BLOG VIEW: A mortgage broker is an intermediary between a business and lenders during the purchase of a commercial or residential property. Like other professionals and entities in the world of finance, mortgage brokers must follow strict rules for ethical practices. To uphold their commitment to honesty and integrity, states require brokers to obtain mortgage broker surety bonds. This quick guide explains what those bonds are, how they work and how a claim against one works.
What Is a Mortgage Broker Bond?
A mortgage broker surety bond is a legal and binding agreement. Like other types of surety bonds, a mortgage broker bond is a three-party contract. It involves the obligee, the principal, and the surety. When a mortgage broker obtains a surety bond for conducting business, the broker is the principal. Obligees are those who require the bond or can make claims. In this case, the obligees are the state and the broker’s clients. The surety is the company backing the bond, and the broker pays the surety company for the bond. In the event of the mortgage broker working unethically or causing financial damage, a claim can be filed against the bond.
How Does a Mortgage Broker Surety Bond Work?
Some people confuse surety bonds with insurance. However, unlike insurance companies that do not require policyholders to pay them back fully for damages from claims, surety bond companies certainly expect to be paid back by the mortgage brokers who buy bonds from them if a claim is made. The mortgage broker pays for the bond to meet state requirements and show a commitment to ethical business practices. These are the basic steps involved that explain how a surety bond works.
Bond Requirements
With mortgage brokers, states require them to obtain surety bonds as part of the licensing process. This is to protect everyone they serve. The amount of the bond depends on the state’s rules. Also, there may be different requirements within the state itself rather than a set amount. For example, the state of Washington requires mortgage brokers to obtain a bond based on the loan volume from the previous year. There are different tiers based on loan volume in millions, and brokers who make more are required to have a surety bond that is a larger amount.
Surety Agreement
Once the mortgage broker completes any other preliminary steps required by the state of operation, the next step is obtaining the bond. The broker contacts a surety bond provider to request a quote and submit an application. Brokers must pay the fee for the bond, which varies somewhat since there is interest that depends on individual credit factors. Once the surety bond is obtained, and all other state-specific requirements are met, the mortgage broker can provide services.
Working With Clients
Before working with a mortgage broker, it helps to ensure the individual is licensed and has a surety bond that meets state requirements. Clients should be ready with the required documentation and a clear picture of their financial status. For example, if a growing business is looking to buy a new commercial property, having a professional business valuation done first can be helpful. This will help all parties better understand the company’s true worth. This makes looking for the right financing much easier.
What Happens When a Claim is Filed Against a Mortgage Broker’s Surety Bond?
If a claim is made against a surety bond, the surety provider will notify the broker and will open an investigation. An investigation may focus on both the obligee and the principal. If the investigation shows the claim is invalid, that is the end of the process. However, if the investigation shows the claim is valid, the surety provider will give the broker an opportunity to rectify the situation. In some cases, brokers become insolvent. When a broker does not compensate, the surety company will. After that, the surety company collects compensation from the broker to cover all expenses related to the claim.
When Can a Claim Be Filed Against a Mortgage Broker Surety Bond?
If a mortgage broker acts unethically or violates any contract terms, it is possible to file a claim. Fraud, discrimination, RESPA violations, overcharging, manipulating fees, and misusing customer funds are grounds for a potential claim.
How to File a Claim Against a Mortgage Broker’s Surety Bond
In some cases, commercial mortgage brokers will remedy any financial wrongdoing. If not, it helps to know how to file a claim against the surety bond. The first step is finding out who issued the bond. Always ask for this information at the start of a professional relationship with a mortgage broker. Next, contact the surety company to ask for instructions on how to file a claim. A representative will likely be assigned to the case, and it is important to maintain contact with the person handling the claim.
Eventually, the surety bond provider determines if the claim is valid or invalid. If it is valid, the mortgage broker has an opportunity to provide compensation for damages. In the event the situation is not resolved, the surety company provides compensation. This can vary with different states, companies, and situations.
Surety bonds provide confidence and financial protection for those looking to work with a mortgage broker.
Robin Kix is renewal department manager at Lance Surety Bond Associates. Since joining the company in 2014, she has helped thousands of businesses throughout the nation remain compliant at the federal, state and local level.