The business of bail bonds often is lucrative

HOUSTON CHRONICLE

August 25, 2017

By Michael Taylor

Like all of my favorite finance topics, this one was inspired by my
daughter's question as we slowly drove past the county correctional facility.

Daddy, what are bail bonds?

Prior to her question, my knowledge of the industry came from
watching Robert DeNiro in "Midnight Run." Fun movie.

I tried to answer as best I could.

Well, honey, first you need to be arrested for a crime.

Then, you really don't want to spend much time in jail waiting for
your trial, but the judge will make you put up some money to
guarantee you'll return for the trial.

If you, your family or no-good friends don't have enough money to
make your bond, that's when you call a bail bondsman.

Criminal defendants. With no money. Also, no collateral. That is a
rough way to lend money, compared to a bank.

Oh, how I was wrong.

Having sat down with bail bondsman David Fernandez of Jailbusters
Bail Bonds, as well as Susan Monsalvo of Express Bail bonds, both of
Bexar County, I've come to the opposite conclusion.

First, I could see how bail bonds might be very profitable; even more
so than a traditional bank.

Second, the underwriting of bail-bond financial risk harkens back to
some old-school lending criteria that traditional banks won't or
can't do anymore.

Let's talk about the potential profitability first. A typical bail
bond company charges a 10 percent fee to customers, meaning if a
judge sets $5,000 bail, the defendant pays a $500 fee to the bail
bond company, who pledges the $5,000 on his behalf. (I'm using the
male pronoun for defendants since men made up 92 percent of the U.S.
prison population in 2015, according to U.S. Bureau of Justice Statistics.)

When the defendant shows up in person for trial, the bail bond
company's $5,000 risk is released and the bail bond business keeps
the $500 fee. Now, the first thing to notice about this deal is that
any finance company that can earn 10 percent on its capital for just
a few weeks or even a few months of financial risk has the potential
to earn an extremely high annual rate of return on its capital. This
sounds potentially very profitable.

But wait, that's not even the best part. Bail bond companies do not
have to hand over the $5,000 in pledged money to the county court. In
the vast majority of cases, no money ever changes hands. The bail
bond company just takes the $500 fee upfront and promises to pay the
bond if the defendant skips bail. In the meantime, it keeps the
money. A huge advantage.

This, you should notice, is a way better deal than what a typical
bank gets. Banks have to actually give their money over to borrowers,
and if all goes well, they get their money back slowly, with
interest, over time. The fact that bail bond companies only virtually
pledge money, but in fact don't give any money, is pretty awesome for
bail bonds businesses.

It gets even better.

Bail bond companies, in order to get and keep a license to do
business, have to prove that they have assets, either in cash in the
form of a bank CD, or in property. Their license typically allows
them to underwrite bail bonds up to ten times the value of their
proven cash assets. This creates what a finance nerd like me would
call leverage.

One of the magic tricks that traditional banks get to do is called
fractional reserve banking, in which a bank lends out many more times
in money than it ever actually has in capital, sometimes close to 10
times its capital. Bail bonds companies get to do pretty much the
same thing, because if a bail bond company has a $100,000 cash CD,
its license allows the company to underwrite up to $1 million in bonds.

Finally, there's the underwriting process, which I mistakenly assumed
would be extremely difficult. Actually, according to both Fernandez
and Monsalvo, they use a combination of personal judgment and
reliance on the accused's mom to take appropriate risks. That's
right, more often than not, mom (or another female significant other)
co-signs the bond.

Regular banks don't do this kind of touchy-feely thing anymore. With
traditional banks, it's all algorithms, credit scores and heartless
technology-based lending.

With bail bonds, the owner often has to take a leap of faith,
engaging in a sort of character-based lending. Often that's Mom's
character. Or Grandma's.

This is just like George Bailey in "It's a Wonderful Life," or like
"Leave It to Beaver"-type lending.

An additional support for this type of old school personal-judgment
based lending is the preponderance of repeat customers in the bail
bonds business. Fernandez of Jailbusters usually ends his discussion
with customers with the admonishment: "I don't want to see you
again," but of course he does see them again. A combination of repeat
customers and personal referrals make up the majority of his
business, according to Fernandez.

Monsalvo of Express Bail Bonds described working with her father's
criminal defense attorney business and later her mother's Express
Bail Bonds business, where as a result she knows multiple generations
of (her father's) customers. In some cases the grandfather, father
and son. She said she might see a customer she knew in diapers and
think, "I remember you as a baby."

If that doesn't warm your heart, I don't know what will.
Shouldn't we all start a bail bonds business together?

Now that I've helped you, like me, fall in love with the business of
bail bonds, I need to warn you about the bad news for the business.
This year has so far has proved to be a terrible, horrible, no-good
very bad year for bail bonds in cities like Houston and in states
like New Jersey, where they've practically been banned. More on that next week.

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