available. Next, we will review what a surety looks at when underwriting a bond in the article, “Commercial Bonds: Obtain The Lowest Rate (Part 1 of 2) ” . The article only goes over commercial underwriting, not contract. For the purposes of learning the basics of surety we will only review commercial bond underwriting, as contract bond underwriting is more in depth and would go beyond the scope of what we would like to go over in this article. The second part of the series “Commercial Bonds: Obtain The Lowest Rate (Part 1 of 2) “, goes into specifics on what a principal must do in order to become a lesser risk for the surety, which in turn could lower their premium.

Lastly, you should read “Surety Bond Myths“. This article reviews some of the more common suretyship misconceptions. If you ever plan on working in the surety industry, you can also plan on answering some of the questions listed in this article on a daily basis.

Now you should have a very good idea of the basics of surety bonds. With the knowledge you have obtained, you should be able to discuss with a principal about what bonds are, and even do some brief underwriting to determine whether an applicant is “bondable” or not. Should you have any questions regarding any of the Surety Bond Blog articles you can feel free to ask them at the Surety Bond Forums at: http://forums.jwsuretybonds.com

Surety Bond Categories

To completely understand suretyship, one must know the major categories and sub-categories of surety bonds. There are two main surety categories: contract bonds and commercial bonds. Below, we will discuss what each of these bond types guarantee and give example bond types that would fall under each category.

Contract Bonds: provide financial security and assurance on specific contracts by assuring the project owner (obligee) that the contractor (principal) will perform the work and pay certain subcontractors, laborers, and or material suppliers.

  • Bid Bonds guarantee that the bidder will perform the contract at the amount bid. In the event the bidder has been awarded the project the bonding company will provide the performance, payment and maintenance bonds (if required).
  • Performance Bonds guarantee the principal will perform the contract per its terms and conditions
  • Payment Bonds guarantee the principal will pay subcontractors, laborers, and material suppliers.
  • Maintenance Bonds guarantee against defective materials or craftsmanship for a specified period.
  • Subdivision Bonds guarantee that the principal will finance and construct certain improvements (ie street, sidewalks, curbs, gutters, sewer, and drainage systems).

Commercial Bonds: guarantee the performance of the principal as listed on the bond.

  • License & Permit Bonds guarantee a licensee will operate per the terms of the license the bond is filed with. (ie auto dealer bond, mortgage broker bond, telemarketing bond, etc.)
  • Public Official Bonds guarantee the performance of a public official.
  • Miscellaneous bonds guarantee lost securities, contributions to union fringe benefits, payment of utilities, leases, and workers compensation.
  • Judicial and Probate Bonds guarantee the performance of fiduciary services in compliance with a court order (ie executor bonds, guardianship bonds, appeal bonds, etc. Also known as fiduciary bonds.)

Each of the two categories has multiple sub-categories. The sub-categories often have numerous different bond types. There are literally thousands of different license and permit bonds in existence. With so many different bond forms out there, an agent will often stumble upon one he/she has never dealt with.

Bonding companies underwrite each of the sub-categories differently. While there are many commonalities, there are also many differences in what is required to apply for each sub-category.

If you are applying for a bond, it is not necessarily all that important to know what category your bond falls under. However, if you are trying to learn about suretyship in general, knowing the categories and how they differ is an absolute must.

Surety Bond Indemnity Agreements

Indemnity agreements are a standard of the surety bond industry. Bonding companies usually require the president to sign on behalf of the company, all owners with over 5% ownership to sign personally, and the owners’ spouses to sign personally. In this article, we will learn why the bonding companies require all of these people to indemnify, what the agreements usually include, why they aren’t as scary as they appear to be, and the alternatives to bonds and indemnification.

Each bonding company has different language for their indemnity agreement. In general, the agreements all have very similar terms, but just use different language to state them. An indemnity agreement states that the principal is responsible for reimbursement for claims and the attorney fees associated with them. One must recall that surety bonds are not like insurance. The principal is in no way protected, the bond is required to protect the public. Claims are to be paid by the principal.

Often, a principal states they do not want their spouses to sign personally. They make the argument that they created the corporation to protect themselves personally, which is exactly why the surety wants spouses to sign. Unfortunately, spousal indemnity is rarely waived, even for the strongest of accounts. The bonding companies do have reasons for the requirement. For one, they don’t want corporate assets to be transferred to a spouse after a claim. To understand why they want spousal indemnity, one must recall what a surety bond is, a guarantee that a company will operate per the terms of the bond. Bonding companies can underwrite using every piece of financial information available, but why would they feel comfortable bonding a company if the owner’s spouse doesn’t feel comfortable doing the same?

A common fear among indemnifiers is that a surety is going to take their home. Bonding companies are not in the business of kicking people out of their homes. Homes are a last resort when it comes to collecting payment on a bond claim. The surety will first look to the company listed on the bond for repayment. If the company is unable to pay for the claim and associated legal fees then the surety will attempt to collect from the individual owners. It is rare that a surety will attempt to take ownership of an individuals home. For one, the surety will not make a good name for themselves taking ownership people’s homes just to make year end profits higher. In many cases, the surety has no right to pursue ownership of an individuals home, due to state laws prohibiting such action.

It is extremely rare for a surety to waive any of the above requirements. Usually, the only way to do so is to provide 100% collateral. Providing 100% collateral is a poor alternative, as it would be better to post a letter of credit instead (if an ILOC is acceptable to the obligee). Directly posting a letter of credit would alleviate the any indemnification worries and would be roughly the same cost of a bond. The downfall of a letter of credit is that you have to tie up a good amount of capital. One must also remember, that bonding companies typically only write bonds that have aggregate limits. Therefore, the claim amount can not exceed what one would lose with a letter of credit. When one looks at the alternative, spousal indemnification does not look so bad.

At the end of the day, the ball is in the court of the bonding companies. They are guaranteeing the bond, so they get to make the terms of issuance. Personal and spousal indemnification makes more sense if you look at it from the bonding companies point of view. If the applicant and their spouse can’t guarantee the company, why would they want to? The alternatives to bonds only tie up capital and do not low the amount of liability. In a perfect world the bonding companies would not need spousal indemnification. Unfortunately, bond claims are a real thing and the sureties need all the assurance they can get that there will not be a claim on a bond.

Mortgage Broker Bonds: Florida

Florida mortgage brokers and lenders should count their blessings with this easy to obtain state requirement. The surety bond market is freely writing the Florida Mortgage Lender/Correspondent Lender bond. The amount is small, the bond form is agreeable to the bonding companies, and the state takes appropriate measures to assist in lowering claims.

Current Market: The surety bond industry is conservative in general, as the previous soft market claims caused many companies to close their doors for good. Unfortunately, many sureties lump mortgage broker bonds in with other higher risk license bonds. Fortunately, there are some bonding companies that consider mortgage brokers a low risk guarantee.

Bond Amount: The state of Florida only requires a $10,000 surety bond. It is one of the lowest state requirements, only higher than Oklahoma. It is past due for the state to increase the bond requirement to protect citizens from fraud. If an applicant obtains a high quote or a declination, it is due to the applicants perceived risk, as the bond amount is extremely low. If a principal does not qualify for a bond as small as the Mortgage Lender/Florida Correspondent Lender bond they will not qualify for any other state either.

Bond Form: The state required bond form has clauses required by most bonding companies. The aggregate clause does not allow the total amount of claims to exceed the bond amount. The cancellation clause allows the bonding company to cancel the bond within 30 days of notice. In addition, there is no high risk language such as a bond tail or other wording that creates an additional risk of a claim.

Additional State Requirements: Florida mortgage licenses are processed by the Florida Department of Banking and Finance, Division of Finance. Mortgage broker rules and regulations apply to anyone who solicits mortgage loans for someone borrowing, who accepts an application for a mortgage loan, or who negotiates the terms and conditions of a mortgage loan for a lender of the money. A mortgage broker must be an associate of one broker business that is licensed in the State of Florida. The Florida license allows brokers to place both 1st mortgages and 2nd mortgages. Brokers must be at least 18 years of age and pass a written examination. The exam includes, but is not limited to questions on the Fannie Mae underwriting guidelines and closing procedures, Florida Mortgage Brokerage and Lending Act, the Florida Fair Lending Act, the Patriot Act, all federal lending and housing regulations, complete knowledge of FHA/VA and Conventional mortgages, basic real estate knowledge such as surveys and deeds, plus mathematical calculations pertaining to financing. Prior to the exam, the broker must attend twenty-four hours of classroom instruction at a school that meets accreditation requirements. An additional 14 hours of continuing education classes must be completed two years from obtaining a license. All applicants for the Mortgage Broker License must provide full legally-provided fingerprints for submission to either the Federal Bureau of Investigation or the Florida Department of Law Enforcement. Any actions pending that involve dishonest dealing, fraud, or acts of moral turpitude will be grounds for denial of the license. A nonrefundable application fee of $200 includes the examination. There is an additional fee if the applicant has to retake the examination.

Avoid claims by reading Florida State Web Site: Mortgage Law.

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 Florida mortgage broker bond is an easy to obtain requirement. If an applicant can not obtain an approval for this bond, they will likely run into the same predicament when it comes to other states. The best way to get started is to obtain a quote by applying online.