[Federal Register Volume 72, Number 121 (Monday, June 25, 2007)]
[Rules and Regulations]
[Pages 34597-34600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2983]



13 CFR Part 115

RIN 3245-AF39

Surety Bond Guarantee Program-Preferred Surety Qualification, 
Increased Guarantee for Veteran and Service-Disabled Veteran-Owned 
Business, Deadline for Payment of Guarantee Fees, Denial of Liability, 
and Technical Amendments

AGENCY: U.S. Small Business Administration (SBA).

ACTION: Final rule.


SUMMARY: On September 26, 2006, SBA published a proposed rule in the 
Federal Register addressing six changes to the SBA Surety Bond 
Guarantee (SBG) Program in order to improve operation of the SBG 
program and make it easier for sureties and small business concerns to 
participate in the program. Specifically, this rules makes the 
following amendments to the program: (1) Gives effect to the statutory 
reduction in the frequency of audits required of Preferred Surety Bond 
(PSB) Sureties; (2) obligates SBA to guarantee 90 percent of the loss 
incurred by a Prior Approval Surety on bonds issued

[[Page 34598]]

on behalf of small businesses owned and controlled by veterans, and 
Service-disabled veterans; (3) imposes a 60-day deadline for the 
submission of surety fees to SBA; (4) allows PSB Sureties to charge 
premiums in accordance with applicable state ceilings, as presently 
permitted under the Prior Approval Program; (5) deletes the existing 
reference to the expiration of the PSB Program; and (6) allows 
Affiliates of a PSB Surety to participate in the Prior Approval 

DATES: This rule is effective July 25, 2007.

FOR FURTHER INFORMATION CONTACT: Frank Lalumiere, Director, Office of 
Surety Guarantees, (202) 205-6540; [email protected].

    SBA can guarantee bonds for contracts up to $2 million, covering 
bid, performance and payment bonds for small and emerging contractors 
who cannot obtain surety bonds through regular commercial channels. 
SBA's guarantee gives sureties an incentive to provide bonding for 
small businesses and thereby strengthens their ability to obtain 
bonding and greater access to contracting opportunities.
    Section 411(g)(3) of the Small Business Investment Act of 1958 (the 
Act) formerly required PSB Sureties to be audited every year. 15 U.S.C. 
694b(g)(3). As amended by Public Law 108-447, Div. K. Section 203, the 
Small Business Reauthorization and Manufacturing Assistance Act of 
2004, the Act now requires audits to be made at least once every 3 
years. This final rule implements this statutory requirement.
    In relevant part, Section 4(b)(1) of the Small Business Act 
provides that SBA ``shall give special consideration to veterans of the 
Armed Forces of the United States and their survivors and dependents.'' 
15 U.S.C. 633(b)(1). This final rule encourages the issuance of bonds 
on behalf of small business concerns owned and controlled by veterans 
and Service-disabled veterans, by guaranteeing to pay 90 percent of a 
Prior Approval Program Surety's loss. This guaranty affords such 
concerns more opportunity to obtain contracts generally.
    Section 411(h) of the Small Business Investment Act mandates the 
operation of the program ``on a prudent and economically justifiable 
basis'' and authorizes SBA to impose fees on both small business 
concerns and sureties, ``to be payable at such time as may be 
determined by [SBA].'' Accordingly, this final rule establishes a clear 
deadline for a Prior Approval Surety's payment of the guarantee fees 
owed to SBA in order to maintain SBA's guarantee.
    The final rule also allows PSB Program Sureties to charge no more 
than the premium rates permitted under applicable State law, as Prior 
Approval Sureties are already allowed. The initial regulations for the 
PSB program specified that the premium rates charged by PSB Sureties 
could not exceed the Surety Association of America's advisory premium 
rates in effect on August 1, 1987. SAA discontinued its rate setting 
function shortly after promulgating the 1987 rates, and participating 
surety companies have been obligated to use the 1987 SAA rates for the 
past 18 years despite economic and market place changes. This change 
puts the Preferred and Prior Approval Programs on the same footing by 
relying on the individual State oversight bodies for setting fee rates.
    From its creation in 1988 until 2004, the PSB program was a pilot 
program, subject to automatic termination in the absence of affirmative 
Congressional action. Now that the PSB program has been made permanent, 
the present regulation that speaks of the termination of the program 
has been removed.
    Finally, pursuant to this rule Affiliates of PSB Sureties are no 
longer barred from participation in the Prior Approval program. The 
term ``Affiliate'' is defined in 13 CFR part 121, but in the context of 
the present discussion it means a relationship in which one Surety owns 
or otherwise controls another Surety, or in which two or more Sureties 
are commonly owned by, or under common control with, a third party. A 
series of mergers and acquisitions in the surety industry in recent 
years had caused Sureties previously eligible to participate in the 
Prior Approval Program to become Affiliates of PSB Sureties and lose 
their eligibility. This final amendment should encourage increased 
participation in the Prior Approval Program by otherwise qualified 
Sureties that are Affiliates of PSB Sureties.

Discussion of Public Comments

    SBA received five public comments on the proposed rule, three from 
associations and two from individual surety companies. Each commenter 
supported the proposed changes, with two exceptions.
    Four commenters recommended removal of the proposed language in 
Sec.  115.19, Denial of Liability, that would allow SBA to deny bond 
liability as a result of the failure of a surety company to pay the 
required surety fee. In general, the commenters stated that such a 
requirement would weaken the SBA/Surety Industry partnership that is 
designed to assist small businesses. While SBA values its partners in 
the surety industry, the Agency has a fiduciary responsibility to 
ensure timely payment of guaranty fees in order to honor its guaranty. 
Accordingly, the language in the proposed rule regarding the denial of 
bond liability if the surety fee is not paid within 60 days is 
retained. The proposed rule also included a provision that the guaranty 
can be reinstated if a valid reason for the delinquent payment of 
guaranty fee is provided and the contract is not in default. This 
language is also retained in the final rule.
    Three commenters expressed concern with the proposed 45 days fee 
payment requirement. One commenter requested clarification of when the 
45-day period begins. A few commenters said it would be difficult to 
remit payment within 45 days, in part because many sureties do not 
receive payment on the final bond premium until 45 days after the bond 
is issued, and to require payment before collection on the premium is 
unduly punitive. In consideration of these comments, in this final 
rule, SBA has amended the proposed rule. First, the proposed 45-day 
period cited in Sec.  115.32 is increased to 60 days. SBA believes that 
the additional 15 days will provide time for a surety company agent to 
provide the surety company with sufficient information for the surety 
company to make payment. Second, the same section is also revised to 
specify that payment is required within 60 days following SBA approval 
of the Prior Approval Payment or Performance Bond on the SBA Form 990, 
Guarantee Agreement.
    One commenter also suggested that the agency should extend the 10-
day deadline for PSB sureties to submit the executed bond to SBA to a 
15-day deadline. SBA did not propose to amend this particular 
requirement, and it will be considered among other changes in a future 

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 
U.S.C. 601-612)

Compliance With Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a significant regulatory action for purposes of 
Executive Order 12866, thereby necessitating a regulatory impact 
analysis. SBA

[[Page 34599]]

published this analysis in the Proposed Rule. The agency did not 
receive any comments addressing the analysis and is not aware of any 
additional information that would require revision of its initial 

Compliance With Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.

Compliance With Executive Order 13132

    For purpose of E.O. 13132, the SBA has determined that the rule 
will not have substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. Therefore, for the purpose of Executive Order 13132, SBA 
determines that this final rule has no federalism implications 
warranting preparation of a federalism assessment.

Compliance With Paperwork Reduction Act, 44 U.S.C. Ch. 35

    SBA has determined that this final rule does not impose additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C., Chapter 35.

Compliance With the Regulatory Flexibility Act, 5 U.S.C. 601-612

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their actions on 
small entities, small non-profit enterprises, and small local 
governments. Pursuant to the RFA, when an agency issues a rulemaking, 
the agency must prepare a regulatory flexibility analysis which 
describes the impact of the rule on small entities. However, Section 
605 of the RFA allows an agency to certify a rule, in lieu of preparing 
an analysis, if the rulemaking is not expected to have a significant 
economic impact on a substantial number of small entities. Within the 
meaning of RFA, SBA certifies that this rule will not have a 
significant economic impact on a substantial number of small entities. 
Consequently, this rule doe not meet the substantial number of small 
businesses criterion anticipated by the Regulatory Flexibility Act.
    There are about a dozen Sureties that participate in the SBA 
program, and this rule does not impose any additional cost or any 
significant burden on them. Allowing PSB Sureties to charge the highest 
premium rates permitted by applicable State law raises the possibility 
of an economic impact on those contractors that now receive their 
bonding from PSB Sureties, but out of 843 contractors participating in 
the SBA program in FY2005, about 143 were bonded by PSB Sureties. Prior 
Approval Sureties are already allowed to charge the premium rates 
permitted by the individual State law, so the economic effect, if any, 
of this final rule would be to subject approximately 17 percent of the 
contractors in the SBA program to the risk that they might have to pay 
the same premium rates that their fellow participating contractors must 
pay. No public comments were received in response to the RFA analysis 
provided in the proposed rule.

List of Subjects in 13 CFR Part 115

    Claims, Reporting and recordkeeping requirements, Small businesses, 
Surety bonds.

For the reasons stated in the preamble, the Small Business 
Administration amends 13 CFR part 115 as follows:


1. The authority citation for part 115 is revised to read as follows:

    Authority:  5 U.S.C. app. 3; 15 U.S.C. 687b, 687c, 694a, 694b 
note, Pub. L. 106-554; Pub. L. 108-447, Div K, Sec.  203.

2. Amend Sec.  115.10 by adding the following definitions in 
alphabetical order.

Sec.  115.10  Definitions.

* * * * *
    Service-Disabled Veteran means a veteran with a disability that is 
service-connected, as defined in Section 101(16) of Title 38, United 
States Code.
    Small Business Owned and Controlled by Service-Disabled Veterans 
    (1) A Small Concern of which not less than 51 percent is owned by 
one or more Service-Disabled Veterans; or a publicly-owned Small 
concern of which not less than 51 percent of the stock is owned by one 
or more Service-Disabled Veterans; and
    (2) The management and daily business operations of which are 
controlled by one or more Service-Disabled Veterans, or in the case of 
a Service-Disabled Veteran with permanent and severe disability, the 
spouse or permanent caregiver of such Veteran.
    Small Business Owned and Controlled by Veterans means:
    (1) A Small Concern of which not less than 51 percent is owned by 
one or more Veterans; or a publicly-owned Small Concern of which not 
less than 51 percent of the stock is owned by one or more Veterans; and
    (2) The management and daily business operations of which are 
controlled by one or more Veterans.
* * * * *
    Veteran has the meaning given the term in Section 101(2) of Title 
38, United States Code.

3. Revise Sec.  115.19(g) to read as follows:

Sec.  115.19  Denial of liability.

* * * * *
    (g) Delinquent fees. 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, or has not made timely payment of the 
Surety's fee within the time period required by Sec.  115.32(c). SBA 
may reinstate the guarantee upon showing that the contract is not in 
default and that a valid reason exists why a timely remittance or 
payment was not made.
* * * * *

4. Revise Sec.  115.21(a)(2) to read as follows:

Sec.  115.21  Audits and investigations.

    (a) * * *
    (1) * * *
    (2) Frequency of PSB Audits. Each PSB Surety is subject to an audit 
at least once every 3 years by examiners selected and approved by SBA.
* * * * *

5. Revise Sec.  115.31(a)(2) to read as follows:

Sec.  115.31  Guarantee percentage.

    (a) * * *
    (1) * * *
    (2) The bond was issued on behalf of a small business owned and 
controlled by socially and economically disadvantaged individuals, on 
behalf of a qualified HUBZone small business concern, or on behalf of a 
small business owned and controlled by veterans or a small business 
owned and controlled by Service-disabled veterans.
* * * * *

6. Revise Sec.  115.32 (c) and (d)(2) to read as follows:

Sec.  115.32  Fees and premiums.

* * * * *
    (c) SBA charge to Surety. SBA does not charge Sureties application 
or Bid Bond guarantee fees. Subject to

[[Page 34600]]

Sec.  115.18(a)(4), the Surety must pay SBA a guarantee fee on each 
guaranteed bond (other than a Bid Bond) within 60 calendar days after 
SBA's approval of the Prior Approval Payment or Performance Bond on the 
SBA Form 990, Guarantee Agreement. 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 Contract or bond amount changes.
    (d) * * *
    (1) * * *
    (2) Increases; fees. Notification of increases in the Contract or 
bond amount under this paragraph (d) must be accompanied by the 
Principal's check for 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, no payment is due until the total 
amount of increases in the Principal's fee equals or exceeds $40. The 
Surety's check for payment of the increase in the Surety's guarantee 
fee, computed on the increase in the bond Premium, must be submitted to 
SBA within 60 calendar days of SBA's approval of the supplemental Prior 
Approval Agreement, unless the amount of such increased guarantee fee 
is less than $40. When the total amount of increase in the guarantee 
fee equals or exceeds $40, the Surety's check must be submitted to SBA 
within 60 calendar days.
* * * * *

7. Revise Sec.  115.60(a)(2) to read as follows:

Sec.  115.60  Selection and admission of PSB Sureties.

    (a) * * *
    (1) * * *
    (2) An agreement that the Surety will neither charge a bond premium 
in excess of that authorized by the appropriate State insurance 
department, nor impose any non-premium fee unless such fee is permitted 
by applicable State law and approved by SBA.
* * * * *

Sec.  115.61  [Removed & Reserved]

8. Remove and reserve Sec.  115.61.
9. Revise Sec.  115.62 to read as follows:

Sec.  115.62  Prohibition on participation in Prior Approval program.

    A PSB Surety is not eligible to submit applications under subpart B 
of this part. This prohibition does not extend to an Affiliate, as 
defined in 13 CFR Sec.  121.103, of a PSB Surety that is not itself a 
PSB Surety provided that the relationship between the PSB Surety and 
the Affiliate has been fully disclosed to SBA and that such Affiliate 
has been approved by SBA to participate as a Prior Approval Surety 
pursuant to Sec.  115.11.

Steven C. Preston,
[FR Doc. 07-2983 Filed 6-22-07; 8:45 am]