What the 2012 State of the Union address could mean for the surety industry

surety industryBarack Obama gives the annual State of the Union Address on January 24, 2012.

If you watched President Barack Obama’s State of the Union address on January 24, you probably remember a few key talking points about his stance on taxation, job creation and education, among other initiatives. What you might not have realized, though, is how some of his suggested overhauls could affect the way government agencies and the way the surety industry operates.

Obama briefly called out the mortgage lending industry for its corrupt lending practices of late. He then declared that Americans must hold lenders to higher standards in the future.

“We’ve all paid the price for lenders who sold mortgages to people who couldn’t afford them, and buyers who knew they couldn’t afford them. That’s why we need smart regulations to prevent irresponsible behavior. Rules to prevent financial fraud, or toxic dumping, or faulty medical devices, don’t destroy the free market. They make the free market work better.”

Surety bond requirements are commonly used to regulate professionals who work in finance. In short, the use of surety bonds holds professionals to higher industry standards. For example, surety bond requirements are enforced in the mortgage industry to curb instances of fraud and other unethical lending practices. The financial guarantee provide by mortgage bonds can protect consumers from lenders who might

  • deliberately approve borrowers for loans they won’t be able to repay
  • encourage buyers to use fraud when applying for mortgages
  • pressure buyers into certain loan products, including high-risk loans or loans with higher interest rates
  • intentionally target vulnerable or at-risk buyers and suggest cash-out refinances

Mortgage professionals typically have to file a surety bond before they can get their industry licenses. If their financial credentials or past work records disqualify them from a bond as required, they will not be permitted to work in the industry. As such, the surety application process keeps financially unstable or otherwise unqualified individuals from gaining a position through which they might take advantage of consumers.

A number of licensing agencies have discovered just how useful surety bonds requirements can be when screening those looking for jobs in the finance industry. As such, a number of new surety bond requirements have been established during the past few years. These new bonding requirements keep unqualified individuals out of the markets that have recently been known to take advantage of consumers.

Within the past two years, state governments in 10 states have established new surety bond requirements for appraisal management companies. These new appraisal management bonds provide a financial guarantee that appraisal management companies will fulfill their tasks according to law. If the trend of further regulating unruly financial professions continues — as Obama advocates — appraisal management companies across the country might find themselves struggling to get licensed.

Surety bond regulations are also being used to prevent a second robo-signing crisis, which resulted in the mass production of false and forged mortgages across the country. To combat the potential for such a problem in the future, Alabama recently increased its required surety bond amount for notaries from $10,000 to $25,000. The $25,000 notary bond amount is currently the highest in the nation.

The need to protect consumers from unneeded financial loss in the current unstable economy makes one thing certain: the government certainly values the financial security that surety bonds provide. If Obama’s call for stronger regulation is answered, government agencies will begin revising existing surety bond requirements while also developing new ones.