Surety Bond News

Real estate closing agents must abide by new legislation in the state of Iowa. The Iowa Banking Division has modified its regulations to enact SB 2348 (2010). SB 2348 requires real estate closing agents to obtain a $25,000 surety bond in order to be licensed with the state but the Superintendent of the Division of Banking has the ability to require a larger bond. When it comes to mortgage brokers and mortgage bankers, the new law also requires the bond amount to be calculated by the amount of residential mortgage loans serviced; opposed to the current law which calculates the bond amount by the amount of residential mortgage loans made, originated, arranged, brokered, processed, and underwritten.

There are countless clients calling us at JW Surety Bonds who are surprised and even frustrated when they find out how much a bond will cost them. Many of these customers have had bonds years ago claiming they only had to pay a fraction of what they are being asked to pay these days; what many people don’t understand is that the surety industry has a consistent pattern when it comes to bond underwriting.

Commercial and contract bond underwriting was very lax several years ago; but in this article I’ll be speaking on commercial bonding. There was a flat rate that would be charged for most commercial bonds which mostly depended on the type of bond and amount. No matter what the client’s financial condition was, whether good or bad, bond premiums were pretty consistent. As a result of sureties writing bonds so laxly, an influx of claims arose against the bonds. The claims were a lot of stress on the surety companies because they were the ones backing the bonds and any claims that arose. Although the surety company will go to the client with the bond claim for reimbursement, many clients couldn’t pay the claim because of their weak financial condition which was not researched prior to the bond issuance. This made the surety companies become much stricter when it came to assessing clients in search of bonds, specifically when it came to their financial strength and responsibility.

Let’s fast forward a bit to the present. Now, as oppose to charging flat bond rates dependent on the bond type and amount, it’s now based off of the client’s financial strength which is strongly based off of credit, personal, and business financials. The surety company will look at your credit history, which is used as a gauge as to how you handle financial responsibility. Depending on your credit history, the surety will charge a percentage of the bond size (roughly 1-20%). Now should you be a client with bad credit who had a bond a few years earlier before sureties became more stringent, you will more than likely see a large increase in the cost for a bond because it’s no longer a flat rate bond premium but a percentage of the bond amount calculated using your credit history and financial responsibility.

Many people find this increase in bond cost unfair. When it comes down to it your credit history is an efficient way to assess how you handle your financial obligations; this helps assure that if a claim does arise, you‘re not only capable but willing to pay the claim. The surety industry is cyclical; there is a back and forth pattern when it comes to bond premiums and approvals. Sureties will go from being very lenient, selling bonds and approving anybody and everybody, many claims will arise from these bonds costing the sureties thousands, which will then result in sureties becoming much stricter when it comes to bond approvals. Once the surety’s approval process is more conservative, they bring in much less money which forces sureties to slowly become more lax. At the moment, we seem to be somewhere in the middle of this cycle.

Changes in the surety bond industry are few and far in-between, but the conservative/non-conservative bond approval cycle is one consistent element that shifts in the surety industry. Credit based bond premiums are much more sound and accurate when dealing with financial accountability and potential claims. Although it doesn’t happen often in the surety world, change is welcome in our eyes because it has often facilitated innovation within the industry.

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.

Mortgage brokers, bankers, and servicers are all affected by a law update in the state of Arkansas. Named HB 1881, the new law updates the current surety bond requirements for mortgage bankers, brokers and servicers. The previous law required mortgage bankers and servicers to obtain a surety bond in the amount of $100,000; while mortgage brokers had to obtain a $50,000 surety bond. HB 1881 allows the Securities Commissioner to prescribe the quantity required through regulations. The surety bond amount will be calculated by the mortgage banker’s, broker’s or servicer’s loan activity in the preceding year and it must be less than $100,000. The surety bond also has to cover the loan officers that a banker, broker or servicer employs, assuring the loan officer’s truthful performance of their responsibilities and be for the state’s advantage for claims in opposition to the officer. HB 1881 also revoked provisions of previous law that authorized cash or other security in place of the surety bond so that only a surety bond will be acknowledged.

Mortgage brokers and lenders must recognize a new act in the District of Columbia. The new act which is named B 1020 is the Mortgage Lender and Broker Emergency Amendment Act of 2008. The new law requires a net worth requirement on mortgage brokers while inducing the license bond requirement under present law. B 1020 also authorizes the broker to pay into a recovery fund as the Commissioner of the Department of Insurance, Securities and Banking imposes in lieu of meeting the net worth and bonding requirements. The current law bases the bond amount on the loan volume of the broker with a minimum amount of $12,500 and a maximum amount of $50,000. The law was introduced behind schedule in the session and was enacted after 11 hours. The bill adds a new federal law enacted under H.R. 3221 (2008), which asks the Secretary of Housing and Urban Development to institute licensing and bonding requirement standards for all mortgage loan originators and brokers. While under the federal structure, all state licensing laws must contain a surety bond or a minimum net worth requirement. The federal law requires the surety bond amounts or the net worth levels to be based on the volume of loans. H.R. 3221 also permits the utilization of recovery funds in place of bonding or a minimum net worth. All states have 24 months to apply the federal standards, or the secretary’s federal program will apply. The District of Columbia has chosen to ask for both a surety bond and a net worth standard, and also authorizes for a recovery fund payment. B 1020 also revoked the present requirements for the bond amount. The Commissioner of the Department of Insurance, Securities, and Banking will establish all requirements for the surety bond under the new law.