What is a Credit Services Organization bond ?
Credit services organization bonds, also known as debt management or credit counseling bonds, are a subset of the broader financial guarantee bond category that must be filed with the state government agency responsible for regulating companies that offer credit repair services for a fee.
Credit services organization 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 credit services organization bond, will also be referred to as the “surety company” or the “bond company”. Credit services organization bonds refer to the service company as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Credit Services Organization bond required?
Credit services organizations are required to purchase financial guarantee bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the consumer is compensated for damages resulting from a credit services organization failing to make payments due to creditors on behalf of the consumer. The surety company provides the government a guarantee (the surety bond) that the government will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, credit service organizations are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face civil action.
Credit services organization bond violations triggering a bond payment may include a debt management firm failing to pay creditors amounts due after having collected payment from their customer.
How much does a Credit Services Organization bond cost?
Credit services organization bonds generally cost between 1.5% and 10% of the bond limit.
Example: $10,000 Credit Services Organization Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or above | 2.0% | $200 |
| 650-679 | 2.5% | $250 |
| 625-649 | 4.0% | $400 |
| 600-624 | 5.0% | $500 |
| 550-599 | 7.0% | $700 |
| 500-549 | 7.5% | $750 |
The actual cost of a specific credit services organization bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the organization’s license & payment history, experience and creditworthiness. .
Is a Credit Check Required for Credit Services Organization Bonds?
Credit checks are required for credit services organization bonds and, ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of a Credit Services Organization bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and credit service organization (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 organization via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a credit services organization bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
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 credit services organization 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. Credit services organization bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the credit services organization 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 organization failing to pay premiums due, claim payouts, or material changes in the organization owner’s credit score. Credit services organization 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.
Forfeiture Clause
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”). Credit services organization bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.