Surety Bond Requirements Overview
Here is a brief description of the surety process. Integrity Mortgage Licensing can have an initial conversation with you about the basics and then any specifics with respects to underwriting are best left up to the insurance broker and their surety markets.
A surety bond involves three parties, the Principal (in this case mortgage companies), the Obligee (the state department), and the Surety (insurance surety carrier). It is an agreement by the surety to be responsible to the obligee for the obligation or conduct of a third party which is the Principal. It is also a way for the states to regulate the licensing of mortgage companies conducting business in their states as a broker or a banker or both. The laws and statutes vary from state to state. When the statutes or laws are broken by the Principal a claim or loss can occur on the bond. The most important thing to remember on a surety bond is that it is not an insurance policy. Whereas, in a regular insurance policy, the Insurer takes all risk and pays out claims, in a surety bond the law seeks that Surety ask for recovery or reimbursement for what surety pays out to handle the claim with the state.
The legal contract that allows for surety to collect reimbursement on claims they pay out is called an indemnity agreement. In most cases the insured will be asked to sign a corporate and personal guarantee. A surety carrier will ask for the insured to reimburse them out of corporate equity or money first, however, if a worse case scenario were to occur where corporate funds couldn’t handle the claim, with a personal guarantee, the surety has access to seek reimbursement from the individual indemnitor which is any owner of the company with 10% or more interest in company. With personal guarantees, spouses are required to sign as personal indemnitors. The reason for spousal indemnity is the right for an owner to transfer funds to a spouse and the fact that when married many times property and assets are shared.
When submitting to the insurance broker for bond quotes, we will need to provide the insurance broker with the following items so that they can turn around a prompt quote for us (All of these items will be requested from you when you sign up with Integrity Mortgage Licensing to complete your state licensing).
- 1. Surety Bond Supplement Form
- 2. Financials – the carrier prefers audited financials. If you are a start-up company or don’t get audited the carrier will accept a balance sheet showing assets and networth and income statements showing net income and revenues/expenses. If the financials are unaudited, you must send along a bank statement copy to verify cash assets.
- 3. Resumes on all owners
- 4. Company business plan – if a formal one is drafted this will help the carrier understand what kind of mortgage transactions the company participates in and their projected revenues and loan volumes.
- 5. Copy of declaration page to current fidelity/E&O coverage. Some mortgage brokers may not carry this coverage. If you don’t, let us know and we can make arrangements with the carrier to waive the requirement to carry this coverage. If you do carry fidelity/E&O, send in the page that shows limits, policy period etc. The insurance broker can also assist insured’s in placing this coverage for them.
The carrier will run credit checks on the owners as an underwriting tool. Once they have all submission materials, the insurance broker will get terms in a few days from the markets. Then the indemnity agreement will come separately. Once that is signed and returned, the bonds are issued. For a new account, it can take about 4-5 business days on average because of the agreement and approval to take place. It can be quicker if everything goes that way.