Do I Need My Own Insurance to be a Mortgage Loan Originator?
Attorneys, physicians, and surgeons do it through malpractice insurance. IT professionals, insurance agencies, property management companies, and many other businesses do it through professional liability insurance. Protecting oneself personally and professionally from accusations and instances of professional error and misconduct makes considerable sense in a society that’s quick to turn to the judicial system for resolution and remedy.
Amy McBride-Frobish, a seasoned Commercial CSR with Darden, Miranda & Associates Insurance in Fayetteville, North Carolina, regularly encounters individuals from various professional fields seeking to protect both themselves and their businesses from professional liability. Ms. McBride-Frobish shared how many employers wisely carry errors and omissions (E&O) insurance, frequently referred to as professional liability insurance, to protect themselves and their companies from errors and professional misconduct, negligently or accidentally committed by their employees.
For mortgage professionals, professional liability coverage is not only a smart idea, it’s mandatory. In order to secure a state license to operate, mortgage loan originators, lenders, and brokerages must demonstrate the procurement and maintenance of appropriate surety bonds.
What is a Surety Bond?
Among other things, surety bonds insure against malpractice, contractual shortcomings, errors, and other adverse occurrences. Surety bonds contractually obligate an entity to properly perform specific duties and, in the event of a contractual failure, the party who is injured through that failure may file a claim against the surety bond in attempt to recover for damages and injuries. All state-licensed mortgage originators, brokers, and lenders must secure and at all times maintain valid and adequate surety bonds, payable to the State Commissioner of each state in which they are licensed. In the event that a claim is levied against or paid out through a licensee’s surety bond, that licensee must immediately file a replacement bond in order to continue conducting business.
How Are Mortgage Loan Originators at Risk?
As a professional licensee, the mortgage loan originator (MLO) is subject to civil and criminal sanctions for failing to comply with any of the numerous federal and state laws governing his or her conduct. In the presence of a regulatory violation or compliance failure, the loan originator, along with his or her employer, may be held personally accountable, criminally and civilly. Recovery for wrongdoing, regardless if it resulted from intentional malice or simple ignorance, may be pursued by federal and state regulatory and enforcement authorities as well as by the individual parties injured as a result of that wrongdoing.
Similar to their sponsors, individual mortgage loan originators must satisfy surety bond requirements in order to be issued their state licenses. Their sponsor’s surety bonds, however, cover their actions thereby fulfilling this requirement and negating the need for the MLO to procure his or her own surety bond coverage.
Although Ms. McBride-Frobish admits that a mortgage loan originator seeking professional coverage to protect him or herself beyond the coverage provided through his or her sponsor may be rare, a mortgage professional may certainly pursue such coverage if he or she desires to do so. It’s all a matter of the individual’s personal tolerance for risk.
As a mortgage professional of almost 30 years, I never purchased professional liability coverage nor am I aware of any mortgage professional who has. Having said that, however, it never hurts to cover all bases by protecting yourself as comprehensively as possible. The bottom line is that having a conversation with your insurance agent about risks, liability exposure, and all available options can never hurt and may ultimately give you peace of mind and the freedom to sleep soundly.