Bail Bond Surety Industry Risk Diversification
Overview of Bail Bond Credit Risk
Bail bond companies are typically only licensed to issue bonds that are actually underwritten by surety bond companies. A surety company is a highly specialized form of insurance company that basically puts up the money to fund the bonds used by bail agents. So bail bond companies are not really the principal putting up the real money.
Surety Bond Companies – Unknown Heroes
Not many members of the public even realize that there is a company sitting behind the scenes that should get the credit for bailing them out of jail. Bail enforcement agents and bail bond companies normally understand that their business is predominately controlled by the insurance industry. Insurance is exempt from the federal anti-trust laws, which is either a good thing or a bad thing depending on your perspective.
Why Insurance Companies Should Avoid Being a Credit Lender
Due to necessity, the surety industry has come into the unfortunate circumstance of participating in the subprime credit markets. This creates a larger than necessary loss risk on their books. Although bail bonds are issued by bail bond companies, it is really the bail surety companies that are at risk if a bail bond gets forfeited to the courts. All in all, the fact that bail bond companies are allowing people to get bailed out on credit is a disaster.
The Credit Situation for Surety Companies
Let us use some real numbers to put this huge problem in perspective. Pretend you were a surety agent who underwrites bonds for bail bond companies. Let’s say the average court ordered release bond is around $6,000. Normally there is a 10%-15% fee a bail agent charges to bail a person out of jail. That means that the average person has to pay $600-$700 to bail someone out of confinement in the city or county jail. A portion of that fee goes to the surety company that wrote the original bond as the principal. The process is a little hazy for us, so forgive our poor description of the process. So for a small fee, the surety company is risking thousands of dollars in hopes that people don’t skip bail.
How Credit Lending Is a Risk to Bail Surety Providers
Not everyone has the money upfront to bail themselves or someone else out of jail. Of course this can happen sometimes in the middle of the night. Bail bond companies are then left with a choice to bail the person out on a signature bond and extend credit to them, charge a partial fee and lend the rest on credit, or just flat out refuse to write the bond in the first place. What happens if the person does not pay the rest of the fee and skips bail before going to court?
Who Is Left Holding The Bag of Defaulted Bonds?
The bail bond company of course loses money, but it’s the surety company that runs the highest risk of loss as they put up the principal amount to fund the bond in the first place. Being that bail agents get the lion’s share of profit from the bail fees, they have the potential for losing the most profit. On the other hand, the bail surety doesn’t get the benefit of the high profit margin, and can end up taking very large losses.
The Solution for Surety Companies in the Bail Bond Industry
Bail agents should be required by their surety underwriters to diversify the risks of lending before the bond is even written. The more credit a bail agent extends on behalf of the surety, the higher the risk for the whole industry. There is already a highly specialized industry for dealing with risky loans. The subprime lending industry is around $50 billion a year and specialize in basic credit check unsecured loans under $1,500.
Why This Solution Is a Top Down Control
Bail bond companies don’t hold all the risk, so they are not always going to be innovative when it comes to protecting the interests of their surety providers. That means it’s the surety providers that have to force the bondsmen and women to push the credit risk to the unsecured credit markets. If a person can get an unsecured loan to cover the costs of whole bond fee upfront, then the bail bond business has diverted that credit risk away from its surety and on to the market that is equipped to deal with it.
What Should Be Done From Here
Bail bond companies should either volunteer or be persuaded to have their customers apply for a loan online before they decide to issue the bond on credit. This would greatly reduce the risk assessments for the entire industry if this became an internal industry rule. Why not have someone borrow the money to pay the fees in full upfront?
How Online Lending Works
There are companies that specialize in providing a bridge between the short term lending industry and the bail bond industry. People can apply 24-7, seven days a week. Applications take about 2-3 minutes. The website provides the decision within about 2-3 minutes. The person will be told how much they are approved for and what the payment terms are. They can then either accept or reject the lenders offer at that time. This gives bail agents advanced knowledge that the customer will be getting the cash directly deposited to their account within a couple hours or at least by the next business day.
What Are The Requirements For Approval
Applicants are required to be over the age of 18, but those over 25 generally have a much higher chance of getting approved. Many people who are bailing someone out of jail or prison are responsible parents, grandparents, etc. that likely fit the criteria already. Members of the military have a harder chance of getting approved. Employment is of course favored over fixed income. People who have their pay checks directly deposited to their savings or checking accounts have a much higher approval rate than paper checks and cash. US Citizenship is also a major factor.
Basic Credit Checks or Faxing of Documents
Credit does not matter as there are simple credit checks for these types of online short term loans. Interest rates are high, but so is the risk for the unsecured lenders who do not have the same collection recourse as credit check lenders. Either way, this is a win-win situation for the bail bond industry, and the secret power behind them, the surety providers. We wonder if any of them are actually listening to our message, but we hope they have their ears open because lower risk means higher profits in the end.