Hawaii has created a “recovery fund” in lieu of their mortgage broker bond requirement, which is repealed at the end of 2010. The change helps fraudulent loan originators and penalizes those who play by the rules. In addition, it makes it more difficult and costly for the public to collect payment on a claim.
Bad For The Public:
Hurting the victims
According to the Department of Commerce & Consumer Affairs, “A consumer will be required to obtain a judgment from a court and will have to exhaust all other remedies before applying for recovery from the fund.”. So after a mortgage loan originator commits fraud, the victim must then hire legal counsel to file a judgment. Unfortunately, the victim is out of luck if the judgment is over $25,000 since that is the max the fund will pay out to an individual.
No Skin In The Game = More Fraud
With a surety bond requirement, each loan originator had to file a bond to guarantee their specific company. In the world of suretyship, bonding companies require corporate indemnification, as well as personal indemnification of all owners and their spouses, holding the surety harmless in the event of a claim. In layman’s terms, that means if a claim is paid out, the surety will pursue the company, it’s owners, and the spouses of the owners for financial reimbursement, including legal fees. If they are unable to reimburse the surety, they will never be bonded again.
More Government Bureaucracy
If a claim occurred under the bond, a licensed bonding company would handle the payout. There is no requirement to obtain a legal judgment in the courts first. Bonding companies will refuse invalid claims, but would risk their license to do business in the state should they refuse to pay a valid claim. I think most of the public would prefer dealing with a private company that is held accountable rather than working their way through the courts, then having to deal with more government bureaucracy with the recovery fund.
Why it’s bad for Hawaiian Mortgage Loan Originators:
Now that the government has setup a recovery fund, there is no underwriting to ensure those who are likely to commit fraud pay more into the fund. Some might call this a level playing field, I prefer to call it socialism. Why should those who play by the rules be subject to paying the same amount as those who don’t?
What is the solution?
Hawaii’s mortgage bond requirement was small when compared to other state requirements. Some states have requirements over $100,000 where Hawaii’s was only $15,000. A bond requirement is the right solution for the reasons above. However, the state’s previous requirement was too small and out-dated. A requirement $50,000 (or more) provides the public more protection than the current recovery fund and helps to keep more fraudulent companies out of the playing field.