What is a Collection Agency Bond?
Collection Agency bonds are a subset of the broader license bond category that must be filed with the government agency (city, county, or state) responsible for regulating debt collection activity in the collector’s jurisdiction as a condition of licensure for most collection agencies. Most states handle debt collector licensing directly, while a handful of local municipalities require licensing with the city or county.
Collection agency license bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a collection agency license bond, will also be referred to as the “surety company” or the “bond company”. Collection agency bonds refer to the debt collector as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Collection Agency bond required?
Collectors are required to purchase license bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a debt collector breaking federal (The Fair Debt Collections Practices Act “FDCPA”), state or local debt collection law. The surety company provides the government a guarantee (the surety bond) that the consumers of the licensed debt collector will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the collection license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, debt collectors are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Collection Agency license bond violations triggering a bond payout may include a collector failing to comply with the Fair Debt Collection Practices Act, demonstrating harassment or abuse to consumers, or failure to obtain or maintain a proper license.
How much does a collection agency bond cost?
Collection agency bonds generally cost between .75% and 5% of the bond limit with a minimum premium of $100.
Example: $25,000 Collection Agency Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|700 or above||0.75%||$188|
|650 - 699||1.00%||$250|
|625 - 649||1.50%||$375|
|600 - 624||1.88%||$470|
|550 - 599||4.00%||$1,000|
The actual cost of a specific collection agency bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the debt collector’s license history, experience and creditworthiness. Collection agency bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Collection Agency Bonds?
Credit checks are required for collection agency bonds.
How does the wording in the bond form impact the cost of a collection agency bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and contractor (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the collection agency via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a debt collector license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 collection agency bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Collection agency bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the collector and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the collection agency failing to pay premiums due, claim payouts, or material changes in the debt collector’s credit score. Collection agency bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Collection agency bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.