Most states require collection agencies to be licensed and bonded because debt collection is a highly regulated industry. A collection agency bond is a license bond that guarantees compliance with state laws governing debt collection.
In addition to guaranteeing legal compliance, collection agency bonds indemnify the state against liability for damages incurred by clients or debtors as a result of the unlawful or unethical actions of debt collectors licensed by the state. They also ensure that funds will be available for compensating those who experience a financial loss caused by such actions.
Who Needs Them?
The states that require bonding of debt collectors and collection agencies typically issue both individual licenses for debt collectors operating as sole proprietors and collection agencies that employ a staff of debt collectors. Failure to have an active collection agency bond in force at all times can result in license suspension or revocation.
The required bond amount is established by the state licensing authority. It’s usually is based on the collection agency’s volume of debt collected during the preceding 12 months.
How Do They Work?
There are three parties to a collection agency bond, which is a legally binding contract. These parties are referred to as the “obligee,” the “principal,” and the “surety”:
- The obligee is the state licensing authority requiring the bond.
- The principal is the debt collector or collection agency purchasing the bond.
- The surety is the company that authorizes the bond.
The terms of the surety bond agreement place the legal responsibility for paying claims entirely on the principal. If the principal commits a legal violation that causes a financial loss by a client or consumer, the injured party can file a claim against the principal’s collection agency bond. One common cause of claims is the principal’s failure to turn over to the client the funds collected from debtors. The surety will determine whether the claim is valid and should be paid.
The usual practice is for the surety to pay a claim initially, even though the principal is legally obligated to pay all valid claims. The principal must subsequently reimburse the surety.
What Do They Cost?
The annual premium for a collection agency bond is a small percentage of the required bond amount. That percentage is known as the premium rate, and it’s set by the surety on a case-by-case basis.
The surety’s main concern is being reimbursed for claims paid on behalf of the principal, so the premium rate is based largely on the principal’s personal credit score. The higher the credit score, the lower the premium rate will be, perhaps as low as 1% for someone with very good credit.