JW Surety Bonds

Connecticut Increases Mortgage Bond Requirements

The Connecticut House Bill 5577 increases the mortgage bond requirements in the State of Connecticut by doubling the amount of existing bonds. This Bill became effective on July 1, 2008. The passing of this Bill is not good news for licensed Mortgage Brokers and Lenders in the State of Connecticut, since this Bill requires that all Mortgage Brokers and Lenders carry a bond for $80,000. All licensed Brokers and Lender must be compliant by August 1, 2009.

What will this mean to the thousands of Mortgage Brokers and Lender in the state of Connecticut? Bottom-line financially, they will be paying more for their Surety Bonds to be compliant with the state guidelines. The Surety Companies will be looking a bit closer at applications and increases for bonds in Connecticut due to the now large requirement of $80,000. Surety underwriters will be looking a bit closer at Net Worth of the business and the owners of the company. They will want to make sure there will be enough cash in reserves to handle any claims that could arise.

Due to the increased bond requirements, the affect on Mortgage Brokers and Lenders that may have issues with personal credit will result in difficulty securing lower rates for these bonds. The bill allows for in increase in personal net worth from $25,000 to $50,000. There will be a few markets that will be positioned to write these bonds, but overall it can be expected that they will be looking for larger premiums, due to the increased financial risks.

In addition, this bill will combine existing “First “and “Second” mortgage expert licenses into one combined license that will cover all activities and require that all applicants are using the Nationwide Mortgage Licensing System (NMLS). The state will also require that the license have an expiration date of December 31st of the following year.

To summarize further changes in the Bill, the State of Connecticut requires each licensee to contact the state license center, if any of the following occur:

  • Licensee experiences a bankruptcy
  • Criminal Indictment of any type
  • Provide notice of license denial, cease and desist, license suspension, and or fines from any other licensing entity
  • Notification by any agency of the Attorney General
  • Any revocation of a warehouse line of credit
  • Notification of any license holders owning over 10% of the company filing bankruptcy
  • Notification of ownership changes

Neglecting to report any of the occurrences above could result in suspension or revocation of a license.

With all these changes in the State of Connecticut, we can expect the Surety Companies to tighten their guidelines and underwriting practices and these bonds will not be as easy to get as they have been in the past. For specific rules and regulations, it is strongly recommended visiting the Connecticut State Website for more specific licensing requirements.

Tips For Creating Surety Bond Requirements

Our agency has been getting contacted by numerous government officials as of recent; state, Federal, military, etc. All of them have questions about how to best handle bonding requirements for upcoming government contracts from the upcoming stimulus package. This is not new territory for us, as we have various government departments revise bond forms and create new requirements throughout the years. We expect to hear from many more seeking advice in the coming months. The current stimulus package proposal calls for 180 billion for infrastructure. An investment larger than any other since the creation of the interstate!

The flurry of requests for advice prompted me to compile this list of tips on what government workers need to think about when creating contracts. This post will be updated as more questions come in. Feel free to ask a question in the comment box below or by using our agency’s contact email form. Should you find this page useful, please be sure to create a link to it on your department’s website to ensure it is reviewed by those who need it.

Break Up Large Contracts
It may require a little more work to do, but breaking up large contracts into several smaller ones is a good idea. Doing so allows smaller contractors to get involved, that would otherwise not qualify due to bond line limitations. This means that there will be increased competition for each bid. The recession has hit the balance sheets of contractors throughout the country, often resulting in reduced bonding capacity. Don’t limit your projects to the largest of contractors by not breaking up contracts when possible.

Less Than 100% Requirements Are A Waste
At times, government policies do not meet real world situations. The intentions may be good, but failures to consult industry professionals result in useless or harmful policy. Requiring a bond less than 100% of the contract amount is a prime example (see: FAR 28.102-2). Bonding companies underwrite and charge based on contract amounts, not bond amounts. Therefore, requesting less than a 100% bond only lowers the maximum amount that can be filed for any possible claims. It does not allow for smaller contractors to participate as intended.

Use AIA Standard Forms
A bad bond form can make a contract “unbondable”. Keep in mind, the bond form declares precisely what the bonding company is guaranteeing on behalf of the contractor. Therefore, if they don’t like the terms of it, they will not write it, even if the contractor qualifies for the bond amount. The AIA has standardized bond forms that should be used when possible. Doing so will protect the government from a defaulting contractor properly and ensure a smoother process for all involved.

Do you have questions of suggestions of your own? Please feel free to comment below!

Understanding the Surety Process

The surety underwriting procedure can often be viewed as being an agonizing ordeal for insurance agents as well as applicants needing to obtain bonds. Many times, the entire process can be very aggravating and stressful if an applicant is under a specific deadline or needs a bond very quickly. Here are some items that the surety company will most likely require. It is important to know what crucial information that a surety company or agency will require in order to be approved for any type of surety bond.

Like insurance, the surety industry is recurring. In the mid 90s, the surety industry was very pliable, and there was little underwriting being performed. A combination of the slowing economy and the poor underwriting practices from years prior caused the surety industry to suffer for the first five of five consecutive years in 2000. However, a booming economy led to more bond approvals and issuance, even for applicants that were less than qualified.

Fortunately, these losing years caused the market to fluctuate almost overnight underwriting standards were tightened and premiums increased substantially. Capacity quickly became an issue for contractors, particularly at both the small and large ends of the spectrum. Small, emerging contractors were finding it increasingly more difficult to obtain any bonding capacity and large contractors were also feeling the affects of the more stringent industry. The market has fluctuated over the past couple of years, and contract bonds and some commercial bonds can still be difficult to obtain. Some items that are crucial to obtaining prior to applying for a surety bond are:

A surety bond is a form of credit. The underwriter requiring financial information from an applicant is making a credit decision without ever meeting the contractor or applicant.. There may be a substantial amount of paperwork required; however, it may be the extra paperwork required that will get an applicant approved for a bond. An underwriter will most likely request the following:

Business financials It is beneficial and most often a requirement that these are prepared by a CPA. If it is a new company, submitting the most recent business financials will suffice.

The Contract Bond Claim Process

As a contractor, the notion of a claim arising can be a troublesome thought. However, if a claim does arise it is important to know how the process is managed. Here is a basic breakdown of how claims are handled for performance bonds and payment bonds.

Performance Bond Claims:
As you may already know, a performance bond is in place to protect the obligee against financial loss should the principal fail to perform their obligations as outlined in the bonded contract. When a claim is filed, the process of investigating the validity of the claim can be timely and judicious. The surety must collect the necessary information from the obligee and principal in order to come to a decision that is fair to both parties. Cooperation and constant communication between the surety, obligee, and principal are fundamental to quickly resolving a claim.

If they determine that the claim is valid, there are a variety of resolutions they may employ.

The most common resolution is called the “Tender Option”. Under this option, the surety and the obligee agree on a replacement contractor to complete the work. The replacement contractor’s price may exceed the remaining balance of the contract, in which case the surety would pay any overruns.

Another common resolution is called the “Takeover Option”. Here, the surety hires construction professionals to complete the job. They could either hire a construction manager to finish the job using the original subcontractors. Or, more commonly, the surety simply hires a completion contractor. Under the Takeover Option, the surety and obligee usually puts a Takeover Agreement in place, since the surety is taking over responsibility for seeing that the project is completed.

Another option that is more reluctantly considered is for the surety to elect not to be directly involved in the completion work. The surety, of course, is still liable for excess cost beyond the remaining contract balance. However, the obligee would initially finance the completion and seek reimbursement later.

Other resolution options exist, though not as commonly applied. Sometimes the surety and obligee might agree on an upfront cash settlement. Other times they may decide to have the original contractor complete the work under additional monitoring.

Payment Bond Claims:
A payment bond guarantees payment for labor and material used for the bonded contract if the principal defaults. This bond would ensure that the suppliers and subcontractors will be paid. Once again, when a claim is filed, the surety must gather information from both parties in order to make a determination. They may request certain documentation including, but not limited to purchase orders, invoices, payment records, and delivery slips. They may also require the completion of certain forms and affidavits.

If it is determined that the principal has in fact defaulted on payment, the surety would pay the claim and pursue the principal for reimbursement.

The claims process can vary from situation to situation. Sometimes the principal admits that they cannot meet their obligations and a claim can be processed and resolved quickly. However, most times the surety must investigate the claim. Be sure to stay in constant contact with the surety throughout the entire process and provide them any requested documentation promptly. With proper communication by all parties, along with reasonable expectations, a claim should be resolved in a fair and timely manner.

Understanding Conservative Surety Bond Underwriting

For many years the surety industry has experienced considerable profitability due to the backing of a strong economy and a theoretical zero percent loss ratio business plan. This model for operations worked very well for many years, but also set the stage for a few years that hurt the surety industry on a whole, leading to much stricter underwriting guidelines and pricing.

Up until around 1989 the surety industry had experienced a fairly consistent low loss ratio, with moderate times of increasing and decreasing loss amounts, combined with considerable premiums being earned, newer players entered the market and began competing with previously existing players. This resulted in a much more lax standard on background checks for the principals applying for the bonds as well as driving costs down. It is widely noted that many bonds began to be written with little regard to risk consideration due to this more aggressive market with underwriters competing with each other. Around 2000 the economy experienced a faltering that resulted in principals getting into financial difficulties, requiring support of the surety bonds and ultimately the bond companies. The number of claims that were experienced between 2000 and 2002 were staggeringly high, resulting in a huge direct loss ratio that contradicted to original model of zero loss. Many carriers were forced to withdraw themselves from the market as others became insolvent.

While the terrorist attacks on September 11, 2001 did not directly affect surety companies in the same sense as careless underwriting did, there was an adverse effect that was experienced. The insurance companies that paid out money for property and casualty losses were in many cases the sureties’ parent companies as well as their affiliates. This caused the insurance companies to tighten up on requirements from the primary sureties that they owned, which in turn caused bond underwriters to make more disciplined decisions while trying to place their bonds. Around this same time period Enron filed for bankruptcy, which in turn had a negative impact on economy. Once again this created a difficult time for principals that were trying to maintain their bonds, relying on help once again from the surety bonds causing more claims.

All these events have led up to this current state of conservative guidelines for underwriters to consider while they issue the bonds, although this does have a positive consequence for all parties involved in the bonding relationship. The surety companies can avoid hazardous claims and work back closer to a zero loss ratio, stabilizing the bond market which will ease guidelines and pricing in the near future. Principals also benefit from this; companies that would have a difficult time meeting their requirements won’t get into any obligations that will hurt them financially in the long run during this unstable economy.

Florida Home Health Agency Bond

FloridaOn 06/30/2008, a new law concerning home health agencies was enacted in Florida. Titled HB 7083, the new law demands applicants for a new home health agency license to obtain a license bond of $50,000, where a surety bond or other comparable security that the Agency for Health Care Administration finds satisfactory. The acceptable alternate forms include letters of credit and trust accounts. The surety bond functions to secure the payment of administrative penalties and the fees and costs that the health care agency encountered regarding the license that the licensee failed to pay within 30 days after they became final. The Agency for Health Care Administration is allowed to make a claim on the surety bond until one year following the license is no longer active, one year after the license has been renewed twice, or 60 days following any administrative or legal proceeding for penalties or fees evaluated throughout the first four years of the original issuance of the license, whichever is later.