Surety bonds

Mortgage brokers and mortgage lenders are frequently required to submit a surety bond as part of the licensing process. The bond guarantees that the mortgage broker/lender will obey the laws and regulations of the state in which it is licensed. In the event that the state banking department finds a violation of its laws or regulations, it can impose a fine or require the company to issue refunds to its customers. If the company does not make the required payments, the surety bond will be used to make the payments. When the bonding company makes the payment to the banking department, it then requires the mortgage company to reimburse the bonding company for all amounts it paid out under the bond.

Each state has its own language and required amount for its surety bond. Based on the language and amount of the bond, certain bond companies will not write surety bonds in certain states or will make the premiums to buy the bond very high. In the boom years that ended in 2006, it was very easy to get a surety bond. Underwriting was simple and premiums were low. But in the last two years, mortgage companies have gone out of business or filed for bankruptcy, leaving the bond companies to pay the claims that the mortgage companies should have. Since the risk has gone up to the bond underwriters, the costs of getting a surety bond have gone up for mortgage companies. Additionally, as the net worths of mortgage companies have gone down, it becomes harder for them to qualify to obtain or renew their surety bonds. Moreover a surge in litigation against mortgage brokers and lenders has made it more difficult to get approval for a surety bond. Start-up companies are being especially hard-hit by the new underwriting climate. Many of the surety bond companies refuse to underwrite surety bonds to new companies.

If you need a surety bond, you will have to expect to pay more than you have in the past. You can also anticipate that you may not qualify for as many bonds as you did in the past. This is the time to do your cost benefit analysis of each state in which you are licensed. Are the costs of maintaining your license in each state less than the fees you are making in each state? If not, get out of that state (follow each state’s rules for inactivating or surrendering a license) and cancel your registered agent and surety bond. If you intend to stay in the business, keep your financials looking healthy by putting earnings back into the business. Individual loan officers should be cognizant that in some states, their credit report must be submitted. You should also be aware that part of the underwriting process requires personal guarantees from the owners of the mortgage broker and lender companies. Even if the company goes out of business, the surety bond companies reserve the right to go after the owners to pay the claims from the banking departments.

It’s a difficult climate to be in the mortgage business and the state regulation will get tighter. Stay on top of the licensing requirements to ensure that your business stays in business.