What is a Mortgage Bond?
A mortgage bond, in regards to surety, is a type of license and permit surety bond required by a state agency for licensure pertaining to mortgage activities.
This is not to be confused with mortgage bonds that are also known as mortgage-backed security bonds.
There are a number of different types of mortgage bonds for surety which vary based on state statutes.
Some states only have one license type and therefore only have a single bond. Other states have very detailed license types and, therefore, have multiple bonds. The SAFE Mortgage Licensing Act of 2008 has created minimum standards that every state has adopted.
Popular Types of Mortgage Bonds
- Mortgage Originator Bonds
- Mortgage Loan Originator Bonds
- Mortgage Loan Originator Blanket Bonds
- Mortgage Company Bonds
- Mortgage Banker Bonds
- Mortgage Servicer Bonds
- Mortgage Lender Bonds
Bonds are required before a license can be issued to you. For example, a mortgage broker bond is required before a mortgage broker license can be legally issued. To be able to legally conduct your business, you will need to obtain the proper mortgage surety bond.
In some cases, you might need more than one mortgage bond. For example, depending on your state’s requirements, mortgage loan originators might need to secure an individual mortgage loan originator surety bond in addition to the mortgage broker bond that their company holds.
How Do Mortgage Bonds Work?
The purpose of your Mortgage Bond is to protect the state in which you are licensed in as well as protect your customers.
There are two primary obligations you have under your bond. One, to follow the rules of the license you/your company holds. Two, to indemnify the surety company if they payout on a bond claim.
The Mortgage Bond Claim Process
A bond claim is a complaint saying that you have not fulfilled the duties of your license. Anyone can make a claim against your bond. Generally, the claim cannot be for more than the total amount of the bond. Someone might make a claim against your bond for any of the following reasons:
- RESPA violation
- Overcharging customers, misusing their money, or manipulating your fees for your benefit
Claims can only be made against your bond during the time it was active. This includes if a tail is specified on a bond form.
If a claim is filed against your bond, the surety company expects you to take care of the claim. If you fail to do this, the Surety will usually start an investigation to determine the claim’s validity. They will reach out to both you and the claimant.
One of two things will happen:
- The Surety will investigate the claim and determine it to be invalid. No further action will be taken with the investigation, but you might be liable for any costs the Surety incurred during the investigation process.
- The Surety will investigate the claim and determine it to be valid.
If the Surety finds the claim to be valid, they will remind you of your obligations under the bond and ask you to settle the claim. Usually this involves compensating the claimant for any financial loss or damages incurred.
If you fulfill the claim, the claim process ends.
If you fail to fulfill the claim, the surety company will step in and pay the claim for you. The surety company will then come to you for reimbursement of the settlement and any legal costs associated with it.
This is one way a surety bond differs from an insurance policy. While an insurance company does not expect to be paid back for a claim, a surety company does. You are responsible for cooperating with the surety company during the entire claim process. You are also responsible for paying back the surety company every penny they payout on a claim, including all costs associated with the claim. This is all outlined in the indemnity agreement you signed.
The best way to avoid claims on your mortgage bond is to perform the professional duties associated with your license.
Cost of Mortgage Bonds
Mortgage bonds range in bond amount, anywhere from $5,000 – $500,000. You don’t need to pay the entire bond amount to get bonded, though.
First, find out your state’s bond amount.
Then, find out how much your bond would cost.
The range in premium is largely dependent on your personal and business credit history.
The best way to see what you’d pay for a mortgage bond is to get a free quote.
Why are Mortgage Bonds Important?
Mortgage bonds are not only essential to you, they are also essential to your clients. Mortgage bonds serve an important purpose of protecting your clients. If you break the law or any other rules while operating as a mortgage lender, broker, or servicer, and you have a bond, your clients can file a claim against your bond.
If you are found guilty of the claim, your clients are protected by the bond and ‘made whole’ by the surety company. It is then your duty to reimburse the surety company for the payment they made to your client.