August 2016

nmls

Dawn of the Bond – New NMLS Electronic Surety Bond

On September 12, 2016, the Nationwide Multistate Licensing System (“NMLS” or “the System”) will begin receiving and tracking Electronic Surety Bonds (“ESB”). In an unprecedented departure from the traditional uploading of a copy of a surety bond document to the applicant’s or licensee’s record followed by the delivery of the paper bond to the state, regulators in Idaho, Indiana, Iowa, Massachusetts, Texas, Vermont, Washington, and Wisconsin have publicly announced the adoption of ESB in 2016 for several license types. This is the first group of states to “bond on line,” but all states are expected to have a common bond process through the NMLS. Many states require licensed financial services businesses to get a surety bond so that state regulators or consumers may file claims against the bond to cover fines or penalties assessed, or provide restitution to consumers if the licensee fails to comply with licensing or regulatory requirements. The NMLS reports that 177 license authorities currently managed on the system require a licensed company to maintain a surety bond as a condition of licensure. States have even imposed bond requirements on individual mortgage loan originators (“MLOs”), in accordance with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”), but allow for MLOs to be covered under a company bond. NMLS was created to serve as a comprehensive system of record for licensing information. However, as it relates to surety bonds, the System’s current functionality is antiquated, limited, and does not allow for the tracking of bond requirements, or the maintenance of bond information validated by authorized surety companies and/or bond producers. State regulators have also cited the tracking of surety bond compliance as a reason for processing delays in license applications, amendment filings, and renewal approvals. For those reasons, the State Regulatory Registry LLC, which administers the NMLS, believed a fully electronic surety bond process would provide efficiencies for both industry and regulators. The first phase of this ESB process entailed the creation of an account by each participating surety company and association with those accounts by surety bond producers. The second phase, which will begin September 2016, entails implementation of bond issuance, tracking, and maintenance. If you have not already done so, and especially if you are licensed or intend to become licensed in one of the eight states listed above that will be implementing this new functionality in September, you should ensure that your surety bond company has created an account in the system and be aware of the new application and conversion deadlines that are listed on the NMLS ESB Adoption Map and Table. http://www.lexology.com/library/detail.aspx?g=6c836cd3-60de-4fa2-bb0d-1c64a4447e3c

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Potential Claims Against Mines Worry Financial Industry

Aug. 19 — The threat of third-party claims tied to the EPA’s looming financial assurance rule for hardrock mining is ginning up concerns among financial institutions, top surety backers and industry attorneys say. The new Superfund rule may allow states, tribes, the public and federal agencies other than the Environmental Protection Agency to make claims against hardrock mining financial instruments, such as bonds and letters of credit, the EPA says. That may raise risk to an unreasonable level, large institutions such as AIG, State Farm, Liberty Mutual and others recently told the agency. Industry attorneys supported that concern in interviews with Bloomberg BNA, arguing such language may jeopardize the availability of those instruments. Dec. 1 Deadline The U.S. Court of Appeals for the District of Columbia Circuit approved an agreement in early 2016 to force the EPA to complete the rule by Dec. 1 ( In re Idaho Conservation League, D.C. Cir., No. 14-cv-01149, 1/29/16 ). The Superfund statute, the Comprehensive Environmental Response, Compensation and Liability Act, directed the EPA to complete a financial assurance rulemaking by 1984 making them more than three decades late. Hardrock refers to minerals that contain gold, silver, iron, copper, zinc, nickel, tin, lead and other metals, as opposed to, for instance, coal. The assurances exist to cover any cleanup necessary after the mines are closed. The EPA has indicated it will exempt certain categories of facilities, such as mines less than five acres and stream bed mines that don’t use hazardous substances. Third-party Prospects The EPA is “considering” assurance requirements to cover response costs for hazardous discharges or the threat of discharge, natural resource damages, and to cover health assessments, agency spokesman Melissa Harrison told Bloomberg BNA Aug. 18. The public, alongside states, tribes and other government agencies, “could” claim directly against a financial surety, Harrison said, while pointing out that the agency has met with financial industry representatives. EPA officials are now putting the finishing touches on a study to evaluate the ability of financial institutions to make available CERCLA-compliant sureties. “The draft study report is currently undergoing internal review,” Harrison said. “EPA expects to make the report available before it issues the proposed hardrock mining rule.” ‘Threatened Release Too Subjective.’ That outreach, however, has seemingly left the financial industry apprehensive, according to a Surety and Fidelity Association of America said in a July 14 letter. “The potential that multiple parties, other than EPA, can make a claim under the surety bond significantly enlarges the surety’s exposure to claims, and possibly dilutes the protection available to EPA to fund the response to a release or threatened release,” the organization’s General Counsel Robert Duke told EPA Assistant Administrator Mathy Stanislaus. “Further, the triggering event should be the failure to fund the costs associated with a release. We submit that a ‘threatened release’ could be too subjective to define the bright line that marks when the surety’s obligations are triggered.” Claim rights are likely to be limited to those entities rendering services at or near a mine, rather than public advocates contesting, for instance, environmental degradation, John Jacus, attorney with Davis, Graham and Stubbs LLP, told Bloomberg BNA in an interview. Those eligible entities could include other potentially responsible parties under Superfund law, such as mine operators, Jacus said. Despite reservations from the financial industry, mining companies would probably not be able to own up to all natural resource and heath damage liability, David Chambers, president of the Center for Science in Public Participation, told Bloomberg BNA. The center is a nonprofit corporation formed to provide technical assistance on mining and water quality to public interest groups and tribal governments, according to its website. Moreover, such coverage would be globally unprecedented, he said, noting that current state and other federal agency assurance requirements for mining are geared solely towards reclamation. “I’ll bet you a dime to the dollar the rule reflects present procedure, but I would love to see EPA come out and say you have to compensate all injured parties,” Chambers said. “They’ve been sitting on their hands for 30 years in terms of promulgating this sort of rule. For them to take that stance now would be almost unbelievable.” Market Instability Claimant latitude could cause significant uncertainty in the surety market, indicating financial institutions may require more higher-priced sureties, a number of mining experts said. “The ramification of an overly conservative bond for the entity that needs to get the bond is that it costs more; annual costs simply go up for bonding that may not be serving any particular purpose,” Stephen Smithson, a lawyer with Snell and Wilmer, told Bloomberg BNA. “As it becomes a bigger bond and a bigger pool of money that third parties can make claims against, financial institutions begin incurring more costs defending against those claims. It just makes them a bigger target.” Smithson and Chambers said financial institutions historically underestimated cleanup costs and, in the late 90s, had to pony up more money than expected tied to bonds, leading many insurers to leave the market. The duration of the bond also is a critical consideration, said the surety and fidelity association. “A surety bond with a long duration increases the risk to the surety,” Duke wrote to the EPA. “To compensate for the increased risk due to the diminished certainty of underwriting, sureties typically raise their underwriting standards, and provide long-term bonds only to the largest and most financially sound operators. We recommend that the implementing regulations should contain measures by which the surety can control the duration, such as a cancellation clause in the bond.” For example, acid drainage requires water monitoring “in perpetuity,” Chambers said. Self-Bonding The EPA left the door open for self-bonding permission in outreach to interested parties and Bloomberg BNA, saying credit rating-based financial tests and corporate guarantees may be permissible. Jacus said self insurance, accompanied by monitoring that could compel market assurances, helps to diversify industry options. But the questionable ability of self-bonded coal operators to pony up cash for

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