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Thursday, March 26, 2015

Managing Surety Bond Requirements

QUESTION
As a stateside licensed mortgage lender in many states, I am frustrated with the process of manually managing the surety bond and related requirements. Are there any plans in place to automate this process?

ANSWER
A number of state laws and regulations require financial service licensees to obtain a surety bond as a condition of licensure. State regulators and consumers can file claims against a surety bond to cover fines or penalties assessed or provide restitution to consumers due to the failure of a licensee to comply with licensing or regulatory requirements.

Additionally, the SAFE ACT imposes the requirement of net worth or surety bonds. This requirement stipulates that mortgage loan originators obtain their own surety bond or be covered by an aggregate surety bond under the sponsoring company’s blanket coverage surety bond. Approximately forty-eight states require this bond as a condition of originating residential home mortgages. State regulators provide statutes and regulations that spell out the specific requirements that must be met and maintained in order to become licensed and remain licensed.

At this time, NMLS has 177 license authorities on the system that require surety bonds as a condition of obtaining and keeping a license.

NMLS functionality is currently limited to the uploading of a surety bond document but does not provide any solutions for tracking bonds or requirements for maintaining bond information that is validated by insurance companies or surety bond providers. The manual tracking of these bonds is very time consuming and requires hands-on monitoring and reviewing by agency employees resulting in processing delays of renewals and approvals of new licenses.

In the coming two years, NMLS plans to provide functionality that will dramatically change how industry and regulators handle bond requirements.

State regulators have the following expectations for NMLS Electronic Surety Bond (NEBS) functionality:
  • Regulators will be able to track surety bond compliance;
  • The process for regulators to make a claim against a bond will be streamlined;
  • The surety bond forms and processes will be simplified;
  • Reliance on paper surety bonds will be dramatically reduced by using electronic bonds;
  • The monitoring and enforcement of surety bonds thresholds will be accomplished by relying on information on the NMLS system such as the Mortgage Call Reports; and,
  • Automation of the process will also include automating reports, notifications, deficiencies and other related issues.

At this year’s NMLS Annual Conference, representatives from the Conference of State Bank Supervisors, state banking agencies and the insurance industry discussed some of the steps being taken to accomplish the objective of automating the process. A working group has been established that includes industry representatives and eight states.

Basically, only insurance companies and surety bond providers that are entitled in NMLS will be able to provide bonds to their licensee clients. It is anticipated that some states will need to modify their statutes, regulations and rules prior to opting into the electronic bond system.

The entitled companies will designate the appropriate bond in line with bond limits that will be made part of the entity’s record. Going forward, the bond will be continuous and information from the Mortgage Call report will be used to determine the adequacy of the bond amount.

While there are still some issues that need to be worked out, the automation process is well underway and all involved can look forward to the day in the not too distant future when the process will be automated.

Alan Cicchetti
Director/Agency Relations
Lenders Compliance Group