Surety Bond Authority Weblog

Today, a majority of surety bonds are purchased by principals through surety bond producers, also referred to as surety bond agents. This does not only pertain to contract bonds, but all other surety bonds to include the numerous commercial bonds available, as well as court bonds.  Surety bond producers serve as middlemen between those in need of bonds, and the deep-pocketed surety bond companies. These agents are knowledgeable about the surety bond industry, and the industries in which they provide bond service, such as the construction industry. They work as part of bond agencies that focus on suretyship, but can also be a part of certain insurance agencies that have surety departments. The best, most professional surety bond producers have well-established relationships with multiple surety bond companies. This allows the agents to help find their customers (principals) the surety company that is the best fit for their particular needs.

When it comes to the construction business, surety bond producers not only help contractors obtain their required surety bonds, but they also can provide additional business advice, technical expertise, and managerial consulting. A good surety bond producer can become part of a contractor’s business advisory group, similar to the contractor’s lawyer, accountant and financial advisor. Producers familiar with the construction industry, and the surety bonds pertaining to it, can utilize their experience and knowledge to assist their customers in preparing for the often rigorous prequalification process required by surety bond companies. Working with solid, reputable, reliable surety bond producers and bond companies can help contractors increase their surety capacity which will help them if they choose to grow their business in the future.

While most of the larger property and casualty insurance companies out there have their own surety departments, there are also some companies (surety companies) that focus most, if not all, of their business efforts on the surety bond industry. Regardless of whether it’s an insurance company with a surety department or a surety company, any company that wants to write surety bonds in the U.S. is required to be licensed in one or more states. Typically, surety companies must ensure they obtain a license from the state they in which they conduct business, or from the state where the bond guarantee is required.

Most surety companies become members of the Surety & Fidelity Association of America (SFAA). The SFAA is a non-profit organization based out of Washington DC that is officially licensed as a rating or advisory organization in all 50 states. Additionally, SFAA is designated by the insurance departments of all states (except for TX) as a statistical agent to deal with the reporting of surety experience. Perhaps SFAA’s most significant role is how it represents all of its member’s common interests before a variety of local, state and federal government agencies. They also post annual reports with news on state and federal legislation that has affected the surety and fidelity industries.

Today, everyone is looking for a way to cut expenses, even with state construction bonds (a type of contract bond). Some states that have not matched the federal Miller Act, with a threshold of $100,000, are now thinking about increasing their thresholds. Since there are not many claims under $100,000, it is believed that by changing the threshold to $100,000 taxpayers’ would be saving money.

Those states that have made changes with the threshold of these types of surety bonds are:

• Maine will increase their bond threshold from $100,000 to $125,000.
• California will increase their bond threshold from $5,000 to $25,000.
• Illinois has an increase from $25,000 to $50,000.
• Kentucky’s attempt to increase from $40,000 was defeated.
• New Hampshire’s bond threshold will stay at $25,000.
• Rhode Island would like to increase their threshold from $50,000 to $150,000, but plans have been put on hold until later.

For more information on state thresholds, click on the following link from the SFAA:  http://www.surety.org/GovRel/StateBondThresholds.pdf

All states are under a time crunch to rapidly implement Title V of 2008’s Housing and Economic Recovery Act. As part of this bill that Congress recently passed, there are a number of new federal mortgage broker licensing standards.

Under these provisions, mortgage originators in each state must become licensed in their state/s of operation in order to at least meet the new minimum standards set forth by this new federal law. One example of these new requirements pertaining to licensing is that all mortgage originators must do one of the following:

1.  Provide payment into a recovery fund.
2.  Obtain a surety bond for the specific loan amount.

States have only two years to comply with the Housing and Economic Recovery Act of 2008, and put in place the minimum licensing requirements for all mortgage originators. After this two-year period, all that do not comply with the new standards may be subject to penalty from a system yet to be determined by the Department of Housing and Urban Development (HUD).

While many states already had a mortgage broker surety bond requirement, to date it appears that most states are opting for the surety bond requirement under the new law. One new component to this law is that the surety bond must be based on the loan’s actual dollar amount. This is a requirement that some bank commissioners will have to adjust to. The Surety & Fidelity Association of American (SFAA) has given all states guidelines to assist with the new state regulations, and have provided regulatory language and a description of a mortgage broker bond. They suggest a mortgage broker bond amount in the range of $12,500-$50,000, which as previously stated will be based on the loan volume of the mortgage originator.

In recent years, numerous state bills have been passed that look to hold sureties liable, and put contractors in default, when a contractor violates immigrations laws. Such bills have also made general contractors responsible (or liable) for immigration legislation compliance by all sub-contractors. However, due to the fact that the constitutionality of some of these laws is currently being challenged, the full affect of such immigration laws has not yet been experienced.

The Surety & Fidelity Association of America (SFAA) has been working closely with other interested groups to monitor immigration laws to identify what, if any, impact they will have on the surety bond industry. Specifically, the SFAA has worked to help contractors found in violation of such laws by trying to change the way penalties are handed down. Their thought is that project termination should not necessarily be the first option for a penalty, because terminating an on-going project may end up costing the taxpayers more money. Such terminations have many underlying costs associated with delays, etc, and will ultimately prove to be nonbeneficial to the public entity.

Currently, Mississippi is the only state in the country that passed immigration legislation in 2008 that will have a visible impact on contract surety bonds.

Mississippi’s recently enacted state Senate Bill (SB) 2988 requires employers in MS to hire only legal U.S. citizens, or legal aliens. All employers are required to use “E-Verify”, which is a pilot program aimed at assisting employers in determining whether or not prospective employees are in fact legal U.S. residents. Beginning with contracts that are entered into after 1 July 2008, general subcontractors and sub-contractors must register and fully participate in E-Verify in order to go into contract with a public entity. Employers that comply with this law will be held harmless unless they are found guilty of knowingly/willingly accepting false documents from a prospective employee, or aid in the creation of such documents. Violators will have all of their public contracts canceled, and lose eligibility for state/public contracts for up to 3 years after the infraction. Additionally, they can have their state license and permits suspended for up to year.

As previously mentioned, the SFAA is trying to lessen the severity of this punishment for first-time offenders, and they are hopeful that appropriate revisions will be made to this immigration law in 2009.

Throughout 2008, most retainage legislation focused on trying to limit or completely prohibit the withholding of retainage after projects are 50% complete. Retainage legislation in Alabama, Colorado, Illinois, Nebraska and also Rhode Island was defeated this past year, thanks in part to the efforts of the Surety & Fidelity Association of America (SFAA) and AIA Surety.

The most significant retainage legislation that was enacted was California Senate Bill (SB) 593. SB 593 prohibits California’s state transportation department (CalTrans) from being able to require retainage, and withholding funds. Of note, the law passed in SB 593 does come with a 5-year sunset period, which will give the legislature an opportunity to evaluate the effects of prohibiting such retainage by CalTrans. Additionally, the law states that CalTrans must inform the legislature any time they believe the inability for CalTrans to apply retainage on a given project will actually end up working against the best interests of California.

NOTE: For more information on “retainage”, and how it works and how they are related to surety bonds, read my article titled “What is “retainage” and how does it pertain to surety bonds?”

Retainage is a term that applies to the contracting business, and is therefore important to grasp when learning about contract bonds.  While it is not necessarily a part of the surety bond industry, it is related. 

Retainage is defined as the portion of a contractor’s payment that is withheld until a project is completely finished. In other words, the client won’t pay the contractor the retainage until all work has been completed, in order to provide the contractor with incentive to provide a quality product/work until the very end. Usually, the retainage amount will be negotiated before a contract has been agreed upon, and will be listed as a certain percentage of the project’s overall cost. Typical retainage percentages are around 10%. In some instances, where clients develop familiarity and confidence in a certain contractor, they may offer to forego the retainage requirement.

To illustrate the concept of retainage here is a simple example:

Lets say a customer (obligee) hires a contractor (principal) to do some construction work. The two go into contract for a $200,000 construction project to build some sort of structure. Using the average retainage percentage listed above, 10%, the customer puts into the contract that 10%, or in this case $20,000, will be withheld as retainage. Throughout the course of the construction project, the customer pays the contractor $180,000 for the work performed. Once all work is completed per the terms of the contract, and in a quality fashion, the final $20,000, the retainage amount, will be paid to the contractor.

Despite collaborative efforts by The Surety & Fidelity Association of America (SFAA), The National Association of Surety Bond Producers (NASBP), and AIA Surety, individual surety legislation was defeated in both the states of Virginia and Maryland.

In Virginia, SFAA, NASBP and AIA worked to notify the opponents of the legislation they had gained in the previous year that there was new individual surety legislation in Virginia. This was introduced as Virginia House Bill (HB) 187. Unfortunately their efforts did not have the intended effect, as the bill failed to get out of the committee due to strong opposition.

In Maryland, House Bill (HB) 312 was also unable to make it past the committee. If passed, HB 312 would have successfully eliminated a sunset provision for Sep 30, 2009, on the state’s individual surety law. Additionally, HB 312 could have gotten rid of the requirement for the Board of Public Works to have to issue annual report outlining the impact (pros and cons) of Maryland’s individual surety law. This report includes information on how the individual surety legislation impacts small businesses, as well as those owned/operated by minorities. An agreement was made between the sponsor of the bill and AIA state counsel to put into effect an extension of the sunset provision until the year 2014. Also as part of that agreement, the previously mentioned annual reports would now only be required every two years.

The Surety & Fidelity Association of America (SFAA) stated in their annual report that they believed this to be a positive development, due in large part to Maryland’s lack of experience with the utilization of individual sureties.

If passed, Rhode Island Senate Bill (SB) 2323 and 2229 would have allowed anyone who is under a performance, payment or fiduciary bond (claimants, principals and obligees) to file claim against the surety bond company for a bad faith refusal to pay a claim, settle on a claim, or for failing to perform their obligations in a timely manner. The Senate Bill would have authorized claimants to go after both punitive and compensatory damages, and even attorney fees, and other costs associated with the lawsuit.

Senate Bill 2323 happens to be identical to a SB from last year that wasn’t passed either. Rhode Island House Bills (HB) 7766 and 7981 were SB 2323 and 2229 counterparts that went before the State’s House legislation, and these bills were defeated as well. Of note, AIA Surety, CNA Surety and members of The Surety & Fidelity Association of America (SFAA) all testified before both the Senate and House chambers in Rhode Island.

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.