Hawaii has created a “recovery fund” in lieu of their mortgage broker bond requirement, which is repealed at the end of 2010.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 lenders and brokers must follow new requirements that were set in West Virginia State. The new law is named HB 4285 and authorizes any individual that is not subject to the present legislation’s licensing requirements for mortgage lenders/brokers and who also employ mortgage loan originators to register with the Nationwide Mortgage Licensing System and Registry; they must also acquire a surety bond in the suitable quantity for its mortgage loan originators. HB 4285 authorizes the Commissioner of Banking to decrease or relinquish the surety bond requirements for mortgage loan originators employed by nonprofit business’s, including community housing development organizations, or any municipal, state or federal agency supplying loans to individuals with incomes under the HUD established median income for a specified region.
Alaska State mortgage brokers and mortgage lenders must cooperate with a new law which is referred to as SB 279. The new law modifies the present surety bond requirements for mortgage brokers and lenders. The previous legislation required a $25,000 surety bond while the new law, SB 279, requires a surety bond in a quantity that is established via policy. Also, the previous law only required the surety bond to stay active until the mortgage lender or broker’s license was retracted. The new legislation requires the surety bond to remain active for three years after the cancellation of the license. 
Mortgage brokers must abide by a new bill that was enacted in Washington State. The new bill, which is labeled HB 1749, addresses mortgage brokers, who are required under present legislation to be licensed and bonded. The previous law required a license bond in a quantity ranging from $20,000 to $60,000. HB 1749 terminates the existing surety bond amount, and states that the Banking Commissioner will promulgate the surety bond amounts, which will differ according to the yearly loan origination volume of the broker. The new legislation also terminates other alternatives to bonding authorized under the previous law. Should the surety bonds under the new requirements not be obtainable, then the Director of Financial Institutions will relinquish the requirement. HB 1749 provides for a mortgage broker recovery fund. Only individuals acquiring a judgment in court regarding damages sustained as a result of a mortgage broker can make recovery from the fund. 
