In recent months, the mortgage industry has gone through a whirlwind of turmoil. From loan buybacks to the seemingly endless amount of defaults, the professionals and corporations of this industry have experienced continued anguish over the last six months. On an almost daily basis we are reading about predatory lending, bad investments, or worse, the carelessness in underwriting and failure of major corporations. Even with all the dreadful news there are still ways to protect your company from a catastrophic hit to your financial statement. One way is to establish a Mortgage Brokers Professional Liability Insurance Policy. These polices are designed to specifically protect Mortgage Brokers and provide financial protection for an actual or alleged wrongful act while acting in the capacity as a mortgage broker. Many suits include errors in the loan application process, failure to disclosure material information, inaccurate / incomplete appraisals and even negligence in recording a payment of the correct amount. A main component is the perception of an unsuccessful transaction. A client may feel they have been financially wronged and will bring a multitude of parties into a suit to try and recap the perceived losses. In addition to the occasional mistake, even if we believe that we have conducted ourselves in a professional and thorough manner, there is still the need to retain an attorney to defend the claim. With many attorneys’ fees starting at $250+ / hour, everyone looks to their insurance policy for coverage. The insurance market as a whole continues to make a conservative commitment to providing insurance for brokers. From a marketplace perspective, the traditional mainstream insurance companies have been hit hard with losses, mostly related to residential transactions. Rates have continued to rise while companies limit coverage to try and retain their losses. Still some markets are committed to the long term goal of providing financial protection. Especially with the state of the housing market, underwriters are increasingly concerned with the following items before they release additional capacity into the marketplace:
- Amount of Commercial vs. Residential Deals: - Traditionally, from an underwriting perspective there has been a far greater chance of a severity type of loss if a customer is doing more commercial than residential lending (considering the higher dollars, sophistication of clients and the opportunity for a larger loss). As the market continues to move in a downturn pattern, insurance carriers are weighing the residential loans just as risky considering the frequency of smaller claims.
- Predatory Lending – This is clearly one of the most talked about items over the last year. Many insurance companies have taken the position to exclude all items concerning predatory lending, especially when loans were pushed through with poor FICO scores and a lack of due-diligence. Past experience has proven to the insurance community that the coverage is too valuable for the minimal cost.
- Subprime Loans – There are markets that are willing to offer the coverage if a broker is only doing a small percentage of subprime loans. The quality of paper has drawn the attention of virtually every underwriter in the US and theUK. A broker that continuously provides C and D rated paper would have a hard time obtaining the specific coverage.
- Experience of Brokers – A big part of obtaining the most broad terms and conditions comes from the experience of the firm and brokers. A company will be in a far better position to obtain competitive terms and conditions if it has been in business for more than five-to-ten years, can show they are demonstrating practices such as avoiding predatory lending, has a process to avoid discrimination, and provides appropriate disclosures (where required) concerning the yield spread premiums.
