A surety bond is a crucial component in obtaining and maintaining a lending license. This post will provide an in-depth overview of surety bonds – what they are, why they are required, how much they typically cost, and the step-by-step process for securing one.
What is a Surety Bond?
A surety bond is a three-party agreement between the principal, the obligee, and the surety company. The purpose of a surety bond is to guarantee that the principal will fulfill duties and obligations to the obligee.
In the case of lending licenses, the principal is the lending company or individual seeking licensure. The obligee is the state regulatory agency that oversees lending activity. The surety company issues the bond on behalf of the principal.
If the lending company fails to adhere to state lending laws or causes harm to consumers, the obligee (regulatory agency) can make a claim on the bond to recover losses. Essentially, the bond serves as a “safety net” to reassure the state that licensing the lender does not pose inordinate risks to the public.
Why is a Surety Bond Necessary for a Lending License?
There are two primary reasons why surety bonds are mandated for lending licensure:
1. Consumer Protection
The core purpose of surety bonds for lenders is to protect consumers. Lending and financing activities carry intrinsic risks for borrowers and the general public. When approving licenses, regulators aim to only authorize companies demonstrating financial stability, integrity, and commitment to legal compliance.
Requiring licensed businesses to carry bonds ensures that consumers are somewhat insured against losses from unscrupulous conduct. If harm occurs, there are means to recover damages.
2. Weeding Out Unreliable Lenders
Surety bonds also help regulators screen lending license applicants for risk-factors. Qualifying for a reasonably priced bond entails underwriting by the surety company assessing business credit, company history, key personnel, and other data points.
The ability to acquire and afford a surety bond implicitly indicates overall financial health and suitability for licensing. Companies unable to obtain reasonably priced bonding may suffer from poor credit, lack of operating history, legal troubles, or other deficiencies making them higher-risk borrowers.
In short, the surety bond requirement filters out unreliable, unstable, and unscrupulous lenders seeking licenses.
How Much Do Lending License Bonds Typically Cost?
Costs for lending license surety bonds vary based upon jurisdiction, type of lending activity, company attributes, bond amount minimums, and other factors. However, most fall within a range of 1-15% of the bond penalty amount on an annual basis.
For example, if a state requires a $50,000 lending license bond, annual premiums could range from $500 – $7,500 with most applicants paying towards the lower end assuming they have decent credit and operating history.
Below are rough national averages for lending entity licensing bond costs based on business type and loan activity:
- Mortgage Lender/Broker – $500 to $5,000
- Consumer Finance Lender – $500 to $3,000
- Payday/Title Loan Lender – $1,000 to $7,500
- Commercial Lender – $1,000 to $5,000
Actual lending license bond pricing aligns closely with standard surety bond underwriting criteria:
1. Bond Penalty Amount
The higher the bond dollar amount, the larger the gross premiums. States often impose minimum bond penalties for different license types. Typical amounts range from $10,000 for consumer lenders up to $200,000 for mortgage bankers/brokers in some states.
2. Credit Score
The stronger the credit rating of the licensed company and its owners, the lower bonding rates. Underwriters scrutinize personal and business credit reports and typically demand scores above 650-700.
3. Business History and Financials
Established enterprises with solid revenue streams, assets, and good net worth often qualify for better pricing. Startups may pay higher rates but can still often secure lending license bonds.
4. License Type and Activity
Bonds for higher-risk/highly regulated activities like payday lending, complex commercial financing, or mortgage origination may cost more than basic consumer lending licenses.
5. Jurisdiction
Surety requirements and costs can vary significantly between states. Local bond amount minimums, asset demands, restrictions, and additional oaths/riders impact pricing as well.
Overall, most reputable lending companies pay $500 to $3,000 annually assuming they apply in fiscally healthy shape, have a clean regulatory record, and seek licensure in an accommodating jurisdiction.
Conclusion
Surety bonds are a requirement that all lending license applicants must satisfy. Making licensees financially accountable for errors via surety backing brings prudence to consumer protection oversight.
And the due diligence process prohibits unstable or fraudulent companies from gaining legitimacy through licensure.