By Todd Bryant of Byrant Surety Bonds
Claims are no fun at all, and this holds true for surety bond claims too. They present a serious challenge to your mortgage brokerage’s financial stability, as well as its licensing, credibility and reputation.
There are various situations that can cause a claim to be filed on your surety bond, but they all involve a potential mistake that puts your customers in a difficult situation.
In fact, that’s the basic idea behind a mortgage broker surety bond. It’s a third-party agreement, required during your licensing as a broker, that guarantees your business will follow all applicable rules. In essence, it’s a safety net for your customers and a reassurance for the state in which you operate.
To help you understand surety bond claims in-depth, so that you are better prepared to avoid them, let’s go through the basics: what are surety bond claims, and what’s the process, once a claim is filed?
What is a surety bond claim?
A claim on your broker bond can be filed, usually by your customers or in some cases by other affected parties, in case you have committed a violation of your obligations, which has resulted in a damage for them.
The claim is filed with the surety according to its specific requirements. In some cases, the plaintiff may directly bring the case to court and then proceed to call on the claim.
There are a few common reasons for claims against mortgage brokers. They are all based on fraud and abusive practice, such as:
- Intentionally providing your customers with a mortgage that exceeds their financial capacity
- Persuading borrowers to choose high-risk or financially damaging loans
- Unlawfully manipulating your fees, or the buyer’s interest rate
- Suggesting fraudulent practices to your customers during their loan application
What happens when a claim is filed?
When a claim is filed against your bond with your surety provider, the surety’s first step is to investigate. The investigation should be carried out in a timely and diligent manner. With the help of internal or external legal staff, the surety analyzes all existing documents and issues its legal position.
In case the claim is proven, the surety covers the damages and costs up to the surety bond amount. This provides a temporary buffer for your mortgage brokerage. However, all costs need to be reimbursed afterwards, as they are your obligation according to the indemnity agreement signed during the bonding process.
That’s why it is a wise idea to avoid costs as much as possible. Once the process has started, you’re likely to face serious financial damage or even go bankrupt. Additionally, you can lose your mortgage broker license, and your reputation in the field could be damaged beyond repair.
Naturally, the most straightforward way to avoid claims is to adhere to all legally imposed regulations that apply to your mortgage brokerage. The mortgage broker surety bond is there to guarantee to your clients that you’ll play by the rules. Make sure you are well acquainted with the obligations you are held liable for under the bond contract.
Furthermore, avoiding claims means sticking to high standards of conduct when it comes to working with higher risk or vulnerable applicants. While this might be a challenge at times, an honest approach in doing business pays off, especially when you consider the cost of claims.
In case a claim is filed against you, whether you agree with it or not, it’s a good idea to look for a settlement. Rather than an admission of defeat, a settlement will likely help you avoid more serious financial penalties and reputation problems.
Equipped with the essential details about surety bond claims, you’re more likely to avoid them, and to respond effectively in the event that a claim is filed.
We’d love to hear from you about your experience with preventing claims or managing them. Please share in the comment section!
Todd Bryant is the President and Founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping mortgage brokers get bonded and start their business.