What lender-servicers should know about a new state process

One aspect of a law that takes effect in Connecticut on Oct. 1 was designed to improve the surety bond cancellation process by fully automating it, but making that possible will involve a procedural change that servicers who are also lenders in the state will need to understand.

"The bill generally requires surety companies to give all their cancellation notices electronically for the bonds they issue to certain banking department regulated entities," according to Connecticut's Office of Legislative Research.

The state only requires lender-servicers to have one license on the nationwide industry platform states use, which also has a registry component. However, Connecticut has two separate surety bond requirements: one for lending operations and the other for servicing.

So to ensure surety bonds can be cancelled through automation on that platform, avoiding delays that occur through a manual process that would involve mailing, lenders in this situation will need to create a second registration for their servicing operations.

Why completing the process is important

Industry attorneys are urging lender-servicers working with mortgages in Connecticut need to complete this process by Oct. 1 because the surety bond process is essential to maintaining their license.

Loss of a surety bond at Connecticut lender 1st Alliance led to the company's closure during a legal disagreement with regulators over how it licensed individuals. (The Consumer Financial Protection Bureau's case against 1st Alliance was dismissed earlier this year.)

The origins of surety bond use in the mortgage industry

Surety bonds came into broader use in the mortgage industry after the Great Financial Crisis, driven largely by the Secure and Fair Enforcement of Mortgage Licensing Act, which created the Nationwide Multistate Licensing System and Registry and generally made them a requirement.

The aim of surety bonds is to ensure that mortgage entities comply with laws and regulation, allowing for claims to be filed against it for compensation if there are injured parties. 

Surety bond cancellations can occur for a routine reason like expiration but also due to contingencies such as nonpayment of premiums.