[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3266-3280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1347]



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SMALL BUSINESS ADMINISTRATION
13 CFR Part 115


Surety Bond Guarantee

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: This final rule revises the regulations found at 13 CFR Part 
115, governing the Surety Bond Guarantee (SBG) Program. It eliminates 
inconsistencies, clarifies procedures, accommodates program experience 
and industry changes, and provides for more efficient program 
operation. It also clarifies and shortens regulations where 
appropriate, eliminates redundant provisions, consolidates and 
reorganizes sections, and clarifies ambiguous language.

EFFECTIVE DATE: This final rule is effective March 1, 1996.

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

SUPPLEMENTARY INFORMATION: In response to a Memorandum from President 
Clinton for all federal agencies to simplify their regulations, SBA 
published a proposed rule on November 27, 1995, to revise the 
regulations governing the Surety Bond Guarantee Program. See 60 FR 
58263 (November 27, 1995). The public was afforded a thirty-day period 
in which to submit comments on the proposed rule to SBA. During that 
period, SBA received 12 comment letters. After giving careful 
consideration to the concerns raised in those letters, SBA is today 
finalizing the proposed rule with certain modifications discussed 
below.

General Comments

    Those comment letters that addressed the proposed renumbering and 
reorganization of Part 115 commended the rewrite for its clarity and 
comprehensibility. Those aspects of the proposed rule are being 
finalized as proposed. In this final rule, SBA has continued its effort 
to simplify Part 115 by creating smaller sections out of the largest 
proposed section (Sec. 115.60). Subsequent sections (Secs. 115.61 
through 115.64) have been renumbered to accommodate this change.

Definitions--Contract, etc.

    All three of the comments received on the proposed change to the 
definition of ``contract'' objected to the exclusion of maintenance 
agreements covering defective materials. Under the proposal, a 
maintenance agreement covering defective workmanship would be 
considered a contract, but a maintenance agreement covering defective 
materials would not. It was argued in the comments that the typical 
maintenance agreement in use today covers both defective workmanship 
and defective materials. On reconsideration, SBA agrees that the 
definition of contract should permit coverage of defective materials 
since that accords with standard practice in the industry today. The 
definition is finalized accordingly. The final version also clarifies 
that maintenance agreements of longer than two years duration can be 
considered contracts if they meet the requirements set forth in the 
definition.
    A new defined term has also been added to the final rule: ``final 
bond''. The term means a performance bond and/or a payment bond. This 
is one of several non-substantive changes SBA is making in the final 
rule to make the regulations clearer.

Eligibility of Payment Bonds

    Proposed Sec. 115.12(b) would have allowed payment bonds to be 
guaranteed by SBA only if performance bonds were issued at the same 
time. As four comment letters pointed out, recent amendments to the 
Miller Act eliminate the bonding requirement for federal contracts of 
less than $100,000, but allow for certain alternatives to protect 
subcontractors and suppliers against non-payment by the general 
contractor. As one alternative, the contracting officer may require a 
payment bond on the contract. Under SBA's proposed change to 
Sec. 115.12(b), contractors in the SBG Program would have been unable 
to bid on those small public contracts that require payment bonds only.
    Given the recent Miller Act changes, SBA agrees that payment bonds 
should not automatically be considered ineligible for guaranteed 
bonding when no performance bond is issued. The final version of 
Sec. 115.12(b), therefore, does not restrict the eligibility of payment 
bonds. However, SBA does not intend to guarantee payment bonds that are 
essentially forfeiture bonds. If a payment bond allows the claimant to 
receive the full amount of the bond from the surety regardless of the 
amount of the damage or loss the claimant has 

[[Page 3267]]
actually suffered, the bond is a forfeiture bond. The definition of 
payment bond has been changed in this final rule to clarify that no 
forfeiture bonds will be guaranteed by SBA.
    In response to a comment from the Surety Association of America, a 
technical change to proposed Sec. 115.12(b) is also being adopted. The 
reference in the current and proposed regulation to the Surety 
Association's ``Rating Manual'' has been changed to its ``Manual of 
Rules, Procedures and Classifications'' to conform to the Association's 
current name for its publication.

Transfer of Surety's Files

    SBA's proposal to prohibit the transfer or sale of surety files and 
accounts is finalized with certain changes to clarify SBA's intent. As 
the commenters surmised, the provision (proposed Sec. 115.12(f)) was 
not intended to apply to the sale of a surety's entire property and 
casualty operations. SBA does not want to restrict the sale of a 
surety's entire book of business. In addition to this clarification, 
the final rule now provides that when the prohibition against the 
transfer or sale of files and accounts does apply, it can be overridden 
with SBA's prior approval.

Principal's Eligibility

    Several comment letters expressed concern regarding SBA's proposal 
to exclude from participation in the SBG Program those principals who 
are primarily brokers or construction managers. SBA recognizes that 
many small general contractors subcontract out a high percentage of the 
work under a contract. This is not necessarily objectionable. Rather, 
SBA is trying to weed out those principals whose subcontracting results 
in the principal losing control over the project. In the most egregious 
cases, the principal may be fronting for the subcontractor. This 
objectionable activity may not be discernible solely from the 
percentage of work subcontracted on a project, although that is often a 
good indicator. To clarify SBA's position, proposed Sec. 115.13(e) has 
been rewritten to delete the reference to ``construction managers''. 
Instead, the final version excludes from participation in the SBG 
Program principals who are brokers or who, through subcontracting out 
work under the contract, have effectively lost control over the 
project. The final version (now designated Sec. 115.13(a)(5)) still 
requires principals to specify the percentage of work under the 
contract to be subcontracted.
    Proposed Sec. 115.13(g) seems to have created a misunderstanding. 
It was not SBA's intent to prohibit a contractor whose spouse works for 
a surety company from obtaining bonds through the SBG Program. Such 
``conflicts of interest'' would not preclude contractors from 
participating in the program, but they might bar contractors from 
obtaining guaranteed bonds through the ``affiliated'' surety. For 
example, if the spouse of a contractor (1) is ``empowered to act on 
behalf of the surety'' (and is therefore included under the definition 
of ``surety'') and (2) is considered to own at least 10% of the 
contractor business, then that surety company can not issue a 
guaranteed bond for that contractor. Any other surety company in the 
SBG Program, however, could issue a guaranteed bond for that principal. 
The final version of the subsection (now designated Sec. 115.13(b)) 
clarifies that it addresses the eligibility of a principal to receive 
guaranteed bonds issued by a particular surety, not by all sureties in 
the SBG Program. The other paragraphs in the section have been 
relettered accordingly.

Loss of Principal's Eligibility

    Subsections (1) and (2) of proposed Sec. 115.14(a) provided that 
principals would lose eligibility for further SBA bond guarantees if 
legal action under the bond had been initiated or if the principal had 
been declared in default under the contract. The comments received on 
these two paragraphs questioned the wisdom of an automatic loss of 
eligibility under these two situations. It was argued that taking such 
action could cause financial hardship to the contractor and might even 
put the contractor out of business. The suggestion was made that the 
surety company's underwriter or claims department should make the 
determination as to loss of a principal's eligibility in these two 
cases.
    SBA believes that the subsections governing a principal's loss of 
eligibility must be read in conjunction with the section on reinstating 
the principal's eligibility (proposed Sec. 115.36(b)). SBA is rewording 
proposed Sec. 115.36(b) to allow for reinstatement of the principal's 
eligibility in the event SBA and the surety agree to reinstate. With 
that change, if legal action is initiated under the bond, or if any of 
the other events in Sec. 115.14(a) occurs, the principal still loses 
eligibility for further guaranteed bonding, but reinstatement of 
eligibility can occur almost immediately if both SBA and the surety 
agree it is appropriate. SBA expects that, with that mechanism in 
place, frivolous lawsuits and baseless claims under the bond will not 
stand in the way of further guaranteed bonding of an otherwise eligible 
principal. Subsections (1) and (2) of proposed Sec. 115.14(a) are 
therefore unchanged in the final rule.
    Subsection (3) of proposed Sec. 115.14(a) provided that a 
principal's eligibility would be lost if the surety established a claim 
reserve for the bond in excess of $100. All five of the comments 
received on this subsection objected to the $100 threshold as too low. 
The argument was made that some sureties routinely set up a claim 
reserve in excess of $100 every time a trouble notice is received on a 
project, and that claim reserves do not necessarily reflect actual loss 
potential. Two of the comments recommended a $500 claim reserve as the 
minimum level which indicated the potential for serious loss.
    SBA's proposal had been intended as a liberalization of the current 
regulation (Sec. 115.34(a)), which provides that a claim reserve of any 
amount results in automatic loss of the principal's eligibility. SBA 
believes, though, that with the other triggers for loss of eligibility 
in place in Sec. 115.14(a), it is appropriate to increase the minimum 
claim reserve threshold. SBA has concluded that claim reserves below 
$1000 should not result in the loss of the principal's eligibility. The 
rule is finalized accordingly.
    A new provision has been added to Sec. 115.14(b) to clarify that in 
the PSB Program a principal's eligibility is reinstated upon the 
surety's own determination that reinstatement is appropriate.

Underwriting and Servicing Standards

    Four comments were received on the proposed rewrite of the 
program's underwriting standards (proposed Sec. 115.15(a)). All were 
opposed to the proposed 150% limit on contracts for contractors new to 
the SBG Program. SBA had intended the 150% limit as general guidance 
for underwriting decisions, not as an absolute requirement. Upon 
reconsideration, SBA believes that underwriting guidelines need not 
appear in the regulations. Accordingly, the guidance on limits for 
contractors new to the SBG Program is being moved to an SBA Standard 
Operating Procedure (SOP) for the SBG Program. Also moved to the SOP 
are SBA's recommendations as to type and size of contract for 
guaranteed bonding and other general underwriting guidelines. SBA 
expects that sureties will follow the recommendations in the SOP when 
making their underwriting determinations. The balance of Sec. 115.15(a) 
is finalized as proposed.
    Four comments were also received on the proposed rewrite of the 
program's 

[[Page 3268]]
servicing standards (proposed Sec. 115.15(b)). All four addressed the 
requirement for sureties to obtain job status reports from obligees on 
final bonds guaranteed by SBA. The comments pointed out the difficulty 
in obtaining job status reports from an obligee who refuses to respond 
to job status inquiries. SBA agrees that sureties should not be held to 
a requirement that is outside of their control. Instead of requiring 
sureties to obtain job status reports, therefore, the final rule 
provides that sureties must request job status reports and document the 
request in their files.

Determination of Loss

    Two comment letters asked for clarification of the terms ``mark-up 
on expenses'' and ``overhead,'' as used in the computation of the 
surety's ``loss'' in proposed Sec. 115.16(f)(1). The proposal would 
have prohibited reimbursement from SBA for any mark-up on expenses or 
any overhead of ``the surety, its attorney or any other party.'' SBA 
believes the terms in question are generally understood business terms, 
but that some confusion may have been generated by the words ``or any 
other party.'' SBA is remedying that problem by changing the words to 
``or any other party hired by the Surety or the attorney.'' In 
particular, consultants hired by either the surety or the surety's 
counsel cannot indirectly charge SBA for their overhead or for anything 
over their actual costs.
    Using photocopying costs as an example, the restriction on mark-up 
on expenses would mean that if the surety's attorney copies documents 
on its office xerox machine and charges the surety for its actual per 
copy cost, plus 20%, the surety cannot include in ``loss'' the 20% 
excess over the attorney's actual cost of making those copies. The same 
would be true of photocopying by the surety itself; only the actual per 
copy cost could be included in loss. If the surety or the attorney has 
documents copied at a photocopying store, however, the amount of the 
copying expense included in the surety's loss is the full amount the 
store charges the surety or the attorney, regardless of the actual cost 
to the store of that job. The retailer's markup is a permitted expense 
because the retailer has not been ``hired'' by the surety.
    In general, SBA would consider ``mark-up on expenses'' to include 
any add-on to the actual cost of an expense item. ``Overhead'' means 
the general costs of running a business. Some examples of overhead 
include rent, electricity, and heating and air conditioning costs.

Salvage and Recovery

    SBA received three comments on proposed Sec. 115.17(b)(2), the 
subsection establishing SBA's share of the salvage and recovery 
received by a surety when a principal defaults on a bonded contract 
that SBA has guaranteed. The three comments opposed SBA's proposal that 
it share not only in any recovery received by the surety in connection 
with the guaranteed bond for the principal, but also in any recovery 
received in connection with any other bond issued by the surety on 
behalf of that principal. The commenters suggested that the surety be 
allowed to apply contract funds from the defaulted non-guaranteed 
project to that project's losses first, and then give SBA any excess it 
receives. Ordinarily, the excess would be paid over to the principal.
    Upon reconsideration, SBA believes its proposal was overly broad. 
Under the final rule, SBA will not share in contract proceeds and other 
forms of salvage and recovery that are clearly identifiable as related 
solely to a bonded contract that SBA has not guaranteed. On the other 
hand, if the surety's recovery could apply to both a contract without a 
guaranteed bond and a contract with a guaranteed bond, SBA will be 
entitled to its share of the entire amount of that recovery. For 
example, if the surety collects from an individual who has indemnified 
the surety for its losses under both a guaranteed bond and a non-
guaranteed bond, the entire recovery from that party will be assumed to 
relate to the guaranteed bond for purposes of determining SBA's share.

Renegotiation of guarantee percentage

    Several comment letters requested clarification of SBA's ability 
under proposed Sec. 115.18(a)(3) to renegotiate a surety's guarantee 
percentage in the event the surety experiences excessive losses. In 
response to those requests, SBA assures the participants in the SBG 
Program that the guarantee percentage for bonds already written by a 
surety cannot be renegotiated. In the event a surety's losses are 
determined to be excessive by SBA, the surety may be required to 
renegotiate the guarantee percentage for bonds issued after that date. 
The final version of proposed Sec. 115.18(a)(3), now designated 
Sec. 115.18(a)(4), clarifies this point.

Denial of Liability--Excess Bond Amount

    Under proposed Sec. 115.19(a), SBA would not be liable under its 
guarantee if the bond amount at any time exceeded the total contract 
amount determined at the time of the bond's execution. The four 
comments received on this subsection made two points. The first point 
was that certain public (government) projects require bonding in excess 
of 100% of the contract amount. An exception for such projects was 
requested. SBA's proposal limiting bonds to 100% of the contract 
amount, while new to the regulations, has long been a policy of the SBG 
Program. The restriction has been a part of the Program's Standard 
Operating Procedure for over ten years. See SOP 50 45, Revision 1, page 
22. The reason for the restriction is that SBA has determined that any 
situation in which the surety and SBA have a greater liability than the 
obligee is inherently not reasonable in light of the risks involved. It 
would be statutorily impermissible for SBA to issue a guarantee under 
those circumstances. See 15 USC 694b(a)(4)(D). Public projects 
requiring bonding in excess of 100% will have to continue to be bonded 
outside of the SBG Program.
    The second point raised in the comment letters was that as contract 
amounts increase by change order, bond amounts may increase as well. If 
the bond can never exceed the original contract amount, there is no 
possibility for increases in the bond amount when the contract amount 
is increased. SBA has reconsidered its position on this issue. The 
final rule permits the bond amount to exceed the original contract 
amount but, as discussed in the preceding paragraph, the bond amount 
must never exceed the contract amount measured at the same time.

Denial of Liability--Substantial Regulatory Violation

    Under proposed Sec. 115.19(d), SBA would not be liable under its 
guarantee if the surety committed a substantial violation. A 
substantial violation was proposed to include a violation which caused 
an increase in the contract or bond amount of 25% or $50,000. Upon 
consideration of the one comment received on this paragraph, SBA has 
concluded that it is extremely unlikely that a regulatory violation 
could cause an increase in the contract amount. SBA's real concern is 
with increases in the bond amount. The final rule deletes the reference 
to the contract amount in Sec. 115.19(d).

[[Page 3269]]


Denial of Liability--Alteration

    Under proposed Sec. 115.19(e), SBA would not be liable under its 
guarantee if the surety agreed to or acquiesced in any material 
alteration of the contract or bond without SBA's prior written 
approval. This differs from the current regulation, Sec. 115.13(e), 
which does not include alterations in the contract as a basis for SBA 
to deny liability. The single comment received on proposed 
Sec. 115.19(e) pointed out that the standard bond form in the surety 
industry provides that the surety waives notice of changes to the 
contract. Changes to the contract frequently occur without any approval 
from the surety. Accordingly, SBA has decided to remove contract 
alterations as a basis for denial of liability in the final rule.

Denial of Liability--Timeliness

    Under proposed Sec. 115.19(f), SBA would not be liable under its 
guarantee if the surety executed the bond before SBA's guarantee was 
executed. This provision complies with the statutory requirement that 
an SBA bond guarantee may be issued only if the principal is not able 
to obtain the bond on reasonable terms and conditions without the 
guarantee. See 15 USC 694b(a)(4)(C). A bond dated prior to SBA's 
guarantee is a bond that is obtainable without such guarantee.
    The two comments received on this subsection expressed concern that 
the current industry practice of back-dating the bond at the request of 
the obligee could result in an SBA determination to deny liability 
under the guarantee. Apparently, many obligees require that the bond be 
dated the same date as the contract, regardless of the actual execution 
date of the bond. SBA does not object to a bond carrying an ``effective 
date'' (e.g., ``dated as of July 1, 1996'') that is earlier than its 
execution date (e.g., ``signed July 20, 1996'') as long as there is 
proper documentation of the actual date of execution of the bond and 
such execution date is no earlier than the date of SBA's guarantee. SBA 
does not believe that any change to the proposed language in 
Sec. 115.19(f) is necessary, as the proposal speaks only of execution 
of the bond. The provision is finalized as proposed.

Denial of Liability--Other Regulatory Violations

    In accordance with the suggestion in the one comment received on 
proposed Sec. 115.19(h)(6), SBA is correcting the language of the 
proposed subsection to clarify that sureties are permitted to make 
payments under payment bonds even though such payments may not result 
from the principal's breach of the bonded contract. SBA had not 
intended for the proposal to be interpreted any other way. The final 
version of Sec. 115.19(h)(6) makes this technical correction.

Audits and Investigations

    In connection with the requirement under the final version of 
Sec. 115.15(b) for sureties to document the job status inquiries they 
make, SBA is including such documentation, together with any job status 
reports received by the surety, in the list of records required to be 
maintained by the surety under the final version of Sec. 115.21(b).

Prior Approval Program--SBA Approval

    SBA is finalizing proposed Sec. 115.30(b) without change. The 
proposal, which provided that SBA's written approval of a guarantee 
application would control over any conflicting verbal approval, was not 
different substantively from the current regulation (Sec. 115.31(a)). 
Nevertheless, SBA appreciates the concern of the two commenters who 
requested some protection for sureties relying on a verbal approval 
from an SBA officer, only to learn that the guarantee agreement was not 
signed until the following day. SBA intends to make clear to all SBG 
Program personnel that no verbal approval of a guarantee application 
may be communicated unless the guarantee application has already been 
executed by an authorized official. Sureties requiring greater 
certainty than the regulation affords are advised to request a telecopy 
of the signed guarantee form as confirmation.

Prior Approval Program--Principal's and Surety's Fees

    Ten of the eleven comments received on the proposed increase in the 
principal's fee (proposed Sec. 115.32(b)) were opposed to the increase. 
The eleventh comment commended SBA's attempt to make the program self-
financing and recommended an even greater increase in the principal's 
fee than had been proposed by SBA. The vast majority of the comments on 
this topic, however, cited the adverse impact on the contractors and on 
the SBG Program. In particular, there was concern that the increase 
would impose a financial burden on the contractors in the program and 
would result in a dramatic cut-back in program participation. Only the 
higher risk contractors--those without collateral or other alternatives 
to the SBG Program--were predicted to remain in the program.
    Ten comments were also received on the proposed increase in SBA's 
charge to the surety (proposed Sec. 115.32(c))--all opposed. According 
to several sureties, writing bonds in the SBG Program already costs the 
surety more than writing equivalent bonds with standard reinsurance. It 
was predicted that some sureties would leave the program and that 
sureties remaining in the program would attempt to pass the increase on 
to the contractor by raising premium rates.
    SBA has given careful consideration to the concerns surrounding the 
proposed increases in the principal's fee and the surety's fee. SBA 
continues to believe that the long-term goals of the SBG Program will 
be best served if the program can become self-financing. However, the 
costs of any transition to a self-funding program should not outweigh 
the benefits to be derived from the change.
    To allow time for further consideration, SBA has decided to keep 
the fees at their current levels (.06% of the contract amount for the 
principal fee; 20% of the bond premium for the surety fee) at this 
time. Future changes in the fee percentages will be published by SBA in 
the form of a Notice in the Federal Register. SBA is completing an 
analysis of the performance of the SBG Program and evaluating whether 
changes in the fees are warranted, and will publish a Notice within 30 
days of the date of publication.

Prior Approval Program--Contract Increases/Decreases

    Proposed Sec. 115.32(d) elicited nine comments from readers, none 
of which supported the proposal. The proposal contained several 
components. First, sureties would be required to notify SBA of all 
increases or decreases in the contract or bond amount as soon as the 
surety learned of the change. All notifications of increases would have 
to be accompanied by the associated increase in the principal's fee. 
The increase in the surety's fee would be payable in the ordinary 
course of business. Under the current regulation, by contrast, 
notification is required only when the changes in the contract or bond 
amount aggregate at least $10,000 (current Sec. 115.35(c)). No increase 
in the principal's or the surety's fee is computed at that time.
    Second, under the proposal, any single change in the contract or 
bond amount of at least 25% or $50,000 would require prior SBA 
approval. Under the current regulation, changes in the bond amount 
aggregating at least 

[[Page 3270]]
25% or $50,000 require SBA's approval and simultaneous payment of any 
increase in the principal's fee. The increase in the surety's fee is 
payable in the normal course of business.
    Third, under the proposal, payment for the increased fees would be 
due and payable regardless of the size of the check. No exception would 
be made for small sums. Under the current regulation, if the increase 
in the principal's or the surety's fee is less than $40, the amount is 
``disregarded''.
    Fourth, under both the proposal and the current regulation, 
decreases in the contract or bond amount are treated the same as 
increases of an equivalent amount would be treated. Decreases resulting 
in refunds from SBA of a portion of the principal's fee, however, are 
paid directly to the principal under the proposal, but are paid to the 
surety (who then transmits the refund to the principal) under the 
current regulation.
    The comment letters uniformly registered objections to the greater 
administrative burden considered to be imposed by the proposed 
notification and payment requirements. Opposition to the removal of the 
$40 threshold was also expressed consistently, although some commenters 
suggested a $100 threshold in its place. No objection was raised to the 
proposed mechanism for refunding the excess principal's fee.
    SBA has reconsidered its proposal in light of the comments 
received. Instead of requiring notification of all increases and 
decreases in the contract or bond amount, and the payment of associated 
fees, the final rule requires notification of increases or decreases 
only when they aggregate 25% of the contract or bond amount or $50,000. 
Such notification must be accompanied by the increase in the 
principal's fee; however, increases (or decreases) in the principal's 
or the surety's fee will not be due and payable until they aggregate at 
least $40. Increases in the surety's fee will be payable in the 
ordinary course of business, as they are presently. Any single change 
order that increases the bond amount by 25% or $50,000 will require the 
prior approval of SBA. Except for the changes discussed in this 
paragraph, Sec. 115.32(d) is finalized as proposed.

Prior Approval Program--Events Requiring Notification

    Under proposed Sec. 115.35(a)(1)(iv), SBA would require sureties in 
the Prior Approval Program to notify SBA if the surety were to receive 
any adverse information concerning the principal's financial condition 
or possible inability to complete the project or to pay laborers or 
suppliers. One commenter expressed concern that if such notification 
were to be the cause of a principal's loss of eligibility for the 
program, lawsuits against the surety by the principal could follow. SBA 
believes such concern to be unfounded. Section 115.14 of this final 
rule details the grounds for a principal's loss of eligibility to 
participate in the program; adverse information, absent anything else, 
is not among the permitted grounds. SBA's proposal to require 
notification of adverse information is adopted without change.

PSB Program--Premium Rates

    The Surety Association of America has advised SBA that it no longer 
keeps advisory premium rates for the surety industry. Proposed 
Sec. 115.60(a)(2), as well as current Sec. 115.10(d)(2), require that 
PSB Sureties charge principals no more than the Association's advisory 
premium rates. The Association suggested using their advisory premium 
rates in effect on August 1, 1987, as the standard. SBA considers that 
a satisfactory solution for now, but will continue to explore 
alternatives. The final version of Sec. 115.60(a)(2) incorporates that 
change.

PSB Program--Retention of Information

    SBA agrees with the two comment letters received on proposed 
Sec. 115.60(g)(1). PSB Sureties should not be required to keep a record 
of the time of execution of each bond. A record of the date of 
execution of the bond is sufficient. The final version of the 
subsection, redesignated Sec. 115.65(a), reflects this correction.

PSB Program--Principal's and Surety's Fees

    The proposal to increase the principal's and surety's fees in the 
PSB Program (Sec. 115.60(g)(4)) is being revised in the same manner as 
the equivalent provisions in the Prior Approval Program. See the 
discussion above under ``Prior Approval Program--Principal's and 
Surety's fees.''

PSB Program--Contract Increases/Decreases

    The final version of Sec. 115.60(g)(5), redesignated Sec. 115.67, 
mirrors the changes made to the equivalent provision in the Prior 
Approval Program (Sec. 115.32 (b) and (c)), as discussed above under 
``Prior Approval Program--Contract increases/decreases.''

Miscellaneous

    A comment from one of the surety trade associations was received on 
the substitution of SBA form names for SBA form numbers in the proposed 
rule. According to the comment, sureties refer to SBA documents by 
their respective SBA form numbers, not names. SBA recognizes that the 
names of its forms are not as familiar to program participants as its 
form numbers. In order to avoid confusion, SBA has retained the form 
numbers in the final rule.
    In the Supplementary Information section of the proposed rule, SBA 
discussed the proposed deletion of current Sec. 115.30(b), including 
the requirement for the principal to file SBA Form 1624 (Lower Tier 
Certification form) with its initial guarantee application. As SBA 
explained, the requirement would be removed from the regulations and 
would be issued as internal guidance, with the following change: the 
Lower Tier Certification would have to be submitted with each 
application for a principal, not simply the principal's first 
application. One commenter objected to the change as overly burdensome. 
Nevertheless, as was explained in the proposed rule, SBA believes the 
change is necessary to comply with Part 146 of Title 13 of the Code of 
Federal Regulations and that it is consistent with current practice in 
SBA field offices.
    Except as discussed above, SBA adopts as final its proposal to 
amend Part 115.

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

    SBA certifies that this final rule will 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 this rule will not have a significant impact on a 
substantial number of small entities. Final action on the proposed 
increases in the principal's and the surety's fees has been deferred 
until further study of the issue has been completed. There are no fee 
increases in this final rule.
    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 this regulation does not warrant the preparation 
of a Federal 

[[Page 3271]]
Assessment in accordance with Executive Order 12612.

List of Subjects in 13 CFR Part 115

    Small business, Surety bonds.

    For the above reasons, SBA is revising part 115, title 13 of the 
Code of Federal Regulations, to read as follows:

PART 115--SURETY BOND GUARANTEE

Sec.
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  General program policies and 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 Surety's 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.
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  Selection and admission of PSB Sureties.
115.61  Duration of PSB Program.
115.62  Prohibition on participation in Prior Approval Program.
115.63  Allotment of guarantee authority.
115.64  Timeliness requirement.
115.65  General PSB procedures.
115.66  Fees.
115.67  Changes in Contract or bond amount.
115.68  Guarantee percentage.
115.69  Imminent Breach.
115.70  Claims for reimbursement of Losses.
115.71  Denial of liability.

    Authority: 5 U.S.C. app. 3; 15 U.S.C. 687b, 687c, 694a, 694b; 
Pub. L. 101-574, 104 Stat. 2823 (1990).


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. Subpart A of this part 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 of this part contains the 
regulations applicable only to the Prior Approval Program. Subpart C of 
this part 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 of this chapter.
    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. A Contract must not prohibit a Surety from 
performing the Contract upon default of the Principal. A Contract 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 includes a maintenance agreement of 
2 years or less which covers defective workmanship or materials only. 
With SBA's written approval, it can also include a longer maintenance 
agreement covering defective workmanship or materials, or a maintenance 
agreement covering something other than defective workmanship or 
materials. To qualify for such approval, the agreement must be 
ancillary to the Contract for which SBA is guaranteeing a bond, must be 
required to be performed by the same Principal, and must be customarily 
required in the relevant trade or industry.
    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 and/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 (15 
U.S.C. 661), 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. A 
Payment Bond can not require the Surety to pay an amount which exceeds 
the claimant's actual loss or damage.
    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)(2)) 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.

[[Page 3272]]

    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 eligibility of the 
applicant considering its standards and procedures for underwriting, 
administration, claims and recovery. Each applicant must be a 
corporation listed by the U.S. Treasury as eligible to issue bonds in 
connection with Federal procurement contracts.


Sec. 115.12  General program policies and 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 Bond, Final Bond or Ancillary Bond, on any 
eligible Contract. 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 Bonds and Final Bonds are eligible 
for an SBA guarantee if they are executed in connection with an 
eligible Contract and are of a type listed in the ``Contract Bonds'' 
section of the current Manual of Rules, Procedures and Classifications 
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 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 Investment 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 location, regardless 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 for an SBA guaranteed 
bond if neither the annual Contract amount nor the penal sum of the 
bond exceeds $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, without the prior written 
approval of SBA. A violation of this provision is grounds for 
termination from participation in the program. This provision does not 
apply to the sale of an entire business division, subsidiary or 
operation of the Surety.


Sec. 115.13  Eligibility of Principal.

    (a) General eligibility. In order to be eligible for a bond 
guaranteed by SBA, the Principal must comply with the following 
requirements:
    (1) Size. Together with its Affiliates, it must qualify as a small 
business under part 121 of this title.
    (2) 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. A Person's good character and 
reputation is presumed absent when:
    (i) The 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
    (ii) A regulatory authority has revoked, canceled, or suspended a 
license of the Person which is necessary to perform the Contract; or
    (iii) The Person has obtained a bond guarantee by fraud or material 
misrepresentation (as described in Sec. 115.19(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. 

[[Page 3273]]

    (3) 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.
    (4) Availability of bond. It must certify that a bond is not 
obtainable on reasonable terms and conditions without SBA's guarantee.
    (5) 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 who have effectively 
transferred control over the project to one or more subcontractors.
    (6) 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.
    (b) Conflict of interest. A Principal is not eligible for an SBA-
guaranteed bond issued by a particular Surety if that Surety, or an 
Affiliate of that Surety, or a close relative or member of the 
household of that Surety or Affiliate owns, directly or indirectly, 10% 
or more of the Principal. This prohibition also applies to ownership 
interests in any of the Principal's Affiliates.


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 under an 
SBA-guaranteed bond issued on behalf of the Principal:
    (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 of at 
least $1000.
    (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 committed fraud or material misrepresentation in 
obtaining the guaranteed bond.
    (b) Reinstatement of Principal's eligibility. Prior Approval 
Sureties should refer to Sec. 115.36(b) for provisions on reinstatement 
of the Principal's eligibility. A PSB Surety may reinstate a 
Principal's eligibility upon the Surety's determination that 
reinstatement is appropriate.


Sec. 115.15  Underwriting and servicing standards.

    (a) Underwriting. (1) 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 Standard Operating 
Procedures on underwriting and the Surety's principles and practices on 
unguaranteed bonds. The Principal must satisfy the eligibility 
requirements set forth in Sec. 115.13. The Surety must reasonably 
expect that the Principal will successfully perform the Contract to be 
bonded.
    (2) 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 bond must satisfy the eligibility 
requirements set forth in Sec. 115.12(b). The Surety must be satisfied 
as to the reasonableness of cost and the feasibility of successful 
completion of the Contract.
    (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 request job status reports from Obligees of Final Bonds 
guaranteed by SBA. Documentation of the job status requests must be 
maintained by the Surety.


Sec. 115.16  Determination of Surety's Loss.

    Loss is determined as follows:
    (a) Loss under a 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 the Surety recovers by reason of the Principal's defenses 
against the Obligee's demand for performance by the Principal and any 
sums the Surety recovers from indemnitors and other salvage.
    (b) Loss under a 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 a 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 an Ancillary Bond is the amount covered by such bond 
which is attributable to the Contract for which guaranteed Final 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 clear mark-up on expenses or 
any overhead, of the Surety, its attorney, or any other party hired by 
the Surety or the attorney;
    (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 the 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. 115.69. The 
indemnity agreement must be secured by such collateral as the Surety or 
SBA finds appropriate. Indemnity 

[[Page 3274]]
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 unless such recovery is unquestionably 
identifiable as related solely to the non-guaranteed bond. 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) Imprudent 
practices. 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.
    (2) Regulatory violations, fraud. Acts of wrongdoing such as fraud, 
material misrepresentation, breach of the Prior 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.
    1(3) Audit; records. 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.
    (4) Excessive Losses. 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, 
SBA may also require the renegotiation of the guarantee percentage and/
or SBA's charge to the Surety for bonds executed thereafter.
    (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 at least 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) of this section does not, or ceases to, qualify as a 
Surety. SBA may require submission of a Statement of Personal History 
(SBA Form 912) 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 of this chapter. SBA's Administrator may, 
pending a decision pursuant to Part 134 of this chapter, 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 a Prior Approval or PSB Agreement if any of the 
circumstances in paragraphs (a) through (h) of this section exist.
    (a) Excess Contract or bond amount. The total Contract amount at 
the time of Execution of the bond exceeds $1,250,000 in face value (see 
Sec. 115.12(e)), or the bond amount at any time exceeds the total 
Contract amount.
    (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 

[[Page 3275]]
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 the bond amount of at least 25% 
or $50,000; or
    (2) One of the conditions under Part B of Title IV of the 
Investment Act 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 a violation which causes an 
increase in the bond amount of at least 25% or $50,000 in the 
aggregate, 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 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 bond which would increase the bond amount by at least 
25% or $50,000.
    (f) Timeliness. (1) Either:
    (i) The bond was Executed prior to the date of SBA's guarantee; or
    (ii) 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'' (SBA 
Form 991) 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 contained in the original 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.
    (2)(i) For purposes of paragraph (f)(1)(ii) of this section, 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.
    (ii) 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. 115.66 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. The occurrence of any of the 
following:
    (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 under a Performance Bond did not result from 
the Principal's breach or Imminent Breach of the Contract.


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(a)(3) for consequences of 
failure to comply with this section.
    (2) Frequency of PSB audits. Each PSB Surety is subject to audit at 
least once each year by examiners selected and approved by SBA.
    (b) Records. The Surety must maintain the records listed in this 
paragraph (b) for the term of each bond, plus any additional time 
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. 115.65(c)(2);
    (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. 115.69 
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 

[[Page 3276]]
bond, and any other trust accounts, and any reconciliations of such 
accounts;
    (9) Job status reports received from Obligees and documentation of 
each unanswered request for a job status report; and
    (10) 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 those Acts, or of 
any order issued under those 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. 115.15 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 
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, 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)(2)) 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 owned and 
controlled by socially and economically disadvantaged individuals. See 
part 124 of this chapter 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. If the Contract amount 
increases to more than $100,000 after Execution of the bond, 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. If the Contract amount 
increases above the statutory limit of $1,250,000 after Execution of 
the bond, 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. If the Contract amount 
decreases to $100,000 or less after Execution of the bond, 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 equal to a certain percentage of 
the Contract amount. The percentage is determined by SBA and is 
published in Notices in the Federal Register from time to time. The 
Principal's fee is rounded to the nearest dollar and is to be remitted 
to SBA by the Surety together with the form 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. 115.18(a)(4), the Surety 
must pay SBA a guarantee fee on each guaranteed bond (other than a Bid 
Bond) in the ordinary course of business. The fee is a certain 
percentage of the bond Premium, determined by SBA and published in 
Notices in the Federal Register from time to time. 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 amount 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 that aggregate 25% or $50,000, 
as soon as the Surety acquires knowledge of the change. Whenever the 
original bond amount increases as a result of a single change order of 
at least 25% or $50,000, the prior written approval of such increase by 
SBA is required on a supplemental Prior Approval Agreement 
(Supplemental Form 990) 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 computed on the increase 
in the Contract amount. If the increase in the Principal's fee is less 
than $40, such 

[[Page 3277]]
increase is not due until all unpaid increases in the Principal's fee 
aggregate at least $40. The Surety's check for payment of the increase 
in the Surety's guarantee fee, computed on the increase in the bond 
Premium, may be submitted in the ordinary course of business. Increases 
in the Surety's fee are not due until they aggregate at least $40.
    (3) Decreases; refunds. 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. If the amount to be refunded or rebated is less 
than $40, such refund or rebate will not be made until the amounts to 
be refunded or rebated, respectively, aggregate at least $40. 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 Surety's 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 amount of the Principal's bonded and unbonded 
work on hand at any time, including outstanding bids, during the term 
of the bonding line;
    (3) The number of such bonded and unbonded contracts outstanding at 
any time 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. 115.19(f)(1)(ii); 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 after the Execution of any Bid Bonds under a bonding line, the 
Surety must submit a ``Surety Bond Guarantee Underwriting Review'' (SBA 
Form 994B) 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'' (SBA Form 
994C) 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'' 
(SBA Form 994B) 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'' 
(SBA Form 994C) 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 by the 
Principal, 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. OSG's prior approval will be given only if the Surety 
demonstrates to SBA's satisfaction that a breach is 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 amount, 
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 


[[Page 3278]]
Principal's financial condition or possible inability to complete the 
project or to pay laborers or suppliers.
    (2) Timing of notification. Notification must be made in writing at 
the earlier of the time the Surety applies for a guarantee on behalf of 
an affected Principal, or 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'' (SBA Form 994H), 
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 the Loss incurred and paid by the Surety 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 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. The Surety must notify SBA 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 repay 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 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) Any settlement proposal 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. 115.14(a), 
the Surety may recommend that such Principal's eligibility be 
reinstated. OSG may agree to reinstate the Principal and its Affiliates 
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 OSG, 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 are 
appropriate.
    (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  Selection and admission of PSB sureties.

    (a) Selection of PSB Sureties. 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 Surety 
Association of America's advisory premium rates in effect on August 1, 
1987;
    (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) Admission of PSB Sureties. 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.


Sec. 115.61  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.


Sec. 115.62  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.


Sec. 115.63  Allotment of guarantee authority.

    (a) 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. 

[[Page 3279]]

    (b) 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 guarantee has expired (see Sec. 115.12(c)), 
SBA debits or credits the Surety's allotment accordingly.
    (c) 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.
    (d) 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.


Sec. 115.64  Timeliness requirement.

    There must be no Execution or approval of a bond by a PSB Surety 
after commencement of work under a Contract unless the Surety obtains 
written approval from the AA/SG. To apply for such approval, the Surety 
must submit a completed ``Surety Bond Guarantee Agreement Addendum'' 
(SBA Form 991), together with the evidence and certifications described 
in Sec. 115.19(f)(1)(ii).


Sec. 115.65  General PSB procedures.

    (a) 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 of 
approval and Execution of each bond. See also Sec. 115.19(f). 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.
    (b) Usual staff and procedures. The approval, Execution and 
administration by a PSB Surety of SBA guaranteed bonds must be handled 
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 Obligees in accordance with its own procedures.
    (c) Notification to SBA. (1) Approvals. A PSB Surety must notify 
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 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.
    (2) Other events requiring notification. The PSB Surety must notify 
SBA within 30 calendar days of the name and address of any Principal 
against whom legal action on the bond has been instituted; whenever an 
Obligee has declared a default; whenever the Surety has established or 
added to a claim reserve; of the recovery of any amounts on the 
guaranteed bond; and of any decision by the Surety to bond any such 
Principal again.


Sec. 115.66  Fees.

    The PSB Surety must pay SBA a certain percentage of the Premium it 
charges on Final Bonds. The PSB Surety must also remit to SBA the 
Principal's payment for its guarantee fee, equal to a certain 
percentage of the Contract amount. The fee percentages are determined 
by SBA and are published in Notices in the Federal Register from time 
to time. Each fee is 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.


Sec. 115.67  Changes in Contract or bond amount.

    (a) Increases. The PSB Surety must process Contract or bond amount 
increases within its allotment in the same manner as initial guaranteed 
bond issuances (see Sec. 115.65(c)(1)). The Surety must present checks 
for additional fees due from the Principal and the Surety on increases 
aggregating 25% of the contract or bond amount or $50,000, and attach 
such payments to the respective monthly bordereau. If the additional 
Principal's fee or Surety's fee is less than $40, such fee is not due 
until all unpaid increases in such fee aggregate at least $40.
    (b) Decreases. 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. No refund or adjustment will be made until the amounts to 
be refunded or rebated, respectively, aggregate at least $40.


Sec. 115.68  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. 115.69  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 
under this section cannot exceed 10% of the Contract amount, 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 under any provision of 
these regulations in this part.
    (c) Recordkeeping requirement. The PSB Surety must keep records of 
payments made to avoid Imminent Breach.


Sec. 115.70  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 

[[Page 3280]]
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 responsibilities. 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, and when the 
Surety has established a claim reserve. The Surety may dispose of 
collateral at fair market value only. 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 SBA's 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 repay the specified amounts to SBA.
Sec. 115.71  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 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: January 22, 1996.
John T. Spotila,
Acting Administrator.
[FR Doc. 96-1347 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P