Changes For Mortgage Broker Bonds & Mortgage Lender Bonds

New state legislation is changing the way many brokers and lenders will conduct future business, as there have been numerous changes in 2008-2009 timeframe which will affect mortgage brokers and mortgage lenders.

First, a primary change will be the increased required bond amounts along with tighter regulations that will be imposed on business transactions and pre-licensing certifications. Although some of this new state legislation has passed, it seems like many states are set waiting critical decisions from Congress, which is expected to jump start the weakened economy. Many states are taking a back seat to changing regulations until they see how the new president’s economic stimulus package will affect the mortgage industry, as well as being afraid to move too quickly to adopt new legislation, since remembering the demise of the sub-prime mortgage crisis which left many small mortgage brokers and lenders out of business or severely crippled. In addition, many states are looking to the government for their proposed solution to the housing crisis. The combination issues of the current economy & housing crisis may result in a decrease of licensing for brokers and lender in this upcoming year.

New legislation passed that went into effect mid 2008 and are effective for all renewals in 2009 & introduced in the following states: Connecticut, Iowa, and Maryland which have all increased the required bond amounts.

  • Connecticut has increased their required bond amount from $40,000 to $80,000 effective August 1st, 2009.
  • Iowa increased the required bond amount from $50,000 to $100,000 effective 12/31/08.
  • Maryland has made increases in the bond amounts based on the volume of loans. Their $25,000 requirement has increased to $50,000, the $50,000 requirement has increased to $100,000, and their $75,000 requirement has increased to $150,000.

In addition, four (4) other states attempted to pass legislation that would increase the required bond amount and impose tighter requirements for mortgage brokers and lenders in 2008. Those states included Hawaii, Missouri, Oregon, and South Carolina, all which rejected the proposed increases and thereby postponing any decisions at this time. These states have concluded to revisit this legislation in 2009 once the economic situation is further determined for 2009. The state of Alabama had a proposal on the table to enact legislation requiring a bond for mortgage brokers and bankers for the 2009 license period. This legislation did not pass and will be revisited in mid 2009.

It is further expected that we will see many changes in 2009 to the legislation and bond requirements that affect mortgage brokers and lenders. The primary focus of the state legislation is expected to reduce the amount of claims and keep business owners working honestly and ethically. Keep in mind, that with the economy in crisis there will be many changes in the future that will affect your license and your bond. To remain best advised of these current changes, keep in contact with your state licensing agency.

Stimulus Package: Pros & Cons For The Construction Industry

The stimulus package is absolutely gigantic. So much so, I thought I would create a list of pros and cons related to the construction industry pertaining to the bill. Many of the cons are items that the industry was pushing for, but did not get.

Overall, the bill looks like a victory for the construction and surety industries. See below for details.

PROS: CONS:
The biggest investment in infrastructure for 50+ years
No specified amount for school construction
Passed with $8 billion towards high-speed rail (previous Senate version included $2 billion, while previous House version included $0)
“State fiscal-stabilization� funds cannot be used for new construction of schools, only modernization
General Stimulus: $110.7 billion (35%) is appropriated for projects in 2010 General Stimulus: Only $34.8 billion (11%) of the $308.3 billion will be spent on “shovel-ready� projects by 9/30/09, the fiscal year end for 2009
Infrastructure Stimulus: 50% of funds spent on work to be started within 120 days of the enactment
“Use it or lose it� policy for DOT, a 50% expenditure for within 120 days “Use it or lose it� policy is not in force for the following departments, but they must report to Congress on how they are spending their funds:
DOD & VA – 30 days
GSA – 45 days
“Build America� tax-credit bonds can be issued by local and state governments in 2009 & 2010
Small businesses may deduct income up to $250K of capital expenditures as well as a 50% deduction on depreciable assets (e.g. construction equipment)
Businesses can carry 08’ operating losses to offset profits from previous years Only companies with less than $15 million in revenue can qualify
A bill that requires public companies to withhold 3% of their contracts will no longer be effective for 2011 The bill will be effective for 2012

Insurance and Surety Concerns For 2009 State Legislatures

Along with many other issues, The 2008 November Presidential election and economy has changed some of the makeup of the state legislative agendas. Like the battle of some in Congress to the industry’s use of information from credit reports, limitations on the use of credit scores are likely in many states in which the Democrats have gained control of both chambers of the legislature. So far, the legislation has been restricted mainly to personal lines insurance.

Due to these recent changes, there are some added subjects that are expected in the state legislation in 2009 that have either been created or revitalized from the recent political and economic state of affairs. These subjects are listed below:

Antitrust

The Florida Senate Banking and Insurance Committee is revising the repeal of the insurance industry’s exemption under the Florida antitrust statute. The next Senate President kicked off this topic late last year. Application of the state antitrust laws to the insurance industry and to advisory and statistical groups, such as SFAA, is mainly unchartered waters. There is minor case law or enforcement of state antitrust laws against the industry, mostly due to state exemptions that reflect the federal McCarran Act.

Bad Faith

The trial bar is presumed to push bad faith legislation to Florida, Idaho, Louisiana, Michigan, Minnesota, Oregon and Washington. SFAA will evaluate all bills for application to both surety and fidelity bonds. The extra states in which there are concerns with the trial bar that could generate bad faith or other anti-tort development measures are: California, Colorado, Illinois, Nevada, New York, Pennsylvania, and New Jersey.

Regulation of Credit Default Swaps (CDS) Given the position that credit default exchanges played in the meltdown on Wall Street, a few state insurance regulators may try to regulate CDSs as insurance, or as surety or financial guarantee, depending on the descriptions and other licensing and capital and financial regulations in their insurance code. A CDS is a contract under which the supplier guarantees the consumer to pay upon the event of a credit incident, usually a failure to pay, at an exact entity.

The Missouri Insurance Department just released a bulletin affirming that it will standardize particular CDS as surety as of January 1, 2009, while the Department will use good judgment in its enforcement authority to the degree of any wide-ranging federal regulatory scheme is created for CDSs. Sellers of CDSs have to be licensed in Missouri, abide by the capitalization requirements, and agree to financial and market conduct regulation as insurers.

New York will be a key state because New York law usually has governed regarding the regulation of surety and financial guarantees because of the extraterritorial statute the Appleton Law. While New York initially confirmed that it would look into regulating CDSs as insurance in some way, in more recent proof in Congress, the Department stated that it would wait to see what development federal regulators made on addressing these free products. The New York legislature will carry out a hearing on CDSs in early December. There was legislation initiated in Congress late this year to demand every swap and copy to be traded on a regulated exchange. A number of the federal banking and securities regulators have stated that they are in the process of working on a clearing house for these transactions so that all the suitable regulators will have information required to observe and reduce the risk in these connections.

The Uniform Trust Act

In recent years trusts have been used more frequently, both in family estate planning as well as commercially in transactions. Along with the greater use of trusts came the understanding that trust laws were varied greatly from state to state and were considered thin at best. In an attempt to codify generally practiced and accepted common law principles regarding trusts, the National Conference of Commissioners on Uniform State Laws created the Uniform Trust Code (UTC) in regards to the creation of a uniform code for all fifty states.

Most law governing the regulation of creation and administrative duties of trusts in the United States have become statutory at the level of the state. The Uniform Trust generally involves three parties in its creation as well as its regulation of administrative duties. The first is the grantor or settler who is the individual that has created the trust; a trustee who oversees and manages the trust and its assets; and a beneficiary who, much like the title suggests, receives the benefit of the administrated trust.

The Grantor of a trust is simply the individual who has decided to create the trust by making a trust agreement which outlines the terms and conditions of the trust. Generally such a trust is revocable in that the Grantor retains the ability alter, change or revoke the trust at any time unless the terms of the trust specifically mentions otherwise.

The Trustee is the person or persons who manage the trust and all of the duties that are required to make the trust function properly. Unlike the Grantor position, a trust may have only one trustee or multiple trustees. This position is responsible collect trust assets, pay expenses and enforce or defend claims in its interests.

The Beneficiary as defined by the Uniform Trust Code is the person that has a present or future beneficial interest in the trust. These individuals are the holders of equitable title of trust assets and receive all the benefits of the trust property. The Beneficiary is also subject of the Trustee’s legal title ownership as well as control under the terms and conditions of the trust agreement dictated by that of the Grantor.

To date, twenty states have adopted some substantive form of the Uniform Trust Code and executed the laws as they see fit. Despite the fact that an attempt has been made to make all participating states uniform in regards to the handling of these trusts, each state has adapted the law as they see fit. The three most recent states that have tried to pass this new bill would also require a bond from the trustee to regulate their duties if the court decides on the necessity of protecting the interests of the Beneficiary. The court would also be granted the ability to set the price of the bond, the terms of liability and alter or terminate the bond at any time. Only Arizona has passed and enacted this bill, while Connecticut and Oklahoma defeated it.

Considerations when shopping for Surety Bonds

As a consumer of any type of purchase, the first thing that comes to mind for consideration is the final cost of the product. This same methodology rings true when shopping around for your surety bond needs, but this should not be the purchaser’s only concern. Aside from the bottom-line cost of the bond, there are several other factors that should be taken into account before settling down with the agency that is writing your bond. These include the surety’s financial strength, the requirements that must be met for the renewal of the bond, as well as attentiveness from the agency that will be writing the bond.

A good rule of thumb when doing a background check on a potential surety is looking up the Federal Treasury list. Every year surety companies are rerated by organizations like A.M. Best. They are given a letter grade that corresponds with the information submitted. Any agent worth a grain of salt will have this information readily available for you, as they represent the surety.

It is a good idea to find an agency that has experience in the industry that you are getting your bond in. The more experience the agency has will ease the transition and help with the expedition of the bonding for your industry.

When it comes down to the requirements that must be met for the renewal of the bond, there is a considerable difference from company to company. Some sureties will ask for periodical financial updates on the account that they have with their clients. These include, but are not limited to business financial statements such as balance sheets and profit and loss statements, credit reports as well as personal financial statements for the owner’s of the company. These updates are used for the guidelines that are established by the bond companies themselves, if at any time the requirements are not met, the bond will simply be terminated despite the how long the bond has been continuing.

Perhaps one of the most important and overlooked factors when determining a bonding agency is their customer service. Don’t be afraid to ask for referrals and client testimonials from the agency. Bond agencies should provide friendly customer care service. Another consideration should be the ability to quickly and efficiently turn bonds around and get them to their clients, especially if it is a contract bond. A strong relationship with a good agent can even yield helpful advice and alternatives even if they are unable to get to provide the desired bond.

Just like anything else that is purchased, there is more to buying a surety bond then just the cost of the bond itself. It is always a wiser decision to weigh all of these factors when considering any potential agency providing bonds so that you get a complete package that is right for you.

Stimulus Package Impact On Surety Bond Industry

The Federal government’s stimulus package will no doubt impact the surety industry. Will it mean business as usual for contract bond agents or a boom like we have never seen before?

The sheer size of the bill is absolutely daunting to put it lightly. The bill includes roughly 130 billion in funds towards construction related projects. It is the largest infrastructure investment seen in this country for the last 50 years. Unfortunately, it is impossible to come up with an exact number for construction spending, as the bill allows some departments freedom to use the funds for non-construction related expenses (see: Revovery Bill).

Stimulus Package Details

The website www.recovery.gov is dedicated by the government to keep Americans in the loop on where funds are being spent; it is currently vague at best with a bar graph including some categories of where funds are to be spent. A link below the graph titled “learn more” shows us the same figues in a bubble chart. I doubt showing the same information in a different chart format will appease many.

In all fairness, the bill was just passed yesterday so it might be a bit early to expect detailed information on the www.recovery.gov site. However, I am sure people will begin to demand more details to be provided since this is suppose to be an attempt at transparency through the use of the web.

The Engineering News Record posted an article on 2/13/09 entitled, The Stimulus Bill Compromise, Sector by Sector. They did a better job at breaking out the spending, specifically what applies to the surety industry. According to ENR, the major categories are appropriated as follows:

Transportation – $49.3 Billion
  • Highways: $27.5 billion
  • Transit: $8.4 billion
  • New discretionary grant program: $1.5 billion for highways, transit, rail, seaports, other projects. U.S. Dept. of Transportation would choose which projects would be funded
  • Airport Improvement Program construction grants: $1.1 billion
  • Rail: $9.3 billion, including allocations for Amtrak and high-speed rail
  • Port, transit, rail security: $300 million
  • DHS/Transportation Security Administration, procure, install airport explosives-detection, baggage-scanning equipment, $1 billion
  • Coast Guard, bridge alterations $142 million
  • Coast Guard, acquisition, construction, improvements $98 million
ENERGY – $30.62 Billion
  • Electricity grid, including “Smart Grid” activities: $11 billion
  • Home weatherization assistance: $5 billion
  • Energy efficiency and conservation grants: $6.3 billion
  • Renewable-energy loan guarantees: $6 billion
  • Carbon capture and sequestration demonstration projects, $1.52 billion
  • Clean Coal Power Initiative, round III $800 million
WATER AND ENVIRONMENT – $20.1 Billion
  • DOE environmental cleanup: $6 billion
  • EPA Clean Water and Drinking Water funds: $6 billion
  • EPA cleanup, including Superfund: $1.2 billion
  • Agriculture Dept., rural water and waste disposal facilities: $1.28 billion appropriations, to support $3.8 billion in loans and grants
  • Corps of Engineers civil works: $4.6 billion
  • Bureau of Reclamation: $1 billion
BUILDINGS – $13.365 Billion
  • GSA federal buildings, energy-efficiency upgrades: $4.5 billion
  • Border stations, ports of entry: $300 million
  • Facilities on federal and tribal lands:$3.1 billion
  • Fire stations (federal grants): $210 million
  • GSA new Dept. of Homeland Security headquarters, $450 million
  • GSA U.S. Courthouses, other federal buildings, $300 million
  • Agriculture Dept. bldgs/facilities $ 200 million
  • Agriculture Dept. rural facilities $130 million (supports $1.234 billion in loans)
  • NIST construction $360 million
  • NOAA procurement, acquisition and construction $430 million
  • NASA construction (hurricane damage repairs) $50 million
  • National Science Foundation academic facilities modernization $200 million
  • NSF major research equipment and facilities construction $400 million
  • DHS consolidation $200 million
  • DHS ports of entry $420 million
  • Smithsonian facilities, $25 million
  • National Institutes of Health, grants for construction, renovation of non-NIH research facilities, $1 billion
  • NIH buildings and facilities (construction, renovation) $500 million
  • Social Security Administration, National Computer Center replacement, $500 million
  • State Dept. Capital Investment Fund, $90 million
SCHOOLS – Unknown

Roughly $39.5 billion out of the $53.6 billion total for the State Fiscal Stabilization Fund is set aside for local school districts. These funds allow for school modernization, but a precise amount for construction purposes is undecided at this time.

HOUSING/HUD $9.6 Billion
  • HUD Public Housing Capital Fund: $4 billion
  • HUD redevelopment of abandoned and foreclosed homes: $2 billion
  • HUD energy retrofits, “green” projects in HUD-assisted housing projects: $250 million
  • HUD Community Development Block Grants (housing, services, infrastructure): $1 billion
  • HOME investment partnerships program $2,250
  • Lead paint abatement $100
Defense & Veterans – $7.78 Billion
  • VA: $1.25 billion for hospital and other medical facility construction and upgrades
  • DOD: $4.240 billion for “facilities sustainment, restoration and modernization,” includes energy-efficiency improvements, plus repair and modernization of DOD buildings, including medical facilities.
  • DOD: $2.33 billion for facilities projects, including housing, hospitals, child-care centers, other military “quality of life” projects.
OTHER – $100 Million
  • Security, border fencing, infrastructure, technology $100 million

Below you will find a chart that breaks out the details of spending towards construction. The size of the chart speaks to the size of the bill, as we could not fit the graphic properly on the blog. Please click here for a full sized version of the chart.


Bull Or Bear Surety Market?

All of this government spending must lead to a large surge in surety premium, right? Of course, but will it offset the slump seen due to the current economic conditions? John Welch, President of CNA stated the following during CNA’s 2008 4th qtr. earnings call on 2/6/09:

“The infrastructure part of the stimulus package from best I could tell looks to be anywhere $70 to $80, $90 billion, which is good and it’s great and we need it, but it still is relatively a small part of the overall construction spending in a full year.”

Does this mean that an expert such as Mr. Welch is bearish on a surety premium boom? Think again…In the same CNA meeting Mr. Welch stated:

“Our production was supported by the continued spending on public construction offset to some degree by the drop off in the private market. While there are strains on public construction spending, talk of a government stimulus package including public infrastructure spending give us some encouragement going forward.”

In other words, we are going to need to wait to see how this all plays out.

SBA Changes

The SBA announced today that they will receive $730 million from the bill. What does this mean for the surety industry? How about a raise on the maximum allowable contract amount for the SBA Surety Bond Program from $2 million to $5 million, a 250% increase. In special circumstances, the SBA can now even consider contracts up to $10 million, or a 500% increase! The additional funds will also be used to expand the program further.

Conclusion

The economy has seen better days. Every day on the news we all hear about more layoffs from industry to inudstry. Hopefully the stimulus bill is the begining of our road to recovery.

As one might guess, there is no clear answer on how the surety industry will weather this recession. Even the experts cannot predict what is going to happen, as this is uncharted territory for our industry and the country as a whole.

Personally, I am an optimist and see the surety industry getting through this crisis better than most other industries. This is something we will all have to watch as it unfolds.

Are you bullish or bearish on the surety industry? Leave a comment below!