07-2983. Surety Bond Guarantee Program-Preferred Surety Qualification, Increased Guarantee for Veteran and Service-Disabled Veteran-Owned Business, Deadline for Payment of Guarantee Fees, Denial of Liability, and Technical Amendments

AGENCY:

U.S. Small Business Administration (SBA).

ACTION:

Final rule.

SUMMARY:

On September 26, 2006, SBA published a proposed rule in the Federal Register addressing six changes to the SBA Surety Bond Guarantee (SBG) Program in order to improve operation of the SBG program and make it easier for sureties and small business concerns to participate in the program. Specifically, this rules makes the following amendments to the program: (1) Gives effect to the statutory reduction in the frequency of audits required of Preferred Surety Bond (PSB) Sureties; (2) obligates SBA to guarantee 90 percent of the loss incurred by a Prior Approval Surety on bonds issued on behalf of small businesses owned and controlled by veterans, and Service-disabled veterans; (3) imposes a 60-day deadline for the submission of surety fees to SBA; (4) allows PSB Sureties to charge premiums in accordance with applicable state ceilings, as presently permitted under the Prior Approval Program; (5) deletes the existing reference to the expiration of the PSB Program; and (6) allows Affiliates of a PSB Surety to participate in the Prior Approval Program.

DATES:

This rule is effective July 25, 2007.

FOR FURTHER INFORMATION CONTACT:

Frank Lalumiere, Director, Office of Surety Guarantees, [phone]; [e-mail].

SUPPLEMENTARY INFORMATION:

SBA can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for small businesses and thereby strengthens their ability to obtain bonding and greater access to contracting opportunities.

Section 411(g)(3) of the Small Business Investment Act of 1958 (the Act) formerly required PSB Sureties to be audited every year. 15 U.S.C. 694b(g)(3). As amended by Public Law 108-447, Div. K. Section 203, the Small Business Reauthorization and Manufacturing Assistance Act of 2004, the Act now requires audits to be made at least once every 3 years. This final rule implements this statutory requirement.

In relevant part, Section 4(b)(1) of the Small Business Act provides that SBA “shall give special consideration to veterans of the Armed Forces of the United States and their survivors and dependents.” 15 U.S.C. 633(b)(1). This final rule encourages the issuance of bonds on behalf of small business concerns owned and controlled by veterans and Service-disabled veterans, by guaranteeing to pay 90 percent of a Prior Approval Program Surety's loss. This guaranty affords such concerns more opportunity to obtain contracts generally.

Section 411(h) of the Small Business Investment Act mandates the operation of the program “on a prudent and economically justifiable basis” and authorizes SBA to impose fees on both small business concerns and sureties, “to be payable at such time as may be determined by [SBA].” Accordingly, this final rule establishes a clear deadline for a Prior Approval Surety's payment of the guarantee fees owed to SBA in order to maintain SBA's guarantee.

The final rule also allows PSB Program Sureties to charge no more than the premium rates permitted under applicable State law, as Prior Approval Sureties are already allowed. The initial regulations for the PSB program specified that the premium rates charged by PSB Sureties could not exceed the Surety Association of America's advisory premium rates in effect on August 1, 1987. SAA discontinued its rate setting function shortly after promulgating the 1987 rates, and participating surety companies have been obligated to use the 1987 SAA rates for the past 18 years despite economic and market place changes. This change puts the Preferred and Prior Approval Programs on the same footing by relying on the individual State oversight bodies for setting fee rates.

From its creation in 1988 until 2004, the PSB program was a pilot program, subject to automatic termination in the absence of affirmative Congressional action. Now that the PSB program has been made permanent, the present regulation that speaks of the termination of the program has been removed.

Finally, pursuant to this rule Affiliates of PSB Sureties are no longer barred from participation in the Prior Approval program. The term “Affiliate” is defined in 13 CFR part 121, but in the context of the present discussion it means a relationship in which one Surety owns or otherwise controls another Surety, or in which two or more Sureties are commonly owned by, or under common control with, a third party. A series of mergers and acquisitions in the surety industry in recent years had caused Sureties previously eligible to participate in the Prior Approval Program to become Affiliates of PSB Sureties and lose their eligibility. This final amendment should encourage increased participation in the Prior Approval Program by otherwise qualified Sureties that are Affiliates of PSB Sureties.

Discussion of Public Comments

SBA received five public comments on the proposed rule, three from associations and two from individual surety companies. Each commenter supported the proposed changes, with two exceptions.

Four commenters recommended removal of the proposed language in § 115.19, Denial of Liability, that would allow SBA to deny bond liability as a result of the failure of a surety company to pay the required surety fee. In general, the commenters stated that such a requirement would weaken the SBA/Surety Industry partnership that is designed to assist small businesses. While SBA values its partners in the surety industry, the Agency has a fiduciary responsibility to ensure timely payment of guaranty fees in order to honor its guaranty. Accordingly, the language in the proposed rule regarding the denial of bond liability if the surety fee is not paid within 60 days is retained. The proposed rule also included a provision that the guaranty can be reinstated if a valid reason for the delinquent payment of guaranty fee is provided and the contract is not in default. This language is also retained in the final rule.

Three commenters expressed concern with the proposed 45 days fee payment requirement. One commenter requested clarification of when the 45-day period begins. A few commenters said it would be difficult to remit payment within 45 days, in part because many sureties do not receive payment on the final bond premium until 45 days after the bond is issued, and to require payment before collection on the premium is unduly punitive. In consideration of these comments, in this final rule, SBA has amended the proposed rule. First, the proposed 45-day period cited in § 115.32 is increased to 60 days. SBA believes that the additional 15 days will provide time for a surety company agent to provide the surety company with sufficient information for the surety company to make payment. Second, the same section is also revised to specify that payment is required within 60 days following SBA approval of the Prior Approval Payment or Performance Bond on the SBA Form 990, Guarantee Agreement.

One commenter also suggested that the agency should extend the 10-day deadline for PSB sureties to submit the executed bond to SBA to a 15-day deadline. SBA did not propose to amend this particular requirement, and it will be considered among other changes in a future amendment.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 U.S.C. 601-612)

Compliance With Executive Order 12866

The Office of Management and Budget (OMB) has determined that this rule constitutes a significant regulatory action for purposes of Executive Order 12866, thereby necessitating a regulatory impact analysis. SBA published this analysis in the Proposed Rule. The agency did not receive any comments addressing the analysis and is not aware of any additional information that would require revision of its initial conclusions.

Compliance With Executive Order 12988

This action meets applicable standards set forth in Sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden. The action does not have retroactive or preemptive effect.

Compliance With Executive Order 13132

For purpose of E.O. 13132, the SBA has determined that the rule will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, for the purpose of Executive Order 13132, SBA determines that this final rule has no federalism implications warranting preparation of a federalism assessment.

Compliance With Paperwork Reduction Act, 44 U.S.C. Ch. 35

SBA has determined that this final rule does not impose additional reporting or recordkeeping requirements under the Paperwork Reduction Act, 44 U.S.C., Chapter 35.

Compliance With the Regulatory Flexibility Act, 5 U.S.C. 601-612

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires administrative agencies to consider the effect of their actions on small entities, small non-profit enterprises, and small local governments. Pursuant to the RFA, when an agency issues a rulemaking, the agency must prepare a regulatory flexibility analysis which describes the impact of the rule on small entities. However, Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an analysis, if the rulemaking is not expected to have a significant economic impact on a substantial number of small entities. Within the meaning of RFA, SBA certifies that this rule will not have a significant economic impact on a substantial number of small entities. Consequently, this rule doe not meet the substantial number of small businesses criterion anticipated by the Regulatory Flexibility Act.

There are about a dozen Sureties that participate in the SBA program, and this rule does not impose any additional cost or any significant burden on them. Allowing PSB Sureties to charge the highest premium rates permitted by applicable State law raises the possibility of an economic impact on those contractors that now receive their bonding from PSB Sureties, but out of 843 contractors participating in the SBA program in FY2005, about 143 were bonded by PSB Sureties. Prior Approval Sureties are already allowed to charge the premium rates permitted by the individual State law, so the economic effect, if any, of this final rule would be to subject approximately 17 percent of the contractors in the SBA program to the risk that they might have to pay the same premium rates that their fellow participating contractors must pay. No public comments were received in response to the RFA analysis provided in the proposed rule.

List of Subjects in 13 CFR Part 115

• Claims
• Reporting and recordkeeping requirements
• Small businesses
• Surety bonds

For the reasons stated in the preamble, the Small Business Administration amends 13 CFR part 115 as follows:

PART 115—SURETY BOND GUARANTEE

1. The authority citation for part 115 is revised to read as follows:

Authority: 5 U.S.C. app. 3; 15 U.S.C. 687b, 687c, 694a, 694b note, Pub. L. 106-554; Pub. L. 108-447, Div K, § 203.

2. Amend § 115.10 by adding the following definitions in alphabetical order.

§ 115.10

Definitions.

* * * * *

Service-Disabled Veteran means a veteran with a disability that is service-connected, as defined in Section 101(16) of Title 38, United States Code.

Small Business Owned and Controlled by Service-Disabled Veterans means:

(1) A Small Concern of which not less than 51 percent is owned by one or more Service-Disabled Veterans; or a publicly-owned Small concern of which not less than 51 percent of the stock is owned by one or more Service-Disabled Veterans; and

(2) The management and daily business operations of which are controlled by one or more Service-Disabled Veterans, or in the case of a Service-Disabled Veteran with permanent and severe disability, the spouse or permanent caregiver of such Veteran.

Small Business Owned and Controlled by Veterans means:

(1) A Small Concern of which not less than 51 percent is owned by one or more Veterans; or a publicly-owned Small Concern of which not less than 51 percent of the stock is owned by one or more Veterans; and

(2) The management and daily business operations of which are controlled by one or more Veterans.

* * * * *

Veteran has the meaning given the term in Section 101(2) of Title 38, United States Code.

3. Revise § 115.19(g) to read as follows:

§ 115.19

Denial of liability.

* * * * *

(g) Delinquent fees. The Surety has not remitted to SBA the Principal's payment for the full amount of the guarantee fee within the time period required under § 115.30(d) for Prior Approval Sureties or § 115.66 for PSB Sureties, or has not made timely payment of the Surety's fee within the time period required by § 115.32(c). SBA may reinstate the guarantee upon showing that the contract is not in default and that a valid reason exists why a timely remittance or payment was not made.

* * * * *

4. Revise § 115.21(a)(2) to read as follows:

§ 115.21

Audits and investigations.

(a) * * *

(1) * * *

(2) Frequency of PSB Audits. Each PSB Surety is subject to an audit at least once every 3 years by examiners selected and approved by SBA.

* * * * *

5. Revise § 115.31(a)(2) to read as follows:

§ 115.31

Guarantee percentage.

(a) * * *

(1) * * *

(2) The bond was issued on behalf of a small business owned and controlled by socially and economically disadvantaged individuals, on behalf of a qualified HUBZone small business concern, or on behalf of a small business owned and controlled by veterans or a small business owned and controlled by Service-disabled veterans.

* * * * *

6. Revise § 115.32 (c) and (d)(2) to read as follows:

§ 115.32

Fees and premiums.

* * * * *

(c) SBA charge to Surety. SBA does not charge Sureties application or Bid Bond guarantee fees. Subject to § 115.18(a)(4), the Surety must pay SBA a guarantee fee on each guaranteed bond (other than a Bid Bond) within 60 calendar days after SBA's approval of the Prior Approval Payment or Performance Bond on the SBA Form 990, Guarantee Agreement. The fee is a certain percentage of the bond premium determined by SBA and published in Notices in the Federal Register from time to time. The fee is rounded to the nearest dollar. SBA does not receive any portion of a Surety's non-premium charges. See paragraph (d) of this section for additional requirements when the Contract or bond amount changes.

(d) * * *

(1) * * *

(2) Increases; fees. Notification of increases in the Contract or bond amount under this paragraph (d) must be accompanied by the Principal's check for the increase in the Principal's guarantee fee computed on the increase in the Contract amount. If the increase in the Principal's fee is less than $40, no payment is due until the total amount of increases in the Principal's fee equals or exceeds $40. The Surety's check for payment of the increase in the Surety's guarantee fee, computed on the increase in the bond Premium, must be submitted to SBA within 60 calendar days of SBA's approval of the supplemental Prior Approval Agreement, unless the amount of such increased guarantee fee is less than $40. When the total amount of increase in the guarantee fee equals or exceeds $40, the Surety's check must be submitted to SBA within 60 calendar days.

* * * * *

7. Revise § 115.60(a)(2) to read as follows:

§ 115.60

Selection and admission of PSB Sureties.

(a) * * *

(1) * * *

(2) An agreement that the Surety will neither charge a bond premium in excess of that authorized by the appropriate State insurance department, nor impose any non-premium fee unless such fee is permitted by applicable State law and approved by SBA.

* * * * *

§ 115.61

[Removed & Reserved]

8. Remove and reserve § 115.61.

9. Revise § 115.62 to read as follows:

§ 115.62

Prohibition on participation in Prior Approval program.

A PSB Surety is not eligible to submit applications under subpart B of this part. This prohibition does not extend to an Affiliate, as defined in 13 CFR § 121.103, of a PSB Surety that is not itself a PSB Surety provided that the relationship between the PSB Surety and the Affiliate has been fully disclosed to SBA and that such Affiliate has been approved by SBA to participate as a Prior Approval Surety pursuant to § 115.11.

Steven C. Preston,

Administrator.