LB 328: License Bond – Mortgage Loan Originators
Mortgage loan originators must register and be covered by a surety bond. Through this new law the previous bond requirement for mortgage bankers will now need to provide coverage for all originators that the banker employs or that are independent agents of the banker. Under prior law the bond amount was $100,000. The new changes will consist of the bond amount being based on the total dollar amount of the closed residential mortgage loans originated in the state. There must be a base of $100,000 and a maximum of $200,000. This new law became effective upon enactment.
HB 4178: License Bonds – Mortgage Loan Originators
Mortgage Loan Originators must be covered under a surety bond in the amount based on the loans originated. Licensees that are the employee or exclusive agent of a person subject to the existing bond requirement may be able to use their employers bond to fulfill this requirement. Mortgage lenders must obtain a bond in the amount no less than $100,000 under current regulations. The amount of the lenders aggregate loans are what regulate the amount of the bond, and it must be capped at $500,000. Under the new law the Commissioner of Banks is authorized to promulgate regulations to implement the bond requirement. This law became effective as of July 31, 2009.
CONNECTICUT SB 1110
With bill will revise the existing licensing laws for mortgage lenders, brokers and originators. Under existing law a surety bond was required to be posted in the minimum amount of $40,000. This was enlisted to regulate the bond amount by the licensee’s loan origination volume. The revised bill will require mortgage lenders and correspondent mortgage lenders to post a the minimum of $100,000 surety bond and mortgage brokers would be required to post a minimum $50,000 bond. The licensee would have to obtain a bond that covers all loan originators that the licensee sponsors at all locations after the initial bond that covers the license for the main office.
SB 355: License Bond – Mortgage Originators
This law requires mortgage originators to be covered by a surety bond. If this is not feasible this new law will permit the Superintendent of Banking to establish a recovery fund. The new law requires that the surety bond that is covering the mortgage loan originators must be posted in an amount that reflects the dollar amount of loans originated according to the Superintendent’s determination. The originator can be covered underneath of their employer’s surety bond or if they are the exclusive agent of a mortgage broker, mortgage banker, industrial lender or a consumer lender. Those positions are subject to bond requirements under existing law, the employer’s bond will suffice for the bond requirements for originators. The bond amount must reflect the dollar amount of the loans originated for an employer’s bond.
HB 1646 License Bond – Mortgage Loan Brokers
This law requires loan brokers, mortgage loan originators and principal managers to be licensed. Also under this new law requires that a surety bond must be posted to cover originators and principal managers who are employees of the loan broker. The surety bond amount that will be posted is determined upon the total amount of residential mortgage loans originated in the previous calendar year. If the total is not greater than $5 million the bond amount will be $50,000. If the total amount is between $5 million and $20 million the bond amount posted will be $60,000. Any amounts that exceed $20 million will be posted in the amount of $75,000. This law became effective on January 1, 2010.
HB 169: License Bond—Mortgage Brokers and Lenders
This will repeal the existing bond requirements for mortgage lender and brokers. The previous law required a surety bond to be posted in the amount of $25,000 plus another $10,000 per branch. The State now has a mortgage recovery fund under the new law instead of a surety bond. This law became effective July 1, 2009.
SB 1218: License Bond – Mortgage Brokers
This bill will incorporate the federal definition that a mortgage loan originator will be required to be covered by a surety bond in an amount of the loans originated. The loan originator is also covered if he/she is an employee or an exclusive agent of a licensee; this will fulfill the bonding requirements as well. Under this new law it will require that the bond must provide coverage for all originators. This bill became a law because the Governor vetoed the bill and the legislature overrode the veto.
Arkansas revised its law for mortgage brokers, bankers, and servicers. HB 1881 now states that there is no set bond amount. The Securities Commissioner now determines the bond amount based on the loan activity in the past year of the broker, banker, servicer. This needs to be of a minimum of $100,000. These bonds will also cover the employees of the broker, banker or servicer.
Cash or other securities are no longer accepted in lieu of the surety bond.
Effective June 1, 2009, Alabama Mortgage Loan Originators are required to be licensed and to obtain a surety bond. They may be covered under their employers’ bond who is subject to the Alabama Consumer Credit Act or the Mortgage Brokers Licensing Act. The surety bond must include an amount for the loan originator equal to the amount of loans originated.
Effective as of November 21, 2009, a surety bond is now required for mortgage brokers in the state of Alabama. The surety bond is needed if the broker does not meet net worth requirements of the state. The State Banking Department will determine the actual bond amount.
Mortgage Lenders and servicers in the state of California have a minimum surety bond amount of $50,000, while a minimum bond amount of $25,000 is in place for finance lenders and brokers. Also, based on the amount of loans originated, the state may increase the bond amount accordingly.
Mortgage broker bonds, mortgage banker bonds and mortgage lender bonds are all obviously closely related to one another in that they all provide some sort of guarantee for the performance on a person or entity involved in a mortgage loan. Often times the same (or very similar) bond form may be used for each of these types. However, they differ in who and what exactly they guarantee. These commercial surety bonds are actually named after the principal of each bond. For example, the principal for a mortgage broker bond is the mortgage broker required to obtain the surety bond.
Mortgage brokers submit mortgage loan applications on behalf of their customers to individual banks and lenders, and then assemble loan costs and escrow funds to submit to banks and lenders they’ve opted to do business with. Mortgage bankers and lenders offer mortgage loans and various other forms of secured as well as unsecured loans.
Subsequently, each of the 50 states require that these businesses (mortgage brokers, mortgage bankers and mortgage lenders) obtain necessary licenses to conduct business in that state, and also that they post either a mortgage broker bond, mortgage banker bond or a mortgage lender bond. These surety bonds are required by the state, which for these bond types happens to be the obligee for the bond, of the respective principal (mortgage broker, banker or lender) in order to guarantee that the principal will follow all applicable state laws pertaining their specific industry, and also that the principal properly accounts for and remits funds received from customers. These surety bonds also protect the public from any form of fraud or misrepresentation by the bond’s principal, while allowing the state to keep a hold-harmless agreement for any such misconduct.
At first glance, some people may assume that mortgage bonds (mortgage banker bonds, and mortgage broker bonds) are all the same. While there are some similarities between the two types of commercial bonds mentioned above, there are also some clear differences which this article will outline.
Mortgage Banker vs. Mortgage Broker: Most surety bond companies classify mortgage banker and mortgage broker bonds in a similar fashion, but there are some operational elements to each that differentiate the two. Mortgage brokers serve as a “middleman” by bringing principals together with banks that end up loaning qualified principals funds. Mortgage bankers (also referred to as mortgage lenders) are the entities that actually lend money to the principals, and they act as both the banker and broker for the loan. Understanding the difference between a mortgage broker and a mortgage banker (or lender) is the first step toward understanding similarities and differences between mortgage broker and banker bonds.
Bond Amounts: Perhaps the most obvious difference between the two types of bonds lies in the amounts in which they are commonly written for. Mortgage banker bonds are typically much larger, or written for much more money, than mortgage broker bonds are, and can be two to three times the size of mortgage broker bonds. Therefore, qualifying for mortgage banker bonds can be much more challenging for a prospective principal.
Bond Forms: Every state will have a separate bond form for mortgage banker and broker bonds, which will spell out exactly that the specific bond guarantees. The bond forms may differ depending on the language of each state. While any given state’s bond forms for each type may appear similar, it is important to carefully read the bond form, or work with a knowledgeable bond agent, to ensure you understand exactly what is being guaranteed.
Similar Risk for Mortgage Bankers and Brokers: Contrary to popular belief mortgage banker and mortgage broker bonds both have very similar risk factors. Seeing that the bond amounts for mortgage banker bonds are on average significantly higher than those of mortgage broker bonds, most people would think that mortgage bankers face more risk, however that assumption is not necessarily accurate. While the nature of a mortgage banker’s job makes the risk they face obvious to most, the many challenges mortgage brokers face seem to level the playing field when it comes to risk. Recent studies have further proven that the claims ratios for both types of bonds are comparable.
Over the past decade, the surety bond industry has seen some significant changes that have changed the industry landscape, particularly when it comes to high risk bond programs. Companies that were dropped by their bond companies as a result of bad credit, etc, have been forced to find new bond agents in order to help them attain new surety bonds. This created a slew of challenges for agents, as they now have to find markets for these customers with credit problems, and will typically require significant collateral in order to write a bond for someone with bad credit. To serve these types of principals, Bad Credit Surety Bond Programs came into play.
High Risk = Higher Premium: Before there were high risk bond programs, underwriters of surety bonds would only write bonds for customers (or principals) that presented little to no risk of having a claim arise against them. In other words, they went after a “0% loss ratio”, and the bond companies were in a position to do so. With Bad Credit Surety Bond Programs, the underwriters of bonds are able and willing to write bonds for principals that are higher risk (of having a claim), and can do this by approving them at higher premiums. Similar to insurance companies, surety bond underwriters can approve a wider array of customers, but approval for those more likely of having a claim is obviously comes at a cost to the principal… higher rates.
Collateral vs. Increased Premiums: Early on in the process, Bad Credit Surety Bond Programs brought about a need for bond companies to require collateral from principals. This tends to be a cumbersome, time-consuming process that involves a lot of administrative effort, and therefore many bond companies decided to avoid the collateral requirement by offering higher premium rates to their principals. Customer preference depended on the specific principal’s financial situation. Typically, however, the bond programs that offered higher premiums vice collateral were less expensive for the first year of the bond, but over time those that required collateral proved to be less expensive. This was due to the fact that the collateral would eventually be returned to the customer (roughly a year after the bond’s release) if no claims arose.
Knowing Your Options: It is important for principals with bad credit to understand what all of their options are. While many Bad Credit Surety Bond Programs are designed to meet the needs of customers with poor credit, and often times prove to be the most cost-effective option, they are the only option available. For example, an Irrevocable Line of Credit (ILOC) is an alternative whereby the bank will freeze liquid assets of a principal in an amount equal to the total amount of the surety bond they would need to purchase. This would only be more preferable for principals with enough liquid assets to comfortably have the amount of the ILOC frozen by a bank. For customers that truly value their liquidity, and ability to quickly have cash on hand, an ILOC is probably not a viable option. While ILOCs have traditionally had services of around 1% the cost of the line of credit, the money market rate will have an impact on that as well, and can significantly raise the annual rate of the ILOC for the customer. For example, if the money market rate is 5%, and the service fee for the LOC is just 1%, the actual annual rate the principal pays for the ILOC is 6%. Customers must understand the choices available to them, and should choose the option that best fits their specific needs.
Outlook: High Risk Surety Bond Programs have been around for more than 5 years now, and it does not appear that they are going anywhere in the foreseeable future. More and more companies are willing to write surety bonds for principals with bad credits, and those that carry some sort of risk of having a claim arise. While increased premiums are part of what makes bonding companies willing to do this, the increasing number of bonding companies writing high risk has created competition. Competition is obviously a good thing for the customers, in this case the principals with bad credit, because it will eventually drive premium rates down, making Bad Credit Surety Bonds more affordable.
In July 2008, North Carolina House Bill 2463 was passed, and contained a number of changes to the state’s “Mortgage Lending Act” (Article 19 of G.S. 53). While Article 19 applied to just mortgage bankers and mortgage brokers (mortgage lenders), HB 2463 extended coverage to include “mortgage servicers” in the state of NC.
This bill requires mortgage servicers to post a $150,000 license bond (type of commercial bond/surety bond), the same type/amount already required by other mortgage lenders operating inNorth Carolina.
With the signing of this bill, the NC Banking Commission is now authorized to charge a fee for expenses incurred during examinations of any licensees’ books/records in order to ensure compliance. Before HB 2463, such examinations were paid for by the Commission.
To clarify, the term “mortgage bankers” pertains to a person that makes mortgage loans, while “mortgage brokers” are people who solicit applications for such loans, issue loan commitments, etc.
Legislation was recently passed that now places Alaska-based mortgage bankers and mortgage brokers under the direct regulation of the state’s Division of Banking and Securities. The new legislation requires all brokers and lenders that apply in the state after 1 July 2008 to ensure compliance with the new regulations. The law requires all mortgage brokers and mortgage bankers throughoutAlaska, not just new applicants, to be in compliance with the new regulations no later than 1 March 2009.
Some of the new regulations under the Alaska Division of Banking Securities are a more extensive background check, additional monitoring of company records and applications. There will also be a mandatory examination and annual continuing education requirements for Mortgage Originators. A surety bond in the amount of $25,000 will be required as well. However, sinceAlaskais not considered to be a “brick & mortar state”, physical offices will not be required for mortgage brokers/bankers.
To understand surety bonds, and how they work, it is best to start off by breaking them down into larger groups or categories. There are two major categories of surety bonds: Contract and Commercial Bonds. In this article, I will briefly explain what each of the previously listed bond types guarantees, and will also provide you with a few examples of each.
The first category of bonds I will discuss are contract bonds. Contract Bonds are purchased by a contractor (or principal) from a surety at the request of a project owner (obligee), and essentially provide obligee with assurance that the principal will perform in accordance with the terms of the contract (i.e. complete the work, pay subcontractors, material suppliers, etc.).
Examples of Contract Bonds:
- Bid Bonds – Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds.
- Construction Bonds – These are bonds designed to guarantee the performance of obligations under a construction contract.
- Payment Bonds – These bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers and materials suppliers associated with the project.
- Performance Bonds – Guarantee performance of the terms of a contract by a contractor.
- Site Improvement Bonds – These bonds guarantee that any public property that was disturbed or altered during the conduct of a private project will be completely restored upom completion of the project.
- Subdivision Bonds – May be required by local government to ensure that landowners follow-through and complete mandatory public improvements made to their property by builders.
The next category of bonds we will cover are commercial bonds. There are litterally hundreds of different types of Commercial Bonds, which guarantee the obligee that the principal (purchaser of the bond) will perform per the terms outlined on their specific license, etc. The obligee for this type of bond is typically some sort of government entity.
Some examples of the many types of Commercial Bonds are:
- ARC Bonds – Required by the Airlines Report Commission.
- Auto Dealer Bonds – Bonds required by each state to ensure auto dealers abide by state regulations.
- Broker Bonds – The different types of Broker Bonds available are Freight Broker, Insurance Broker and Mortgage Broker Bonds.
- Cigarette Tax Bonds – Cigarette distributors may be required to obtain this type of bond to ensure payment of taxes.
- Collection Agency Bonds – Bonds required by a governing body to ensure collection agencies operate within rules and regulations.
- Freight Broker Bonds (BMC-84) – These federally-mandated bonds must be obtained by freight brokers to ensure delivery of brokered goods.
- License & Permit Bonds (not listed) – Due to the very high number of bonds nation-wide that fall under this category, this link will provide general information on license & permit bonds.
- Liquor Tax Bonds – Bonds required to guarantee the payment of taxes collected on liquor and other alcoholic beverage sales.
- Mortgage Broker Bonds – Bonds that are required by many states to ensure that mortgage brokers operate in accordance with all pertinent rules and regulations of that particular state.
- Sales Tax Bonds – Required by the government to ensure timely payment of sales tax by a company.
- Telemarketing Bonds – These types of bonds are required by the state to ensure that telemarketers, or phone solicitors, follow all rules and regulations set forth by that particular state in the conduct of their solicitation.
Contract and Commercial Bonds can also each further broken-down into many more sub-categories (i.e. A License & Permit Bond is a sub-category of Commercial Bonds), and some of these sub-categories can have numerous different types themselves. Each and every sub-category of surety bond is underwritten differently by the surety bond companies, and there may also be different application requirements for each types as well.