There are thousands of mortgage brokers who assist clients in acquiring commercial and residential properties throughout the country — with more professionals entering
the industry each year. Although the mortgage business is growing, added regulations have complicated
the process of becoming a licensed broker.
Each mortgage broker, or brokerage company, must
follow a set of rules in order to run their business legally
and successfully in each state they operate. Among the
requirements is getting a mortgage-broker bond.
A mortgage-broker bond is a type of surety bond
that protects clients of licensed brokers and shows
that a broker’s business is legitimate. This type of bond
works as a third-party guarantee that the broker will
operate in a way that is in line with the state’s laws
for doing business. Mortgage brokers need to know
about surety bonds, how they differ from insurance,
their pricing and the impact of personal credit on
getting a bond.
Throughout the United States, mortgage brokers are
required to abide by the rules set by individual states
regarding how they do business with their clients.
Obtaining a surety bond is part of this process because
it serves as a safety net of sorts in the event a broker
acts fraudulently or out of line with state laws.
A surety bond may seem similar to insurance coverage, but it works much differently in practice. In fact,
many brokers confuse surety bonds and insurance —
although they cover two separate business needs.
It is important to know the differences between
surety bonds and insurance. This will allow you to
make the best choice for your brokerage.
The most distinguishing difference between surety
bonds and insurance coverage is who is protected.
With surety bonds, mortgage brokers purchase a bond
in an amount that meets the state’s bond requirement,
not for protection against loss to the business, but for
protection extended to clients.
A claim against a surety bond is paid by the surety
company to the broker’s client to cover incidents of
fraud or financial damage. The mortgage broker does
not receive payment from his or her own surety bond.
Insurance coverage for a brokerage business works
differently. A mortgage broker purchases insurance,
typically liability coverage, that protects the business
bilities such as a lawsuit. When a claim is made against
an insurance policy, the insurance company pays the
mortgage broker up to the limits of his or her coverage
for damages incurred.
In addition to these drastic differences, surety bonds
for mortgage brokers are usually mandated by state
regulators. This requirement is meant to add a level
of protection for clients, and all licensed brokers must
abide by their state rules and regulations.
Insurance, on the other hand, is not always a requirement to operate a legal business. It is, however, recommended that insurance also be purchased to safeguard
the brokerage against unforeseen events that could
lead to financial stress.
Surety bonds and insurance coverage also have significant differences as it relates to pricing and payments.
Mortgage-broker surety bonds are priced as a percentage of the total bond amount. The percentage
charged to the mortgage broker depends on certain
factors, including their credit history, the business’
history of bond claims and the financial condition of
Insurance pricing does not rely on personal credit
history, but instead is determined by the risk the mortgage broker poses to the company. If there have been
several claims against a broker’s insurance policy in the
past, for example, an insurance company may charge
more for a new policy than if claims were minimal. In
determining prices, insurance companies also evaluate
the location of the business, the amount of time the
company has been operating and the nature of the
policy coverage being sought.
Continued on Page 84 >>
Surety Bonds Protect
You and Your Clients
It pays to learn the ins and outs of these security instruments
and how they differ from insurance
By Eric Weisbrot
Eric Weisbrot is the chief marketing officer at JW Surety
Bonds. He has years of experience in the surety industry
working in several different roles within the company and
also is a contributing author to a surety-bond blog. Reach
Weisbrot at (888) 592-6631 or email@example.com.
A surety bond is a financial guarantee against
future work performance and obligations, including
requirements outlined in state laws and regulations.
If a mortgage broker acts in a way that breaches
the terms of the surety-bond contract by committing fraud or other transgressions, the client has a
right to file a claim against the broker for damages
or losses incurred. If the claim is deemed valid, the
surety-bond issuer will pay those costs up to the
amount covered by the bond. A surety bond is not
an insurance policy, however, and the broker is
normally required to reimburse the surety company
for claims paid.