[Congressional Record Volume 158, Number 69 (Tuesday, May 15, 2012)]
[House]
[Pages H2676-H2678]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SECURITY IN BONDING ACT OF 2012
Mr. SMITH of Texas. Madam Speaker, I move to suspend the rules and
pass the bill (H.R. 3534) to amend title 31, United States Code, to
revise requirements related to assets pledged by a surety, and for
other purposes, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 3534
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Security in Bonding Act of
2012''.
SEC. 2. SURETY BOND REQUIREMENTS.
Chapter 93 of subtitle VI of title 31, United States Code,
is amended--
(1) by adding at the end the following:
``Sec. 9310. Individual sureties
``If another applicable law or regulation permits the
acceptance of a bond from a surety that is not subject to
sections 9305 and 9306 and is based on a pledge of assets by
the surety, the assets pledged by such surety shall--
``(1) consist of eligible obligations described under
section 9303(a); and
``(2) be submitted to the official of the Government
required to approve or accept the bond, who shall deposit the
assets with a depository described under section 9303(b).'';
and
(2) in the table of contents for such chapter, by adding at
the end the following:
``9310. Individual sureties.''.
SEC. 3. GAO STUDY.
(a) Study.--The Comptroller General of the United States
shall carry out a study on the following:
(1) All instances during the 10-year period prior to the
date of the enactment of this Act in which a surety bond
proposed or issued by a surety in connection with a Federal
project was--
(A) rejected by a Federal contracting officer; or
(B) accepted by a Federal contracting officer, but was
later found to have been backed by insufficient collateral or
to be otherwise deficient
[[Page H2677]]
or with respect to which the surety did not perform.
(2) The consequences to the Federal Government,
subcontractors, and suppliers of the instances described
under paragraph (1).
(3) The percentages of all Federal contracts that were
awarded to small disadvantaged businesses (as defined under
section 124.1002(b) of title 13, Code of Federal Regulations)
and disadvantaged business enterprises (as defined under
section 26.5 of title 49, Code of Federal Regulations) as
prime contractors in the 2-year period prior to and the 2-
year period following the date of enactment of this Act, and
an assessment of the impact of this Act and the amendments
made by this Act upon such percentages.
(b) Report.--Not later than the end of the 3-year period
beginning on the date of the enactment of this Act, the
Comptroller General shall issue a report to the Committee on
the Judiciary of the House of Representatives and the
Committee on Homeland Security and Government Affairs of the
Senate containing all findings and determinations made in
carrying out the study required under subsection (a).
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Texas (Mr. Smith) and the gentleman from Puerto Rico (Mr. Pierluisi)
each will control 20 minutes.
The Chair recognizes the gentleman from Texas.
General Leave
Mr. SMITH of Texas. Madam Speaker, I ask unanimous consent that all
Members may have 5 legislative days to revise and extend their remarks
and include extraneous materials on H.R. 3534, as amended, currently
under consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Texas?
There was no objection.
Mr. SMITH of Texas. Madam Speaker, I yield 5 minutes to the gentleman
from New York (Mr. Hanna), who is the sponsor of this legislation.
Mr. HANNA. Madam Speaker, I introduced H.R. 3534 with my colleague,
Mr. Mulvaney from South Carolina, to address an issue in the
construction industry I know all too well: surety bonding.
Bonding is not something most people think about, but it was a daily
reality in my business. The concept is simple. Contractors on a Federal
construction project are required to post assets prior to entering a
contract to prove that they are capable of paying their subcontractors
and downstream paying their suppliers for work. It indicates that a
contractor is capable of successfully completing a project and is
supposed to protect taxpayers and small businesses downstream in the
event of failure or nonpayment.
The business of bonding is predicted on a zero failure rate. The
assets pledged to back a project must be real, easily convertible to
cash, and held by the contracting officer for the duration of the
project--and most are. Unfortunately, a loophole in these laws has been
exploited. It has resulted in a number of cases where assets pledged to
back a bond issued by an individual surety have been insufficient or
illusory. This has left small businesses and taxpayers without
sufficient payment remedies, and in the case of one Colorado woman,
nearly put her out of business.
A single stock or private residence, which is subject to huge changes
in value or may have an existing first mortgage, are quite simply not
acceptable assets to back multimillion-dollar projects. Madam Speaker,
the Security in Bonding Act will remedy this problem by requiring
individual sureties to pledge solely those assets described in
contracting laws as ``eligible obligations.'' Further, it would require
them to be placed in custody of the Federal Government just as they
would using a corporate surety or posting an asset in lieu of corporate
surety. This loophole is putting small businesses and workers and the
taxpayer at risk. It is time to close this loophole and restore the
integrity of the bonding process.
H.R. 3534 would ensure that if an individual surety bond is furnished
for a Federal construction project, that small businesses and
subcontractors providing goods and services on that contract will not
need to worry about the integrity of their payment revenue. This bill
provides the surety that small businesses need and subcontractors and
citizens deserve from the Federal Government. Without it, good jobs and
our limited taxpayer dollars will continue to be at risk.
In closing, I would like to extend a personal thanks to Chairman
Lamar Smith for his leadership in advancing this legislation and for
allowing me to join him during the committee's proceedings.
Madam Speaker, I urge my colleagues to support this legislation.
{time} 1700
Mr. PIERLUISI. Madam Speaker, I rise in support of H.R. 3534, the
Security in Bonding Act, and I yield myself such time as I may consume.
H.R. 3534 will strengthen the protection that surety bonds are
intended to provide by requiring individual sureties to use low-risk
cash assets, such as United States bonds, as collateral. At the same
time, H.R. 3534 will require the Government Accountability Office to
assess the impact of these enhanced collateral requirements on the
availability of surety bonds for emerging businesses, and particularly
for disadvantaged business enterprises, seeking to be prime contractors
on Federal projects.
When the Federal Government enters into a contract, the American
taxpayer, as well as those who subcontract with the contractor, should
be protected. That is why, under current law, any Federal construction
contract valued at $150,000 or more requires a surety bond as a
condition of the contract being awarded. The bond will pay the
government and downstream contractors in the event that the contractor
fails to perform the contract.
Bonds issued by so-called ``corporate'' sureties, which have been
vetted and preapproved by the Treasury Department, provide financial
assurance to taxpayers and contractors in the event that a contractor
fails to perform. On the other hand, bonds issued by individual
sureties have not been so vetted and are not subject to strong
collateral requirements.
Accordingly, I support H.R. 3534 for several reasons.
To begin with, any entity that provides a surety bond should be held
to strong underwriting standards. For instance, we know very well what
happens when industries, particularly those involving financing, are
not closely regulated. Consider mortgage lenders, for example. In a
vacuum of regulation, unscrupulous and predatory lenders engaged in
practices that hurt not just their borrowers, but ultimately
jeopardized the Nation's economy and the financial well-being of all
Americans. Measures such as H.R. 3534 are intended to mandate more
reliable collateral standards, which is a commendable goal. Such
strengthened requirements should help to ensure that American taxpayers
are not made to pay for the consequences of undercollateralized bonds.
In addition, this bill will protect so-called ``downstream''
subcontractors and suppliers who very much depend on the economic
vitality and performance of the general contractor and its surety. Many
such downstream subcontractors and suppliers are small businesses owned
by members of historically disadvantaged groups, including racial
minorities, women, and the disabled. Ensuring that unnecessarily
heightened risk is avoided for minority-owned businesses is key to
their economic survival as well as to our Nation's fiscal health.
According to the Commerce Department, these businesses are an
``integral part of local, national, and global business communities.''
Measures such as H.R. 3534 that strengthen collateral requirements
lessen the incidence of poor underwriting practices and undersecured
surety bonds.
Finally, H.R. 3534, as amended in committee, will help to ensure that
it does not result in too much of a good thing. Particularly during
these difficult economic times, our role in Congress should not be to
construct unnecessary or overly burdensome hurdles to those who want to
enter into a particular business or industry.
To the extent that heightened collateral requirements might dissuade
individual sureties from providing bonds on Federal projects, there is
a risk that new businesses may have a more difficult time bidding on
Federal projects. We need to ensure that these businesses continue to
be vital contributors to our Nation's economy, not only as
subcontractors, but also as prime contractors. This is why there was
bipartisan agreement in committee to add language requiring the GAO to,
among other things, assess the impact that the enactment of H.R. 3534
may
[[Page H2678]]
have on disadvantaged business enterprises' ability to successfully bid
on Federal contracts. This analysis will help us monitor whether H.R.
3534 has any unintended consequences in this regard.
I thank Chairman Smith for his willingness to work with us to reach a
mutually agreeable result. I also commend the bill's sponsor,
Representative Richard Hanna, as well as Representative Jared Polis,
the lead Democratic cosponsor, for their leadership on this important
matter.
I reserve the balance of my time.
Mr. SMITH of Texas. Mr. Speaker, I yield 2 minutes to the gentleman
from South Carolina (Mr. Mulvaney) who is an original cosponsor of this
legislation.
Mr. MULVANEY. I thank the gentleman from Texas.
This is not, Mr. Speaker, the most glamorous thing we're going to do
in this 112th Congress. If you stop to think about it, there are not
that many people who are aware of, let alone care about, what kind of
security is offered on surety bonds.
I can assure you, it is important to some people. It really is. If
you are the person who is entering into that contract, who is counting
on somebody doing that work, the quality of that security in that
surety bond is of the utmost importance to you. And as you heard the
gentleman from New York (Mr. Hanna) mention, in certain cases, it could
be a matter of life or death for your business. So I am proud to be the
sponsor of this bill.
But that is not why I rise today, Mr. Speaker. I rise today to bring
to light the fact that we are actually doing something on a bipartisan
basis to help the country. We get a lot of criticism back home--I know
we both do, the Republicans and the Democrats--for not being able to
come together to fix things. And, yes, we do struggle, perhaps, to fix
the big things, and maybe rightly so. We are unlikely to solve the
issue of taxes versus spending here today, but it's nice to know that
we're still able to get together from time to time on the small things.
Face it. It used to be, before this bill, that you could take
marketable coal as collateral on a surety bond. That's outrageous. With
this bill, we'll fix those types of things and actually make it safer
to do business on a government contract. Again, is it the big things
that stand between our country and its current lack of prosperity?
Absolutely not. But it does make business better in the United States
of America.
That's why I congratulate the gentleman from Texas (Mr. Smith) and
the ranking member, Mr. Conyers. I also thank the gentleman from
Missouri (Mr. Graves) and gentlelady from New York (Ms. Velazquez) from
the Small Business Committee who also took a look at this bill and also
passed it on a bipartisan basis.
So with that, Mr. Speaker, I thank the gentleman. I thank my
colleagues from across the aisle for actually coming together today to
try to do something to help the Nation advance. And with that, I
encourage everyone to support this bill.
Mr. PIERLUISI. Mr. Speaker, I have no further requests for time, so I
will yield back the balance of my time.
Mr. SMITH of Texas. Mr. Speaker, I yield back the balance of my time
as well.
Mr. SMITH of Texas. Mr. Speaker, today the House continues its effort
to restore the financial security of our country with consideration of
H.R. 3534, the Security in Bonding Act of 2011. I thank Mr. Hanna for
his sponsorship of this bill and Mr. Gowdy and Mr. Polis, both members
of the Judiciary Committee, for their support as well.
This bill protects the federal government from financial loss as it
improves the effectiveness of surety bonds contractors must post when
they perform construction projects for the United States.
Also, this bill protects small business subcontractors and enhances
the financial security of the United States.
The bill amends federal acquisition law to requre individual sureties
to post only low-risk collateral to back up their bonds. If the prime
contractor defaults, the government and subcontractors will have
recourse to real, stable, valuable assets to make them whole.
The Miller Act, enacted in 1935, requires a contractor to obtain
surety bonds in favor of the government when the contractor undertakes
a construction job worth more than $150,000. These surety bonds protect
not only the United States but also subcontractors whom the prime
contractor hires.
Unlike in the private sector, subcontractors on federal projects have
no mechanic's lien rights; surety bonds are their sole protection.
A bid bond assures the federal contracting officer that the
contractor bids in good faith and will complete the job if it is the
winning bidder.
Similarly, a performance bond guarantees the United States that the
contractor will not walk away from the job even if, for instance, the
contractor found a more lucrative opportunity elsewhere.
The Federal Acquisition Regulation (FAR) currently allows a
contractor to obtain a surety bond through a corporate surety or an
individual surety. Alternatively, a contractor may deposit low-risk
collateral, like T-bills or other cash equivalents, with the government
to cover the project cost.
Corporate surety companies are regulated by the Treasury Department,
which requires the sureties to be sufficiently funded in an amount over
the risk of default on the bonds they underwrite. But individual
sureties are not approved by the Treasury, and they may pledge
collateral whose value may fluctuate. For example, the FAR allows an
individual surety to pledge stocks and bonds or real property.
The lax collateral requirements for individual sureties have
seriously harmed subcontractors and the federal government.
At a hearing on this bill in the Courts, Commerical and
Administrative Law Subcommittee, the President of a minority-owned
construction company in Colorado, testified that they lost $100,000
because the prime contractor's individual surety bond was backed by
valueless assets.
The federal government cannot afford to be left in the lurch because
an individual surety bond proved to be worthless. American taxpayers
deserve a government that acts carefully and with fiscal responsibility
when it spends their money on construction projects.
I urge my colleagues to support this bill.
Mr. COBLE. Mr. Speaker, I rise in support of H.R. 3534.
Surety bonds are financial instruments used to provide financial
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 must also obtain
bid and performance bonds to guarantee the owner that the work will be
performed according to 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 or 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. The contractor can obtain a bond from a corporate surety
approved by the Treasury Department, give the United States a
possessory security interest in low-risk, liquid assets, such as T-
bills, cash, or cash equivalents, or the contractor can secure a bond
from an individual surety.
In recent years, there have been a number of instances in which
individual surety bonds have not provided the security 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 addresses this problem by requiring individual sureties to
pledge low-risk assets. This will benefit government and
subcontractors, who typically get the short end of the stick.
I am happy to report that H.R. 3534 is supported by the American
Subcontractors Association and the National Association of Minority
Contractors.
I urge all members to vote ``yea'' on final passage for H.R. 3534.
The SPEAKER pro tempore (Mr. Chaffetz). The question is on the motion
offered by the gentleman from Texas (Mr. Smith) that the House suspend
the rules and pass the bill, H.R. 3534, as amended.
The question was taken; and (two-thirds being in the affirmative) the
rules were suspended and the bill, as amended, was passed.
A motion to reconsider was laid on the table.
____________________