Like all surety bonds, mortgage broker bonds are required as a guarantee to customers and the government that your business is operating lawfully.
Mortgage broker bonds guarantee that people who have a mortgage broker license will operate in accordance with state regulations, as well as with the professional standards upheld by the Nationwide Mortgage Licensing System, under which all mortgage professionals are licensed.
Excluding instances of deliberate fraud, all sorts of situations arise — and sometimes even reputable brokers find they are facing a claim on their bond.
So, what is a mortgage broker bond claim, when can someone file such a claim and how can brokers avoid them?
Mortgage broker bonds recap
Being bonded is a requirement for all mortgage brokers to obtain their license. The amount of the bond may vary depending on the state you are obtaining a bond in and the financial health and other specifics of your business.
Once you, the principal, have received a mortgage broker bond, it acts as a financial guarantee and protection for the state government and your customers — the obligees. If a broker causes losses or damages to one of their clients, the client may proceed with filing a claim against the broker’s bond.
If the mortgage broker bond claim is found to be legitimate, the surety then has to rectify the situation by compensating the claimant(s) for any financial damages they have sustained, up to the full bond coverage amount. In return, the principal, i.e. the broker, then has to pay back the surety in full.
When are mortgage broker bond claims filed?
Claims on mortgage broker bonds are usually filed by a mortgage broker’s customers. These include borrowers, loan applicants, loan servicing customers or a legal representative of one of these. In some cases, a case is first brought to court, and then a claim on the bond is raised.
There are many reasons for the filing of a mortgage broker bond claim. These are always concerned with some form of malpractice on the side of the mortgage broker, such as:
- Purposefully offering a mortgage to someone who will be unable to repay it
- Misleading customers during their application
- Intentionally offering high-risk loans to borrowers
- Suggesting that customers engage in or become complicit in fraudulent activities
- Overcharging on the principal or interest of a loan or manipulating your fees
There are also a growing number of cases of mortgage broker bond claims that “are not explicitly based on a violation of the mortgage-brokering statutes under which a broker issued the bond” as this 2012 paper shows. These can be even more complicated and confusing because state statutes often use rather broad language, which leaves many brokers vulnerable.
The mortgage broker bond claim process
Although it is best to avoid claims against one’s mortgage broker bond, the filing of a claim is not necessarily an irreparable situation.
Once a customer or their representative file a claim against the bond, they must notify the surety. It is at this point that the surety’s obligations have “matured” — once a claim has been raised and/or the principal has been declared to be in default.
The surety then launches an investigation into the nature of the claim and the reasons for it. This process might take a while because the surety must evaluate all contracts and documents pertaining to the case and establish:
- whether there is a legitimate reason for the claim
- whether the surety is required to engage in the situation and begin resolving it
The surety must also carefully evaluate the principal’s position, especially if the principal (the mortgage broker) claims to not have breached any rules, regulations or license standards and procedures.
Once the investigation is over and if the surety has found that it must engage, it will proceed with compensating the obligee for any damages or losses, as per contract and up to the full amount of the bond. If the surety considers that there is no good case for a claim it may decline to engage.
How to avoid a mortgage broker bond claim
You can take several actions to ensure that a claim will never be raised against your mortgage broker bond.
First and foremost, you need to play by the rules. A large number of claims can be avoided by sticking to best practices, guidelines and regulations. Being strict with yourself, and avoiding decisions that fall within a gray area means you’re less likely to encounter such troubles.
Secondly, working closely with your surety and developing that relationship means that you will have greater support if a claim does get filed. If you suspect difficulties with a certain case, it is best to inform the surety right away and present them with all the relevant documentation. That way, they may be able to offer a way out before a customer even comes to consider raising a claim.
When it pays to reach a settlement
Thirdly, if a claim against your bond does get filed, there are usually ways to settle it. A majority of claims are avoided this way, so if you are faced with a choice between a claim and a settlement, it is usually wiser to opt for the settlement.
Having a claim against you can incur greater financial and reputational damages than a settlement would. And if it comes to a settlement, your surety will still be there to advise you and help you manage the situation.
Have you had a claim filed against you? How did it get resolved? Please share in the comments section below.
Vic Lance is the founder and president of Lance Surety Bond Associates, Inc, where he focuses on educating and assisting mortgage brokers throughout the country. You can follow him on Twitter.
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