I get calls all of the time from companies that are interested in getting away from a net branch company and getting their own mortgage licenses. After hundreds of these conversations, I’ve been able to reduce the call to a simple question. What is your mortgage company’s net worth?
Now you may be thinking that net worth is not a requirement in a lot of states especially for mortgage brokers or is very minimal such as $10,000 to $20,000. You are correct. Most states don’t have a very high net worth requirement for mortgage brokers, although a few do. That is actually not why I ask the question, “What is your net worth?” The reason I ask the question is because most states have a surety bond requirement. To better explain this, let me tell you what a surety bond is.
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.
With that being said, basically if you receive any claims on your surety bond, your company and then in most cases the ultimate owners of the company will be required to pay back the surety company. Since the surety may have to go after your mortgage company and owners for the losses, the surety company needs to verify that you actually have the ability to pay them back if their was ever a claim. So they verify the company’s and the owners assets and ultimately net worth.
Most surety companies that you talk with will tell you that the maximum they can offer in surety bonds is the net worth of the company. With that being said, now you can see why net worth is so important when you go into multiple states. For example: Let’s just say that you decide to get licensed in 5 states. Each state has between a $10,000 to $50,000 surety bond. The total of all surety bonds in the 5 states equals $175,000. If you try to get $175,000 worth of surety bonds, the surety company will ask to see your company’s financials to see if your company could pay back any claims. If your company only has a net worth of $25,000, you may have a difficult time getting the bonds. There is one exception, and that is if the owners financials are very good. If the owner has a couple hundred thousand in net worth, the surety companies may look at that as enough to lower their risk of non-payment.
Now despite this being the largest barrier to mortgage licensing in multiple states, surety bonds are hardly ever claimed. Usually companies pay any fines or fees way before they get a claim on their surety bond. The reason is for this is if there is a claim on a company’s surety bond, they usually will start to lose their bonds, because no surety company will insure them and they will subsequently lose all of their state licenses. It just doesn’t happen very often.
Even though multiple states may not be an option at this time, I do recommend getting licensed in a few states that you do most of your business. This will greatly reduce your overhead and allow you the flexibility to work on your own.