Determining the Correct Bond Amount for an Arizona Mortgage Banker License

The Arizona statutes require that a mortgage banker maintain a surety bond.  A.R.S. § 6-943(H).  The purpose of the surety bond is to compensate a party injured by a mortgage banker’s wrongful act, failure to comply with the applicable Arizona statutes or fraud or misrepresentation.  The amount of the bond is determined by statute and is based upon the types of investors the mortgage banker utilizes.  Calculation of the bond amount is explained in A.R.S. § 6-943(H) and (I) which provide:

H. Every person licensed as a mortgage banker shall deposit with the superintendent, before doing business as a mortgage banker, a bond executed by the licensee as principal and a surety company authorized to do business in this state as surety.  The bond shall be conditioned on the faithful compliance of the licensee, including his directors, officers, members, partners, trustees and employees, with this article.  Only one bond is required for a person, firm, association or corporation irrespective of the number of officers, directors, members, partners or trustees who are employed by or are members of the firm, association or corporation.  The bond is payable to any person injured by the wrongful act, default, fraud or misrepresentation of the licensee and to this state for the benefit of any injured person.  The coverage shall be maintained in the minimum amount prescribed in this subsection, computed on a base consisting of the total assets of the licensee plus the unpaid balance of loans it has contracted to service for others as of the end of the licensee’s fiscal year.

Base  Minimum Bond

Not over $1,000,000     $25,000 for the first $500,000 plus

       $5,000 for each $100,000 or fraction thereof over $500,000

$1,000,001 to $10,000,000     $50,000 plus $5,000 for each $1,800,000

       or fraction thereof over $1,000,000

$10,000,001 to $100,000,000   $75,000 plus $5,000 for each $18,000,000

       or fraction thereof over $10,000,000

$100,000,001 and over   $100,000

No suit may be commenced on the bond after the expiration of one year following the commission of the act on which the suit is based, except that claims for fraud or mistake are limited to the limitation period provided in section 12-543, paragraph 3.  If any injured person commences an action for a judgment to collect on the bond, the injured person shall notify the superintendent of the action in writing at the time of the commencement of the action and shall provide copies of all documents relating to the action to the superintendent on request.

I. Notwithstanding subsection H of this section, the bond required shall be twenty-five thousand dollars for licensees whose investors are limited solely to institutional investors.

The term “investor” is defined in the statute as:

any person who directly or indirectly provides to a mortgage banker funds that are, or are intended to be, used in the making of a loan, and any person who purchases a loan, or any interest therein, from a mortgage banker or in a transaction that has been directly or indirectly arranged or negotiated by a mortgage banker.

A.R.S. § 6-943(J)(2).

If a mortgage banker only uses “institutional” investors, then the bond amount is $25,000.  However, if non-institutional investors are used, the amount of the bond is computed based upon the formula described above which typically results in a much higher bond amount.

“Institutional” investors are defined as:

a state or national bank, a state or federal savings and loan association, a state or federal savings bank, a state or federal credit union, a federal government agency or instrumentality, a quasi-federal government agency, a financial enterprise, a licensed real estate broker or salesman, a profit sharing or pension trust, or an insurance company.

Therefore, as an example, if a state or national bank provides a warehouse line of credit which the mortgage banker uses to fund all of its loans and it only sells its loans to Fannie Mae or Freddie Mac, then its bond amount is $25,000.  If the mortgage banker utilizes investors which do not meet the definition of institutional investor to fund or purchase its loans, however, then it must compute the bond amount based upon the formula.

An argument can be made that the statute is silent as to the bond amount when no investors are used such as when a mortgage banker funds all of its loans using its own funds and holds all of its loans in its portfolio.  In my experience, in this scenario, the AZDFI interprets the statute to mean that the bond amount is $25,000 unless the mortgage banker uses non-institutional investors.   The intent of the statute appears to be to protect non-institutional investors to a greater degree than institutional investors as they may be less sophisticated and therefore more vulnerable.  Therefore, it there are no investors, there would be no reason to require a higher bond amount.

If a mortgage company uses non-institutional, or “private” investors, the securities issues and requirements must be carefully addressed using counsel who is experienced in securities law.  Federal and state laws apply and enforcement is implemented by the Securities and Exchange Commission, the Arizona Corporation Commission/Securities Division and other government regulatory and prosecutorial agencies.  Obtaining a surety bond using the formula described above indicates that a mortgage banker has non-institutional investors.  This should be avoided if no non-institutional investors are used as this can generate an unnecessary referral to the the Arizona Corporation Commission/Securities Division for investigation as to compliance with the securities laws.

2018-02-01T19:09:52+00:00February 1, 2018|