Surety Bond Authority Weblog

2008 saw a large increase in the amount of legislation pertaining to mortgage broker bonds and mortgage lender bonds (types of commercial bonds). Most of the legislation focused on tightening regulation on mortgage brokers and lenders, and also on increasing the specific license bond amounts. While a good amount of legislation has been passing, many states are willing to wait and see what the US Congress’ economic stimulus plan entails this year, which will aim to alleviate economic problems in general as well as the significant problems in the housing markets, and what impact such changes will have on the surety bond industry. Before making any significant changes with regards to mortgage broker bonds or mortgage lender bonds regulation, some states wanted to see if any actions taken by Congress would significantly decrease the demand for the renewal of these surety bonds. In the aftermath of the subprime mortgage market meltdown, many mortgage brokers have been forced to go out of business, or have voluntarily shut down their operations.

This past year, numerous states, as well as the District of Columbia, passed bills that created either a new mortgage broker bond and/or mortgage lender bond requirement, or increased an existing bond amount.

States with changes to their required bond amounts:
• Connecticut’s House Bill (HB) 5577 doubled the required amount for mortgage broker bonds from $40,000 to $80,000.
• In Iowa, HB 2556 doubled the amount for mortgage brokers and bankers from $50,000 to $100,000.
• Maryland’s HB 363 & Senate Bill (SB) 270 also doubled the required amount of the license bond needed for mortgage lenders depending on the loan volume. Loan volumes of $3,000,000 or less saw the surety bond requirement increase from $25,000 to $50,000. Loans of $3,000,000-$10,000,000 rose from $50,000 to $100,000. The surety bond requirement for any loan greater than $10,000,000 went from $75,000 to $150,000.
• Conversely, Idaho’s HB 450 got rid of the $10,000 license bond required for loan originators.
• District of Columbia Bill 1020 added a net worth requirement on mortgage brokers to go along with the current license bond requirement. The recently enacted bill gives mortgage brokers the option of paying into a recovery fund, as prescribed by the Commissioner of Insurance, in lieu of meeting the previously mentioned net worth and license bond requirements. The surety bond amount is based off of the loan volume of the respective mortgage broker, with a $12,500 minimum and a $50,000 max.

Other changes to requirements pertaining to mortgage broker bonds (and/or lender):
• With the enactment of HB 2463, North Carolina mandates that “mortgage servicers” must be subjected to the same licensing and bonding requirements as mortgage brokers and lenders operating in the state.
• Similarly, in Pennsylvania, HB 2179 requires that “correspondent lenders” post the license bond required for mortgage brokers.
• Wyoming’s SB 44 changes the forfeiture requirements under the existing law for the license bond required for mortgage brokers and lenders. While the previous law required that the entire surety bond be forfeited to persons suffering damage as a result of a violation by a mortgage broker or lender, the new law requires that the bond only be forfeited in a sufficient amount to right the wrong. In the event that the violation exceeded that amount, the entire penal sum of the license bond could be forfeited.

The Uniform Trust Code (UTC) was created by the National Conference of Commissioners on Uniform State Laws in order to create a uniform code for common law principles pertaining to trusts for all fifty states (i.e. for commericial transactions, as well as family estate planning).  To better understand how a Uniform Trust works, I will briefly define the three parties involved with the creation and administrative duties.  The person who created the trust is the “grantor” (or “settler”).  The person who agrees to manage and oversee the trust and all of its assets is known as the “trustee”.  Lastly, the person that is slated to receive the benefits of a trust is referred to as the “beneficiary”. 

Thus far, 20 states have adopted the UTC in some form, and have begun to executed its laws.  In 2008, the UTC was introduced in a number of states as well.  Under these recent bills, trustees are only required to obtain a surety bond to guarantee the performance of their duties when the court deems such a bond necessary to protect the beneficiaries interests. A surety bond may also be needed if is outlined in the terms of the trust, and court has not done away with the requirement. This act gives courts the authority to set surety bond amounts, as well as the specific terms of a trustee’s liability. Furthermore, the court can also terminate the bond at any time.

Another element of the Uniform Trust Act is the requirement for title insurance companies, trust companies, involved banks, national banking associations, as well as savings and loan associations to give a bond, regardless of whether or not a surety bond is required in the terms of the trust. In the event that a trustee resigns, none of the trustee’s liability, or that of respective surety bond company will be discharged or otherwise affected as a result of such a resignation.

Last year, Arizona House Bill (HB) 2806, pertaining to the Uniform Trust Act, was successfully enacted. However, bills in both Connecticut (HB 508), and Oklahoma (Senate Bill 1825) were defeated for the time being.

Similar to last year, the Surety and Fidelity Association of American (SFAA) noticed a trend of amended state bills that change specific requirements pertaining to motor vehicle bonds (type of commercial bond also referred to as “auto dealer bonds”). These new bills are either requiring an increase in the motor vehicle bond amount, or an extension of its application to include additional vehicle types as well. The five states with recent enactments by state legislature are Colorado, Idaho, Pennsylvania, Tennessee and West Virginia.

In Colorado, Senate Bill 144 (SB 144) requires that all motor vehicle repair shops operating in the state must obtain a surety bond twice the amount of the retail value of a vehicle whenever they choose to seek title for any abandoned vehicle.

Idaho has two new requirements pertaining to motor vehicle regulation. House Bill 365 mandates that all dealers of motor-driven cycles comply with the $20,000 surety bond requirement, which currently is in existence for vehicle dealers operating in the state. Additionally, Idaho House Bill 440 requires all dealers of truck campers to obtain a $10,000 license bond.

The enactment of Pennsylvania Senate Bill 1019 (SB 1019), makes it a requirement for all state recreational vehicle dealers to obtain a license bond in the amount of $30,000, in order to act as a security against any possible claims. Specifically, this license bond will protect against claims brought up by an agency of the commonwealth for money past due, such as fees, licenses, unpaid taxes, payment of criminal penalties, civil fines/penalty, etc.

Tennessee’s House Bill 2809 simply increases (doubles) the surety bond amount requirement for a motor vehicle dealer license from $25,000 to $50,000.

Similarly, in West Virginia, House Bill 4364 raised the motor vehicle dealer license bond amount from $10,000 up to $25,000.

While the aforementioned states experienced amendments to existing motor vehicle bond requirements, etc, the SFAA was successful in working to defeat California AB 1939, which could have raised the license bond requirement for CA’s motor vehicle dealers from $50,000 all the way to $100,000.

According to the recently enacted Iowa House Bill 2646 (HB 2646), fire sprinkler installers and maintenance workers are required to become officially licensed, purchase public liability insurance, and must obtain a surety bond (specifically a license bond). The amount of this commercial bond will be determined by Iowa’s Department of Public Safety.

In the state of New Mexico, HB 199 was enacted, which requires replaces the existing contractors’ license bond requirement with a $10,000 surety bond from a corporate surety bond company licensed in New Mexico. The existing contractors’ license bond needed to be replaced because the bond amounts were too small, and were based on size of projects already completed. Payments from the license bond can only be utilized to cure code violations of the licensee. Any claims that arise against the surety bond must be brought up within two years after the final inspection, or within two years of a certificate of occupancy being issued. Typically, whichever is earlier is what will be used. Furthermore, the surety bond company’s total aggregate liability cannot be higher in value than the surety bond’s face amount. Lastly, this bond requirement has a 30-day cancellation provision.

With the enactment of North Carolina HB 2353 and SB 1795, the state’s Irrigation Contractors’ Licensing Board was created. This new law requires all irrigation contractors operating in the state either obtain a $10,000 license bond from a state-licensed issuer (surety), or a letter of credit (LOC). If a surety bond is obtained, it must be conditioned on compliance, and be open to claims arising from people injured as a result of a direct violation of the newly enacted law.

According the recently enacted Kansas House Bill 2315 (HB 2315), home inspectors are now required to register with the Home Inspectors Registration Board if they wish to legally operate in the state of Kansas. They are required to submit proof of a fidelity bond of no less than $10,000 to the Board, which will cover dishonesty of the home inspector. Additionally, home inspectors are required to separately submit proof of financial responsibility. This proof can come in the form of a surety bond (license bond, which is a type of commercial bond) for at least $10,000, one that cannot be terminated without at least 30 days advance written notice to the Board. In addition to the surety bond option, home inspectors can meet their proof of financial responsibility requirement with an irrevocable letter or credit (no less than $10,000), or with an escrow account with a minimum balance of $10,000. Additionally, financial responsibility can be demonstrated via an errors and omissions insurance policy.

However, a similar bill was defeated in the state of Georgia. If passed, Georgia Senate Bill 485 (SB 485) would have required home inspectors to be officially licensed, purchase liability insurance for a specific amount that would be determined by regulation, and either purchase a surety bond or maintain no less than $100,000 in net assets.

If you don’t know what to look for, purchasing a surety bond can appear to be a challenging process. There are numerous surety bond companies and bond agents around the country to choose from, so I have provided four things for customers to consider that will help them find the bond that is right for them.

Total Cost of the Bond
The annual total cost of the surety bond to the customer is a very significant factor to look at when shopping for a bond. While this is definitely not the only element that should be considered, it is typically the first place most people look. This should include premium rates from the surety bond companies as well as the bond agents you purchase them through. All else being equal, customers should look to buy bonds that take the least amount of their hard-earned money as possible. However, as you’ll see below, when it comes to the surety bond industry, all is else is not always equal. Bond companies as well as agencies that represent them can vary greatly.

Quality Customer Service
The level and quality of customer service provided by a bond agent is of particular importance and should not be overlooked, particularly for customers that plan on renewing their bonds. You want to look for skilled agents that can quickly turn bonds and get them to the customers that need them in a timely, efficient manner.  Turnaround time is especially important for customers attempting to purchase contract bonds. The most successful agents are those that truly lookout for the best interests of their customers and work to develop lasting business relationships. Such a relationship with a trusted, knowledgeable agent will benefit both parties and can provide principals (customers) with valuable business advice.

Conduct Background Checks
While bond companies and agents will conduct financial/credit checks on you, the customer, you too have the ability to conduct background checks on prospective sureties. You can do so by looking up the company on a database known as the Federal Treasury List. All sureties are given annual ratings by a number of organizations. Based on the documents they are required to submit, the sureties are assigned a letter grade. This letter grade is updated annually, and should be easily accessible to all who would like to find it. It should be attainable from surety bond agents, because they represent the sureties to prospective customers. Additionally, customers may want to consider how much experience a prospective agency has in the industry in which their specific bond type falls under, because it can possibly expedite the process and help you get exactly what you need.

Ease of Renewal Process
Another factor that may not jump out at customers at the beginning of the surety bond purchasing process is the ease of the renewal process. It goes without saying that this should be of significant importance for customers that know they’ll need to renew their bonds in the coming years. Requirements for the renewal of a bond may vary between different companies and agencies. Customers may want to find out how often they will be required to provide updated financial statements to their agents, such as balance sheets, income statements, statements of cash flow, as well as credit reports. Requirements established in writing by sureties and agents must be met by principals in order to prevent termination of a needed surety bond. 

For more information on the surety bond renewal process click here. 

While the aforementioned factors are not the only things to consider when shopping for a surety bond, they will definitely help steer you in the right direction, and should help customers find the right bond from the right company and agency.