E&O: Errors & Omissions

Mortgage Brokers & Bankers

Opportunities

The mortgage brokers professional liability segment can be a significant opportunity for new sales because the market is fragmented and many organizations do not buy professional liability coverage.

A mortgage broker is a professional organization providing mortgages to buyers and owners of real estate. The bulk of the business is focused on providing mortgages to buyers of residential property and refinancing existing residential mortgages. The broker will work with the client to identify potential lenders, will compile the loan application and then will submit the application to the lender for approval and a loan commitment. The mortgage broker is a true broker and does not make underwriting decisions on behalf of the lender.

Mortgage bankers are similar to mortgage brokers with the exception that mortgage bankers actually make the loan decision and provide the commitment to the borrower. The mortgage banker can act as a bank and actually fund the mortgage on behalf of the lender, or the lender can delegate the authority for loan commitments to the mortgage banker. Mortgage bankers typically package the loans and then re-sell them to lenders. Sometimes the mortgage banker is a larger organization and sells very large mortgage portfolios in the open market, but often the mortgage bankers are smaller organizations with a close relationship with a particular lender or small group of lenders. In this case the mortgage banker might package the loans into smaller groups and re-sell the package to their lenders. Because the mortgage banker has the authority to make the underwriting decision and loan commitment the professional liability exposure is considerably greater than a mortgage broker.

The mortgage broker business has grown substantially over the years. The residential mortgage market used to be dominated by banks, but this has changed over the last 25 years as mortgage brokers have done a more effective job of providing a competitive market for mortgages. Mortgage brokers have also provided an efficient distribution channel for lenders participating in the mortgage market. These factors have led to a dramatic increase in the mortgage broker industry.

Exposure

Mortgage broker claims do occur, although rare. The mortgage broker is in a position to impact both the lender and the client in a negligent transaction. For example, a mortgage broker claim might be made for a loss of a buyer's deposit on a property when a closing does not take place. The closing could fall through due to a failure of a mortgage broker to meet the lenders closing requirements. This can occur if the paperwork is not completed in a timely manner or is completed incorrectly.

Often, a claim or lawsuit may not involve a clear error on the part of the mortgage broker. For example, a lender might not be willing to close on a purchase due to its review of some additional information received late in the process from the mortgage broker. The failure to close could result in a financial loss to the client, such as the loss of the deposit. However, the requirement for the additional information could have been triggered by the lenders review and not be related to the mortgage brokers service at all. The client may bring an action in any case. These types of claims are often just as difficult and expensive to defend as a clear-cut error. Insurance typically pays for the cost of defending this type of claim as if it were a clear-cut error on the part of the insured mortgage broker.

Other types of claims can develop from:

Professional Liability Insurance

Mortgage brokers (and mortgage bankers) professional liability insurance, sometimes called errors and omissions or E&O insurance, is available from a wide range of specialty lines insurers. Coverage and pricing varies greatly depending upon the type of professional operation, the specific services provided and its size and location. Specific coverage provisions may be important for certain types of mortgage broker or banker organizations. Some professionals require coverage with special provisions to protect themselves from unique claims arising from their specialized services. For example, coverage is sometimes restricted for commercial or larger multi-family properties. Optional coverages may include Mortgage Impairment Coverage and Employment Practices Liability Insurance. Coverage is typically provided on a . Limits and deductibles vary with the size and type of insured. Standard limits for most small to medium sized organizations start at $1.0 million. Policy forms vary significantly, but typically are claims-made forms with defense costs included within the limit and deductibles. Mercator Risk Services Inc. ("Mercator" or "Mercator Risk Services") provides coverage for a wide range of real estate related professionals, including mortgage brokers and mortgage bankers. Please let us know your client's needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage.

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