Mortgage Broker Bond

Mortgage Broker Bonds Information and Resources

Mortgage broker bonds are license bonds required by state governments. The bond guarantees the mortgage broker (principal) will operate per the rules and regulations of the state licensure code. Laws regulating mortgage broker bonds vary from state to state.

Consequently, each state requires a separate bond, stating the penalty amount and precisely what statutes are being guaranteed by the bond. Mortgage brokers bond forms or application must be submitted and approved by the local state department and agency. Currently, many states are beginning to accept and process mortgage broker bonds and other forms through the online system of Nationwide Mortgage Licensing System (NMLS.)

 

Mortgage broker bonds are currently being written at great rates for those who qualify. In general, rates are lower than other license bond types. However, not all bonding companies offer lower rates for mortgage brokers.

 

Some of the sureties offering lower rates are not willing to write bonds in all 50 states due to high risk bond language. Therefore, it is critical for your surety agent to be familiar with the current markets.

 

Let's use New York for demonstrative purposes. Here's a partial example of some of the fine print in a mortgage broker bond application: WHEREAS, Article 12-D of the Banking Law of the State of New York requires all registered mortgage brokers "principals" to furnish a surety bond in an amount based on the principal's volume of business, as set forth in section 410.15 of part 410 of the Superintendent's regulations, this principal is required to furnish a surety bond in the amount of XX,XXX dollars. In New York State, the surety bond ranges between $10,000 to $100,000 depending on the amount of loans made in a year.

 

In the past two years, many things have changed in operations of the underwriting departments of Surety Companies nationwide. To begin with, 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. Therefore, 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 determine 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. Usually, 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 part. The rate 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 factor 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 decreases, it will become harder for them to qualify to obtain or renew their surety bonds they have in effect. 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 down the business. This demonstrates accountability on the part of the small business owner.

 

Unfortunately, one of the last criterions that a Surety Company looks at 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 be operate at high risks. Start-up companies are being especially hit hard by the new underwriting atmosphere, since many of the surety bond companies refuse to underwrite surety bonds to new companies.