Many states require mortgage brokers to get bonded before they start brokering. Brokers may not always be aware of why posting a surety bond is necessary — after all it requires additional time and paperwork.
But there is a reason states enact such practices in their legislation. Mortgage broker bonds are beneficial to both homebuyers and brokers.
If you are an aspiring broker, here is what you need to know before getting bonded.
Legislative background
Back in 2008, the financial crisis instigated the federal government to create the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). Among other provisions, it stipulated that all states should put in place a registration and licensing process for mortgage brokers.
Today, the Nationwide Mortgage Licensing System and Registry (NMLS) has turned into the central resource for mortgage brokers on legal compliance issues. The result is a better-regulated industry offering high-quality services and enhanced protection for homebuyers.
One of the common licensing requirements that states have imposed on mortgage brokers is to obtain a mortgage broker surety bond.
What being bonded means
A wide variety of businesses need to post a surety bond to get licensed: auto dealers, freight brokers and many others. Authorities that regulate a certain industry often require bonds to ensure that all licensed entities will follow the law.
The mortgage broker bond works like an extra line of credit for the bonded party. A surety guarantees that a brokerage will adhere to the licensing rules by backing it with a bond. This functions like a security in front of the licensing authorities.
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In case there is a legal breach, an affected party, say, a client, can file a claim. If proven, they can receive a reimbursement for suffered damages. The bond amount that brokers are asked to obtain is in fact the maximum penal sum that can be repaid on claims.
Protecting homebuyers
As the stricter licensing rules were adopted after the financial crisis, many policy makers pointed out subprime mortgage loans as a reason for its serious impact. More precisely, as many homebuyers were allowed and stimulated to get loans that are beyond their financial capabilities, the responsibility of mortgage brokers came in the spotlight.
Mortgage broker bonds aim to protect people obtaining loans from unlawful practices of all kinds. They put in place a higher level of accountability for brokers. It’s worth it to note that bonds are not only about consumers’ rights — they also safeguard the interests of mortgage brokers by keeping fraudulent individuals out of the industry.
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Most states already require bonds during the licensing process of mortgage brokers. The mortgage broker license itself is a solid compliance-ensuring factor. Still, the bond further enhances its efficacy because brokers engaging in unlawful practices can directly get claims and be liable to repay homebuyers who have become victims of fraud.
A sign of trustworthiness
Besides providing additional protection for consumers, surety bonds have turned into a strong sign of trustworthiness for brokerages.
Bonds also provide a self-regulating mechanism that keeps brokers who engage in fraudulent practices away from the business. Once a broker gets a proven claim on their bond, it is much more difficult to get bonded again. In states where the bond is a licensing requirement, this means that obtaining a license might not be that easy after a proven case of fraud.
As these examples show, the bonding requirement naturally boosts the reputation of the brokerage industry. Although it does constitute yet another piece of paperwork for brokers, in fact, it can save them a lot of trouble in the long run. With a smoother functioning mortgage ecosystem, policy makers will not need to introduce stricter regulations in the industry.
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How do you see the value of mortgage broker bonds? Are they required in your state? We’d love to hear your thoughts in the comments below.
Todd Bryant is the president and founder of Bryant Surety Bonds. You can follow him on Twitter and LinkedIn.