California Residential Finance Lender Bond: A Comprehensive Guide
March 22, 2021
This guide provides information for insurance agents to help residential finance lenders obtain California Finance Lender Bonds
*This page focuses solely on the bonding requirements for Residential Finance Lenders and Brokers. For information on the bonding requirements for non-residential finance lenders and brokers click here
At a Glance:
- Average Cost: Between 0.75% to 5% of the bond amount per year based on the lender/broker’s credit
- Bond Amount: Based on the aggregate dollar amount of residential mortgage loans originated in the preceding year:
Table 1.1
| Aggregate Loans | Bond Amount |
|---|---|
| 0 to $1 million | $25,000 |
| Over $1 million to $50 million | $50,000 |
| Over $50 million to $500 million | $100,000 |
| Over $500 million | $200,000 |
- Who Needs It: All residential finance lenders and brokers seeking to obtain a license in the State of California
- Purpose: To ensure the public will receive compensation for any damages should the finance lender/broker fail to comply with licensing law
- Who Regulates Residential Finance Lenders and Brokers in California: The California Department of Financial Protection and Innovation (DFPI)
Background
California Statute 22100 requires all residential finance lenders and brokers operating in the state to obtain a license with the Department of Financial Protection and Innovation. The California legislature enacted the licensing laws and regulations to ensure that finance lenders and brokers engage in ethical business practices. In order to provide financial security for the enforcement of the licensing law, finance lenders and brokers must purchase and maintain a finance lender surety bond (limits outlined in Table 1.1) to be eligible for licensure.
What is the Purpose of the California Residential Finance Lender Bond?
California requires residential finance lenders and brokers to purchase the finance lender bond as part of the application process to obtain a business license. The bond ensures that the public will receive compensation for financial harm if the lender/broker fails to comply with the licensing regulations. In short, the bond is a type of insurance that protects the public if the finance lender/broker breaks licensing laws.
How Can an Insurance Agent Obtain a California Residential Finance Lender Surety Bond?
BondExchange makes obtaining a California Residential Finance Lender Bond easy. Simply login to your account and use our keyword search to find the “finance” bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. Our friendly underwriting staff is available by phone (800) 438-1162, email or chat from 7:30 AM to 7:00 PM EST to assist you.
At BondExchange, our 40 years of experience, leading technology, and access to markets ensures that we have the knowledge and resources to provide your clients with fast and friendly service whether obtaining quotes or issuing bonds.
Is a Credit Check Required for the California Residential Finance Lender Bond?
Surety companies will run a credit check on the owners of the lending/brokerage company to determine eligibility and pricing for the California Residential Finance Lender bond. Owners with excellent credit and work experience can expect to receive the best rates. Owners with poor credit may be declined by some surety companies or pay higher rates. The credit check is a “soft hit”, meaning that the credit check will not affect the owner’s credit.
How Much Does the California Residential Finance Lender Bond Cost?
The California Residential Finance Lender surety bond can cost anywhere between 0.75% to 5% of the bond amount per year. Insurance companies determine the rate based on a number of factors including your customer’s credit score and experience. The chart below offers a quick reference for the approximate bond cost on a $50,000 bond requirement.
$50,000 Residential Finance Lender Bond Cost
Table 1.2
| Credit Score | Bond Cost (1 year) |
|---|---|
| 700+ | $375 |
| 650 – 699 | $500 |
| 625 – 649 | $600 |
| 600 – 624 | $750 |
| 550 – 599 | $2,000 |
| 500 – 549 | $2,500 |
*The credit score ranges do not include other factors that may result in a change to the annual premium offered to your customers, including but not limited to, years of experience and underlying credit factors contained within the business owner’s credit report.
How does California Define “Residential Finance Lender”?
The California DFPI defines a residential finance lender as “any person who is engaged in the business of making residential consumer loans.”
How Does California Define “Residential Finance Broker”?
The California DFPI Defines a residential finance broker as “any person engaged in the business of negotiating or performing any act as broker in connection with residential loans made by a finance lender.”
How do Residential Finance Lenders and Brokers Apply for a License in California?
Residential finance lenders and brokers in California must navigate several steps to secure their business license. Below are the general guidelines, but license applicants should refer to the NMLS’s application guidelines for details on the process.
License Period – The California Residential Finance Lender License expires on January 1 of each year and must be renewed before the expiration date
Step 1 – Meet the Net Worth Requirements
Applicants for the California Residential Finance Lender License must amass a company net worth (assets – liabilities) of at least $250,000 ($50,000 if the applicant is a broker only). Applicants must submit unaudited financial statements verifying their company’s net worth when submitting their license application.
Step 2 – Purchase a Surety Bond
Residential finance lenders and brokers must purchase and maintain a finance lender lender surety bond (limits outlined in Table 1.1)
Step 3 – Request a NMLS Account
The California Residential Finance Lender License application is submitted electronically through the Nationwide Multistate Licensing System (NMLS). To submit a license application, applicants must first request to obtain an NMLS account.
Step 4 – Complete the Application
All California Finance Lender License applications can be completed online through the NMLS. Completed applications will include the following items:
-
- Unaudited financial statements indicating a company net worth of at least $250,000 ($50,000 if the applicant is a broker only)
- Information pertaining to the company’s qualifying individual, who will manage the on-site locations where the company conducts business
- Completed Business Plan Form
- Certificate of Good Standing issued by the California Secretary of State
- Company formation documents
- A management chart detailing the leadership hierarchy of the company
- Customer Authorization Form
- CFLL Execution Section Form
Applicants for the California Residential Finance Lender License must pay a $400 application fee when submitting their license application.
How Do California Residential Finance Lenders/Brokers Renew Their License?
Residential Finance Lenders/Brokers can renew their license online through the NMLS. License holders need to simply login to their account to access their renewal application. The California Residential Finance Lender License expires on January 1 of each year and must be renewed before the expiration date.
What Are the Insurance Requirements for the California Residential Finance Lender License?
The State of California does not require residential finance lenders and brokers to obtain any form of liability insurance as a prerequisite to obtaining a Residential Finance Lender License. Lenders and brokers must purchase and maintain a residential finance lender surety bond (limits outlined in Table 1.1).
How Do California Residential Finance Lenders/Brokers File Their Bond?
Finance lenders and brokers should submit the completed bond form, including the power of attorney, electronically through the NMLS. The residential finance lender/broker surety bond requires signatures from both the surety company that issues the bond and the broker/lender. The surety company should include the following information on the bond form:
- Legal name and address of entity/individual(s) buying the bond
- Surety company’s name, state of incorporation, and address
- Bond amount
- Date the bond goes into effect
What Can Finance Lenders and Brokers Do to Avoid Claims Against the California Residential Finance Lender Bond?
To avoid claims on the Residential Finance Lender Bond, lenders and brokers must follow all license regulations in the state, including some of the most important issues below that tend to cause claims:
- Do not engage, or allow representatives of the business to engage, in any acts of fraud
- Pay all taxes and fees on time and in full
What Other Insurance Products Can Agents Offer Residential Finance Lenders/Brokers in California?
California does not require residential finance lenders and brokers to obtain any form of liability insurance. However, most reputable businesses will seek to obtain this insurance anyway. Bonds are our only business at BondExchange, so we do not issue liability insurance, but our agents often utilize brokers for this specific line of business. A list of brokers in this space can be found here.
How Can Insurance Agents Prospect for California Residential Finance Lender Customers?
California conveniently provides a public database to search for active residential finance lenders/brokers in the state. The database can be accessed here. Contact BondExchange for additional marketing resources. Agents can also leverage our print-mail relationships for discounted mailing service
