Many people associate the phrase “licensed and bonded” with business transactions involving service industries like janitorial services, contractors, house cleaners, and car dealerships. However, surety bonds are incredibly prevalent in all spheres of business in the United States today and some of the most critical bonds from a consumer protection standpoint are found in industries like mortgage and insurance brokerage, surplus lines, and other more ‘white collar’ areas of the business sector.
Surety bonds are in place primarily to protect consumers against fraud during business dealings of many different types. Generally, a business becomes bonded due to state, local, or federal regulations requiring them to hold a surety bond of a certain amount (which varies by industry), and the bond acts as an added protection to whomever does business with the bonded company to ensure that it will act in a lawful and ethical way in all business dealings. If there is a claim filed against the bond, the bonded company is responsible for paying damages or making restitution to the wronged party, up to the full face value of the bond. For example, in the case of a Michigan surety bond, a mortgage broker must be bonded up to $25,000 which means that if the broker acts unethically or engages in fraudulent lending activity, he or she may have to pay up to $25,000 to the consumer who was damaged by the illegal actions.
As the economy began to decline several years ago, many mortgage brokers were making increasingly risky loans to borrowers and engaging in fraudulent lending practices simply to get an edge on the incredibly competitive home loan market. Their actions resulted in a whole subset of borrowers who couldn’t make the payments on their loans because their finances were not sufficient, or borrowers that eventually defaulted on their loans due in part to poor credit history or lack of financial readiness. While surety bonds can’t completely eliminate this type of predatory lending activity, they can drastically reduce it by holding lenders accountable for their actions and providing a financial disincentive to conduct lending without appropriate financial documentation from buyers. In all cases of predatory lending with a bonded lender, borrowers have the opportunity to file a complaint and have their case heard, as well as potentially being compensated for their losses resulting from the activity.
The act of becoming bonded represents, for the bonded company, an agreement to conduct their business within the legal confines of their locality, state, and country. I cannot overstate the importance of making sure that any business that you do with companies eligible for bonding is actually licensed and bonded. The financial implications of doing so are just too great otherwise.