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Surety Bonds And The Rise Of Bad Credit Programs
By T Bryant
As the calendars rolled from the 20th to the 21st century the surety bond industry as a whole experienced some large scale changes. It was after several years of record breaking losses that forced many bonding companies to close down operations. Those sureties that were able to survive the soft market of the early millennium had some major changes to make. After a thorough review of their underwriting guidelines the industry shifted to become a much more conservative, leaving many applicants without the good credit unable to be bonded.
The fact of the matter is that many Americans do not have perfect credit, or anywhere near for that matter. One study (http://www.nationalscoreindex.com/ScoreNews_Archive_03.aspx) by Experian shows that the credit of an average American is 683. With a bond market that generally looks for a credit score of 650 or better, a large amount of the market was considered “un-bondable”. Typically those with sub-par credit score would have to get an Irrevocable Letter of Credit from the bank, or obtain a bond by posting 100% collateral.
After a short a period of time where this was the norm, Bad Credit Surety Bond Programs started to emerge. These programs were an alternative for those with bad credit that went against traditional suretyship. In these programs the surety would write for high risk commercial (sorry, this programs do not apply to contract bonds), but at much higher rates then typical bonds. Though this solution may have seamed very obvious to many, it should be noted that traditional surety underwriting is done with a 0% loss ratio. What this means is that unlike insurance, which many people mistake surety bonds for, there is no loss built into the premium of the bonds, hence only
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