Mortgage License Bond Claims Guide

To be registered with the Nationwide Multistate Licensing System and Registry (NMLS), and to maintain licensure by your governing state regulator, an applicable Mortgage License Bond is required of these common license types within the industry: mortgage brokers, mortgage lenders, mortgage servicers, and mortgage loan originators. Occasionally, a mortgage banker or mortgage company license will also pop up among the regulations. 

The mortgage industry is generally regarded as low-risk due to the various educational qualifications and extensive licensing processes required of applicants, as well as an overall “by the book” attitude within the profession. 

However, mortgage professionals do hold a position of power over consumers on account of their access to sensitive information (e.g. social security numbers, bank details, loan information, etc.), and their thorough knowledge of a niche business that is not really common sense based. Because of this, a surety bond is required by state regulators to ensure the credibility and responsibility of the licensee. 

So, where does Jet Insurance Company come in? By providing a Mortgage License Bond, Jet financially guarantees that restitution is available to any damaged party should the mortgage professional commit a license transgression. Hopefully, it never comes to that, but bond claims do happen. Let’s go over how to steer clear of Mortgage License Bond claims and what to do should an official claim ever occur.

How to Avoid Action on Your Mortgage Bond

It’s safe to say that committing negligence, acting dishonestly, and full-fledged fraud are all mortgage license violations that can lead to a bond claim. For more specific, and common examples of violations within the mortgage industry, take a look at the list below.

• Engage in the omission or misrepresentation of material fact
• Produce false or misleading statements and/or advertising
• Improper holding or disbursement of borrower and/or loan funds
• Engage in unfair or deceptive business practices to any person
• Collect or attempt to collect improper fees (e.g. charge fees for services not provided)
• Directly or indirectly employ a scheme to defraud a borrower
• Fail to maintain proper books and records per state regulations

Claim Process Details

Who Can File a Claim on a Mortgage License Bond?

So, there are two possibilities. One is that a financially damaged borrower/client could pursue civil action against the mortgage professional directly which can lead to a court-ordered bond claim. The other, and more likely scenario, is that the damaged party will submit a consumer complaint to the governing state regulator. If the complaint is determined to be valid, the regulator may choose to file a bond claim on behalf of the harmed claimant. Typically, this point of action will only occur if all other options are exhausted and the licensee in question is unable or unwilling to resolve the dispute.

Are There Limits to Claim Filings?

An official claim may only be filed against a Mortgage License Bond for activities committed during the bond’s active duration, as well as for any last-minute deeds performed within the liability period. This means that if the surety bond is cancelled before the end of its term, the bond may be required to remain in effect for an additional period of 30, 60, or 90 days, which will then extend the claim filing window. Each bond form or the regulations attached will state how long the state-mandated cancellation period is to be.

Some states will put a limit on how much time may pass for a claim to be filed on a cancelled surety bond—this is commonly referred to as a bond “tail”. For instance, the States of Indiana and Kansas do not allow action to be pursued against a Mortgage License Bond beyond two years of the accused violation on which the claim is based. Once the liability tail has ended, legal action cannot be pursued.

As for the amount of coverage, state-required bond limits for a Mortgage License Bond range from $10,000 to upwards of $250,000. Usually, a standard bond amount is stated on the form or can be based on the aggregate loan amount written by the mortgage professional in the previous year (first-year applicants are typically subject to a minimum bond limit). A claim, or in a worst-case scenario, multiple claims on one surety bond, in no circumstances can exceed the total amount of the bond. If a bond is drained of its coverage due to claim payouts, no further claims may be filed against it.

What Would a Mortgage License Bond Claim Look Like?

Let’s say that Alice Anderson has purchased a new home in Lansing, Michigan and that her mortgage loan was through a local lender, Grand River Mortgage Associates. Alice has completed one year of mortgage payments and receives a statement highlighting the first year. Upon review, she notices that a standard payment of $1,600 is being credited to the loan each month. However, this can’t be right, because she had signed up for auto-pay and $2,200 is taken from her checking account each month. So, where is this missing $600 going every month?

Complaint

The first step Alice can take is to call Grand River Mortgage Associates directly to discuss why she is being charged more than what is being credited to her loan account. However, when she calls the company and speaks to a representative, they are unable to give her the answers she needs. If the mortgage company continues to refuse Alice’s requests to look into this problem, she has the option to file a complaint with the state regulator, the Michigan Department of Insurance and Financial Services (DIFS). 

Investigation/Judgement

Alice chooses to submit an official complaint to the DIFS, and is notified that with her cooperation, an investigation into the matter is underway (this process could involve court proceedings). It is up to Alice to provide evidence of Grand River Mortgage Associates’ wrongdoings, such as bank statements and documentation of her loan agreement. 

The DIFS discovers that a mortgage servicer under the employment of Grand River Mortgage Associates has been overcharging Alice’s account, as well as a number of other borrower accounts, and pocketing the difference. 

This is an unlikely move, but for the sake of this story, let’s say that the mortgage servicer, and even their employer, refuse the DIFS order to provide all damaged parties with proper restitution. In this case, the DIFS would offer to file a bond claim on behalf of the damaged claimant, Alice. License penalties against both the mortgage servicer and Grand River Mortgage Associates are likely to be pursued by the DIFS as well.

Restitution

On her behalf, Alice allows the DIFS to file a claim on the guilty party’s bond (i.e. First Mortgage Servicer Bond). Once the claim notice has been received by the surety provider (Jet), a review and investigation of the claim will proceed per usual. 

As we know, the DIFS has already completed an investigation into the violation and declared judgment that it is valid, therefore, the claim will likely hold up. If the claim stands, Jet is legally obligated per the First Mortgage Servicer Bond form to payout the claim.

Such payment will be equal to the fiscal amount of damages incurred by Alice and under no circumstances may exceed the bond’s $25,000 limit. The claim will be officially closed as soon as payment to the claimant has been received.

Indemnification

Unfortunately for the mortgage servicer, the claim is not over yet as they must reimburse Jet Insurance Company for the full amount of the original claim payout. Failure to repay the bond may result in further problems for the mortgage professional, such as trouble obtaining a new surety bond for licensure purposes. 

Additional Information

It is important to note that each state’s laws vary in one way or another, so it is best to read up on the regulations for the state or states that surround your specific mortgage license. Take a look at the chart at the bottom of the page for full details.

In addition, Jet’s comprehensive Mortgage License Bonds Guide includes details regarding the mortgage industry, licensure processes in multiple states, and applicable surety bond regulations.