Following the financial crisis of 2008, the federal government adopted the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), which obliged all states to introduce a registration and licensing system for mortgage brokers. States could choose between introducing their own systems or becoming part of the Nationwide Mortgage Licensing System & Registry (NMLS).
The measure was designed to ensure that consumers have a reliable database, where they can identify brokers who have been using malicious business practices. Most states have added an additional layer of protection, by requiring mortgage broker bonds as part of the licensing process.
If you are an active mortgage broker– or planning to become one– this is a requirement you need to know in detail. With this in mind, let’s go through what mortgage broker bonds are, why you need to get bonded and everything else you need to know.
An Overview of Mortgage Broker Bonds
Mortgage broker bonds belong to a larger type of surety bonds, known as license bonds. License bonds (or permits bonds as they are sometimes called) are used by regulatory bodies to make sure certain businesses comply with state and federal laws, concerning their profession. They’re required for a variety of businesses, from freight brokers to contractors, and even telemarketing agents. Depending on the law, it’s often the case that a business cannot get a valid license unless it’s also accompanied by the bond. To learn more about the different types of bonds, check out this useful guide.
Mortgage broker bonds in particular are intended to prevent clients from becoming victims of fraud. The subprime mortgage loans, which many policy makers blamed for the financial crisis, were in part attributed to people being pushed into loans they cannot afford, hence the need for stricter regulations.
How Mortgage Broker Bonds Protect Consumers, and You
So how do mortgage broker bonds ensure such protection to mortgage consumers? Each state sets a minimum total bond amount, for example, $25,000 in California. This means that clients of mortgage brokers can be compensated for up to that sum, if they become victims of fraud and file a successful claim.
Unlike insurance, which aims to provide full compensation, mortgage broker bonds are more of a way to keep fraudulent brokers away from the industry. You can think of the bond as a line of credit. If a surety does have to pay out a claim on your behalf, you’ll be required to repay them in full.
Some mortgage brokers complain that the language used in bond agreements is sometimes too broad and vague, allowing for numerous parties, beside their clients, to file claims. It’s true that since the financial crisis the number of claims against mortgage broker bonds has increased, so you need to be extra careful and be aware of both federal and state mortgage regulations.
The good news is that mortgage broker bonds can protect you and your business, too. By keeping fraudulent brokers out, mortgage broker bonds help honest brokers do business, and boost the industry’s credibility. The less fraud there is in the mortgage industry, the less federal and state regulators will feel compelled to create more regulations.
Your mortgage broker bond can also be used as a marketing tool, giving your clients peace of mind that they work with someone trustworthy. And if a disagreement does occur, your surety agency can actually help you resolve the dispute before it becomes an expensive, and potentially reputation-damaging, claim.
Every state sets their own minimum bond requirement and in some of them the amount varies based on the volume of loans you originate each year. For example, in North Carolina the minimum required amount is $75,000 while the maximum can go as high as $250,000.
Since mortgage broker bonds function like a line of credit, brokers don’t need to maintain the full amount listed on the bond. Instead, surety bonds companies who write the bond will charge a small premium (normally, each year), depending on the level of risk the broker presents. Risk is measured mainly through an evaluation of your credit history, mainly your credit score.
Here’s a quick way to get a ballpark estimate of your premiums. An excellent credit of 700 or more can get you premiums as low as 0.5 percent, whereas 550 or under can increase it to 10 percent. Of course, there are plenty of other factors can affect your premium, both negatively and positively.
Bad credit shouldn’t be a predicament to getting bonded, but other credit issues such as open bankruptcies or late child support payments can be. Conversely, things like liquid assets, strong financial statements, or years of experience in the real estate industry can positively affect your premiums. It’s best to talk to your surety agent about what you can do to reduce your bonding costs.
Have questions about mortgage broker bonds? Leave us a comment.
Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping mortgage brokers get bonded and start their business.