Surety Bond News

The state of Alabama enacted a new law on 05/21/2009 concerning the Boxing Commission. The new law, which is labeled SB 98, produces the Alabama Boxing Commission. SB 98 now requires promoters to be licensed and must acquire a performance bond in an amount and under the conditions that the commission will establish. Also, any individual boxing promoter is required to post a permit for every match and the Boxing Commission can ask for a performance bond with any permit as well as the license bond.

Califonia’s SB 1007 law originally did not have any relation to fidelity bonds. When the law was amended and became effective on January 1, 2009, it required exchange facilitators to be licensed and obtain either a minimum $1 million bond or fidelity bond, securities, post cash, or an irrevocable letter of credit in the same amount. Financial Institutions and title insurers, underwritten title companies and controlled escrow companies are exempt from the licensing requirement of the bill, but they still need to comply with the bonding and insurance requirements.

On 06/19/2009, Texas has enacted HB 2774. This eliminates the $25,000 net worth and $50,000 license bond requirement for mortgage brokers. This law requires that the financial requirements for holding a mortgage loan officer or mortgage broker’s license must be met through participation in the mortgage broker recovery fund; under Texas law in section 156.01 of the financial code, this already exists. The new law amends the recovery fund provisions. This change limits payments out of the fund to 25,000 aggregate for all claims arising from the same transaction, and to $50,000 as to all claims against a licensee. From now on this will not allow recovery of attorneys’ fees and court costs. Also, payments from the recovery fund will be reduced by any recovery from the surety or insurer. The banking regulators can use these funds to cover any costs of safely managing old mortgage loan documents and any financial responsibilities of administering the fund.

The Oregon Construction Contractors Board has changed a requirement for new and renewing licensees in which they must choose an endorsement for their license rather than a licensing category. The endorsements are broken down into either Residential Endorsements or Commercial Endorsements.

The reason for this change is to make it easier for contractors because they would be able to include a range of disciplines under a single license. With over 45,000 licensed contractors in Oregon, this licensing structure also helps the Construction Contractors Board (CCB) to more effectively regulate licensees.

Because of this change, the CCB is also requiring licensees to submit their contractor license bonds on a new bond form and for the amount specified according to the endorsement they choose. For those with a Dual Endorsement, two separate bonds will be required – one for residential and another for commercial.

The change was made effective July 1, 2008 for all new licensees. For existing licensees, it will come up when your license renews. If you are unsure of the bond requirement for your license endorsement, refer to the CCB Licensing Endorsement Chart. You can also refer to the renewal notice packet the CCB sends you – they are providing detailed explanations about the endorsements and the new bond requirements. If you believe your license is up for renewal and have not received a renewal notice, you should contact the CCB immediately.

Once you receive your renewal notice from the CCB, be sure to contact your bond agency to have your bond issued on the new bond form. You will need to let them know which endorsement you have chosen – Residential or Commercial, and the bond amount now being required. If you have chosen a Dual Endorsement, let your agent know that you will need both the Residential Contractor Bond and Commercial Contractor Bond.
They should already be familiar with this new bond requirement and will be able to ease you through the transition from your old bond to the new one.

If there has not been a significant increase in the bond amount, most sureties will be able to issue the new bond without additional underwriting. In the case that additional underwriting is required, be prepared to provide updated information, especially if the bond amount has increased significantly. These updates could include personal financial statements and/or business financial statements (fiscal year-end and year-to-date). In either case, the process should be fairly easy – with the assistance of the CCB’s Customer Service Unit and your bond agency.

In the past two years, many things have changed in operations of the underwriting departments of Surety Companies nationwide. To start, the criterion had been minimal and the premiums were low prior to 2006. In addition, many Mortgage Brokers have filed Bankruptcy in the past two years leaving the Surety Companies on the hook to pay any outstanding claims. Hence, these have impacted a change in the underwriting process and higher premiums for bonds.

There are many factors that a Surety company will take into consideration to come up with a premium for a Mortgage Broker Bond. One of the important factors that the Surety Companies are now scrutinizing is personal credit of the owners of the company. Typically, any owner of a company applying for a bond and showing over 5% interest in ownership must be listed on the agreements for a bond. A company applying for a bond is only as strong as its weakest link. The basis of the premium will end up being based on the owner with the worst credit. This means if all owners of the company have great credit and one owner is having credit issues the basis for the premium will be the owner’s reports with the credit issues.

Another aspect that the Surety Companies are looking at is the liquid assets of each owner of the company. They want to make sure that in case there is a claim against a bond that the company or owner of the company can cover the claim up to the specified amount of the bond. Additionally, as the net worth of a mortgage companies goes down, it will become harder for them to qualify to obtain or renew their surety bonds they have in place. Also, litigation against mortgage brokers and lenders has made it more difficult to get approval for a surety bond. This is also the reason that most Surety Companies require a spousal indemnification (signature of responsibility) from the spouses of each owner. This will prevent a company owner from transferring all of his or her assets to their spouse and closing up shop. This demonstrates accountability on the part of the small business owner.

Unfortunately, one of the last criterions that a Surety Company is concerned with is the experience that a broker may have in the Mortgage Industry. While it is somewhat important to the Surety, the industry as a whole has shifted to operate as a higher risk industry. Start-up companies are being especially hard-hit by the new underwriting climate, since many of the surety bond companies refuse to underwrite surety bonds to new companies.