Surety Bond For Mortgage Brokers Requirements By Regulators

Surety Bond For Mortgage Brokers Requirements By Regulators

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About Surety Bond For Mortgage Brokers Requirements By Regulators. Understanding The Surety Bond Requirement By State Mortgage Regulators For Mortgage Brokers. Every state mortgage regulator will have its own surety bond requirements for mortgage brokers who want to get licensed and do business in that particular state.

Amount of Surety Bond Requirements Per State

Some states will have higher surety bond requirements while other states may not require surety bonds. The purpose of state mortgage regulators requiring surety bonds is to make sure mortgage brokers are compliant with state and federal laws, regulations, guidelines, and to protect public consumers from negligence and/or fraud. Surety bonds are a form of insurance that needs to be renewed annually. Mortgage brokers need to apply to individual states where they want to get licensed and conduct business. Every state has its own guidelines for mortgage brokers, mortgage bankers, and mortgage servicers.

Understanding Surety Bond And How It Works

In this paragraph, we will explain surety bonds and how it works. The Surety is the insurance company that issues the bond for mortgage brokers, mortgage bankers, and/or mortgage servicers. The surety bond will compensate those affected by the principal’s failure in performing their work per the state’s standards. If the principal and its agents covered by the bond fail to meet the minimum state’s mortgage laws and regulations, the bond will cover the damages assessed by the state regulator. The bond will also cover damages to public customers. When an insurance company issues a surety bond, the bond is a contractual agreement between three parties. The first party is the buyer of the bond which is the Principal. The principal of the bond is the owner and/or owners of the mortgage company that needs the bond. The insurance company will charge a premium for the bond. The purpose of the bond is to guarantee and insure the principal and its agent’s performance of their work. The third party is the agency/obligee. The Agency/Obligee is the agency that is requiring the surety bond. In this case, the state government regulatory agency will be the Agency/Obligee. The surety issues the bond.

Surety Bond Issued By Surety Bond Company

The bond issued by the surety is a written contractual agreement where the surety is guaranteeing the Agency/Obligee that the surety will issue the face value of the bond in the event the principal (mortgage broker) fails to meet the terms established in the bond. Terms of the surety bond can be specific contractual terms, regulations, and other written guidelines specified by the Agency. If the principal and/or agents of the mortgage broker fail the duties on the agreement, they have broken the terms of the bond.

How Does Surety Bond Company Pay The Insured

Therefore, the surety needs to pay the Agency/Obligee the amount of the claim which cannot exceed the face value of the bond. Once the surety pays out the damages to the Agency and/or Obligee, the principal needs to compensate the surety on the amount they have paid out.

Comparison And Difference Between Surety Bonds Versus Insurance Policies

Mortgage brokers still need their regular insurance policies to protect their business. Surety bonds by no means replace the mortgage broker’s liability insurance policy. Surety bonds are specialty protection insurance required by state government regulatory agencies to protect consumers and the public. Furthermore, the purpose of surety bonds is to make sure the principal and its employees of a mortgage broker are compliant, reputable, trustworthy, and follow the rules and regulations of the state.

What Is The Main Purpose For Surety Bond

The main purpose of surety bonds is to protect public consumers from incompetence, fraud, misrepresentation, negligence, and wrongful damages by the principal and/or its agents. The amount of bond depends on the state and the commissioner. Every state has its own bonding requirements. Some states will determine the face value of the bond by the amount of volume the mortgage broker does annually. In general, the face value of bonds required varies from $10,000 to $150,000.

How Does Surety Bond Requirements By Regulators Work?

Most states will allow mortgage brokers to deposit cash in an escrow account in the equivalent of the bond amount. Mortgage brokers who are planning on applying for a particular state license need to obtain a surety bond. Getting surety bonds is very simple. It can be done online. It is similar to getting quotes on an insurance policy. Before you start shopping for surety bonds, find out the requirements. Each state has different bonding requirements. Mortgage brokers need to get separate surety bonds for every state they plan on doing business in.  One surety bond does not cover multiple states.

How Much Does Surety Bonds Cost Mortgage Brokers

How Much Does Surety Bonds Cost Mortgage Brokers

Mortgage regulators will issue mortgage brokers once they have met all the state’s requirements including a valid surety bond. The Agency requires the bond so they can make a claim if the mortgage broker and/or any of the broker’s agents breached their duties in being compliant and/or harm against the public consumer. The regulator than can make a claim to the surety on the compensation they are seeking. The agency can make a claim against the bond for fraud, compliance violations, negligence, and/or financial penalties. Once the surety pays out the damages, the mortgage broker needs to reimburse the bond company for the amount the bond company has paid out.

How Much Are Surety Bond Premiums 

Mortgage brokers pay an annual premium for the cost of the bond. The premium of surety bonds costs anywhere between 0.50% to 3.0% of the face value of the bond amount. Like other insurance premiums, there are many factors that go into the pricing of surety bonds. The mortgage broker’s years of business, the credit profile and scores, financial profile, and net worth all play into pricing the surety bonds. The bonding company will charge less in premium for mortgage brokers with great credit and financial profiles. Years of experience in the mortgage business is a great factor in the prices of the premium.

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