80 FR 19886 - Surety Bond Guarantee Program; Miscellaneous Amendments

SMALL BUSINESS ADMINISTRATION

Federal Register Volume 80, Issue 71 (April 14, 2015)

This rule proposes to change the regulations for SBA's Surety Bond Guarantee Program in four areas. First, as a condition for participating in the Prior Approval and Preferred Programs, the proposal would clarify that a Surety must directly employ underwriting and claims staffs sufficient to perform and manage these functions, and final settlement authority for claims and recovery is vested only in salaried employees of the Surety. Second, the proposal would provide that all costs incurred by the Surety's salaried claims staff are ineligible for reimbursement by SBA, but the Surety may seek reimbursement for amounts paid for specialized services that are provided by outside consultants in connection with the processing of a claim. Third, the rule proposes to modify the criteria for determining when a Principal that caused a Loss to SBA is ineligible for a bond guaranteed by SBA. Fourth, the rule proposes to modify the criteria for admitting Sureties to the Preferred Surety Bond Guarantee Program by increasing the Surety's underwriting limitation, as certified by the U.S. Treasury Department on its list of acceptable sureties, from at least $2 million to at least $6.5 million.

[Federal Register Volume 80, Number 71 (Tuesday, April 14, 2015)]
[Proposed Rules]
[Pages 19886-19889]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-08297]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

RIN 3245-AG70


Surety Bond Guarantee Program; Miscellaneous Amendments

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to change the regulations for SBA's Surety 
Bond Guarantee Program in four areas. First, as a condition for 
participating in the Prior Approval and Preferred Programs, the 
proposal would clarify that a Surety must directly employ underwriting 
and claims staffs sufficient to perform and manage these functions, and 
final settlement authority for claims and recovery is vested only in 
salaried employees of the Surety. Second, the proposal would provide 
that all costs incurred by the Surety's salaried claims staff are 
ineligible for reimbursement by SBA, but the Surety may seek 
reimbursement for amounts paid for specialized services that are 
provided by outside consultants in connection with the processing of a 
claim. Third, the rule proposes to modify the criteria for determining 
when a Principal that caused a Loss to SBA is ineligible for a bond 
guaranteed by SBA. Fourth, the rule proposes to modify the criteria for 
admitting Sureties to the Preferred Surety Bond Guarantee Program by 
increasing the Surety's underwriting limitation, as certified by the 
U.S. Treasury Department on its list of acceptable sureties, from at 
least $2 million to at least $6.5 million.

DATES: SBA must receive comments to this proposed rule on or before 
June 15, 2015.

ADDRESSES: You may submit comments, identified by RIN 3245-AG70, by any 
of the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov, following the instructions for submitting 
comments; or (2) Mail/Hand Delivery/Courier: Barbara J. Brannan, Office 
of Surety Guarantees, 409 Third Street SW., Suite 8600, Washington, DC 
20416.
    SBA will post all comments on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, you must submit such information to U.S. 
Small Business Administration, Barbara J. Brannan, Office of Surety 
Guarantees, 409 Third Street SW., Washington, DC 20416 or send an email 
to [email protected]. Highlight the information that you consider 
to be CBI and explain why you believe SBA should hold this information 
as confidential. SBA will review your information and determine whether 
it will make the information public.

FOR FURTHER INFORMATION CONTACT: Barbara J. Brannan, Office of Surety 
Guarantees, (202) 205-6545 or email: [email protected].

SUPPLEMENTARY INFORMATION:

I. Discussion of Proposed Changes

    The U.S. Small Business Administration (SBA) guarantees bid, 
payment and performance 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, assists small businesses in obtaining greater 
access to contracting opportunities. SBA's guarantee is an agreement 
between a Surety and SBA that SBA will assume a certain percentage of 
the Surety's loss should a contractor default on the underlying 
contract.
    This rule proposes to change the regulations governing SBA's Surety 
Bond Guarantee Program (SBG Program) in four areas that have prompted 
questions from participating Sureties over the past year. First, the 
rule proposes to clarify that, to participate in the Prior Approval and 
Preferred Programs, a Surety must directly employ underwriting and 
claims staffs sufficient to perform and manage these functions. Final 
settlement authority for claims and recoveries is vested only in the 
surety's claims staff. The current rules require PSB Sureties to vest 
final settlement authority for claims and recovery in their salaried 
employees, see 13 CFR 115.60(a)(5), and this proposed rule would extend 
this requirement to Prior Approval Sureties. Some Prior Approval 
Sureties retain the final underwriting authority to approve a 
particular bond and some Prior Approval Sureties grant their agents 
this authority. For the latter arrangement, the proposed rule would 
clarify that Prior Approval Sureties must have salaried employees 
responsible for managing and overseeing the underwriting operations. In 
conducting such oversight, SBA would expect Prior Approval Sureties to 
periodically conduct reviews of the underwriting operations of their 
agents to ensure that the agent is underwriting SBA-guaranteed bonds in 
accordance with the standards set forth in 13 CFR 115.15(a). SBA is not 
aware that any Prior Approval Surety currently participating in the SBG 
Program is unable to satisfy this requirement, but is making this 
requirement explicit in the regulations for clarity and to avoid 
misunderstanding. PSB Sureties are currently required to vest 
underwriting authority in their salaried employees, see 13 CFR 
115.60(a)(4), and the proposed rule would not affect this requirement. 
Accordingly, while PSB Sureties may allow their agents to perform the 
initial underwriting on a bond, the current rule requires that only the 
PSB Surety may execute the bond guarantee agreement (SBA Form 990 or 
990A).
    Second, the rule proposes to specify that the costs that the Surety 
incurs for its salaried claims staff are ineligible for reimbursement 
by SBA. SBA considers such costs to be integral to the Surety's 
overhead, which is not eligible for reimbursement by SBA. See 13 CFR 
115.16(f)(1). Under the proposed rule, however, the Surety may seek 
reimbursement for amounts actually paid by the Surety for specialized 
services that are provided by an outside consultant, which is not an 
Affiliate of the Surety, in connection with the processing of a claim, 
provided that such services are beyond the capability of the Surety's 
salaried claims staff. For example, to evaluate a claim, the Surety may 
need the opinion of a structural engineer to determine the Principal's 
compliance with engineering specifications. SBA would not expect the 
Surety to directly employ a structural engineer, and SBA would approve 
reasonable costs to contract for this specialized service as part of 
the Surety's Loss.
    Third, the rule proposes to modify the conditions under which a 
Principal, and its Affiliates, would be deemed ineligible for a bond 
guaranteed by SBA in the circumstance where the Principal has 
previously defaulted on an SBA guaranteed surety bond. Under the 
current rules, a Principal and its Affiliates are ineligible for 
further SBA bond guarantees if the Surety has requested reimbursement 
for Losses

[[Page 19887]]

incurred under an SBA guaranteed bond issued on behalf of the 
Principal. See 13 CFR 115.14(a)(4). However, in the Prior Approval 
Program, the current rules provide that SBA's Office of Surety 
Guarantees (OSG) may agree, upon the Surety's recommendation, to 
reinstate the Principal, and its Affiliates, if the Surety has settled 
its claim with the Principal for an amount and on terms accepted by OSG 
(13 CFR 115.36(b)(2)), or the Principal's indebtedness to the Surety is 
discharged by operation of law (e.g., bankruptcy discharge) (13 CFR 
115.36(b)(4)), or OSG and the Surety determine that further bond 
guarantees are appropriate (13 CFR 115.36(b)(5)). In addition, in the 
PSB Program, the current rules provide that the PSB Surety may 
reinstate a Principal's eligibility upon the Surety's determination 
that reinstatement is appropriate (13 CFR 115.14(b)).
    SBA is proposing to modify these rules in two ways. First, the 
proposed rule would prohibit the reinstatement of a Principal if the 
Principal, or any of its Affiliates, had previously defaulted on an SBA 
guaranteed bond that resulted in a Loss (as defined in 13 CFR 115.16) 
that has not been fully reimbursed to SBA or if SBA has not been fully 
reimbursed for any Imminent Breach payments. The proposed rule would 
provide that the Principal, or any of its Affiliates, may be reinstated 
only if SBA has been fully repaid for the Loss or for the Imminent 
Breach payment. In addition, the discharge of the indebtedness in 
bankruptcy would no longer qualify the Principal for reinstatement. 
These changes would conform the SBG Program more closely to SBA's other 
financial assistance programs under which an applicant is ineligible 
for financial assistance if it has caused a prior loss to the Agency. 
See 13 CFR 120.111(q). SBA believes that a Principal that has 
previously caused a Loss to SBA presents a higher risk to the Agency 
and should not receive the benefit of further SBA financial assistance. 
Under the proposed rule, SBA would have the authority to waive this 
prohibition for good cause. For example, if the Principal is able to 
show that the Loss was attributed to the acts or omissions of a co-
owner who is no longer a part of the business, SBA could find good 
cause to reinstate the eligibility of the Principal. PSB Sureties would 
not be delegated the authority to make this ``good cause'' 
determination, but would continue to have the authority to reinstate 
the eligibility of a Principal when the Surety determines that further 
bond guarantees are appropriate for those Principals deemed ineligible 
under paragraphs (1), (2), (3), (5) or (6) of section 115.14.
    Second, the proposed rule would apply the same standards regarding 
the loss of eligibility and the conditions for reinstatement to both 
the Prior Approval Program and the PSB Program. SBA believes that the 
conditions for reinstatement of a Principal's eligibility for SBA 
guaranteed bonds should not depend upon whether the Surety is a Prior 
Approval Surety or a PSB Surety, but that the reinstatement conditions 
should be uniform and apply equally to both Programs.
    Fourth, the rule proposes to modify the criteria for admitting a 
Surety to participate in the Preferred Surety Bond Guarantee Program by 
increasing the Surety's underwriting limitation, as certified by the 
U.S. Treasury Department on its list of acceptable sureties on Federal 
bonds, from at least $2 million to at least $6.5 million. This change 
would conform the underwriting limitation to the statutory increase 
made by Public Law 112-239 in the maximum amount of any Contract or 
Order for which SBA may guarantee a bond. All PSB Sureties currently 
participating in the PSB Program would satisfy this new requirement.

II. Section-By-Section Analysis

    Section 115.11. SBA is proposing to revise this Section by 
including the requirement that an applicant have a salaried staff that 
is employed directly (not an agent or other individual or entity under 
contract with the applicant) to oversee its underwriting functions and 
to perform all claims and recovery functions. This section would also 
be revised to provide that final settlement authority for claims and 
recovery actions must be vested only in the applicant's salaried staff. 
In addition, this section would be revised to clarify that the 
applicant must continue to comply with SBA's standards and procedures 
for underwriting, administration, claims, recovery, and staffing 
requirements while participating in SBA's Surety Bond Guarantee 
Program.
    Section 115.13(a). SBA is proposing to revise this section by 
adding a new paragraph (7) to provide that, to be eligible for an SBA 
guaranteed bond, neither the Principal nor any of its Affiliates may be 
ineligible for an SBA guaranteed bond under the grounds set forth in 13 
CFR 115.14.
    Section 115.14. SBA is proposing to modify the criteria regarding 
the loss of the Principal's eligibility for future assistance and the 
conditions for reinstatement by providing that a Principal loses 
eligibility for further SBA bond guarantees if the Principal, or any of 
its Affiliates, has defaulted on an SBA guaranteed bond that resulted 
in a Loss (as defined in 13 CFR 115.16) that has not been fully 
reimbursed to SBA, or if SBA has not been fully reimbursed for any 
Imminent Breach payments. OSG would have the authority to waive this 
requirement for good cause. In addition, the discharge in bankruptcy of 
the Principal's indebtedness to the Surety would no longer qualify the 
Principal for reinstatement.
    SBA is also proposing to apply the same criterion on ineligibility 
and conditions for reinstatement to both the Prior Approval Program and 
the PSB Program. As the same conditions for reinstatement would apply 
to both the Prior Approval Program and the PSB Program, the conditions 
for reinstatement set forth in 13 CFR 115.36(b) and (c) would be moved 
in their entirety to 13 CFR 115.14(b) and (c), and the heading of this 
section would be changed to ``Loss of Principal's eligibility for 
future assistance and reinstatement of Principal''.
    Section 115.16(e)(1). SBA is proposing to revise this provision to 
provide that SBA will reimburse amounts actually paid by a Surety for 
specialized services that are provided under contract by outside 
consultants in connection with the processing of a claim, provided that 
such services are beyond the capability of the Surety's salaried claims 
staff. The change, coupled with the other changes in this Proposed 
Rule, clarifies that a Surety cannot outsource routine claims functions 
and responsibilities or include such costs in its reimbursement 
requests submitted to SBA under the bond guarantee agreement. With the 
exception of specialized work that falls outside the scope of the 
routine processing and administration of claims, the expectation is 
that the Surety will be able to perform the claims function at no cost 
to the Agency.
    Section 115.16(f)(1). SBA is proposing to revise this provision to 
clarify that all costs incurred by the Surety's salaried claims staff, 
whether or not specifically allocable to an SBA guaranteed bond, are 
excluded from the definition of Loss. Costs incurred by the Surety's 
salaried claims staff, like all other overhead of the Surety, are the 
responsibility of the Surety.
    Section 115.18(a)(2). SBA is proposing to revise this paragraph to 
provide that the Surety's failure to continue to comply with the 
requirements set forth in section 115.11 are sufficient grounds for 
refusal to issue further guarantees, or in the case

[[Page 19888]]

of a PSB Surety, termination of preferred status.
    Section 115.36. By including the conditions for reinstatement and 
the standard for underwriting after reinstatement in Sec.  115.14(b) 
and (c), this rule proposes to rename the heading of this section to 
``Sec.  115.36 Indemnity settlements'', delete ``(a) Indemnity 
settlements.'', renumber paragraphs ``(1)'', ``(2)'', and ``(3)'', as 
``(a)'', ``(b)'', and ``(c)'', respectively, and remove paragraphs (b) 
and (c).
    Section 115.60(a)(1). SBA is proposing to conform this provision to 
the statutory increase in the maximum contract amount for which a bond 
may be guaranteed by removing ``$2,000,000'' and inserting 
``$6,500,000'' in its place.
    Section 115.60(a)(5). By including in Sec.  115.11 the requirement 
that all Sureties vest final settlement authority for claims and 
recovery only in their salaried claims staff, this rule proposes to 
remove 115.60(a)(5) and renumber the existing paragraph 115.60(a)(6) 
accordingly. Compliance with Executive Orders 12866, 13563, 12988, and 
13132, the Paperwork Reduction Act (44 U.S.C. Ch. 35) and the 
Regulatory Flexibility Act (5 U.S.C. 601-612).

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule does not constitute a significant regulatory action under 
Executive Order 12866. This rule is also not a major rule under the 
Congressional Review Act (5 U.S.C. 800).

Executive Order 13563

    In accordance with Executive Order 13563, SBA discussed with 
several surety companies issues regarding the SGB Program regulations. 
In particular, SBA discussed the underwriting and claims staffing 
requirements that sureties must meet in order to participate in SBA's 
SGB Program. SBA also discussed with these companies the conditions for 
reimbursement of the costs incurred by their claims staffs. Generally, 
the sureties responded favorably to SBA's position that changes were 
necessary to clarify or amend the regulations on these issues.

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.

Executive Order 13132

    SBA has determined that this proposed 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 purposes of Executive Order 13132, SBA has determined that this 
proposed rule has no federalism implications warranting preparation of 
a federalism assessment.

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

    For the purpose of the Paperwork Reduction Act, 44 U.S.C., Chapter 
35, SBA has determined that this proposed rule will not impose any new 
reporting or recordkeeping requirements.

Initial Regulatory Flexibility Analysis

    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. There are 23 
Sureties that participate in the SBA program, and no part of this 
proposed rule would impose any significant additional cost or burden on 
them. Consequently, this proposed rule does not meet the significant 
economic impact on a substantial number of small businesses criterion 
anticipated by the Regulatory Flexibility Act.

List of Subjects in 13 CFR Part 115

    Claims, Reporting and recordkeeping requirements, Small businesses, 
Surety bonds.

    For the reasons cited above, SBA proposes to amend 13 CFR part 115 
as follows:

PART 115--SURETY BOND GUARANTEE

0
1. The authority citation for Part 115 continues to read as follows:

    Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b 
note; and Pub. L. 110-246, Sec. 12079, 122 Stat. 1651.

0
2. Amend Sec.  115.11 by adding three sentences at the end to read as 
follows:


Sec.  115.11  Applying to participate in the Surety Bond Guarantee 
Program.

    * * * At a minimum, each applicant must have salaried staff that is 
employed directly (not an agent or other individual or entity under 
contract with the applicant) to oversee its underwriting function and 
to perform all claims and recovery functions. Final settlement 
authority for claims and recovery must be vested only in the 
applicant's claims staff. The applicant must continue to comply with 
SBA's standards and procedures for underwriting, administration, 
claims, recovery, and staffing requirements while participating in 
SBA's Surety Bond Guarantee Programs.
0
3. Amend Sec.  115.13 by adding paragraph (a)(7) to read as follows:


Sec.  115.13  Eligibility of Principal.

* * * * *
    (7) No loss of eligibility. Neither the Principal nor any of its 
Affiliates is ineligible for an SBA-guaranteed bond under section 
115.14.
0
4. Amend Sec.  115.14 to read as follows:
0
a. Revise the section heading, and paragraphs (a)(4) and (b).
0
b. Add paragraph (c).


Sec.  115.14  Loss of Principal's eligibility for future assistance and 
reinstatement of Principal.

* * * * *
    (4) The Principal, or any of its Affiliates, has defaulted on an 
SBA-guaranteed bond resulting in a Loss that has not been fully 
reimbursed to SBA, or SBA has not been fully reimbursed for any 
Imminent Breach payments.
* * * * *
    (b) Reinstatement of Principal's eligibility. At any time after a 
Principal becomes ineligible for further bond guarantees under Sec.  
115.14(a):
    (1) A Prior Approval Surety may recommend that such Principal's 
eligibility be reinstated, and OSG may agree to reinstate the Principal 
if:
    (i) The Surety has settled its claim with the Principal, or any of 
its Affiliates, for an amount that results in no Loss to SBA or in no 
amount owed for Imminent Breach payments, or OSG finds good cause for 
reinstating the Principal notwithstanding the Loss to SBA or amount 
owed for Imminent Breach payments; or
    (ii) OSG and the Surety determine that further bond guarantees are 
appropriate after the Principal was deemed ineligible for further SBA 
bond guarantees under paragraph (1), (2), (3), (5) or (6) of section 
115.14(a).
    (2) A PSB Surety may:
    (i) Recommend that such Principal's eligibility be reinstated, and 
OSG may

[[Page 19889]]

agree to reinstate the Principal, if the Surety has settled its claim 
with the Principal, or any of its Affiliates, for an amount that 
results in no Loss to SBA or in no amount owed for Imminent Breach 
payments, or OSG finds good cause for reinstating the Principal 
notwithstanding the Loss to SBA or amount owed for Imminent Breach 
payments; or
    (ii) Reinstate a Principal's eligibility upon the Surety's 
determination that further bond guarantees are appropriate after the 
Principal was deemed ineligible for further SBA bond guarantees under 
Sec.  115.14(a) (1), (2), (3), (5) or (6).
    (c) Underwriting after reinstatement. A guarantee application 
submitted after reinstatement of the Principal's eligibility is subject 
to a very stringent underwriting review.
0
5. Amend Sec.  115.16 by revising paragraphs (e)(1) and (f)(1) to read 
as follows:


Sec.  115.16  Determination of Surety's Loss.

* * * * *
    (e) * * *
    (1) Amounts actually paid by the Surety for specialized services 
that are provided under contract by an outside consultant, which is not 
an Affiliate of the Surety, in connection with the processing of a 
claim, provided that such services are beyond the capability of the 
Surety's salaried claims staff; and
* * * * *
    (f) * * *
    (1) Any unallocated expenses, all direct and indirect costs 
incurred by the Surety's salaried claims staff, or any clear mark-up on 
expenses or any overhead of the Surety, its attorney, or any other 
party hired by the Surety or the attorney;
* * * * *
0
6. Amend Sec.  115.18 by revising paragraph (a)(2) to read as follows:


Sec.  115.18  Refusal to issue further guarantees; suspension and 
termination of PSB status.

* * * * *
    (2) Regulatory violations, fraud. Acts of wrongdoing such as fraud, 
material misrepresentation, breach of the Prior Approval or PSB 
Agreement, the Surety's failure to continue to comply with the 
requirements set forth in Sec.  115.11, or regulatory violations (as 
defined in Sec. Sec.  115.19(d) and 115.19(h)) also constitute 
sufficient grounds for refusal to issue further guarantees, or in the 
case of a PSB Surety, termination of preferred status.
* * * * *
0
7. Amend Sec.  115.36 to read as follows:
0
a. Revise the section heading;
0
b. Remove the paragraph heading ``(a) Indemnity settlements.'';
0
c. Remove paragraphs (b) and (c); and
0
d. Redesignate paragraphs ``(1)'', ``(2)'', and ``(3)'', as ``(a)'', 
``(b)'', and ``(c)''.


Sec.  115.36  Indemnity settlements.

* * * * *


Sec.  115.60  Selection and admission of PSB Sureties. [Amended]

0
8. Amend Sec.  115.60 to read as follows:
0
a. Amend Sec.  115.60(a)(1) by removing ``$2,000,000'' and inserting 
``$6,500,000'' in its place; and
0
b. Remove paragraph (a)(5) and redesignate paragraph (a)(6) as 
paragraph (a)(5).

    Dated: April 6, 2015.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2015-08297 Filed 4-13-15; 8:45 am]
BILLING CODE 8025-01-P