At least four new surety bonds have hit the market in Texas and Arkansas in the last six months, part of a wave of new bonding requirements nationwide.
Brokers in both states are working to stay on top of the new mandates. They might need overtime in the coming months, given a growing demand for consumer protection in all corners of industry.
“This past year has seemed to be especially active statutorily and even with regulation in terms of requiring or introducing new bond requirements,” said Rob Duke, director of underwriting and assistant counsel for the Surety & Fidelity Association of America. “In this environment, there may be a call for greater oversight and greater consumer protections, and a bond can play a role in that.”
This spring, Utah and Arkansas became the first states to fully regulate appraisal management companies through their state’s real estate appraiser boards. Four more states enacted similar legislation by the fall, and industry experts anticipate as many as 20 more states to consider AMC legislation in 2010.
“There is a significant belief out there that mortgage fraud played a significant role in the meltdown in the housing market, and any unregulated entity that is out there presents the possibility for mortgage fraud to creep back into the system,” said Scott DiBiasio, manager of state and industry affairs for the Washington, D.C.-based Appraisal Institute, a global association of real estate appraisers. “I think legislators recognized that this was a gaping loophole that needed to be corrected.”
Elected officials in Arkansas actually went a step further — it’s so far the only state that requires appraisal management companies to post a surety bond.
Every appraisal management company operating in Arkansas must post a $20,000 surety bond with the real estate appraiser board starting Jan.1, 2010.
Anyone with standing can file a claim against the new bond, including appraisers with a claim against the appraisal management company. But the claims of allegedly maligned consumers will take precedence over all other bond claims, according to the legislation.
Instead of a bond, appraisal management companies can also submit a deposit of cash or security.
The new AMC legislation also requires companies to verify they use only licensed or certified appraisers. They’re also required to ensure that appraisals comply with the industry’s Uniform Standards of Professional Appraisal Practice.
“We need to have and the public deserves to know who owns, operates and manages these appraisal management companies,” DiBiasio said. “I think the $20,000 surety bond is really there to provide some minimal protection to consumers.”
A similar push to improve consumer protection is at the root of a trio of new bonding requirements in Texas. The legislature recently enacted three pieces of legislation governing identity recovery companies, mortgage originators and title agents.
Traditionally, identity recovery companies needed an insurance policy and a client reimbursement account in order to operate legally in the state. The new regulations will add a layer of financial protection for consumers and the state.
Identity recovery companies will have to post a surety bond, letter of credit, a CD or cash in order to secure a license.
The bond amount has to be at least $25,000, or “an amount equal to 5 percent of the gross consideration of the provider received from consumers from the sale of all identity recovery service contracts issued and outstanding in this state, minus any claims,” according to the bill’s final language.
On top of that, identity recovery companies must also maintain — or have a parent company that maintains — a net worth or stockholders’ equity of at least $100 million.
The new requirements will apply to all contracts entered into after January 1.
During the summer, the Texas legislature also passed legislation aimed at curbing fraud and risk among mortgage originators. Signed on June 19 by Gov. Rick Perry, the “Secure and Fair Enforcement for Mortgage Licensing Act” was drafted to protect consumers from unfair or fraudulent practices by mortgage loan originators.
The law requires all mortgage originators — whether they’re employed by a mortgage broker or not — to obtain a surety bond or to pay into a reimbursement fund that covers default, bankruptcy and other claims. Originators must also possess current and complete licenses.
The new regulations also apply to credit unions. There may be some lingering impacts on motor home and RV dealers, as the law includes new language and requirements for those who sell motor vehicles that serve as primary dwelling units.
On the same June day, Gov. Perry also signed a similar consumer protection bill for Texas title agents. The measure was set to take effect on September 1, but the state Department of Insurance is still working with stakeholders to hammer out particulars for the bonding requirements.
Bond amounts are set to vary depending on the population of the title agent’s principal county of business. Face values will range from $25,000 for smaller areas to $150,000 for those in metropolitan areas.
“We’re all trying to get rules, regulations and bond forms that will satisfy the legislature and the bill that they passed,” said Bill King, a founding board member of the Texas Surety Federation and president of SureTec Insurance Company. “They’re all working together.”
Birk, a former newspaper reporter and magazine writer, is a principal at SuretyBonds.com. He teaches journalism at Webster University in St. Louis, Mo.
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