SFAA Seeks Improvements to License Bond Requirements for Financial Services Providers in Indiana
Wednesday, January 23, 2013
HB 1081 revises the existing bond requirements for several different financial
services providers and creates a new bond requirement for pawnbrokers. SFAA believes that there are three problems
with the new requirements for these bonds: the bond amounts for some are too
high; there is a long tail for filing claims for these bonds; and the
requirement of an A- rating for the surety issuing these bonds is
unnecessary. SFAA recommended amendments
throughout the bill to the bill sponsors in order to make each license
bonda more workable bonding obligation.
1081 addresses the following license bonds: small loan lenders, debt management
service providers, money transmitters and the persons and entities that would
not otherwise be subject to the mortgage lender or broker bond: persons acting
as creditors in first lien mortgages, entities exempt from licensing who employ
mortgage loan originators, and creditors licensed as supervised lenders and
lenders who are exempt entities employing mortgage loan originators.
debt management service providers, the bill specifies a new $100,000 bond
amount. Upon renewal, the bond would
have to be in an amount equal to the "average monthly balance of funds held in
trust for Indiana residents during the licensee's most recently concluded
fiscal year.” The bill specifies a new
$300,000 bond amount for money transmitters.
Existing law requires the bond to be for $300,000 or the amount
resulting from the formula, whichever is less. The bill would eliminate the option of
alternative forms of security such as letters of credit that may be used in
lieu of a surety bond for money transmitters.
The bill would require a surety bond only instead.
SFAA’s letter to the bill sponsor, we point out that the amount of the bond
required affects the extent of availability for the bond. As the bond amount increases, the surety
tightens its underwriting parameters.
Part of the surety’s underwriting involves a financial assessment of the
principal. The surety will require a
certain threshold of financial strength relative to the bond amount – the
higher the bond amount, the higher the threshold. If the law requires an unduly high bond size,
some licensees may not be able to obtain the required bonds.
most of these existing license bonds, HB 1081 would require the bond to remain
in place for two years after the licensee stops providing financial services to
Indiana residents. For money
transmitters, the bill would add a five year tail. For small lenders, the existing two-year tail
would be revised under this bill to make the bond payable to the State in
addition to consumers as provided in existing law.
these provisions are intended to provide the claimant adequate time to discover
a loss and make a claim. SFAA believes
that these provisions are problematic for two reasons. First, the provisions do
not contemplate that one surety could be replaced by another surety during the
period the licensee is licensed. The
time for which losses can be discovered under the first surety’s bond should
begin to run when the first surety cancels its bond. The time between cancellation of the first
bond and the time when the licensee ceases to do business could be rather long,
and a surety would be unwilling to maintain an open exposure for such a long
time. As the duration of the bonded
obligation becomes longer, and the surety must predict the strength of the bond
principal and its operation for periods of time well into the future, the
certainty of the judgment is lessened and the surety’s risk increases. To compensate for the increased risk,
sureties typically tighten their underwriting standards. As a result, fewer
bond principals will qualify for the bond.
the requirements that the bond be "in effect” for a period of time after the licensee ceases to
offer the relevant services raises a question of whether a surety would be
responsible for the licensee’s activity even after the license period
expires. Certainly, a surety would not
want to undertake this liability.
HB 1081, the surety issuing each of these bonds would need an "A-” rating from
a nationally recognized investment rating service. Because of the system of state regulation
that is in place for the insurance industry, the primary criteria for the
surety company issuing a bond should be that it is licensed and in good
standing with the Indiana Department of Insurance, which is the state agency
that is charged with regulatory oversight of the surety industry. Relying on the state insurance department
also would be the most effective way to assure the financial condition of the
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