Surety Bond Authority Weblog

Effective upon the March 25, 2009 enactment of HB 1002/SB 26, all vendors in the state of Arkansas are now required to either obtain a lottery and lotto bond (type of surety bond), a letter of credit, or securities for contracts with the Arkansas Lottery Commission. All surety bond amounts shall be determined by the Commission.

Additionally, lottery retailers in Arkansas must also post a lottery and lotto bond for an amount no greater than the average tickets sales for two of the retailer’s billing periods.

Lastly, state employees handling the Arkansas Lottery Commission’s lottery revenue or other funds must also obtain a surety bond, of which the amount will once again be determined by the Commission.

For more information on “lottery and lotto bonds”, or to apply for a bond, click here.

Enacted on May 22, 2009, Alabama SB 151 changed the way manufactured homes are regulated. While in the past, manufactured homes fell under the same titling law as motor vehicles, they are not treated separately.

Pertaining to motor vehicles, if the Department of Revenue is not satisfied with regards to the ownership of a particular vehicle they can either withhold the title or require that a cash deposit or surety bond be posted for 1.5 times the vehicle’s value.

SB 151 now requires a new surety bond to be obtained based on the age of the model of the specific manufactured home. Models older 10 years old or older must have surety bonds in the amount of $25,000, while models younger than 10 years old require bonds for $50,000.

These new requirements went into effect on January 1, 2010.

The following surety bond requirement is outlined in Alabama HB 428.

As of August 1, 2009, all proprietary schools in the state of Alabama are required by law to post a surety bond in the amount of $20,000. This commercial bond is conditioned on any payments required when a student paid tuition and or fees to the proprietary school, but did not receive the level of instruction or quality of teaching that they paid for. Such damages would only be paid if a court determines such allegations to be truthful.

In Colorado, two new House Bills were recently passed that bring about a couple of changes to surety bond requirements pertaining to manufactured homes. Colorado HB 1260 changes the total amount of the surety bond that is required to be purchased when issuing the certificate of title for a manufactured home. Such a surety bond is required in order to cover any individuals who suffer damages or experience loss as a result of the certificate being issued. Prior to the enactment of HB 1260, the total surety bond amount was established by the Executive Director of the Department of Revenue. Under the new law, the surety bond amount must be twice the total value of manufactured home, according to assessor’s records. Another bill recently passed in Colorado, HB 1319, rescinds the requirement for inspectors and installers of manufactured homes in the state to post a surety bond in the amount of $10,000. As of the first day of 2009, all license applicants will instead be required to purchase liability insurance.

In Mississippi, the recently enacted HB 1388 grants the state’s Insurance Commissioner the ability to adopt regulations pertaining to bonding requirements for manufactured homes. More specifically, the bill gives the Insurance Commissioner the authority to create regulations for both surety bond and insurance requirements associated with licensure of manufacturers, retailers, distributors, transporters as well as installers of factory-built homes.

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.

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 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 not 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 service fees 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.

On 1 July 2009, California State Assembly Bill 180 will become operative, and will set forth tighter laws governing the state’s Foreclosure Consultants.

AB 180 allows homeowners the right to cancel on a contract up to 5 business days, as opposed to 3 business days, as was previously the case, and also makes delivery of a cancellation notice easier than before. Furthermore, the bill prevents foreclosure consultants from getting a power of attorney from the homeowner, regardless of the purpose.

In July 2009, upon becoming operative, the bill will require all California foreclosure consultants to register with the Department of Justice, and also to purchase a $100,000 surety bond (commercial bond) in order to guarantee they all foreclosure consultants follow state law. The Department of Justice will then have proper oversight of the foreclosure consultants throughout the state of CA. The surety bond requirement was put in place to benefit/protect homeowners.