[Congressional Record (Bound Edition), Volume 158 (2012), Part 5]
[House]
[Pages 6763-6765]
[From the U.S. 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 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

[[Page 6764]]

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 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. 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

[[Page 6765]]

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.

                          ____________________