Surety Bond News

Nevada mortgage broker surety requirements have been changed due to a new bill. The bill is labeled AB 77 and alters the bond amount required of mortgage brokers. The previous law stated that the bond amount was calculated by the number of branches that the broker had or its yearly loan volume. The set bond amount was $50,000 plus $25,000 for each branch, but was capped at $75,000; or the bond had to be $50,000 if the broker had less than $20 million in loan volume and $75,000 if the broker’s loan volume was over $20 million. AB 77 does away with the bond amount calculation using the number of branches. It’s now calculated by loan volume only. The new legislation also terminates the option to post alternative forms of security in place of a bond and changes the state bond form to require the signature of a Nevada Licensed Insurance Agent instead of a Nevada resident agent.

New York legislators have re-adopted regulations to implement AB 6924 (2009). The New York Banking Department now requires mortgage loan originators to obtain a surety bond. Should the originator be an employee or exclusive agent of an originating entity subject to the present surety bond requirements, then the employer’s bond could be utilized to meet the requirement. The current law requires mortgage brokers to obtain a bond ranging from $10,000 to $100,000 calculated by loan application volume; under the new bill they must acquire a bond ranging from $50,000 to $500,000, which is calculated by the volume of New York closed loans. AB 6924 states that the Superintendent has the ability to require a larger bond if the “nature or business of a [mortgage loan originator] or originating entity requires in the reasonable judgment of the Superintendent such additional protection for consumers.”

Montana mortgage broker and lenders now have a new rule to follow in order to stay legal with the state. A new bill was enacted named HB 90 and requires mortgage servicers to acquire a $100,000 surety bond. HB 90 states that mortgage lenders and mortgage brokers must obtain a bond whether they’re a company or an individual. The new bill also includes a cancellation provision which requires a 30-day notification to the Division.

Individual mortgage loan originators in Georgia State no longer need to obtain a surety bond for themselves. A new law titled HB 239 gets rid of the requirement for individual mortgage loan originators which requires them to acquire a surety bond. In its place, the new law states that individual originators must be covered under a sponsoring mortgage broker or mortgage lender; so the individual bond is not necessary.

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.