    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                        SECURITY IN BONDING ACT OF 2011

    =======================================================================

                                    HEARING

                                   BEFORE THE

                       SUBCOMMITTEE ON COURTS, COMMERCIAL
                             AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 3534

                                   __________

                                 MARCH 5, 2012

                                   __________

                               Serial No. 112-93

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

                                    _____

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                           COMMITTEE ON THE JUDICIARY

                          LAMAR SMITH, Texas, Chairman
    F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
        Wisconsin                        HOWARD L. BERMAN, California
    HOWARD COBLE, North Carolina         JERROLD NADLER, New York
    ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT,
    BOB GOODLATTE, Virginia                  Virginia
    DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
    STEVE CHABOT, Ohio                   ZOE LOFGREN, California
    DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
    MIKE PENCE, Indiana                  MAXINE WATERS, California
    J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
    STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
    TRENT FRANKS, Arizona                  Georgia
    LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
    JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
    TED POE, Texas                       JUDY CHU, California
    JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
    TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
    TOM MARINO, Pennsylvania             JARED POLIS, Colorado
    TREY GOWDY, South Carolina
    DENNIS ROSS, Florida
    SANDY ADAMS, Florida
    BEN QUAYLE, Arizona
    MARK AMODEI, Nevada

               Richard Hertling, Staff Director and Chief Counsel
           Perry Apelbaum, Minority Staff Director and Chief Counsel
                                     ------

           Subcommittee on Courts, Commercial and Administrative Law

                     HOWARD COBLE, North Carolina, Chairman

                   TREY GOWDY, South Carolina, Vice-Chairman

    ELTON GALLEGLY, California           STEVE COHEN, Tennessee
    TRENT FRANKS, Arizona                HENRY C. ``HANK'' JOHNSON, Jr.,
    DENNIS ROSS, Florida                   Georgia
    BEN QUAYLE, Arizona                  MELVIN L. WATT, North Carolina
                                         JARED POLIS, Colorado

                          Daniel Flores, Chief Counsel

                          James Park, Minority Counsel

                                C O N T E N T S

                                  ----------

                                 MARCH 5, 2012

                                                                       Page

                                    THE BILL

    H.R. 3534, the ``Security in Bonding Act of 2011''...............     3

                               OPENING STATEMENT

    The Honorable Howard Coble, a Representative in Congress from the
      State of North Carolina, and Chairman, Subcommittee on Courts,
      Commercial and Administrative Law..............................     1

                                   WITNESSES

    Mark H. McCallum, CEO, National Association of Surety Bond
      Producers
      Oral Testimony.................................................     6
      Prepared Statement.............................................     8
    Jeanette Wellers, President & CFO, JBlanco Enterprises, Inc.
      Oral Testimony.................................................    21
      Prepared Statement.............................................    23
    Robert E. Little, Jr., Of Counsel, Cohen Seglias Pallas Greenhall
      & Furman PC
      Oral Testimony.................................................    25
      Prepared Statement.............................................    26
    Karen Pecora-Barbour, President, The Barbour Group, LLC
      Oral Testimony.................................................    32
      Prepared Statement.............................................    35

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Material submitted by the Honorable Howard Coble, a
      Representative in Congress from the State of North Carolina,
      and Chairman, Subcommittee on Courts, Commercial and
      Administrative Law.............................................    58

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan, and
      Ranking Member, Committee on the Judiciary.....................    69
    Prepared Statement of the Honorable Steve Cohen, a Representative
      in Congress from the State of Tennessee, and Ranking Member,
      Subcommittee on Courts, Commercial and Administrative Law......    76
    Response to Post-Hearing Questions from Mark H. McCallum, CEO,
      National Association of Surety Bond Producers..................    82
    Response to Post-Hearing Questions from Karen Pecora-Barbour,
      President, The Barbour Group, LLC..............................    88
    Prepared Statement of the American Subcontractors Association,
      Inc............................................................    92

                        SECURITY IN BONDING ACT OF 2011

                                  ----------

                             MONDAY, MARCH 5, 2012

                  House of Representatives,
                        Subcommittee on Courts,
                     Commercial and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to call, at 4 p.m., in room
    2141, Rayburn House Office Building, the Honorable Howard Coble
    (Chairman of the Subcommittee) presiding.
        Present: Representatives Coble and Gowdy.
        Also Present: Representative Hanna.
        Staff Present: (Majority) Travis Norton, Counsel; Ashley
    Lewis, Clerk; and (Minority) James Park, Subcommittee Chief
    Counsel.
        Mr. Coble. The witnesses will please take your places, if
    you will, and the Subcommittee will come to order. We have
    other people who are on their way, I am told, so we will move
    along initially. Good to have you all with us, by the way.
        I will give my opening statement at this time.
        Surety bonds are financial instruments used to provide the
    national security for large construction contracts. For
    example, prime contractors typically post payment bonds to
    assure subcontractors that they will be paid for their work.
    Prime contractors may also bid, and post performance bonds to
    guarantee the owner that the work will be performed according
    to the contract.
        The Federal Government regularly contracts with privately
    owned businesses to complete construction projects. In doing
    so, the government requires contractors to obtain surety bonds,
    but the security provided to the government by a surety bond is
    only as good as the Capital R assets that stand behind the
    bond.
        There are currently three ways a contractor can satisfy the
    Federal Government's requirement for adequate assurance of
    performance and payment. First, the contractor can obtain a
    bond from a corporate surety approved by the Treasury
    Department. These sureties are vetted by Treasury to ensure
    that they have adequate capital to make good on the bond, if
    necessary.
        Alternatively, the individual contractor can give the
    United States the possessory security interest in low-risk
    liquid assets such as T-bills, cash, or cash equivalents. If a
    contractor does not perform, the government seizes the assets
    with ease and finds another contractor to complete the work
    without suffering monetary loss.
        A third option, a contractor may secure a bond from an
    individual surety. Under the Federal Acquisition Regulation,
    however, an individual with surety needs only to pledge assets
    to the government. It does not need to allow the government to
    hold the assets. In addition, an individual surety may pledge
    more volatile assets such as stocks and bonds traded on an
    exchange or rights in real property.
        In recent years, there have been a number of instances in
    which individual surety bonds have not provided the security
    that they purport to offer. In some cases this was because the
    value of the pledged assets had decreased significantly, like
    when the stock market suddenly dropped or real estate values
    plummeted.
        H.R. 3534, by Congressman Hanna of New York, is intended to
    give the Federal Government and subcontractors true security
    when they contract to perform construction work on a Federal
    project. The bill allows Federal contracting officials to
    require a bond from a Treasury-regulated surety. It does not
    foreclose individual sureties from the bonding market, but it
    does require them to pledge in the same manner the same kind of
    low-risk assets that an individual contractor would be required
    to pledge in lieu of a surety bond.
        It should also be noted that H.R. 3534 is supported by the
    American Subcontractors Association and the National
    Association of Minority Contractors. I hope to work with
    Ranking Member Cohen and Congressman Hanna to ensure that the
    Federal Government does not suffer monetary loss on
    construction projects at a time when it can least afford to do
    so.
        I look forward to hearing the testimony from our witnesses
    subsequently.
        [The bill, H.R. 3534, follows:]

                                   __________

        Mr. Coble. Mr. Richard Hanna of New York is recognized. Mr.
    Hanna, glad to have you sit on the podium. You won't be able to
    speak, however, since you are not a Member of the select
    Committee, if you will. It is good to have you with us,
    nonetheless.
        Mr. Hanna. Thank you, sir.
        Mr. Coble. And I am still a little reluctant to start. Let
    me introduce the witnesses, and by then we should be in a
    position to move forward.
        Where is my witnesses list here, Steve? Mr. Mark McCallum
    is the Chief Executive Officer of the National Association of
    Surety Bond Producers. NASBP is an international association of
    companies employing professional surety bond producers and
    brokers. Prior to his service there, Mr. McCallum held a seated
    position at the Association of General Contractors of America,
    and before that at the American Institute of Architects. Mr.
    McCallum earned his law degree from Tulane School of Law in New
    Orleans and his Bachelor's Degree from Vanderbilt University in
    Nashville--one of May favorite towns, by the way, Mr. McCallum.
    I am a country music enthusiast. So when I think country music,
    I synonymously think Nashville, knowing that there is more to
    Nashville than that.
        Mr. McCallum. It is a great town.
        Mr. Coble. It is a great town.
        Jean Blanco Wellers is the Executive Officer of JBlanco
    Enterprises, Inc., a construction and real estate management
    firm in Sheridan, Colorado. Ms. Wellers emigrated to the United
    States as a child to escape the civil war in El Salvador.
    Through hard work and education, she became corporate safety
    director for the largest residential roofing contractor in the
    Southwest before forming JBlanco Enterprises in 2004.
        JBlanco Enterprises participates in the Small Business
    Administration's 8(a) development program. In 2008, Ms.
    Wellers' firm was recognized by the SBA as 8(a) contractor of
    the year and was featured in 2010 as the second fastest growing
    minority-owned business in Colorado.
        Mr. Robert Little, Jr. is an attorney with more than 37
    years in public service and private practice. Currently he is
    of counsel in the law firm of Cohen Seglias Pallas Greenhall &
    Furman, PC. Prior to that he served as a senior associate
    counsel to the headquarters of the Naval Facilities Engineering
    Command for service, supply, and construction contracts
    worldwide. In that capacity, he had a substantial experience
    with reviewing surety bond applications. Mr. Little holds a law
    degree from the College of William & Mary, and a Bachelor's
    Degree in philosophy from the Virginia Polytechnic Institute.
        Finally, Miss Karen Barbour is the owner and founder of the
    Barbour Group, a Maryland-based independent insurance agency
    with a focus on construction bonding and commercial insurance.
    Prior to starting the Barbour Group, Ms. Barbour was a partner
    of Barbour Construction Corp for 10 years. The Governor of
    Maryland has appointed Ms. Barbour to his Commission on Small
    Business. She also serves as vice chair on the advisory board
    for the Small Business Development Center for the State of
    Maryland. Ms. Barbour attended Loyola University in Maryland
    where she earned her Bachelor's Degree in political science and
    history. She earned her business degree from the University of
    Baltimore.
        It is good to have each of you with us, and I am still in a
    reluctant hold right now. I hate to start before a member of
    the Democrat Party shows up, but we may do that because I don't
    want to penalize you all for having been here in a timely way.
        James, I have your assurance that I won't be keel-hauled.
    But for the moment, folks, if you all would just hang loose, I
    need to get another Member here if we can. And if not, we will
    go ahead and proceed. So be at ease for the time being, and
    pardon my gravelly voice, folks. I am trying to come down with
    my annual early March cold, but sounds irritable, I know.
        [Brief recess.]
        Mr. Coble. I appreciate the presence of the witnesses here,
    and hopefully we will get some action momentarily. Let's roll.
    Folks, we are going to go ahead and proceed according to plan.
    Again, thank you for your patience, and I apologize for the
    delay.
        Mr. McCallum, we will start with you, and folks, we try to
    comply with the 5-minute rule. There is a timer on your desk,
    and when the green light turns amber, that is your wake-up call
    that you have a minute at that point, and then when the red
    light appears, that is the 5-minute termination. You will not
    be physically punished if you violate that, but if you can wrap
    it up as soon as possible. Mr. McCallum, we will start with
    you. You are recognized for 5 minutes. Get your mike on,
    please, Mr. McCallum.

      TESTIMONY OF MARK H. McCALLUM, CEO, NATIONAL ASSOCIATION OF
                         SURETY BOND PRODUCERS

        Mr. McCallum. Mr. Chairman, thank you for the opportunity
    to speak to you this afternoon.
        NASBP members are companies employing licensed bond
    producers who assist businesses of all sizes to obtain surety
    credit and to grow as competitive businesses. Bond producers
    often are asked by construction firms to help them assess the
    strength and reputation of a surety furnishing a bond to which
    the firm is a beneficiary. A surety that is not sound
    financially cannot add to the credit standing of the firm to
    which it is bonded. Moreover, such a surety will not supply the
    protection promised by the bond. As a result, bond producers
    advocate for well-regulated and stable surety markets.
        The Security and Bonding Act of 2011, House Resolution
    3534, is a critical and commonsense measure that will assure
    the integrity of surety bonds on Federal construction contracts
    when issued by individuals using a pledge of assets. Bonds
    furnished by unlicensed individual sureties have an unfortunate
    track record of problems on Federal construction projects.
        In fact, financial loss to subcontractors and to
    contracting agencies from individual surety bond fraud was the
    catalyst for changes in the Federal Acquisition Regulation in
    1990. Recent events involving individual sureties, however,
    have made clear that these changes have not proven sufficient
    to ameliorate the problem. It is time to do so, and NASBP,
    along with 10 other national construction and surety
    organizations view the proposed statutory changes in H.R. 3534
    as the solution.
        Mr. Chairman, as you mentioned earlier today, construction
    firms may use one of three methods to furnish security on a
    Federal construction project. They may secure a bond written by
    a corporate surety listed on Treasury Circular 570; they may
    use their own assets to purchase and pledge an eligible
    obligation in lieu of a surety bond or they may obtain a bond
    from an individual if the bond is secured by an acceptable
    asset, which includes stock, bonds, and real property.
        Corporate sureties writing on Federal projects must possess
    a certificate of authority from the Department of the Treasury,
    which conducts a financial review of the surety and sets a
    single bond size limit for the surety. Corporate sureties are
    licensed in the States in which they conduct surety business
    and they must obtain certificates of authority from State
    insurance departments. They are regularly audited and file
    financial reports with State regulators. They must file the
    rates they intend to charge for their bonds and are subject to
    market conduct investigations. They are also rated by private
    rating organizations, such as A.M. Best, which publicize their
    financial strength and size.
        Individual sureties are not subject to the same level of
    scrutiny and oversight as corporate sureties and are vetted
    solely by Federal contracting officers who often are
    overburdened and under resourced for the complex tasked
    required of them. Federal regulations do not require individual
    sureties to possess a certificate of authority as an insurer in
    any State.
        They are not required to furnish character information such
    as information about criminal convictions, State or Federal tax
    liens, prior bankruptcies, or State cease and desist orders. No
    third-party rating information is available on individual
    sureties. If a contracting officer fails to performed
    adequately, the necessary investigation of the individual
    surety and the assets backing the individual surety bond proves
    insufficient or nonexistent, unpaid subs and suppliers are
    denied their statutory payment remedy and contracting agencies
    are denied their guarantee of contract performance.
        H.R. 3534 solves this problem. It requires individual
    sureties to pledge solely those assets defined as eligible
    obligations by the Secretary of the Treasury. Eligible
    obligations are public debt obligations of the U.S. Government
    and obligations whose principal and interest is unconditionally
    guaranteed by the U.S. Government.
        These assets then are given to the Federal contracting
    authority, which in turn deposits them in a Federal depository,
    such as the Federal Reserve Bank, St. Louis, ensuring that
    pledged assets are real, sufficient, convertible to cash, and
    in the physical custody and control of the Federal Government.
    This is nothing more than what now is statutorily required of
    construction firms that wish to pledge assets as security on a
    Federal contract in lieu of a surety bond.
        Firms working on Federal construction projects, either as
    subs or suppliers, have no control over the prime contractor's
    choice of security provided to the Federal Government, but they
    suffer the most harm financially if the provided security
    proves illusory. H.R. 3534 will give them the confidence that
    on all Federal projects adequate and reliable security is in
    place to guarantee that they will be paid.
        Thank you for your time and attention today. I am happy to
    answer questions that you may have.
        [The prepared statement of Mr. McCallum follows:]

                                   __________

        Mr. Coble. Thank you, Mr. McCallum, and you beat the red
    light. It illuminated. You get a gold star for that.
        Ms. Wellers, I am not trying to put pressure on you, but
    you are recognized as well.

        TESTIMONY OF JEANETTE WELLERS, PRESIDENT & CFO, JBLANCO
                           ENTERPRISES, INC.

        Ms. Wellers. Thank you for having me here. My name is
    Jeanette Wellers, and I own a roofing, waterproofing, and
    photovoltaic company located in Sheridan, Colorado. I
    incorporated my company in 2004 with an SBA loan. I will make
    this really short, because I only have 5 minutes and I can talk
    about the subject for hours.
        In 2006, we were located in Bloomfield, Colorado, which is
    now Mr. Jared Polis' district. In 2006, 2 years after I started
    my business, my company entered into a contract with a general
    contractor who had contracted to the Federal Government. This
    was our first Federal job ever. I heard through the grapevine
    that this general contractor had some financial problems, but
    after consulting with my staff, we decided that there was
    minimal risks, and this was a Federal contract and bonding was
    in place.
        After the general contractor failed to pay our progress
    payment and after we found out that we had no privity with the
    Federal Government, we consulted an attorney, who after various
    requests for production of documents found out that the general
    contractor had obtained and the Federal Government had accepted
    a fraudulent bond from an individual surety.
        We expended thousands of dollars only to learn that the
    individual surety did nothing to secure the bond principal
    other than its ability to pay premiums. More detrimental to us
    was the fact that the assets pledged to back the bond did not
    exist. So there were no securities pledged and when we went
    back to talk to the bonding company, they didn't have a claim
    department. They had pledged all of the assets to different
    projects, private and Federal.
        The fact is that the individual surety could not pay any
    money due to us, and we ended up getting a second mortgage from
    our house in $240,000 worth of credit that we owed to credit
    cards. At this time we owe our attorney a lot of money, and we
    talked to an attorney, and he ended up telling us that it is
    okay not to pay what we owed to them. I ended up going to the
    bank and getting a loan to pay my credit cards, and that is how
    we ended up getting back on track.
        So I am here to support Bill 3534, and I am requesting that
    you guys hold individual surety and government entities to the
    same due diligence as contractors are held, and dispel all of
    us the stresses this has caused to my employees, my family, and
    my company.
        That is it.
        [The prepared statement of Ms. Wellers follows:]
                     Prepared Statement of Jeanette Wellers

                                   __________

        Mr. Coble. Thank you, Ms. Wellers. By the way, folks, for
    your information, your entire statements will be made part of
    the record. Thank you, Ms. Wellers. You too beat the
    illuminated red light.
        Mr. Little, the pressure is on you now. Good to have you,
    Mr. Little.

            TESTIMONY OF ROBERT E. LITTLE, JR., OF COUNSEL,
               COHEN SEGLIAS PALLAS GREENHALL & FURMAN PC

        Mr. Little. Thank you for the opportunity to testify today
    on H.R. 3534, Security Bonding Act of 2011. These views are my
    own and do not necessarily represent the views of Cohen Seglias
    or the Naval Facilities Engineering Command, my former
    employer, and my remarks will be brief.
        The bill will provide much needed certainty to a very
    contentious area of Federal construction contracts,
    acceptability of bid, performance and payment bonds issued by
    individual sureties. A little bit of background. To address
    rampant fraud problems encountered with individual sureties in
    the late 1980's, the regulations, that is the Federal
    Acquisition Regulation, was modified in 1990 to require
    individual sureties to pledge certain highly liquid assets. The
    intent was to make the wealth or solvency of the surety largely
    irrelevant.
        The result was that for about 12 years individual sureties
    all but disappeared. Their disappearance, by the way, had no
    apparent ill effects on the small or small disadvantaged
    business community. When they reappeared, they were convincing
    to a few people because the people that saw individual sureties
    initially had never seen them before. As it turns out, most
    individual surety bonds were rejected.
        As I began to look at them in 2004, I noticed that as they
    were rejected they seemed to be modified to account for each
    prior rejection. It was as if there were some central
    clearinghouse that was learning based on the rejections, then
    issuing the learned information to the individual surety
    community. And the one thing that they all had and, in my
    experience at least still have in common, was that all of the
    assets were unacceptable. All of them.
        One of my favorite assets was shares of penny stock based
    on already mined gold abiding in the tailings of a placer mine
    valued by a CPA at around a billion dollars that was in a
    trust, held in another trust, that lived in an escrow account
    at a Wells Fargo Bank.
        When I called the escrow official at the bank to see what
    was actually in the account, the surety threatened to sue me
    for violation of an obscure banking privacy act that did not
    remotely apply.
        While that example may seem laughable, it is indicative and
    very, very serious. H.R. 3534 would end that kind of bullying
    behavior and those kinds of assets from being proffered.
        It could be that individual sureties do have extensive
    commodities at their disposal, valued in billions of dollars.
    The fact that I have seen no evidence of it is hardly
    determinative. But it does make me wary, and I only hope it
    makes others wary as well.
        One final point. If H.R. 3534 becomes law, there will be
    absolutely no incentive for contracting officers to preclude
    individual surety bonds. They will literally become the gold
    standard. Why would any contracting officer prefer arguing with
    a corporate surety when he or she can execute against what is
    essentially a cash asset? Indeed, one might expect agencies to
    find ways to get individual sureties preferential treatment.
        Thank you.
        [The prepared statement of Mr. Little follows:]

                                   __________
        Mr. Coble. I don't know that I can recall any hearing when
    all of the first three witnesses, all three, beat the red
    light. I am not trying to impose pressure on you, Ms. Barbour,
    but good to have you with us.

                   KAREN PECORA-BARBOUR, PRESIDENT,
                         THE BARBOUR GROUP, LLC

        Ms. Barbour. Thank you. Thank you, Chairman Coble, and
    thanks for listening to me on my views of suretyship and the
    benefits of individual sureties.
        I, too, think H.R. 3534's intent is noble. I think
    individual sureties will or should have to prove that their
    assets are real and tangible, but I think that this bill has
    unintentional flaws, I am sure, that would eviscerate
    individual sureties.
        According to General Zafros, who is past Director of
    Contract Policy Division, Chief Acquisition Officer, General
    Services Administration, this bill essentially is a jobs
    creation killer. He says if this bill is passed, a change to
    the FAR would need to be proposed, and it would effectively
    kill individual sureties on FAR contracts. Right now, the
    current language in the Code prohibits a contracting officer
    from requiring the bond issued by a corporate surety. The
    proposed change would give the contracting officers the
    authority to require the use of a corporate surety. So it would
    be easier for them just to simply look up on a T list and say
    okay, fine, that is the corporate surety rather than to try to
    vet the assets.
        So what happens when a minority or small business owner
    tries to get corporate surety credit and is declined because of
    their stringent guidelines? They are not going to have anyplace
    to go.
        Individual surety bonds have helped many. There are over
    7,000 success stories, and while I can't readily dispute what
    Mr. Little is saying, I can say that the assets supporting
    those bonds were just fine and accepted by legal counsel in
    review. They weren't with NAVFAC, however.
        The contractor right now can seek advise from U.S. Treasury
    and even their own legal counsel, and as Mark McCallum has
    pointed out in that letter from U.S. Treasury in his testimony,
    they are required to do so. So they are not overburdened by any
    stretch.
        In fact, one veteran recently I provided an individual
    surety bond for, he was a graduate--he is a graduate from the
    Naval Academy and he came back home and he had financial
    problems. His house was foreclosed on, and the Army gave him a
    $1 million bond, and he was denied corporate surety credit. So
    we provided an individual surety bond. He is doing fabulously
    well. He is going to heal himself with this one job, and he is
    doing so well they want to award him another $1 million job.
    Where would he be without this product?
        So there are many interpretations of the FAR. It varies
    with contracting officer and/or agency, and it is very
    difficult to predict predictability and assurance to
    contractors that the individual surety bonds will be accepted,
    so I agree with H.R. 3534. I think that sureties should be
    preapproved, either by FAR counsel or by U.S. Treasury, and
    those that pass the FAR requirement should be enrolled on a
    list of acceptable individual sureties, and that these sureties
    are able to provide their data and have their attorneys present
    to address any legal issues with regard to FAR compliance.
    There should also be an appeal process if the individual surety
    believes that they were not treated fairly. And this will
    alleviate concerns for general contractors and for agents like
    me. I don't see that in this bill.
        But if such a system is adopted, how long would that
    process take and would time be of the essence? I would hope so.
    We are hearing all of these things about individual sureties.
    Well, let's talk about First Sealord Surety, a corporate surety
    that went defunct 3 weeks ago. They were T listed. They were
    A.M. Best A-minus one day, and literally the next day, they
    were rated C-plus. The next day they declared bankruptcy. And
    then the regulators found out they walked away with $8 million
    of contractors' collateral. They were a small corporate surety
    themselves, so to hedge their losses they took collateral from
    contractors. Where is the collateral? Now the contractors are
    in breach of their contracts. They have to go and secure a new
    bond, pay for that premium, and they can't get paid on their
    contracts because they don't have a valid bond. So that surety
    alone has caused more damage than any individual sureties I
    know.
        So I think we should support legislation for Federal
    contracting officers to disclose what type of security was
    provided by the general contractor. Moreover, I have done
    consulting for the Corps, and I can tell you that sub-guard was
    taken in lieu of a bond on a mega project. This job could not
    get a surety bond, a corporate surety bond, so Zurich puts out
    this product called sub-guard. The Army accepted sub-guard
    because it affords subcontractor failure on the job. Now, those
    subcontractors, I am sure, don't realize that there is not a
    surety bond in place. They don't have any Miller Act claims on
    a bond, I don't believe, on that job, because the GCs don't
    have a bond. I have also seen it where on the mega projects,
    too, that are over a billion dollars where the contractors have
    put up a corporate guarantee. That is not afforded small
    business, but it has afforded big business.
        So individual surety is a great tool to bring contractors,
    and the Miller Act hasn't been updated since 1934. Well,
    $100,000 it was back then. That was a huge sum of money. It is
    $150,000 now. That is not a big jump. That probably wouldn't
    even build a McDonald's. So here you are having $150,000 Miller
    Act requirement that has its tentacles all through small
    business and preventing them from getting bonding. And then you
    want to--well, and also States, by the way, there is like 30
    pieces of legislation out there where States want to up the
    Miller Act requirements in their States to a million.
        But I just wanted to end this and say in terms of the Tip
    Top case, that there is a--his name is, excuse me, Professor
    Nash, the Grand Poohbah of government contracts law, who
    started the George Washington University Law School's program
    on government contract law, in his article says: ``One of the
    best aspects of government contracting is that sometimes it
    gives us a good laugh.'' And this is regarding the Tip Top
    case.
        The humor is found in the FAR--am I done? There is no red
    light.
        Mr. Coble. Go ahead and finish.
        Ms. Barbour. Okay. I didn't see any red light, I
    apologize--oh, I am sorry.
        The humor is found in the FAR, not the decision. Under the
    FAR stocks traded on specific exchanges in real property are
    good, acceptable assets, while under FAR 28-203 personal
    property such as jewelry, furs, antiques are bad, unacceptable
    assets. Since the mined coal was personal property, it arguably
    fell within the FAR definition of bad assets. On the other
    hand, General Motors' stock could have been pledged last year
    and would have been counted as security at 90 percent of its
    value. Similarly, the surety's house could have been pledged
    and counted at 100 percent of its tax assessment value, which
    are all upside down in this market. But the value of coal can't
    be predicted, so it doesn't count.
        So this gentleman says, well, I would take the coal. All
    that Tip Top proves is that FAR was written before we got our
    recent lesson in modern economics. And those good assets turned
    out to be bad assets--I have just one sentence left--and that
    coal still has quite a large amount of value without regards to
    FAR, and maybe someone should try to pledge a retirement
    account. So this is an esteemed professor who disagreed with
    the Tip Top case.
        [The prepared statement of Ms. Barbour follows:]

                                   __________

        Mr. Coble. Thank you, Ms. Barbour. Thanks to each of you
    for your terse statements. I appreciate that.
        Without objection, I want to introduce into the record the
    letter from the National Association of Surety Bond Producers
    and the Security & Fidelity Association of America. It features
    10 corporations that endorsed the bill, and the Surety &
    Fidelity Association of America, their statement as well.
        Without objection, they will be made part of the record.
        [The information referred to follows:]

                                   __________

        Mr. Coble. And we try to comply with the 5-minute rule
    also. So we will try to do that. We have been joined by the
    distinguished gentleman from Atlanta, the land of the palmetto,
    Mr. Trey Gowdy. Trey, good to have you with us.
        Mr. McCallum, can you describe in more detail how the
    government suffers a pecuniary harm when a bid or performance
    bond proves to be worthless?
        Mr. McCallum. Yes, Mr. Chairman. Two different items here.
    The bid bond is to secure that you have a good-faith bidder who
    intends to enter into the final contract and supply the final
    bonds. The bid bond acts to provide the difference between the
    bid, the lowest bid that was accepted, and the next lowest
    bidder. And it will pay that amount to the government to help
    for its reprocurement costs.
        The performance bond is guaranteeing the obligation of the
    awarded prime contractor. If, for whatever reason, that party
    defaults in their performance, the surety will step in, and
    they have a variety of actions that they can take, but
    essentially to guarantee up to the penal sum of the bond any
    amounts that it needs to pay out to complete that contract
    obligation.
        Typically, there are delays, reprocurement costs, and other
    costs that the contracting agency and, hence, taxpayers may
    suffer in the absence of a valid performance guarantee. So that
    bond is there to secure those debts.
        Mr. Coble. Thank you, sir. Ms. Wellers, opponents of H.R.
    3534 have suggested that the bill will harm minority
    contractors' ability to secure surety bonds. Yet the National
    Association of Minority Contractors supports the bill. Can you
    cover that, what appears to be an inconsistency?
        Ms. Wellers. Well, in my opinion, if a contractor doesn't
    have a good balance sheet, or P&L, they shouldn't get a bond.
    It is a detriment, I think, to the contractor itself. Because
    if I go, you know, my business, for example, we know that we
    can do from $1 million to $10 million projects, and I know I
    couldn't do a $50 million project. So I wouldn't be looking for
    a bond that size. Plus, you know, when I got into the struggle
    with the surety bonds, with the individual surety bond that
    didn't have any assets, we went back to the SBA, and they have
    a bond program which I was able to get in. And then I spoke to
    a regular surety, and 2 years later I was back on my feet.
        So, you know, unfortunately, not everybody can be bonded
    and, you know, if you don't, you know, running a business is
    tough and you need to know a little bit about money and
    finances.
        Mr. Coble. I thank you, Ms. Wellers.
        Mr. Little, as a former acquisition counselor for the
    Federal Government, what were some of the assets that you saw
    individual sureties trying to pledge to support their bonds,
    and why did you find them unacceptable?
        Mr. Little. The assets, many of them we couldn't find. The
    way they were presented was not unlike the way I described in
    my statement. That is, it would be an asset hiding in a trust,
    lurking behind another document or another legal instrument,
    and as you tried to unravel it and unravel it, you would
    eventually either give up or you would just reject the bond and
    say we can't figure out what this asset is. We can't figure out
    not only what the asset is, we can't figure out how we would
    ever liquidate it if we could ever figure out what it was and
    if we could ever get our hands on it.
        Mr. Coble. Yeah.
        Mr. Little. That is the biggest problem. Now, we did see
    some obvious things wrong, like one of my earlier ones was
    Wachovia Bank stock. Now, when you get Wachovia stock, there is
    nobody to call to ask what Wachovia stock is valid. What you
    have to do is you have to start with Wachovia. If you ever did
    that, you would find that it is very hard to find somebody in
    Wachovia who knows anything about issuances of Wachovia stock
    and what it might be worth, and whether the CUSIP numbers that
    were on those stocks were valid. Couple that way the fact, that
    very--when somebody comes and tells you that they have got an
    escrow account full of Wachovia stock--I am preaching to the
    choir, I am sure--but you probably have never seen a stock
    certificate from Wachovia stock because they don't print them
    anymore. So one of the problems is, and there is a fair number
    of anachronisms involved in the process. But when you get
    something like a stock certificate, you have no idea--you don't
    have the stock certificate, by the way. The stock certificate
    was placed in escrow, so you have to call the escrow office to
    see whether or not that Wachovia's stock is in there, and so
    forth.
        Mr. Coble. Yeah.
        Mr. Little. So it is difficult. We see instruments that you
    have never heard of in your life before, and you see them on
    all sorts of fancy paper. You see debentures. You see gold
    certificates. You see all sorts of amazing documents that
    ostensibly, if you were to suspend disbelief and pretend like
    this was a play, you would be very entertained. But if you
    actually start trying to pull on the threads of these things,
    it very soon comes unraveled and there is literally no there,
    there.
        Mr. Coble. Thank you, Mr. Little.
        Ms. Barbour, do you believe that individual sureties ought
    to be able to leverage the same asset several times over to
    secure multiple surety bonds, and what happens when that asset
    needs to be liquidated to support more than one bond?
        Ms. Barbour. Well, the FAR says that the asset cannot be
    multiple pledged, that it can only be pledged for that
    transaction. I don't know. First Sealord Surety when they
    closed their doors, the Pennsylvania regulators closed it when
    they had $5 million in assets and $200 million in outstanding
    bond liability. I don't know why they didn't close them any
    sooner. I don't know how they could exist with $5 million in
    net worth or surplus to carry on, you know, to support $200
    million in bonds.
        I think that is a better question for the regulators, and
    how they regulate corporate sureties, because individual
    sureties back dollar for dollar for the bond, and it cannot be
    multiple pledged.
        Mr. Coble. I thank you, Ms. Barbour.
        The distinguished gentleman from South Carolina is
    recognized for 5 minutes.
        Mr. Gowdy. Thank you, Mr. Chairman. I also want to thank
    the gentleman from New York, Mr. Hanna, and the gentleman from
    South Carolina, Mr. Mulvaney, for their work on this issue.
        Mr. McCallum, I believe that Maryland has recently passed a
    law that changed how individual sureties are accepted for State
    construction projects. Are you familiar with that, and do you
    have any initial----
        Mr. McCallum. Yes, I am familiar with that.
        Mr. Gowdy. What is your assessment on how well it is
    working and why?
        Mr. McCallum. That law, the Maryland law was passed in
    2006, under the intent to benefit or provide an additional
    market for small businesses wanting to perform public works
    contracts in the State of Maryland. There is a requirement that
    the contracting agencies of the State report every 2 years to
    the General Assembly on the use of that law in getting
    individual surety bonds on public works projects.
        The next report is due out this month. I don't know what it
    says, but the first two reports basically have indicated that
    no small business has benefited from the 2006 law, and you can
    presume certain things. It is not exactly analogous to the
    Federal requirements. So the State of Maryland decided that
    they wanted more information about a potential individual
    surety, and they created an additional affidavit that the
    surety would actually have to sign a sworn statement where they
    would have to provide information about criminal convictions
    and other matters. And that is a requirement that currently we
    do not have at the Federal level.
        Mr. Gowdy. Thank you.
        Ms. Wellers, during the course of your litigation with the
    individual surety on the Federal project you described in your
    testimony, what other facts did you learn about the owner of
    the Federal surety company and his assets, if any?
        Ms. Wellers. Oh, I can tell you a lot about him. He--
    everything they had pledged, he had a balance sheet, I think he
    was worth $127 million, but you know, really, he had a house in
    Texas and his own house. I don't think it was worth more than
    half a million dollars. He had millions of contracts out there
    where he pledged the same, you know, the same real estate. We
    ended up, we were doing a job in Florida, and this company was
    from Alabama, so we ended up just driving by his house, and his
    office was just, you know, like a double wide, and stuff--not
    to say that that is bad, but it was not a real company. He
    would not return our calls. He didn't have--it was him and his
    wife, so he didn't have a place where you can make a claim. He
    was just somebody that claimed to have a surety company, and
    the GSA accepted it.
        Mr. Gowdy. Yes, ma'am.
        Mr. Little, some individuals complain, I suppose, that this
    bill would effectively remove them from the surety market. What
    do you say to those critics?
        Mr. Little. I would say that every representation that I
    have ever seen by an individual surety indicates that they have
    assets in the hundreds and hundreds of millions, even billions
    of dollars. I can't imagine anything happening to those firms
    that have hundreds and hundreds of millions and billions of
    dollars.
        Mr. Gowdy. Thank you, Mr. Chairman. Again, I thank the
    gentleman from New York, and the gentleman, Mr. Mulvaney, from
    South Carolina for their work on this issue, and I yield back.
        Mr. Coble. I thank the gentleman from South Carolina, and I
    want to reiterate what you said regarding--Mr. Hanna, I
    appreciate your leadership on this bill.
        Folks, again, I want to thank you all for your testimony,
    for your attendance today. I apologize for any delay that may
    result unfavorably. Blame me for it, don't hold me harmless, in
    other words.
        Without objection, all Members will have 5 legislative days
    to submit to the Chair additional written questions for the
    witnesses, which we will forward and ask the witnesses to
    respond as promptly as they can, so that their answers may be
    made a part of record.
        With that, again, I want to thank you all for being here,
    and this hearing stands adjourned.
        [Whereupon, at 4:50 p.m., the Subcommittee was adjourned.]

                                A P P E N D I X

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                   Material Submitted for the Hearing Record