[Federal Register Volume 60, Number 227 (Monday, November 27, 1995)]
[Proposed Rules]
[Pages 58263-58276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28549]



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SMALL BUSINESS ADMINISTRATION
13 CFR Part 115


Surety Bond Guarantee

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

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SUMMARY: SBA proposes to revise the rules governing the Surety Bond 
Guarantee Program. It seeks to eliminate inconsistencies, clarify 
procedures, accommodate program experience and industry changes, and 
provide for more efficient program operation. It also seeks to clarify 
and shorten regulations where appropriate, eliminate redundant 
provisions, consolidate and reorganize sections, and clarify ambiguous 
language.

DATES: Written comments must be submitted on or before December 27, 
1995.

ADDRESSES: Comments should be sent to David R. Kohler, Regulatory 
Reform Initiative Team Leader (115), U.S. Small Business 
Administration, 409 3rd Street, S.W., Suite 13, Washington, D.C., 
20416.

FOR FURTHER INFORMATION CONTACT: Barbara Brannan, Office of Surety 
Guarantees, (202) 205-6540.

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a 
Memorandum to all federal agencies, directing them to simplify their 
regulations. In response to this 

[[Page 58264]]
directive, SBA has completed a page-by-page, line-by-line review of all 
of its existing regulations to determine which might be revised or 
eliminated. As a result of its review of the regulations governing the 
Surety Bond Guarantee Program, SBA is proposing to eliminate obsolete 
or redundant regulations, substantively revise others, and reorganize 
all of Part 115 in a more readable format.
    As background, the following analysis discusses the anticipated 
effect of this proposed rule on SBA's current regulations.
    Changes to Part 115 are being proposed which would reorganize and 
re-word some of the sections, and consolidate others. Sections, as well 
as subsections within the sections, have been reordered into a more 
logical sequence so that they are easier to follow. The major 
consolidations consist of (1) combining Secs. 115.39 and 115.62 from 
Subparts B and C, respectively, and moving the new section to Subpart A 
(where provisions are applicable to both the Prior Approval and 
Preferred Surety Bond Programs) as new Sec. 115.18 ``Refusal to issue 
further guarantees'' and (2) combining Secs. 115.40 and 115.63 and 
moving the new section to Subpart A as new Sec. 115.21 ``Audits and 
investigations.''
    Substantive changes are also proposed. The most significant change 
is an increase in the fees paid to SBA by participating sureties and 
principals. This is being proposed in an attempt to make the program 
self-financing to overcome uncertainties and fluctuations in the 
funding of the program. In addition, all increases in the contract or 
bond amount will require the payment of additional fees by the 
principal and the surety, and the $40.00 threshold under which fees do 
not need to be paid is proposed to be eliminated. Conversely, all 
decreases in the contract or bond amount will require SBA to reimburse 
the proportionate amount of fees paid by the principal and the surety. 
A brief summary of the primary changes follows.
    Proposed Sec. 115.10, which sets forth definitions of terms used in 
this part, eliminates some current definitions, adds definitions, and 
changes others. ``Investment Act'' is added as a defined term for the 
Small Business Investment Act of 1958, as amended. ``Amount of 
contract'' is eliminated as a defined term and moved to Sec. 115.12(e). 
``Approval or approved'' is proposed to be deleted. ``Contract'' is 
clarified to mean a written obligation and could include an agreement 
to cover defective workmanship, but not defective materials, unless 
agreed to by SBA. ``Contractor'' is eliminated and replaced in the text 
of the regulations by ``Principal,'' which is already defined in the 
current regulations. ``Issuance or issued'' is proposed to be deleted 
because the meaning is vague, and replaced with ``Execution'' which 
more clearly pinpoints the time at which a certain action is taken. In 
the proposed regulations, conforming changes are made throughout the 
text.
    The definition of ``Obligee'' would make clear that the addition of 
co-obligees does not increase the liability of the surety under the 
bond. A new term, ``Prior Approval Surety,'' would be added to refer to 
those sureties that are participants in SBA's program requiring prior 
SBA approval on guarantees. Two new definitions would be added for the 
guarantee agreements in the Prior Approval Program and the PSB Program: 
``Prior Approval Agreement'' would be defined as the guarantee 
agreement (Current SBA Form 990) entered into between a Prior Approval 
Surety and SBA for a specific bond; ``PSB Agreement'' would be defined 
as the agreement authorizing a PSB Surety to participate in the PSB 
program.
    Proposed Sec. 115.11, ``Applying to participate in the Surety Bond 
Guarantee Program,'' is a new section which provides general guidance 
about applying to the Prior Approval and PSB programs.
    Proposed Secs. 115.12 (c) and (d) are currently found in 
Sec. 115.10(c). The latter is proposed to be rewritten into two 
subsections, one concerning the ``Eligibility of Sureties'' and the 
other, the ``Guarantee agreement.''
    Proposed Sec. 115.12(e), ``Amount of Contract,'' is proposed to be 
moved from current Sec. 115.11. This would eliminate the phrase as a 
defined term although the substantive provisions remain the same. 
Within this section, the term ``issuance'' is replaced with 
``Execution'' since this substitution of terms is proposed in 
Sec. 115.10.
    Proposed Sec. 115.12(f) would be a new provision which prohibits 
the sale or transfer of surety files or accounts. This is proposed to 
maintain SBA's control over the accounts in accordance with its 
guarantee agreement with the surety. Without this prohibition, in the 
event of a transfer of files or accounts, SBA might have no control 
over a purchaser's methods of recovery.
    Proposed Sec. 115.13(c) clarifies that a principal must certify 
that a bond is expressly required by the bid solicitation or the 
original contract.
    Proposed Sec. 115.13(e) clarifies the concept that SBA will not 
guarantee bonds for principals who are primarily brokers or 
construction managers, replacing the term ``packagers.''
    Proposed Sec. 115.13(g) is a new provision which reflects current 
practice. This provision states that SBA will not issue a guarantee on 
bonds where the surety, or any of its affiliates, close relatives or 
members of its household, owns 10% or more of the principal.
    The substance of proposed Sec. 115.14 ``Loss of Principal's 
eligibility for future assistance,'' is derived from current 
Sec. 115.34, but is re-worded, and several other instances whereby a 
principal will be ineligible for guaranteed bonds are added. It is 
relocated to Subpart A so that it will apply to both the Prior Approval 
and the PSB Surety Bond Guarantee Programs.
    Proposed Sec. 115.15(a), currently Sec. 115.32(a), specifies the 
underwriting standards to be adhered to by sureties rather than 
requiring sureties to consult the SOP as the current regulation does.
    Proposed Sec. 115.15(b), currently Sec. 115.32(b) concerning 
servicing, imposes a new requirement that sureties monitor the progress 
of principals on bonded contracts guaranteed by SBA to insure that 
additional guarantees are not issued if there are problems with the 
work on hand.
    Proposed Sec. 115.16, ``Calculation of Loss,'' is a new section 
bringing together all provisions dealing with loss amount. ``Loss after 
excess contract amount'' is eliminated as a defined term and the 
substantive provisions moved to new Secs. 115.31(d) and 115.61. ``Loss 
adjustment expense,'' ``Loss from litigation cost'' and ``Loss from 
attorneys' fees and damages'' are restructured into two paragraphs 
setting forth the expenses included in the calculation of loss and 
those that are not. The new paragraphs specify that allowable expenses 
must be itemized and documented and must be attributable solely to the 
loss under the guaranteed bond. In addition, overhead and mark-up on 
expenses are explicitly excluded.
    Proposed Sec. 115.17(a), currently Sec. 115.37(a), is rewritten and 
relocated to Subpart A to apply to both the Prior Approval and 
Preferred Programs. There are also some new provisions. One prohibits 
sureties from separately collateralizing the non-guaranteed portion of 
the bond. Without this provision, a surety would have no incentive to 
pursue recovery since it might be able to recoup 100% of its losses 
from SBA and the collateral securing the unguaranteed portion. Sureties 
would also be prohibited from entering into an agreement by which they 
indemnify a principal since such 

[[Page 58265]]
an agreement would create a conflict of interest; nor could an 
indemnity agreement be obtained from an agent or other representative 
of the surety.
    Proposed Sec. 115.17(b), currently Sec. 115.37(c), makes clear that 
SBA is entitled to its guaranteed share of all salvage and recovery 
related to the guaranteed bond or any other bond provided by the surety 
on behalf of the principal.
    Proposed Sec. 115.18, ``Refusal to issue further guarantees,'' 
would be a consolidation of current Secs. 115.39 and 115.62. In 
addition, the provisions in current Secs. 115.39(a) and 115.62(a) that 
a surety may file a petition for review of certain agency actions is 
proposed to be modified to provide that only suspensions and 
terminations of surety bond guarantee participants are reviewable by 
the SBA Office of Hearings and Appeals.
    Grounds on which SBA may deny liability are scattered throughout 
the current regulations. Proposed Sec. 115.19, ``Denial of liability,'' 
consolidates these provisions (currently found at Secs. 115.10(g), 
115.13, 115.31(c)(2) and 115.64(b)), and some new ones are added. 
Proposed Sec. 115.19(a), ``Excess Contract or bond amount,'' adds, as a 
new reason for denial of liability, the circumstance where the bond 
amount exceeds the contract amount.
    Current Secs. 115.13 (d) and (e)(2) provide that regulatory 
violations or alterations to a bond or contract by a surety which cause 
an increase in the bond liability by more than 25% or $50,000 in the 
aggregate, whichever is less, are grounds on which SBA may deny 
liability under its guarantee. Proposed Secs. 115.19 (d) and (e)(2) 
would provide that such actions which cause an increase in bond 
liability of at least 25% or $50,000 are grounds for denying liability. 
Also proposed Sec. 115.19(e)(2) provides that the sanction applies when 
the increase occurs at one time rather than in the aggregate.
    Current Sec. 115.13(c) provides that material breaches which cause 
an increase in the bond liability in the stated amount are grounds for 
denial. Proposed Secs. 115.19 (c), (d) and (e) would change current 
Secs. 115.13 (c), (d) and (e) by adding, as grounds for denial, 
enumerated actions which cause an increase in the contract amount of at 
least 25% or $50,000.
    Proposed Sec. 115.19(e) rewords current Sec. 115.13(e) and allows 
SBA to deny liability if the surety acquiesces to a material change in 
the contract, in addition to such changes in the bond, as currently 
provided. Proposed Sec. 115.19(e)(2) makes clear that this applies only 
to Prior Approval sureties since PSB sureties do not need SBA's 
approval to make alterations causing increases in the bond liability or 
contract amount.
    Proposed Secs. 115.19 (f) and (g) are moved from current 
Secs. 115.10(g) and 115.31(c)(2), respectively. Proposed Sec. 115.19(f) 
also allows SBA to deny liability if the bond was executed prior to the 
date of SBA's guarantee. The term ``Executed'' is used in place of 
``issuance'' to conform to the changes made in proposed Sec. 115.10 
``Definitions.''
    Proposed Sec. 115.19(h) sets forth ``other regulatory violations'' 
as a basis for SBA to deny liability. These provisions are moved from 
current Sec. 115.64(b) and made applicable to both the Prior Approval 
and PSB programs.
    Proposed Sec. 115.20, ``Insolvency of Surety,'' expands on the 
provision currently in Sec. 115.10(a) concerning insolvent sureties. 
The proposed section would provide that in the event of a surety's 
insolvency, any rights or benefits conferred on a surety under a valid 
Surety Bond Guarantee Agreement (either Prior Approval or PSB) would 
accrue only to the trustee or receiver of the surety and to no other 
party. This provision is currently stated on SBA Form 990. The proposed 
section would also add a new requirement that the trustee or receiver 
submit quarterly status reports to SBA concerning funds received and 
settlements under consideration. This is necessary in order to properly 
monitor claims and recovery situations handled by persons other than 
the surety.
    Proposed Sec. 115.21 is a consolidation of current Secs. 115.40 and 
115.63, both titled ``Audits and investigations.'' This section is 
placed in Subpart A since it is applicable to both Surety Bond 
Guarantee Programs. In addition, the provisions in current 
Secs. 115.40(a) and 115.63(a) that a surety may file a petition for 
review of certain agency actions is proposed to be modified and moved 
into proposed Sec. 115.18. It would provide that only suspensions and 
terminations of PSB sureties are reviewable by the SBA's Office of 
Hearings and Appeals.
    Current Sec. 115.30(b), ``Application for guarantee,'' is proposed 
to be deleted from the regulations and issued as internal guidance. In 
addition, a change would be made to require that an approved form 
(Current Form 1624--Lower Tier Certification form regarding debarment, 
etc.) be submitted for a principal with each application for a bond 
guarantee, not just the initial application. This change is being made 
to reflect the current practice and to be consistent with Part 146 of 
this Title (governing lobbying activities) which mandates the 
submission of information relative to any proposal submitted in 
connection with a lower tier covered transaction.
    Current Sec. 115.30(c), which provides information on the different 
guarantee percentages provided by SBA under the Prior Approval program, 
would be moved to its own section--proposed Sec. 115.31. Section 
115.31(a)(2), which would provide for a 90% guarantee for concerns 
owned and controlled by disadvantaged individuals, refers the reader to 
Part 124 of SBA regulations for information on social and economic 
disadvantage.
    Proposed Sec. 115.30(d) (currently Secs. 115.31(c) and 115.36(f)) 
consolidates the time deadlines and information to be submitted to SBA 
when a final bond has been issued under the Prior Approval program, 
including bonds issued under a bonding line. The Prior Approval 
Agreement (SBA Form 990) would be required, rather than the Surety Bond 
Guarantee Review Update (Form 994C), which is currently suggested to be 
used when final bonds are issued under a bonding line. Because Form 990 
asks for the amount of the premium being charged, and Form 994C does 
not, SBA can use the Form 990 for information it needs to determine the 
fee to be charged to the surety. This change would formalize current 
practice. In the case of final bonds issued other than under a bonding 
line, the deadline for submission of the forms would be changed from 45 
days from award of the contract or issuance of the bond, to 45 days 
from execution of the bond. Forms for bonds issued under a bonding line 
would be required to be submitted within 15 days of execution. This is 
a technical correction to current Sec. 115.31(c) which provides for a 
45 day deadline. (The current provision is contrary to current 
Sec. 115.36(f), which provides 15 days for submission to SBA of final 
bonds issued under a bonding line).
    Proposed Sec. 115.31(b), currently Sec. 115.30(c)(2), clarifies 
that the 80% guarantee applies to contracts, not bonds, of more than 
$100,000.
    The definition of ``Loss after excess contract amount'' which is 
currently under Sec. 115.11, is proposed to be moved to Sec. 115.31(d) 
and renamed ``Contract increase to over $1,250,000.''
    Proposed Sec. 115.31(e), ``Contract decrease to $100,000 or less,'' 
would be a new subsection that provides for an increase in SBA's 
guarantee percentage if the surety demonstrates that the contract 
amount has decreased to $100,000 or less. 

[[Page 58266]]

    Most of the provisions found at current Sec. 115.33 are proposed to 
be deleted since the concepts are covered under proposed Sec. 115.15, 
``Underwriting and servicing standards.'' The prohibition against 
guaranteeing forfeiture bonds is proposed to be incorporated within the 
definition of ``Bid Bond.''
    Proposed Sec. 115.32(b), current Sec. 115.35(b), has several 
changes. First, the fee charged to principals would be raised from 
$6.00 to $8.00 per thousand dollars of the contract amount. Because of 
uncertainties and fluctuations in SBA's budget, an attempt is being 
made to make this program self-financing. Another change involves the 
rounding of the principal's guarantee fee. Currently the contract 
amount is rounded and the fee calculated from that figure. SBA proposes 
to calculate the fee and then round that figure to the nearest dollar. 
This will eliminate cents in the fee and simplify the accounting 
process.
    Proposed Sec. 115.32(c), currently Sec. 115.35(c)(1), would 
likewise raise the surety fee from 20% to 25% of the bond premium. In 
addition, Sec. 115.32(d) would revise the notification requirement 
concerning increases and decreases in the contract or bond amount. The 
surety would be required to notify SBA of every increase or decrease, 
and each increase would require payment of additional fees, unlike the 
current requirement which mandates payment of increased fees only when 
the increases reach a certain threshold. When the original contract or 
bond amount increases at one time by more than 25% or $50,000, 
whichever is less, the prior written approval of the authorized SBA 
officer would be required on a supplemental Form 990. Approval would be 
conditioned on the surety's payment of the additional principal's fee. 
Whether there is an increase or decrease, the proposed rules eliminate 
the current $40.00 threshold before payment is required or reimbursed. 
The threshold is proposed to be eliminated for administrative 
convenience.
    Current Sec. 115.36(c) is proposed to be moved from the regulations 
as not needed and issued in internal guidance.
    Proposed Sec. 115.33(d)(1) is new. It would require sureties to 
submit a ``Surety Bond Guarantee Underwriting Review'' (Current Form 
994B) to SBA for approval within 15 business days after execution of a 
bid bond under a bonding line. If this deadline is not met, this 
section provides that SBA's guarantee is void from its inception unless 
SBA determines otherwise upon a showing that a valid reason exists for 
the delay.
    Proposed Sec. 115.33(d)(2), which sets forth a 15 day deadline for 
submission of what is now Form 994B (or 994C if 994B is already on 
file) on final bonds, is moved from current Sec. 115.36(f).
    Proposed Sec. 115.33(e), ``Cancellation,'' is moved from current 
Sec. 115.36(h) and clarifies that the surety is required to notify SBA 
of any adverse information concerning a principal. Upon receipt, SBA 
may cancel the principal's bonding line.
    Proposed Sec. 115.34(a), ``Imminent Breach,'' would provide that 
the aggregate of payments made by SBA to a surety to avoid imminent 
breach cannot exceed 10% of the contract price. This would be a change 
from current Sec. 115.37(b)(1) which provides that no payment by SBA to 
avoid imminent breach will exceed 10%. The current provision that the 
Administrator can approve payments exceeding 10%, and that in no event 
will SBA pay an amount exceeding its guaranteed share of the bond 
penalty, is likewise changed to reflect that amounts will be aggregated 
in determining when the Administrator's approval is needed and when 
SBA's guaranteed share of the bond penalty will be exceeded.
    Proposed Sec. 115.34(b), ``Salvage and recovery,'' (currently 
Sec. 115.37(c)) adds a new requirement. If a surety recommends 
settlement to SBA or recommends that pursuit of salvage or recovery be 
discontinued, the surety would have to certify that pursuing recovery 
is neither economically feasible nor a viable strategy in maximizing 
recovery.
    Proposed Sec. 115.35 ``Claims for Losses,'' is based on current 
Secs. 115.38 and 115.34, but also adds some new provisions. First, 
there is a requirement that the surety notify SBA within 30 days of 
acquiring knowledge of specified adverse circumstances concerning a 
principal. Another subsection requires the surety to take action to 
mitigate losses and expenses due to such adverse circumstances and to 
handle claims and suits arising from a defaulted bond. The requirement 
that the surety submit semiannual status reports on claims is retained, 
but a requirement that SBA also be notified immediately of any 
substantial changes, is added. Lastly, proposed Sec. 115.35(e) provides 
that payment by SBA on a claim submitted by a surety does not waive or 
invalidate the terms of the Prior Approval Agreement or any defenses 
SBA may have. In addition, if SBA determines that it should not have 
paid any portion of a claim, the surety must reimburse SBA that amount 
within 30 days of being so notified.
    Proposed Sec. 115.36, ``Indemnity settlements and reinstatement of 
Principal,'' has two subsections taken from current Sec. 115.34 
concerning conditions for reinstatement of a principal that has become 
ineligible for further bond guarantees, and guidance on underwriting 
for a principal after reinstatement. It also has a new section on 
indemnity settlements, requiring a Prior Approval surety to provide SBA 
with certain documents relevant to making a determination on a 
settlement proposal. The surety would also have to obtain SBA's 
concurrence before agreeing to a settlement. This section retains the 
provision in current Sec. 115.38 that the surety must pay SBA its pro 
rata share of the settlement amount within 90 days of receipt. A new 
provision is proposed which would require the surety to certify that 
SBA has received its share of all indemnity recovery before closing the 
file.
    Current Sec. 115.39, ``Refusal to issue further guarantees,'' is 
proposed to be combined with Sec. 115.62, ``Qualifications of surety,'' 
and moved to Subpart A and renumbered Sec. 115.18.
    Current Sec. 115.40, ``Audits and investigations,'' is proposed to 
be combined with Sec. 115.63, and moved to Subpart A and renumbered 
Sec. 115.21.
    The information on applying to be a PSB surety currently found at 
Sec. 115.60(a) is proposed to be moved to new Sec. 115.11 which sets 
forth information on applying to either the Prior Approval or PSB 
program.
    Proposed Secs. 115.60 (a), (c) and (d) set forth under Subpart C 
the provisions stated at current Secs. 115.10 (d), (e) and (f) 
regarding the selection of sureties for the PSB program, duration of 
the program and prohibition of PSB sureties against participating in 
the Prior Approval program. This also serves to consolidate certain 
information concerning the preferred program found currently in Subpart 
A. The sunset provision at proposed Sec. 115.60(c) has been changed to 
September 30, 1997, which is when the PSB program is currently set to 
expire unless extended by Congress.
    Proposed Sec. 115.60(e), ``Allotment of guarantee authority,'' is 
moved from current Sec. 115.60(b). The proposed subsection clarifies 
that where a bid bond is executed by the PSB surety and (1) the 
contract is awarded for an amount other than the bid amount, (2) the 
bid is withdrawn or (3) the bond has expired, the allotment will be 
debited or credited accordingly. Where the surety did not execute a 
related bid bond, a new provision provides that the 

[[Page 58267]]
guarantee percentage of the penal sum of a guaranteed final bond will 
count against the allotment.
    Proposed Sec. 115.60(f), ``Timeliness,'' is new, and provides that 
a PSB surety may not execute a bond after commencement of work under a 
contract unless the surety receives the written approval of the 
Associate Administrator for Surety Guarantees.
    Proposed Sec. 115.60(g)(1), currently Sec. 115.60(c)(1), concerning 
the retention of certifications and records for inspection by SBA, has 
a new provision requiring such documents to be retained for the term of 
the bond, plus time required to settle claims and an additional three 
years thereafter. This requirement corresponds with the current 
document retention requirement for purposes of SBA-conducted audits. 
(See current Secs. 115.40(b) and 115.63(b), and proposed 
Sec. 115.19(b)). The proposed section also provides that documentation 
must be retained until any unresolved audit findings are resolved.
    Proposed Sec. 115.60(g)(4), currently Sec. 115.60(c)(3), would 
raise the PSB surety's fee and principal's guarantee fee to 25% of the 
premium and $8.00 per thousand dollars of the contract amount, 
respectively. As with the Prior Approval program, these fee increases 
are being recommended in an attempt to make the program self-financing.
    The proposed rules at Sec. 115.60(g)(5)(i) would eliminate the 
provision at current Sec. 115.60(c)(6)(i) which requires payment of 
additional fees only when aggregate increases of the bond liability 
exceed 25% or $50,000, whichever is less. Instead, additional fees will 
be required to be paid on any amount of increase. Correspondingly, 
under proposed Sec. 115.60(g)(5)(ii), any amount of decrease in fees 
will be reimbursed by SBA. These sections also make clear that the 
provisions apply to increases in either the contract or bond amount.
    Whether there is an increase or decrease in the fees, the proposed 
rules eliminate the current $40.00 threshold (see current 
Secs. 115.60(c)(6)(i) and (6)(ii)) before payment is required or 
reimbursed. The threshold is proposed to be eliminated for 
administrative convenience.
    The substance of proposed Sec. 115.61 is moved from current 
Sec. 115.64(a), ``Percentage of indemnification,'' given its own 
section number and renamed ``Guarantee percentage.''
    Current Sec. 115.62 is proposed to be consolidated with current 
Sec. 115.39, moved to Subpart A and renumbered as Sec. 115.18.
    Proposed Sec. 115.62, ``Imminent Breach,'' is moved from current 
Sec. 115.61(b) and given its own section number. A provision would be 
added limiting SBA's aggregate payments to PSB sureties to avoid 
imminent breach to 10% of the contract price. Also added is a provision 
that the Administrator could approve payments exceeding the 10% 
ceiling, and that in no event would SBA reimburse imminent breach 
payments in an aggregate amount exceeding its guaranteed share of the 
bond penalty. These are added to conform to the limitations set by 
statute. The current provision that SBA's guaranteed share of the 
aggregate of imminent breach payments and of indemnification against 
loss is limited to SBA's guaranteed share of the bond penalty, is 
proposed to be deleted. This provision is unnecessary in light of the 
restrictions on imminent breach payments discussed above.
    Current Sec. 115.63 is proposed to be consolidated with current 
Sec. 115.40, moved to Subpart A and renumbered as Sec. 115.21 ``Audits 
and investigations.''
    Proposed Sec. 115.63, ``Claims for Losses,'' would have two new 
subsections, taken from the Prior Approval program. Subsection (b) 
directs the surety to take the necessary steps for mitigation of losses 
and expenses and to take charge of claims and suits arising from 
defaulted bonds, both in a manner consistent with the surety's 
practices on non-guaranteed bonds. This is consistent with current 
practice. Subsection (c) provides that payment by SBA on a claim 
submitted by a surety does not waive or invalidate the terms of the PSB 
Agreement or any defenses SBA may have. This subsection also provides 
that if SBA determines that it should not have paid any portion of a 
claim, the surety must reimburse SBA that amount within 30 days of 
being so notified.
    Proposed Sec. 115.64, ``Denial of liability,'' would be moved from 
current Sec. 115.64(b) and given its own section number. Redundant 
provisions would be deleted.

Compliance With Executive Orders 12778, 12612 and 12866, the Regulatory 
Flexibility Act and the Paperwork Reduction Act

    SBA certifies that this proposed rule, if adopted, would not 
constitute a significant regulatory action for purposes of Executive 
Order 12866, since it is not likely to result in an annual effect on 
the economy of $100 million or more.
    For purposes of the Regulatory Flexibility Act, 5 U.S.C. 604, SBA 
has determined that these rules would not have a significant impact on 
a substantial number of small entities. Although fee increases are 
proposed, it is SBA's opinion that the increases would not have a 
significant impact on either the principals or the sureties. The fees 
paid by principals (small business contractors requiring guaranteed 
bonds) would increase from $6.00 to $8.00 per thousand dollars of the 
contract to be bonded. Under this increase, an average contract of 
$161,251 would impose a fee of $1290 rather than $968, a $322 increase. 
A surety company typically charges a contractor a bond premium of 2.15% 
of the bond amount. SBA currently charges the surety 20% of the premium 
for SBA's guarantee. It is proposed that this fee be raised to 25%. On 
an average final bond, SBA's charge to the surety would increase from 
$694 to $867, a $173 increase.
    There are no reporting, recordkeeping and other compliance 
requirements not approved by the Office of Management and Budget which 
would come under the Paperwork Reduction Act, 44 U.S.C. Ch. 35.
    SBA certifies that this rule is drafted, to the extent practicable, 
in accordance with the standards set forth in Section 2 of Executive 
Order 12778.
    SBA certifies that these rules do not warrant the preparation of a 
Federal Assessment in accordance with Executive Order 12612.

List of Subjects in 13 CFR Part 115

    Small business, Surety bonds.

    For the above reasons, SBA proposes to revise Part 115, Title 13 of 
the Code of Federal Regulations, as follows:

PART 115--SURETY BOND GUARANTEE

115.1  Overview of regulations.
115.2  Savings clause.

Subpart A--Provisions For All Surety Bond Guarantees

115.10  Definitions.
115.11  Applying to participate in the Surety Bond Guarantee 
Program.
115.12  Program Provisions.
115.13  Eligibility of Principal.
115.14  Loss of Principal's eligibility for future assistance.
115.15  Underwriting and servicing standards.
115.16  Determination of Loss.
115.17  Minimization of Surety's Loss.
115.18  Refusal to issue further guarantees; suspension and 
termination of PSB status.
115.19  Denial of liability.
115.20  Insolvency of Surety.
115.21  Audits and investigations.

Subpart B--Guarantees Subject to Prior Approval

115.30  Submission of Surety's guarantee application.
115.31  Guarantee percentage.

[[Page 58268]]

115.32  Fees and Premiums.
115.33  Surety bonding line.
115.34  Minimization of Surety's Loss.
115.35  Claims for reimbursement of Losses.
115.36  Indemnity settlements and reinstatement of Principal.

Subpart C--Preferred Surety Bond (PSB) Guarantees

115.60  Procedures for PSB Program.
115.61  Guarantee percentage.
115.62  Imminent Breach.
115.63  Claims for reimbursement of Losses.
115.64  Denial of liability.

    Authority: Title IV, Part B, and sections 310(a) and 311, of the 
Small Business Investment Act of 1958, as amended (15 U.S.C. 687b 
and c, 694a, 694b), the Inspector General Act of 1978 (5 U.S.C. app. 
3), Pub. L. 100-590, Title II, and Pub. L. 101-574, Sec. 216.


Sec. 115.1  Overview of regulations.

    The regulations in this part cover the SBA's Surety Bond Guarantee 
Programs under Part B of Title IV of the Small Business Investment Act 
of 1958, as amended (the Investment Act). Subpart A contains 
regulations common to both the program requiring prior SBA approval of 
each bond guarantee (the Prior Approval Program) and the program not 
requiring prior approval (the PSB Program). Subpart B contains the 
regulations applicable only to the Prior Approval Program. Subpart C 
contains the regulations applicable only to the PSB Program.


Sec. 115.2  Savings clause.

    Transactions affected by this Part 115 are governed by the 
regulations in effect at the time they occur.

Subpart A--Provisions for all Surety Bond Guarantees


Sec. 115.10  Definitions.

    AA/SG means SBA's Associate Administrator for Surety Guarantees.
    Affiliate is defined in part 121.
    Ancillary Bond means a bond incidental and essential to the 
performance of a Contract for which there is a guaranteed Final Bond.
    Bid Bond means a bond conditioned upon the bidder on a Contract 
entering into the Contract, and furnishing the required Payment and 
Performance Bonds. The term does not include a forfeiture bond unless 
it is issued for a jurisdiction where statute or settled decisional law 
requires forfeiture bonds for public works.
    Contract means a written obligation of the Principal requiring the 
furnishing of services, supplies, labor, materials, machinery, 
equipment, or construction. The term does not include a permit, 
subdivision contract, lease, land contract, evidence of debt, financial 
guarantee (e.g., a contract requiring any payment by the Principal to 
the Obligee), warranty of performance or efficiency, warranty of 
fidelity, or release of lien (other than for claims under a guaranteed 
bond). It can include an agreement of 2 years or less solely to cover 
defective workmanship. It can also include an agreement to cover 
defective workmanship which is ancillary to another Contract described 
in this paragraph if it must be performed by the same Principal, is 
customarily required in the relevant trade or industry, and SBA's 
written approval has been obtained.
    Execution means signing by a representative or agent of the Surety 
with the authority and power to bind the Surety.
    Final Bond means a Performance Bond or a Payment Bond.
    Imminent Breach means a threat to the successful completion of a 
bonded Contract which, unless remedied by the Surety, makes a default 
under the bond appear to be inevitable.
    Investment Act means the Small Business Investment Act of 1958, as 
amended.
    Loss has the meaning set forth in Sec. 115.16.
    Obligee means:
    (1)(i) In the case of a Bid Bond, the Person requesting bids for 
the performance of a Contract; or
    (ii) In the case of a Final Bond, the Person who has contracted 
with a Principal for the completion of the Contract and to whom the 
primary obligation of the Surety runs in the event of a breach by the 
Principal.
    (2) In either case, no Person (other than a Federal department or 
agency) may be named co-Obligee or Obligee on a bond or on a rider to 
the bond unless that Person is bound by the Contract to the Principal 
(or to the Surety, if the Surety has arranged completion of the 
Contract) to the same extent as the original Obligee. In no event may 
the addition of one or more co-Obligees increase the aggregate 
liability of the Surety under the bond.
    OSG means SBA's Office of Surety Guarantees.
    Payment Bond means a bond which is conditioned upon the payment by 
the Principal of money to persons who have a right of action against 
such bond, including those who have furnished labor, materials, 
equipment and supplies for use in the performance of the Contract.
    Performance Bond means a bond conditioned upon the completion by 
the Principal of a Contract in accordance with its terms.
    Person means a natural person or a legal entity.
    Premium means the amount charged by a Surety to issue bonds. The 
Premium is determined by applying an approved rate (see Secs. 115.32(a) 
and 115.60(a)) to the bond or contract amount. The Premium does not 
include surcharges for extra services, whether or not considered part 
of the ``premium'' under local law.
    Principal means, in the case of a Bid Bond, the Person bidding for 
the award of a Contract. In the case of Final Bonds and Ancillary 
Bonds, Principal means the Person primarily liable to complete the 
Contract, or to make Contract-related payments to other persons, and is 
the Person whose performance or payment is bonded by the Surety. A 
Principal may be a prime contractor or a subcontractor.
    Prior Approval Agreement means the Surety Bond Guarantee Agreement 
(SBA Form 990) entered into between a Prior Approval Surety and SBA 
under which SBA agrees to guarantee a specific bond.
    Prior Approval Surety means a Surety which must obtain SBA's prior 
approval on each guarantee and which has entered into one or more Prior 
Approval Agreements with SBA.
    PSB Agreement means the Preferred Surety Bond Guarantee Agreement 
entered into between a PSB Surety and SBA.
    PSB Surety means a Surety that has been admitted to the Preferred 
Surety Bond (PSB) Program.
    Surety means a company which
    (1)(i) Under the terms of a Bid Bond, agrees to pay a sum of money 
to the Obligee if the Principal breaches the conditions of the bond;
    (ii) Under the terms of a Performance Bond, agrees to pay a sum of 
money or to incur the cost of fulfilling the terms of a Contract if the 
Principal breaches the conditions of the Contract; and
    (iii) Under the terms of a Payment or an Ancillary Bond, agrees to 
make payment to all who have a right of action against such bond, 
including those who have furnished labor, materials, equipment and 
supplies in the performance of the Contract.
    (2) The term Surety includes an agent, independent agent, 
underwriter, or any other company or individual empowered to act on 
behalf of the Surety.


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

    Sureties interested in participating as Prior Approval Sureties or 
PSB Sureties should apply in writing to the AA/SG at 409 3rd Street, 
SW, Washington, DC 20416. OSG will determine the 

[[Page 58269]]
eligibility of the applicant considering its standards and procedures 
for underwriting, administration, claims recovery, and whether it is a 
corporation listed by the U.S. Treasury as eligible to issue bonds in 
connection with Federal procurement contracts.


Sec. 115.12  Program provisions.

    (a) Description of Surety Bond Guarantee Programs. SBA guarantees 
Sureties participating in the Surety Bond Guarantee Programs against a 
portion of their Losses incurred and paid as a result of a Principal's 
breach of the terms of a Bid, Payment, Performance or Ancillary Bond, 
on any eligible Contract. A Contract must not prohibit a Surety from 
performing the Contract upon default of the Principal. In the Prior 
Approval Program, the Surety must obtain SBA's approval before a 
guaranteed bond can be issued. In the PSB Program, selected Sureties 
may issue, monitor, and service SBA guaranteed bonds without further 
SBA approval.
    (b) Eligibility of bonds. Bid, Performance, and Payment Bonds 
(other than bonds in the nature of a financial guarantee) are eligible 
for an SBA guarantee if they are executed in connection with a Contract 
and are of a type listed in the ``Contract Bonds'' section of the 
current Rating Manual of the Surety Association of America (100 Wood 
Avenue South, Iselin, New Jersey 08830). Ancillary Bonds may also be 
eligible for SBA's guarantee. A Payment Bond cannot be issued unless a 
Performance Bond is issued at the same time. A Performance Bond must 
not prohibit a Surety from performing the Contract upon default of the 
Principal.
    (c) Expiration of Bid Bond Guarantee. A Bid Bond guarantee expires 
120 days after Execution of the Bid Bond, unless the Surety notifies 
SBA in writing before the 120th day that a later expiration date is 
required. The notification must include the new expiration date.
    (d) Guarantee agreement. The terms and conditions of SBA's bond 
guarantee agreements, including the guarantee percentage, may vary from 
Surety to Surety, depending on past experience with SBA. If the 
guarantee percentage is not fixed by the Act, it is determined by OSG 
after considering, among other things, the rating or ranking assigned 
to the Surety by recognized authority, and the Surety's Loss rate, 
average Contract amount, average bond penalty per guaranteed bond, and 
ratio of Bid Bonds to Final Bonds, all in comparison with other 
Sureties participating in the same SBA Surety Bond Guarantee Program 
(Prior Approval or PSB) to a comparable degree. Any guarantee agreement 
under this part is made exclusively for the benefit of SBA and the 
Surety, and does not confer any rights (such as a right of action 
against SBA) or benefits on any other party.
    (e) Amount of Contract. (1) Statutory ceiling. The amount of the 
Contract to be bonded must not exceed $1,250,000 in face value at the 
time of the bond's Execution.
    (2) Aggregation of Contract amounts. The amounts of two or more 
Contracts for a ``single project'' are aggregated to determine the 
Contract amount unless the Contracts are to be performed in phases and 
the prior bond is released before the beginning of each succeeding 
phase. A bond may be considered released even if the warranty period it 
is covering has not yet expired. For purposes of this paragraph, a 
``single project'' means one represented by two or more Contracts of 
one Principal or its Affiliates with one Obligee or its Affiliates for 
performance at the same locality, irrespective of job title or nature 
of the work to be performed.
    (3) Service and supply contracts. A service or supply Contract 
covering more than a 1 year period is eligible if the annual Contract 
amount and the penal sum of the bond do not exceed $1,250,000 at any 
time.
    (f) Transfers or sales by Surety. Sureties must not sell or 
otherwise transfer their files or accounts, whether before or after a 
default by the Principal has occurred. A violation of this provision is 
grounds for termination from participation in the program.


Sec. 115.13  Eligibility of Principal.

    In order to be eligible for a bond guaranteed by SBA, the Principal 
must comply with the following requirements:
    (a) Size. Together with its Affiliates, it must qualify as a small 
business under part 121 of this title.
    (b) Character. It must possess good character and reputation. A 
Principal meets this standard if each owner of 20% or more of its 
equity, and each of its officers, directors, or general partners 
possesses good character and reputation. Good character and reputation 
is presumed absent when:
    (1) Any such Person is under indictment for, or has been convicted 
of a felony, or a final civil judgment has been entered stating that 
such Person has committed a breach of trust or has violated a law or 
regulation protecting the integrity of business transactions or 
business relationships; or
    (2) A regulatory authority has revoked, canceled, or suspended a 
license of such Person which is necessary to perform the Contract; or
    (3) Any such Person has obtained a bond guarantee by fraud or 
material misrepresentation (as described in Sec. 115.18(b)), or has 
failed to keep the Surety informed of unbonded contracts or of a 
contract bonded by another Surety as required by a bonding line 
commitment under Sec. 115.33.
    (c) Need for bond. It must certify that a bond is expressly 
required by the bid solicitation or the original Contract in order to 
bid on the Contract or to serve as a prime contractor or subcontractor.
    (d) Availability of bond. It must certify that a bond is not 
obtainable on reasonable terms and conditions without SBA's bond 
guarantee assistance.
    (e) Partial subcontract. It must certify the percentage of work 
under the Contract to be subcontracted. SBA will not guarantee bonds 
for Principals who are primarily brokers or construction managers.
    (f) Debarment. It must certify that the Principal is not presently 
debarred, suspended, proposed for debarment, declared ineligible, or 
voluntarily excluded from transactions with any Federal department or 
agency, under governmentwide debarment and suspension rules.
    (g) Conflict of interest. Neither the Surety, nor an Affiliate of 
the Surety, or a close relative or member of the household of the 
Surety or Affiliate can own, directly or indirectly, 10% or more of the 
Principal. This prohibition also applies to ownership interests in any 
of the Principal's Affiliates. Where such ownership equals or exceeds 
10%, SBA will not issue a guarantee.


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

    (a) Ineligibility. A Principal and its Affiliates lose eligibility 
for further SBA bond guarantees if any of the following occurs:
    (1) Legal action under the guaranteed bond has been initiated.
    (2) The Obligee has declared the Principal to be in default under 
the Contract.
    (3) The Surety has established a claim reserve for the bond in 
excess of $100.
    (4) The Surety has requested reimbursement for Losses incurred 
under the bond.
    (5) The guarantee fee has not been paid by the Principal.
    (6) The Principal has committed fraud or material misrepresentation 
in obtaining a guaranteed bond.
    (b) Reinstatement. Prior Approval Sureties should refer to 
Sec. 115.36(b) for provisions on reinstatement of the Principal's 
eligibility. 

[[Page 58270]]



Sec. 115.15  Underwriting and servicing standards.

    (a) Underwriting. Sureties must evaluate the credit, capacity, and 
character of a Principal using standards generally accepted by the 
surety industry and in accordance with SBA's principles and practices 
and the Surety's principles and practices on unguaranteed bonds. There 
must be a reasonable expectation that the Principal will successfully 
perform the Contract to be bonded. The terms and conditions of the bond 
and the Contract must be reasonable in light of the risks involved and 
the extent of the Surety's participation. The Principal must satisfy 
the eligibility requirements set forth in Sec. 115.13. The bond must 
satisfy the eligibility requirements set forth in Sec. 115.12(b). The 
Surety and SBA must be satisfied as to the reasonableness of cost and 
the feasibility of successful completion of the Contract. The Contract 
should be the same in type and size as those contracts previously 
completed by the Principal. Contracts for those who have not previously 
had SBA guaranteed bonds should not exceed 150% of that Principal's 
largest successfully completed contract. The work to be performed 
should be within the Principal's normal geographical area of operations 
and area of expertise.
    (b) Servicing. The Surety must ensure that the Principal remains 
viable and eligible for SBA's Surety Bond Guarantee Program, must 
monitor the Principal's progress on bonded Contracts guaranteed by SBA, 
and must obtain job status reports from Obligees of Final Bonds 
guaranteed by SBA.


Sec. 115.16  Determination of Loss.

    (a) Loss under Bid Bond is the lesser of the penal sum or the 
amount which is the difference between the bonded bid and the next 
higher responsive bid. In either case, the Loss is reduced by any 
amounts recovered by reason of the Principal's defenses against the 
Obligee's demand for performance by the Principal and any sums 
recovered from indemnitors and other salvage.
    (b) Loss under Payment Bond is, at the Surety's option, the sum 
necessary to pay all just and timely claims against the Principal for 
the value of labor, materials, equipment and supplies furnished for use 
in the performance of the bonded Contract and other covered debts, or 
the penal sum of the Payment Bond. In either case, the Loss includes 
interest (if any), but Loss is reduced by any amounts recovered 
(through offset or otherwise) by reason of the Principal's claims 
against laborers, materialmen, subcontractors, suppliers, or other 
rightful claimants, and by any amounts recovered from indemnitors and 
other salvage.
    (c) Loss under Performance Bond is, at the Surety's option, the sum 
necessary to meet the cost of fulfilling the terms of a bonded Contract 
or the penal sum of the bond. In either case, the Loss includes 
interest (if any), but Loss is reduced by any amounts recovered 
(through offset or otherwise) by reason of the Principal's defenses or 
causes of action against the Obligee, and by any amounts recovered from 
indemnitors and other salvage.
    (d) Loss under Ancillary Bond is the amount covered by such bond 
which is attributable to the Contract for which guaranteed Payment or 
Performance Bonds were Executed.
    (e) Loss includes the following expenses if they are itemized, 
documented and attributable solely to the Loss under the guaranteed 
bond:
    (1) Amounts actually paid by the Surety which are specifically 
allocable to the investigation, adjustment, negotiation, compromise, 
settlement of, or resistance to a claim for Loss resulting from the 
breach of the terms of the bonded Contract. Any cost allocation method 
must be reasonable and must comply with generally accepted accounting 
principles; and
    (2) Amounts actually paid by the Surety for court costs and 
reasonable attorney's fees incurred to mitigate any Loss under 
paragraphs (a) through (e)(1) of this section including suits to obtain 
sums due from Obligees, indemnitors, Principals and others.
    (f) Loss does not include the following expenses:
    (1) Any unallocated expenses, or any mark-up on expenses or any 
overhead of the Surety, its attorney, or any other party;
    (2) Expenses paid for any suits, cross-claims, or counterclaims 
filed against the United States of America or any of its agencies, 
officers, or employees unless the Surety has received, prior to filing 
such suit or claim, written concurrence from SBA that such suit may be 
filed;
    (3) Attorney's fees and court costs incurred by the Surety in a 
suit by or against SBA or its Administrator; and
    (4) Fees, costs, or other payments, including tort damages, arising 
from a successful tort suit or claim by a Principal or any other Person 
against the Surety.


Sec. 115.17  Minimization of Surety's Loss.

    (a) Indemnity agreements and collateral. (1) Requirements. The 
Surety must take all reasonable action to minimize risk of Loss 
including, but not limited to, obtaining from each Principal a written 
indemnity agreement which covers actual Losses under the Contract and 
Imminent Breach payments under Sec. 115.34(a) or Sec. 115.62. The 
indemnity agreement must be secured by such collateral as the Surety or 
SBA finds appropriate. Indemnity agreements from other Persons, secured 
or unsecured, may also be required by the Surety or SBA.
    (2) Prohibitions. No indemnity agreement may be obtained from the 
Surety, its agent or any other representative of the Surety. The Surety 
must not separately collateralize the portion of its bond which is not 
guaranteed by SBA.
    (b) Salvage and recovery. (1) General. The Surety must pursue all 
possible sources of salvage and recovery. Salvage and recovery includes 
all payments made in settlement of the Surety's claim, even though the 
Surety has incurred other losses as a result of that Principal which 
are not reimbursable by SBA.
    (2) SBA's share. SBA is entitled to its guaranteed percentage of 
all salvage and recovery from a defaulted Principal, its guarantors and 
indemnitors, and any other party, received by the Surety in connection 
with the guaranteed bond or any other bond issued by the Surety on 
behalf of the Principal. The Surety must reimburse or credit SBA (in 
the same proportion as SBA's share of Loss) within 90 days of receipt 
of any recovery by the Surety.
    (3) Multiple Sureties. In any dispute between two or more Sureties 
concerning recovery under SBA guaranteed bonds, the dispute must first 
be brought to the attention of OSG for an attempt at mediation and 
settlement.


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

    (a) Improper surety bond guarantee practices. (1) SBA may refuse to 
issue further guarantees to a Prior Approval Surety or may suspend the 
preferred status of a PSB Surety, by written notice stating all reasons 
for such decision and the effective date. Reasons for such a decision 
include, but are not limited to, a determination that the Surety (in 
its underwriting, its efforts to minimize Loss, its claims or recovery 
practices, or its documentation related to SBA guaranteed bonds) has 
failed to adhere to prudent standards or practices, including any 
standards or practices required by SBA, as compared to those of other 
Sureties participating in the same SBA Surety Bond Guarantee Program to 
a comparable degree. Acts of wrongdoing such as fraud, material 
misrepresentation, breach of the Prior 

[[Page 58271]]
Approval or PSB Agreement, or regulatory violations (as defined in 
Secs. 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.
    (2) The failure of a Surety to consent to SBA's audit or to 
maintain and produce records constitutes grounds for SBA to refuse to 
issue further guarantees for a Prior Approval Surety, to suspend a PSB 
Surety from participation, and to refuse to honor claims submitted by a 
Prior Approval or PSB Surety until the Surety consents to the audit.
    (3) SBA may also require the renegotiation of the guarantee 
percentage and/or SBA's charge to the Surety if a Surety experiences 
excessive Losses on SBA guaranteed bonds relative to those of other 
Sureties participating in the same SBA Surety Bond Guarantee Program to 
a comparable degree.
    (b) Lack of business integrity. A Surety's participation in the 
Surety Bond Guarantee Programs may be denied, suspended, or terminated 
upon the occurrence of any event in paragraphs (b) (1) through (5) of 
this section involving any of the following Persons: the Surety or any 
of its officers, directors, partners, or other individuals holding at 
least 20% of the Surety's voting securities, and any agents, 
underwriters, or any individual empowered to act on behalf of any of 
the preceding Persons.
    (1) If a State or other authority has revoked, canceled, or 
suspended the license required of such Person to engage in the surety 
business, the right of such Person to participate in the SBA Surety 
Bond Guarantee Program may be denied, terminated, or suspended, as 
applicable, in that jurisdiction or in other jurisdictions. 
Ineligibility or suspension from the Surety Bond Guarantee Programs is 
for the duration of the license suspension.
    (2) If such Person has been indicted or otherwise formally charged 
with a misdemeanor or felony bearing on such Person's fitness to 
participate in the Surety Bond Guarantee Programs, the participation of 
such Person may be suspended pending disposition of the charge. Upon 
conviction, participation may be denied or terminated.
    (3) If a final civil judgment is entered holding that such Person 
has committed a breach of trust or violation of a law or regulation 
protecting the integrity of business transactions or relationships, 
participation may be denied or terminated.
    (4) If such Person has made a material misrepresentation or 
willfully false statement in the presentation of oral or written 
information to SBA in connection with an application for a surety bond 
guarantee or the presentation of a claim, or committed a material 
breach of the Prior Approval or PSB Agreement or a material violation 
of the regulations (all as described in Sec. 115.19), participation may 
be denied or terminated.
    (5) If such Person is debarred, suspended, voluntarily excluded 
from, or declared ineligible for participation in Federal programs, 
participation may be denied or terminated.
    (c) Notification requirement. The Prior Approval or PSB Surety must 
promptly notify SBA of the occurrence of any event in paragraphs (b) 
(1) through (5) of this section, or if any of the Persons described in 
paragraph (b) does not, or ceases to, qualify as a Surety. SBA may 
require submission of a Statement of Personal History from any of these 
Persons.
    (d) SBA proceedings. Decisions to suspend, terminate, deny 
participation in, or deny reinstatement in the Surety Bond Guarantee 
program are made by the AA/SG. A Surety may file a petition for review 
of suspensions and terminations with the SBA Office of Hearings and 
Appeals (OHA) under part 134. SBA's Administrator may, pending a 
decision pursuant to Part 134, suspend the participation of any Surety 
for any of the causes listed in paragraphs (b) (1) through (5) of this 
section.
    (e) Effect on guarantee. A guarantee issued by SBA before a 
suspension or termination under this section remains in effect, subject 
to SBA's right to deny liability under the guarantee.


Sec. 115.19  Denial of liability.

    In addition to equitable and legal defenses and remedies under 
contract law, the Act and the regulations in this part, SBA is not 
liable under any actual or purported Prior Approval or PSB Agreement if 
any of the circumstances in paragraphs (a) through (h) exist.
    (a) Excess Contract or bond amount. The total Contract amount at 
the time of Execution of the bond(s) exceeds $1,250,000 in face value 
(see Sec. 115.12(e)), or the bond amount at any time exceeds the total 
Contract amount as established at the time of the bond's Execution.
    (b) Misrepresentation or fraud. The Surety obtained the Prior 
Approval or PSB Agreement, or applied for reimbursement for losses, by 
fraud or material misrepresentation. Material misrepresentation 
includes (but is not limited to) both the making of an untrue statement 
of material fact and the omission of a statement of material fact 
necessary to make a statement not misleading in light of the 
circumstances in which it was made. Material misrepresentation also 
includes the adoption by the Surety of a material misstatement made by 
others which the Surety knew or under generally accepted underwriting 
standards should have known to be false or misleading. The Surety's 
failure to disclose its ownership (or the ownership by any owner of at 
least 20% of the Surety's equity) of an interest in a Principal or an 
Obligee is considered the omission of a statement of material fact.
    (c) Material breach. The Surety has committed a material breach of 
one or more terms or conditions of its Prior Approval or PSB Agreement. 
A material breach is considered to have occurred if:
    (1) Such breach (or such breaches in the aggregate) causes an 
increase in the Contract amount or in SBA's bond liability of at least 
25% or $50,000, whichever is less; or
    (2) One of the statutory conditions is not met.
    (d) Substantial regulatory violation. The Surety has committed a 
``substantial violation'' of SBA regulations. For purposes of this 
paragraph, a ``substantial violation'' is one which causes an increase 
in the Contract amount or SBA's bond liability of at least 25% or 
$50,000 in the aggregate, whichever is less, or is contrary to the 
purposes of the Surety Bond Guarantee Programs.
    (e) Alteration. Without obtaining prior written approval from SBA 
(which may be conditioned upon payment of additional fees), the Surety 
agrees to or acquiesces in any material alteration in the terms, 
conditions, or provisions of the Contract or bond, including but not 
limited to the following acts:
    (1) Naming as an Obligee or co-Obligee any Person that does not 
qualify as an Obligee under Sec. 115.10; or
    (2) In the case of a Prior Approval Surety, acquiescing in any 
alteration to the Contract or bond which would increase the Contract 
amount or SBA's bond liability by at least 25% or $50,000, whichever is 
less.
    (f) Timeliness. (1) The bond was Executed prior to the date of 
SBA's guarantee; or
    (2)(i) The bond was Executed (or approved, if the Surety is legally 
bound by such approval) after the work under the Contract had begun, 
unless SBA executes a ``Surety Bond Guarantee Agreement Addendum'' 
after receiving all of the following from the Surety:
    (A) Satisfactory evidence, including a certified copy of the 
Contract (or a sworn affidavit from the Principal) showing that the 
bond requirement was 

[[Page 58272]]
contained in the original job Contract, or other documentation 
satisfactory to SBA, showing why a bond was not previously obtained and 
is now being required;
    (B) Certification by the Principal that all taxes and labor costs 
are current, and listing all suppliers and subcontractors, indicating 
that they are all paid to date, and attaching a waiver of lien from 
each; or an explanation satisfactory to SBA why such documentation 
cannot be produced; and
    (C) Certification by the Obligee that all payments due under the 
Contract to date have been made and that the job has been 
satisfactorily completed to date.
    (ii) For purposes of this paragraph (f)(2), work under a Contract 
is considered to have begun when a Principal takes any action at the 
job site which would have exposed its Surety to liability under 
applicable law had a bond been Executed (or approved, if the Surety is 
legally bound by such approval) at the time. For purposes of this 
paragraph (f), the Surety must maintain a contemporaneous record of the 
Execution and approval of each bond.
    (g) Principal fee. The Surety has not remitted to SBA the 
Principal's payment for the full amount of the guarantee fee within the 
time period required under Sec. 115.30(d) for Prior Approval Sureties 
or Sec. 115.60(g)(4) for PSB Sureties. SBA may reinstate the guarantee 
upon a showing that the Contract is not in default and that a valid 
reason exists why a timely submission was not made.
    (h) Other regulatory violations. (1) The Principal on the bonded 
Contract is not a small business;
    (2) The bond was not required under the bid solicitation or the 
original Contract;
    (3) The bond was not eligible for guarantee by SBA because the 
bonded contract was not a Contract as defined in Sec. 115.10;
    (4) The loss occurred under a bond that was not guaranteed by SBA;
    (5) The loss incurred by the Surety was not a Loss as determined 
under Sec. 115.16; or
    (6) The Surety's loss did not result from the Principal's breach or 
Imminent Breach of the Contract for which the guaranteed bond was 
approved.


Sec. 115.20  Insolvency of Surety.

    (a) Successor in interest. If a Surety becomes insolvent, all 
rights or benefits conferred on the Surety under a valid and binding 
Prior Approval or PSB Agreement will accrue only to the trustee or 
receiver of the Surety. SBA will not be liable to the trustee or 
receiver of the insolvent Surety except for the guaranteed portion of 
any Loss incurred and actually paid by such Surety or its trustee or 
receiver under the guaranteed bonds.
    (b) Filing requirement. The trustee or receiver must submit to SBA 
quarterly status reports accounting for all funds received and all 
settlements being considered.


Sec. 115.21  Audits and investigations.

    (a) Audits. (1) Scope of audit. SBA may audit in the office of a 
Prior Approval or PSB Surety, the Surety's attorneys or consultants, or 
the Principal or its subcontractors, all documents, files, books, 
records, tapes, disks and other material relevant to SBA's guarantee, 
commitments to guarantee a surety bond, or agreements to indemnify the 
Prior Approval or PSB Surety. See Sec. 115.18 for consequences of 
failure to comply with this section.
    (2) Frequency of audits. Each PSB Surety is audited at least once 
each year by examiners selected and approved by SBA.
    (b) Records. The Surety must maintain the records listed in this 
paragraph for the term of each bond, plus such additional time as may 
be required to settle any claims of the Surety for reimbursement from 
SBA and to attempt salvage or other recovery, plus an additional 3 
years. If there are any unresolved audit findings in relation to a 
particular bond, the Surety must maintain the related records until the 
findings are resolved. The records to be maintained include the 
following:
    (1) A copy of the bond;
    (2) A copy of the bonded Contract;
    (3) All documentation submitted by the Principal in applying for 
the bond;
    (4) All information gathered by the Surety in reviewing the 
Principal's application;
    (5) All documentation of any of the events set forth in 
Sec. 115.35(a) or Sec. 115.60(g)(6);
    (6) All records of any transaction for which the Surety makes 
payment under or in connection with the bond, including but not limited 
to claims, bills (including lawyers' and consultants' bills), 
judgments, settlement agreements and court or arbitration decisions, 
consultants' reports, Contracts and receipts;
    (7) All documentation relating to efforts to mitigate Losses, 
including documentation required by Sec. 115.34(a) or Sec. 115.62 
concerning Imminent Breach;
    (8) All records of any accounts into which fees and funds obtained 
in mitigation of Losses were paid and from which payments were made 
under the bond, and any other trust accounts, and any reconciliations 
of such accounts; and
    (9) All documentation relating to any collateral held by or 
available to the Surety.
    (c) Purpose of audit. SBA's audit will determine, but not be 
limited to:
    (1) The adequacy and sufficiency of the Surety's underwriting and 
credit analysis, its documentation of claims and claims settlement 
procedures and activities, and its recovery procedures and practices;
    (2) The Surety's minimization of Loss, including the exercise of 
bond options upon Contract default; and
    (3) The Surety's loss ratio in comparison with other Sureties 
participating in the same SBA Surety Bond Guarantee Program to a 
comparable degree.
    (d) Investigations. SBA may conduct investigations to inquire into 
the possible violation by any Person of the Small Business Act or the 
Investment Act, or of any rule or regulation under these Acts, or of 
any order issued under these Acts, or of any Federal law relating to 
programs and operations of SBA.

Subpart B--Guarantees Subject to Prior Approval


Sec. 115.30  Submission of Surety's guarantee application.

    (a) Legal effect of application. By submitting an application to 
SBA for a bond guarantee, the Prior Approval Surety certifies that the 
Principal meets the eligibility requirements set forth in Sec. 115.13 
and that the underwriting standards set forth in Sec. 115.14 have been 
met.
    (b) SBA's determination. SBA's approval or decline of a guarantee 
application is made in writing by an authorized SBA officer. The 
officer may provide telephone notice before the Prior Approval Surety's 
receives SBA's guarantee approval form if the officer has already 
signed the form. In the event of a conflict between the telephone 
notice and the written form, the written form controls.
    (c) Reconsideration-appeal of SBA determination. A Prior Approval 
Surety may request reconsideration of a decline from the SBA officer 
who made the decision. If the decision on reconsideration is negative, 
the Surety may appeal to an individual designated by the AA/SG. If the 
decision is again adverse, the Surety may appeal to the AA/SG, who will 
make the final decision.
    (d) Notice and payment to SBA. When the Surety has Executed a Final 
Bond, 

[[Page 58273]]
including a Final Bond under a bonding line, the Surety must complete 
the Prior Approval Agreement, and submit the form, together with the 
Principal's payment for its guarantee fee (see Sec. 115.32(b)) to SBA 
within 45 days, or in the case of a bonding line, within 15 business 
days (see Sec. 115.33(d)) after Execution of the bond.


Sec. 115.31  Guarantee percentage.

    (a) Ninety percent. SBA reimburses a Prior Approval Surety for 90% 
of the Loss incurred and paid if:
    (1) The total amount of the Contract at the time of Execution of 
the bond is $100,000 or less; or
    (2) The bond was issued on behalf of a small business concern owned 
and controlled by socially and economically disadvantaged individuals. 
See part 124 of this title for applicable definitions and criteria.
    (b) Eighty percent. SBA reimburses a Prior Approval Surety in an 
amount not to exceed 80% of the Loss incurred and paid on bonds for 
Contracts in excess of $100,000 which are executed on behalf of non-
disadvantaged concerns.
    (c) Contract increase to over $100,000. Where the Contract amount, 
after Execution of the bond, increases to more than $100,000, the 
guarantee percentage decreases by one percentage point for each $5,000 
of increase or part thereof, but it does not decrease below 80%. This 
provision applies only to guarantees which qualify under paragraph 
(a)(1) of this section.
    (d) Contract increase to over $1,250,000. Where the Contract 
amount, after Execution of the bond, increases beyond the statutory 
limit of $1,250,000, SBA's share of the Loss is limited to that 
percentage of the increased Contract amount which the statutory limit 
represents, multiplied by the guarantee percentage approved by SBA. For 
example, if a Contract amount increases to $1,375,000, SBA's share of 
the Loss under an 80% guarantee is limited to 72.73% [1,250,000 / 
1,375,000 = 90.91%  x  80% = 72.73%].
    (e) Contract decrease to $100,000 or less. Where the Contract 
amount, after Execution of the bond, decreases to $100,000 or less, 
SBA's guarantee percentage increases to 90% if the Surety provides SBA 
with evidence supporting the decrease and any other information or 
documents requested.


Sec. 115.32  Fees and Premiums.

    (a) Surety's Premium. A Prior Approval Surety must not charge a 
Principal an amount greater than that authorized by the appropriate 
insurance department. The Surety must not require the Principal to 
purchase casualty or other insurance or any other services from the 
Surety or any Affiliate or agent of the Surety. The Surety must not 
charge non-Premium fees to a Principal unless the Surety performs other 
services for the Principal, the additional fee is permitted by State 
law, and the Principal agrees to the fee.
    (b) SBA charge to Principal. SBA does not charge Principals 
application or Bid Bond guarantee fees. If SBA guarantees a Final Bond, 
the Principal must pay a guarantee fee of $8 per thousand dollars of 
the Contract amount (unless SBA agrees otherwise in writing). The fee 
is rounded to the nearest dollar. Example: If the Contract amount is 
$100,100, the Principal's guarantee fee is $801.00 (.008 times 
$100,100, or $800.80, rounded off to $801.00). The Principal's fee is 
to be remitted to SBA by the Surety together with the notice required 
under Sec. 115.30(d). See paragraph (d) of this section for additional 
requirements when the Contract amount changes.
    (c) SBA charge to Surety. SBA does not charge Sureties application 
or Bid Bond guarantee fees. Subject to Sec. 115.17(a)(2), the Surety 
must pay SBA a guarantee fee on each guaranteed bond (other than a Bid 
Bond), computed at 25% of the bond Premium, in the ordinary course of 
business. The fee is rounded to the nearest dollar. SBA does not 
receive any portion of a Surety's non-Premium charges. See paragraph 
(d) of this section for additional requirements when the bond 
obligation or the Contract amount changes.
    (d) Contract or bond increases/decreases. (1) Notification and 
approval. The Prior Approval Surety must notify SBA of any increases or 
decreases in the Contract or bond amount as soon as the Surety acquires 
knowledge of the change. Whenever the original Contract or bond amount 
increases by a change order of at least 25% or $50,000, whichever is 
less (see Sec. 115.18(e)), the prior written approval of such increase 
by SBA is required on a supplemental Prior Approval Agreement and is 
conditioned upon payment by the Surety of the increase in the 
Principal's guarantee fee as set forth in paragraph (d)(2) of this 
section.
    (2) Increases; fees. Notification of increases in the Contract or 
bond amount under this paragraph (d) must be accompanied by payment of 
the increase in the Principal's guarantee fee of $8 per thousand 
dollars of increase in the Contract amount. The Surety's check for 
payment of the increase in the Surety's guarantee fee of 25% of the 
increase in the bond Premium may be submitted in the ordinary course of 
business.
    (3) Decreases. Whenever SBA is notified of a decrease in the 
Contract or bond amount, SBA will refund to the Principal a 
proportionate amount of the Principal's guarantee fee and rebate to the 
Surety a proportionate amount of SBA's Premium share in the ordinary 
course of business. Upon receipt of the refund, the Surety must 
promptly pay a proportionate amount of its Premium to the Principal.


Sec. 115.33  Surety bonding line.

    A surety bonding line is a written commitment by SBA to a Prior 
Approval Surety which provides for the Execution of multiple bonds for 
a specified small business strictly within pre-approved terms, 
conditions and limitations. In applying for a bonding line, the Surety 
must provide SBA with information on the applicant as requested. In 
addition to the other limitations and provisions set forth in this part 
115, the following conditions apply to each surety bonding line:
    (a) Underwriting. A bonding line may be issued by SBA for a 
Principal only if the underwriting evaluation is satisfactory. The 
Prior Approval Surety must require the Principal to keep it informed of 
all its contracts, whether bonded by the same or another surety or 
unbonded, during the term of the bonding line.
    (b) Bonding line conditions. The bonding line contains limitations 
on the following:
    (1) The term of the bonding line, not to exceed 1 year subject to 
renewal in writing;
    (2) The total dollar volume of the Principal's bonded and unbonded 
work on hand at any one time, including outstanding bids, during the 
term of the bonding line;
    (3) The number of such contracts during the term of the bonding 
line;
    (4) The maximum dollar amount of any single guaranteed bonded 
Contract;
    (5) The timing of Execution of bonds under the bonding line--bonds 
must be dated and Executed before the work on the underlying Contract 
has begun, or the Surety must submit to SBA the documentation required 
under Sec. 115.18(f)(2); and
    (6) Any other limitation related to type, specialty of work, 
geographical area, or credit.
    (c)  Excess bonding. If, after a bonding line is issued, the 
Principal desires a bond and the Surety desires a guarantee exceeding a 
limitation of the bonding line, the Surety must submit an application 
to SBA under regular procedures.
    (d) Submission of forms to SBA. (1) Bid Bonds. Within 15 business 
days 

[[Page 58274]]
after the Execution of any Bid Bonds under a bonding line, the Surety 
must submit a ``Surety Bond Guarantee Underwriting Review'' to SBA for 
approval. If that form is already on file with SBA and no new financial 
statements are required or have been received from the Principal, a 
``Surety Bond Guarantee Review Update'' may be submitted instead. If 
the Surety fails to submit either form within this time period, SBA's 
guarantee of the bond will be void from its inception unless SBA 
determines otherwise upon a showing that a valid reason exists why the 
timely submission was not made.
    (2) Final Bonds. Within 15 business days after the Execution of any 
Final Bonds under a bonding line, the Surety must submit a signed Prior 
Approval Agreement and a ``Surety Bond Guarantee Underwriting Review'' 
to SBA for approval. If that form is already on file with SBA and no 
new financial statements are required or have been received from the 
Principal, a ``Surety Bond Guarantee Review Update'' may be submitted 
instead. If the Surety fails to submit these forms together with the 
Principal's payment for its guarantee fee within this time period, 
SBA's guarantee of the bond will be void from its inception unless SBA 
determines otherwise upon a showing that the Contract is not in default 
and a valid reason exists why the timely submission was not made.
    (3) Additional information. The Surety must submit any other data 
SBA requests.
    (e) Cancellation of bonding line. (1) Optional cancellation. Either 
SBA or the Surety may cancel a bonding line at any time, with or 
without cause, upon written notice to the other party. Upon the receipt 
of any adverse information concerning the Principal, the Surety must 
promptly notify SBA, and SBA may cancel the bonding line.
    (2) Mandatory cancellation. Upon the occurrence of a default, 
whether under a contract bonded by the same or another surety or an 
unbonded contract, the Surety must immediately cancel the bonding line.
    (3) Effect of cancellation. Cancellation of a bonding line by SBA 
is effective upon receipt of written notice by the Surety. Bonds issued 
before the effective date of cancellation remain guaranteed by SBA. 
Upon cancellation by SBA or the Surety, the Surety must promptly notify 
the Principal in writing.


Sec. 115.34  Minimization of Surety's Loss.

    (a) Imminent Breach. (1) Prior approval requirement. SBA will 
reimburse its guaranteed share of payments made by a Surety to avoid or 
attempt to avoid an Imminent Breach of the terms of a Contract covered 
by an SBA guaranteed bond only if the payments were made with the prior 
approval of OSG. The Surety must demonstrate to SBA's satisfaction that 
the breach is, in fact, imminent and that there is no other recourse to 
prevent such breach.
    (2) Amount of reimbursement. The aggregate of the payments by SBA 
to avoid Imminent Breach cannot exceed 10% of the Contract price, 
unless the Administrator finds that a greater payment (not to exceed 
the guaranteed share of the bond penalty) is necessary and reasonable. 
In no event will SBA make any duplicate payment pursuant to this or any 
other provision of this part 115.
    (3) Recordkeeping requirement. The Surety must keep records of 
payments made to avoid Imminent Breach.
    (b) Salvage and recovery. A Prior Approval Surety must pursue all 
possible sources of salvage and recovery until SBA concurs with the 
Surety's recommendation for a discontinuance or for a settlement. The 
Surety must certify that continued pursuit of salvage and recovery 
would be neither economically feasible nor a viable strategy in 
maximizing recovery. See also Sec. 115.17(b).


Sec. 115.35  Claims for reimbursement of Losses.

    (a) Notification requirements. (1) Events requiring notification. A 
Prior Approval Surety must notify OSG of the occurrence of any of the 
following:
    (i) Legal action under the bond has been initiated.
    (ii) The Obligee has declared the Principal to be in default under 
the Contract.
    (iii) The Surety has established a claim reserve for the bond.
    (iv) The Surety has received any adverse information concerning the 
Principal's financial condition or possible inability to complete the 
project or pay laborers or suppliers.
    (2)  Timing of notification. Notification must be made in writing 
at the time the Surety applies for a guarantee on behalf of an affected 
Principal or, if no guarantee application is being filed, within 30 
days of the date the Surety acquires knowledge, or should have acquired 
knowledge, of any of the listed events.
    (b) Surety action. The Surety must take all necessary steps to 
mitigate Losses resulting from any of the events in paragraph (a) of 
this section, including the disposal at fair market value of any 
collateral held by or available to the Surety. Unless SBA notifies the 
Surety otherwise, the Surety must take charge of all claims or suits 
arising from a defaulted bond, and compromise, settle and defend such 
suits. The Surety must handle and process all claims under the bond and 
all settlements and recoveries as it does on non-guaranteed bonds.
    (c) Claim reimbursement requests. (1) Claims for reimbursement for 
Losses which the Surety has paid must be submitted (together with a 
copy of the bond, the bonded Contract, and any indemnity agreements) 
with the initial claim to OSG on a ``Default Report, Claim for 
Reimbursement and Record of Administrative Action'', within 1 year from 
the time of each disbursement. Claims submitted after 1 year must be 
accompanied by substantiation satisfactory to SBA. The date of the 
claim for reimbursement is the date of receipt of the claim by SBA, or 
such later date as additional information requested by SBA is received.
    (2) The Surety must also submit evidence of the disposal of all 
collateral at fair market value.
    (3) SBA may request additional information prior to reimbursing the 
Surety for its Loss.
    (4) Subject to the offset provisions of part 140, SBA pays its 
share of Loss within 90 days of receipt of the requisite information.
    (5) Claims for reimbursement and any additional information 
submitted are subject to review and audit by SBA, including but not 
limited to the Surety's compliance with SBA's regulations and the 
requirements of governing SBA forms.
    (d) Status updates. The Surety must submit semiannual status 
reports on each claim 6 months after the initial default notice and 
then every 6 months. SBA must be notified immediately of any 
substantial changes in the status of the claim or the amounts of Loss 
reserves.
    (e) Reservation of SBA rights. The payment by SBA of a Surety's 
claim does not waive or invalidate any of the terms of the Prior 
Approval Agreement, the regulations set forth in this part 115, or any 
defense SBA may have against the Surety. Within 30 days of receipt of 
notification that a claim or any portion of a claim should not have 
been paid by SBA, the Surety must remit the specified amounts to SBA.


Sec. 115.36  Indemnity settlements and reinstatement of Principal.

    (a) Indemnity settlements. (1) An indemnity settlement occurs when 
a defaulted Principal and its Surety agree upon an amount, less than 
the actual loss under the bond, which will satisfy 

[[Page 58275]]
the Principal's indebtedness to the Surety. Sureties must not agree to 
any indemnity settlement proposal or enter into any such agreement 
without SBA's concurrence.
    (2) All settlement proposals submitted for SBA's consideration must 
include current financial information, including financial statements, 
tax returns, and credit reports, together with the Surety's written 
recommendations. It should also indicate whether the Principal is 
interested in further bonding.
    (3) The Surety must pay SBA its pro rata share of the settlement 
amount within 90 days of receipt. Prior to closing the file on a 
Principal, the Surety must certify that SBA has received its pro rata 
share of all indemnity recovery.
    (b) Conditions for reinstatement. At any time after a Principal 
becomes ineligible for further bond guarantees under Sec. 115.36, the 
Surety may recommend that such Principal's eligibility for further bond 
guarantees be reinstated. OSG may agree to reinstate the Principal if:
    (1) The Principal's guarantee fee has been paid to SBA and SBA 
receives evidence that the Principal has paid all delinquent amounts 
due to the Surety (including amounts for Imminent Breach); or
    (2) The Surety has settled its claim with the Principal for an 
amount and on terms accepted by OSG; or
    (3) The Principal contests a claim and provides collateral 
acceptable to the Surety and SBA, which has a liquidation value of at 
least the amount of the claim including related expenses; or
    (4) The Principal's indebtedness to the Surety is discharged by 
operation of law (e.g., bankruptcy discharge); or
    (5) OSG and the Surety determine that further bond guarantees will 
assist in the prevention or elimination of Loss to SBA.
    (c) Underwriting after reinstatement. A guarantee application 
submitted after reinstatement of the Principal's eligibility is subject 
to a very stringent underwriting review.

Subpart C--Preferred Surety Bond (PSB) Guarantees


Sec. 115.60  Procedures for PSB Program.

    (a) Selection of sureties for the PSB program. SBA's selection of 
PSB Sureties will be guided by, but not limited to, these factors:
    (1) An underwriting limitation of at least $1,250,000 on the U.S. 
Treasury Department list of acceptable sureties;
    (2) An agreement to charge Principals no more than the advisory 
premium rates of the Surety Association of America;
    (3) Premium income from contract bonds guaranteed by any government 
agency (Federal, State or local) of no more than one-quarter of the 
total contract bond premium income of the Surety;
    (4) The vesting of underwriting authority for SBA guaranteed bonds 
only in employees of the Surety;
    (5) The vesting of final settlement authority for claims and 
recovery under the PSB program only in employees of the Surety's 
permanent claims department; and
    (6) The rating or ranking designations assigned to the Surety by 
recognized authority.
    (b) Execution of PSB Agreement. A Surety admitted to the PSB 
program must execute a PSB Agreement before approving SBA guaranteed 
bonds. No SBA guarantee attaches to bonds approved before the AA/SG or 
designee has countersigned the agreement.
    (c) Duration of PSB program. The PSB program terminates on 
September 30, 1997, unless extended by legislation. SBA guarantees 
effective under this program on or before September 30, 1997, will 
remain in effect after such date.
    (d) Prohibition on participation in Prior Approval program. Neither 
a PSB Surety nor any of its Affiliates is eligible to submit 
applications under subpart B of this part.
    (e) Allotment of guarantee authority. (1) General. SBA allots to 
each PSB Surety a periodic maximum guarantee authority. No SBA 
guarantee attaches to bonds approved by a PSB Surety if the bonds 
exceed the allotted authority for the period in which the bonds are 
approved. No reliance on future authority is permitted. An allotment 
can be increased only by prior written permission of SBA.
    (2) Execution of Bid Bonds. When the PSB Surety Executes a Bid 
Bond, SBA debits the Surety's allotment for an amount equal to the 
guarantee percentage of the estimated penal sum of the Final Bond SBA 
would guarantee if the Contract were awarded. If the Contract is then 
awarded for an amount other than the bid amount, or if the bid is 
withdrawn or the Bid Bond has expired (see definition in Sec. 115.11), 
SBA debits or credits the Surety's allotment accordingly.
    (3) Execution of Final Bonds. If the PSB Surety Executes a 
guaranteed Final Bond, but not the related Bid Bond, SBA debits the 
Surety's allotment for an amount equal to the guarantee percentage of 
the penal sum of the Final Bond. SBA will debit the allotment for 
increases, and credit the allotment for decreases, in the bond amount.
    (4) Release and non-issuance of Final Bonds. The release of Final 
Bonds upon completion of the Contract does not restore the 
corresponding allotment. If, however, a PSB Surety approves a Final 
Bond but never issues the bond, SBA will credit the Surety's allotment 
for an amount equal to the guarantee percentage of the penal sum of the 
bond. In that event, the Surety must notify SBA as soon as possible, 
but in no event later than 5 business days after the non-issuance has 
been determined. Until the Surety has so notified SBA, it cannot rely 
on such credit.
    (f) Timeliness. A PSB Surety may not Execute or approve a bond 
after commencement of work under a Contract unless the Surety submits a 
completed ``Surety Bond Guarantee Agreement Addendum'', together with 
the evidence and certifications described in Sec. 115.18(f)(2), and 
obtains written approval from the AA/SG.
    (g) Operations. (1) Retention of information. A PSB Surety must 
comply with all applicable SBA regulations and obtain from its 
applicants all the information and certifications required by SBA. The 
PSB Surety must document compliance with SBA regulations and retain 
such certifications in its files, including a contemporaneous record of 
the date and time of approval and Execution of each bond. The 
certifications and other information must be made available for 
inspection by SBA or its agents and must be available for submission to 
SBA in connection with the Surety's claims for reimbursement. The PSB 
Surety must retain the certifications and other information for the 
term of the bond, plus such additional time as may be required to 
settle any claims of the Surety for reimbursement from SBA and to 
attempt salvage or other recovery, plus an additional 3 years. If there 
are any unresolved audit findings in relation to a particular bond, the 
Surety must maintain the related certifications and other information 
until the findings are resolved. See also Sec. 115.19(f).
    (2) Usual staff and procedures. A PSB Surety must approve, Execute 
and administer SBA guaranteed bonds in the same manner and with the 
same staff as the Surety's activity outside the PSB program. The Surety 
must request job status reports from the Obligees in accordance with 
its own procedures.
    (3) Notification to SBA. A PSB Surety must advise SBA by electronic 
transmission or monthly bordereau, as agreed between the Surety and 
SBA, of all approved Bid and Final Bonds, and of the Surety's approval 
of increases and 

[[Page 58276]]
decreases in the Contract or bond amount. The notice must contain the 
information specified from time to time in agreements between the 
Surety and SBA. SBA may deny liability with respect to Final Bonds for 
which SBA has not received timely notice.
    (4) Fees. The PSB Surety must pay SBA 25% of the Premium it charges 
on Final Bonds. The fee is rounded to the nearest dollar. The PSB 
Surety must also remit to SBA the Principal's payment for its guarantee 
fee of $8 per thousand dollars of the Contract amount. This fee is also 
rounded to the nearest dollar. The Surety must remit SBA's Premium 
share and the Principal's guarantee fee with the bordereau listing the 
related Final Bond, as required in the PSB Agreement.
    (5) Increases/decreases in Contract or bond amount. (i) The PSB 
Surety must process Contract or bond amount increases within its 
allotment in the same manner as initial guaranteed bond issuances (see 
paragraph (g)(3) of this section). The Surety must present checks for 
additional fees due from the Principal and the Surety on the increases 
(computed under paragraph (g)(4) of this section), and attach such 
payments to the respective monthly bordereau.
    (ii) If the Contract or bond amount is decreased, SBA will refund 
to the Principal a proportionate amount of the guarantee fee, and 
adjust SBA's Premium share accordingly in the ordinary course of 
business.
    (6) Events requiring notification. The PSB Surety must advise SBA 
within 30 calendar days of the name and address of a Principal against 
whom legal action on the bond has been instituted, or when the Obligee 
has declared a default, or when the Surety has established a claim 
reserve. The Surety must also notify SBA within 30 days of the recovery 
of any amounts on the guaranteed bond, or if the Surety determines to 
bond such Principal again.


Sec. 115.61  Guarantee percentage.

    SBA reimburses a PSB Surety in an amount not to exceed 70% of the 
Loss incurred and paid. Where the Contract amount, after the Execution 
of the bond, increases beyond the statutory limit of $1,250,000, SBA's 
share of the Loss is limited to that percentage of the increased 
Contract amount which the statutory limit represents, multiplied by the 
guarantee percentage approved by SBA. For an example, see 
Sec. 115.31(d).


Sec. 115.62  Imminent Breach.

    (a) No prior approval requirement. SBA will reimburse a PSB Surety 
for the guaranteed portion of payments the Surety makes to avoid or 
attempt to avoid an Imminent Breach of the terms of a Contract covered 
by an SBA guaranteed bond. The PSB Surety does not need SBA approval to 
make Imminent Breach payments.
    (b) Amount of reimbursement. The aggregate of the payments by SBA 
cannot exceed 10% of the Contract price, unless the Administrator finds 
that a greater payment (not to exceed the guaranteed portion of the 
bond penalty) is necessary and reasonable. In no event will SBA make 
any duplicate payment pursuant to this or any other provision of the 
regulations in this part.
    (c) Recordkeeping requirement. The PSB Surety must keep records of 
payments made to avoid Imminent Breach.


Sec. 115.63  Claims for reimbursement of Losses.

    (a) How claims are submitted. A PSB Surety must submit claims for 
reimbursement on a form approved by SBA no later than 1 year from the 
date the Surety paid the amount. Loss is determined as of the date of 
receipt by SBA of the claim for reimbursement, or as of such later date 
as additional information requested by SBA is received. Subject to the 
offset provisions of part 140, SBA pays its share of Loss within 90 
days of receipt of the requisite information. Claims for reimbursement 
and any additional information submitted are subject to review and 
audit by SBA.
    (b) Surety action. The PSB Surety must take all necessary steps to 
mitigate Losses when legal action against a bond has been instituted, 
when the Obligee has declared a default, or when the Surety has 
established a claim reserve. When the Surety disposes of any 
collateral, it must do so at fair market value. Unless SBA notifies the 
Surety otherwise, the Surety must take charge of all claims or suits 
arising from a defaulted bond, and compromise, settle or defend the 
suits. The Surety must handle and process all claims under the bond and 
all settlements and recoveries in the same manner as it does on non-
guaranteed bonds.
    (c) Reservation of rights. The payment by SBA of a PSB Surety's 
claim does not waive or invalidate any of the terms of the PSB 
Agreement, the regulations in this part 115, or any defense SBA may 
have against the Surety. Within 30 days of receipt of notification that 
a claim or any portion of a claim should not have been paid by SBA, the 
Surety must pay the specified amounts to SBA.


Sec. 115.64  Denial of liability.

    In addition to the grounds set forth in Sec. 115.19, SBA may deny 
liability to a PSB Surety if:
    (a) The PSB Surety's guaranteed bond was Executed in an amount 
which, together with all other guaranteed bonds, exceeded the allotment 
for the period during which the bond was approved, and no prior SBA 
approval had been obtained;
    (b) The PSB Surety's loss was incurred under a bond which was not 
listed on the bordereau for the period when it was approved; or
    (c) The loss incurred by the PSB Surety is not attributable to the 
particular Contract for which an SBA guaranteed bond was approved.

    Dated: November 16, 1995.
Philip Lader,
Administrator.
[FR Doc. 95-28549 Filed 11-24-95; 8:45 am]
BILLING CODE 8025-01-P