The benefits of surety bonds in the mortgage industry
New mortgage specialists in California have many things to consider, such as what kind of loans to specialize in, where to locate their office, and how to get their names out into the industry. Unfortunately, one key requirement is often misunderstood by new mortgage specialists as they begin establishing their business: surety bonds.
The purpose of surety bonds in the mortgage industry is to protect consumers in the event of fraud or other wrongful practices on the part of the mortgage lender or broker—whether or not the bond is required by law.
Surety bond basics
Oftentimes even those required to be bonded by law get confused as to how a surety bond works. Essentially, a surety bond is a legal agreement between three parties to help ensure the fulfillment of a contract:
- The principal performs a service and secures a bond to guarantee his or her work. In the mortgage industry, the mortgage specialist is the principal and therefore is responsible for getting a bond.
- The obligee receives the service performed by the principal and is protected by the financial security of the bond. In the mortgage industry, all consumers of a mortgage specialist receive protection from the bond.
- The surety issues the bond as a neutral third party to ensure that all work done by the principal is completed on time and according to the contract. In the mortgage industry the specialist can apply to get a bond at a variety of different surety bonds providers, including surety agencies and insurance companies.
Protection provided by mortgage lender bonds
Mortgage lender bonds protect consumers against dishonest lending practices, including:
- knowingly approving borrowers for loans they will not be able to repay
- encouraging borrowers to fraudulently represent themselves while applying for a loan
- pressuring borrowers to buy to certain loan products, including high-risk loans or loans with higher interest rates
- establishing an interest rate based on anything other than the borrower’s credit history
- charging unnecessary or additional fees
- deliberately targeting vulnerable or at-risk borrowers to suggest cash-out refinances
If a mortgage specialist were to participate in dishonest or fraudulent lending practices, consumers can make a claim on the bond. If the claim is found to be valid, the specialist would be required to pay retribution up to the bond’s full amount. If the specialist is unable to do so the surety could be held accountable for footing the bill. This is why surety agencies conduct thorough background checks when determining who they issue bonds to.
Mortgage license regulations and bonding
There are two different ways to secure a mortgage license in California. One is under the Department of Real Estate and the other is under the Department of Corporations, which is based on the California Finance Lenders Law—or CFLL. The CFLL requires all mortgage brokers and lenders to provide a $25,000 surety bond when applying for their license to work in the state. Licensing under the Department of Real Estate, however, does not utilize the CFLL so surety bonds are not mandatory. The California Residential Mortgage Lending Act (CRMLA) requires all mortgage bankers to provide a $50,000 surety bond before getting their licenses, however there are a number of exemptions to this requirement.
Each method has different stipulations and requirements applicants must meet before being issued a license. If you’re new to the California mortgage industry be sure to review their policies to decide which would best fit your needs. Doing so will also determine if you’re required by law to secure a bond.
Required bond amounts and fees
The amount of a mortgage bond varies for a number of reasons, including the average number of mortgage loans you service in a year and the jurisdiction in which you do business. Typical California surety bond requirements mandate the penal sum to be between $10,000 and $50,000. Always check local rules and regulations before securing a bond to make sure you’re complying with all laws regarding the bond amount.
To secure a bond, an average mortgage specialist pays a fee to the surety provider. The fee usually costs the specialist about 1 to 3 percent of the bond’s penal sum. If the specialist’s financial history has negative marks, the cost of the bond will be higher because the surety takes a greater risk in backing the specialist. Taking the time to secure a solid surety bond is a worthwhile investment for you as a specialist, as well as your consumers.