A mortgage broker bond is a three party contract between a mortgage broker, the broker’s client, and a surety company. Mortgage broker bonds are required for a mortgage broker to be licensed and are meant to protect consumers seeking a mortgage. A mortgage broker would purchase a mortgage broker bond from a surety company, and if the mortgage broker fails to fulfill their obligations to their clients, their client can file a claim against the bond. If the claim is validated, the surety company first reimburses the client for any damages or losses caused by the broker and then seeks repayment from the broker. An example of a failure to fulfill obligations would be if a mortgage broker approves a loan for a client when they know that the client will not be unable to repay.
Mortgage broker bonds are needed to protect consumers from fraud and other unethical practices by mortgage brokers. The bond ensures that consumers will be repaid if their mortgage broker fails to fulfill their obligations, such as providing accurate information about a loan, closing the loan on time, or using the borrower's funds for the intended purpose.
Mortgage brokers are in a position of trust with their clients, and they have a responsibility to act in their best interests. The bond helps to ensure that mortgage brokers will do so, and it gives consumers peace of mind knowing that they are protected if something goes wrong.
In addition to protecting consumers, mortgage broker bonds also help to maintain the integrity of the mortgage industry. By requiring mortgage brokers to post a bond, states are sending a message that they are serious about protecting consumers and ensuring that mortgage brokers are held accountable for their actions.
Most states require you to obtain a mortgage broker bond before you can be licensed as a mortgage broker. Each state has varying requirements.
Here we will detail the requirements of the three most common states to get a mortgage broker bond/mortgage bond in:
There are three different types of mortgage professional licenses in California: the finance broker license, the residential mortgage lender license (RML), and the real estate broker license. All three of these California licenses require a surety bond and because each carries their own set of risks, they have varying surety bond requirements.
The finance broker license is for anyone brokering consumer and commercial loans in California. Those with this license can only broker loans with those who hold the finance lender license in California. Banks and credit unions are examples of those who do not hold a finance lender license. Finance brokers need to obtain a mortgage broker bond with a minimum bond amount of $25,000 to be licensed.
The residential mortgage lender license is for anyone servicing residential mortgage loans in California. These license holders can broker loans if they also hold a mortgage loan originators license. They can broker with other residential mortgage license lenders as well as institutional lenders like a commercial bank. Residential mortgage lenders need to obtain a mortgage broker bond with a minimum bond amount of $50,000.
The real estate broker license is for anyone who wants to act as a real estate and a mortgage broker in California. These license holders can work with any lenders regardless of what kind of license they have. A mortgage broker bond is not required for real estate brokers.
There are two licensing bodies in Texas to regulate mortgage brokers: the Department of Savings and Mortgage Lending and the Office of the Consumer Credit Commissioner (OCCC). To be licensed as a mortgage broker in the state of Texas, you have two options: (1) maintain net assets of at least $25,000 or (2) get a mortgage broker surety bond of at least $50,000. In this context, net asset is the total assets minus total liabilities of the business.
We recommend getting a mortgage broker bond for this scenario because to prove that your business has a net asset of $25,000 requires providing extensive paperwork and documentation to the OCCC. The fee that you will need to pay your lawyers and accountants might exceed the cost of a mortgage broker bond. On the other hand, while a mortgage broker bond requires payment to maintain, it is much less hassle compared to proving net assets to the OCCC and state government.
Florida used to require surety bonds for mortgage brokers; however this is no longer the case. The Florida Office of Financial Regulation (OFR) amended the Florida Mortgage Brokerage and Mortgage Lending Act (Chapter 494) on January 1, 2023 to remove the requirement for mortgage brokers to post a surety bond. The OFR stated that the change was made to reduce the regulatory burden on mortgage brokers and to make it easier for them to enter the market.
There are a few types of mortgage professional licenses available to New Yorkers, each with varying surety bond requirements.
The mortgage banker license is required for companies that make mortgage loans within New York. A license is required if a business makes more than three loans within one year or two loans within five years. Mortgage banker licensees need to maintain a mortgage broker bond in the amount of $50,000.
A mortgage broker registration (or broker license) allows companies & individuals to shop for mortgage loans on behalf of consumers with various mortgage providers. To maintain this license, the mortgage broker must maintain a $10,000 mortgage broker bond.
A mortgage loan service registration allows for businesses to manage mortgage payments on behalf of consumers. Licensed mortgage loan servicers must maintain a mortgage broker bond of $250,000.
The last type of license in New York is a mortgage loan originator (MLO) license. The surety bond requirement for this last type of license varies based on if the MLO works for a company that covers their surety bond requirements. A company could purchase surety bonds for MLOs that they employ according to the following terms:
If the mortgage loan originator’s bond was not covered by their employer, then the originator could purchase a bond based on their loan volume in the previous year:
To get a mortgage bond, you can go through a surety agency like SuretyNow. Surety agencies have online applications that ask for your personal information, like credit score, financial background, and business history. The application is typically filled out online and after your application is completed, the surety agency will send your application to a carrier, the company that will be issuing the bond.
The carrier then goes through a process called underwriting where your application is evaluated to determine whether you are eligible for a mortgage broker bond and how much to charge for it. At this step of the process, the carrier may require you to send additional paperwork as necessary.
Usually within a few days, you will receive an email or call from your surety agency to process payment for your bond. For SuretyNow, we aim to get back to customers either the same day or next day. Once you have purchased the bond, you will receive the bond via email.
Mortgage broker bonds are active for 12 months, after which they must be renewed. To renew the bond, you would go through the same process described above.
The cost of a mortgage broker bond can vary depending on a number of factors. Generally speaking, the cost is based on a percentage of the bond amount, which is the maximum amount of coverage that the bond provides. For example, if the bond amount is $50,000 and the cost is 1%, then the total cost of the bond would be $500.
Typically, the bond costs between 1% to 4% of the bond amount. The cost varies between 1% and 4% depending on factors such as the state in which the broker operates, the broker's credit score, and the broker's experience and track record. Brokers with a good credit score and a solid track record of operating in compliance with regulations may be able to secure lower rates than brokers with a poor credit history or a history of noncompliance. Additionally, some states may require higher bond amounts than others, which can also affect the cost of the bond.
In conclusion, mortgage broker bonds serve as a crucial protection for consumers, lenders, and regulators in the mortgage industry. By requiring brokers to obtain these bonds, authorities ensure that they are financially responsible and capable of operating within the legal and ethical framework of the industry. Furthermore, the bond serves as a safety net for those who might suffer financial losses due to the broker's misconduct or negligence. For brokers, getting a mortgage broker bond is a necessary step towards getting licensed. Overall, mortgage broker bonds are an essential component of the mortgage industry, ensuring its integrity and stability while safeguarding the interests of all parties involved.
