3266 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

another CDC within or adjoining the

deficient CDC’s Area of Operations. If

there is no suitable CDC, SBA may

approve a transfer to another entity.

Future service fees from transferred

loans will be paid to the transferee. In

addition, the CDC’s processing authority

will be temporarily suspended.

§ 120.984 Suspension or revocation of

CDC certification.

(a) Suspend or revoke. The AA/FA

may suspend or revoke the CDC’s

certification if a CDC:

(1) Violates a statute, an SBA

regulation, or the terms of a Debenture,

authorization, or agreement with SBA;

(2) Makes a material false statement,

knowingly misrepresents, or fails to

state a material fact;

(3) Fails to maintain good character;

(4) Fails to operate according to

prudent lending standards;

(5) Fails to correct servicing,

collection, reporting, or other

deficiencies; or

(6) Is unable or unwilling to operate

in accordance with the requirements of

this part.

(b) Transfer portfolio. Upon

suspension or revocation, the CDC must

transfer its remaining portfolio and any

504 applications or financings in

process to another CDC designated or

approved by SBA. If a pending 504

financing is completed after a transfer,

any deposit must also be transferred.

Any fees must be apportioned by SBA

between the two CDCs in proportion to

services performed.

(c) Provide written notice. SBA must

give written notice to the CDC at least

10 business days prior to the effective

date of a suspension or revocation,

informing the CDC of the opportunity

for a hearing pursuant to part 134 of this

chapter.

Enforceability of 501, 502 and 503

Loans and Other Laws

§ 120.990 501, 502, and 503 loans.

SBA has discontinued loan programs

for 501, 502, and 503 loans. Outstanding

loans remain under these programs, and

Borrowers, CDCs, and SBA must comply

with the terms and conditions of the

corresponding notes and Debentures,

and the regulations in this part in effect

when the obligations were undertaken

or last in effect, if applicable.

§ 120.991 Effect of other laws.

No State or local law may preclude or

limit SBA’s exercise of its rights with

respect to notes, guarantees, Debentures

and Debenture Pools, or of its

enforcement rights to foreclose on

collateral.

PARTS 108, 116, 122, and 131—

[REMOVED]

2. Parts 108, 116, 122, and 131 are

removed.

Dated: January 22, 1996.

John T. Spotila,

Acting Administrator.

[FR Doc. 96–1432 Filed 1–30–96; 8:45 am]

BILLING CODE 8025–01–P

13 CFR Part 115

Surety Bond Guarantee

AGENCY: Small Business Administration

(SBA).

ACTION: Final rule.

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 (§ 115.60).

Subsequent sections (§§ 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 § 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 § 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 § 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
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 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

§ 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 § 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

§ 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 § 115.13(a)(5))

still requires principals to specify the

percentage of work under the contract to

be subcontracted.

Proposed § 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

§ 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

§ 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 § 115.36(b)). SBA is

rewording proposed § 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 § 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 § 115.14(a) are therefore

unchanged in the final rule.

Subsection (3) of proposed § 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

(§ 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 § 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

§ 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

§ 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

§ 115.15(a) is finalized as proposed.

Four comments were also received on

the proposed rewrite of the program’s
3268 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

servicing standards (proposed

§ 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 § 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 § 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 § 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

§ 115.18(a)(3), now designated

§ 115.18(a)(4), clarifies this point.

Denial of Liability—Excess Bond

Amount

Under proposed § 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 § 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

§ 115.19(d).
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3269

Denial of Liability—Alteration

Under proposed § 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, § 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

§ 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 § 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 § 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

§ 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

§ 115.19(h)(6) makes this technical

correction.

Audits and Investigations

In connection with the requirement

under the final version of § 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 § 115.21(b).

Prior Approval Program—SBA

Approval

SBA is finalizing proposed § 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 (§ 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 § 115.32(b))

were opposed to the increase. The

eleventh comment commended SBA’s

attempt to make the program selffinancing 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 § 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 § 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 § 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
3270 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

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, § 115.32(d) is finalized as

proposed.

Prior Approval Program—Events

Requiring Notification

Under proposed § 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 § 115.60(a)(2), as

well as current § 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 § 115.60(a)(2)

incorporates that change.

PSB Program—Retention of

Information

SBA agrees with the two comment

letters received on proposed

§ 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 § 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 (§ 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 § 115.60(g)(5),

redesignated § 115.67, mirrors the

changes made to the equivalent

provision in the Prior Approval Program

(§ 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 § 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
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 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).

§ 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.

§ 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

§ 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

§ 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 §§ 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.
3272 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

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.

§ 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.

§ 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.

§ 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

§ 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 § 115.33.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 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.

§ 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 § 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.

§ 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 § 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

§ 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.

§ 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, crossclaims, 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.

§ 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 § 115.34(a) or § 115.69.

The indemnity agreement must be

secured by such collateral as the Surety

or SBA finds appropriate. Indemnity
3274 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

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.

§ 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

§§ 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

§ 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.

§ 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

§ 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
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 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 coObligee any Person that does not qualify

as an Obligee under § 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

§ 115.30(d) for Prior Approval Sureties

or § 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 § 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

§ 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.

§ 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.

§ 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 § 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 § 115.35(a) or

§ 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 § 115.34(a)

or § 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
3276 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

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

§ 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

§ 115.13 and that the underwriting

standards set forth in § 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

§ 115.32(b)) to SBA within 45 days, or

in the case of a bonding line, within 15

business days (see § 115.33(d)(2)) after

Execution of the bond.

§ 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%×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.

§ 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 § 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

§ 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
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 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.

§ 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

§ 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.

§ 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

§ 115.17(b).

§ 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
3278 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

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.

§ 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 § 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

§ 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.

§ 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.

§ 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.

§ 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.
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 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 § 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 nonissuance has been determined. Until the

Surety has so notified SBA, it cannot

rely on such credit.

§ 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

§ 115.19(f)(1)(ii).

§ 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 § 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.

§ 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.

§ 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 § 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.

§ 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 § 115.31(d).

§ 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.

§ 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
3280 Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations

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 nonguaranteed 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.

§ 115.71 Denial of liability.

In addition to the grounds set forth in

§ 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

13 CFR Part 121

Small Business Size Standards

AGENCY: Small Business Administration.

ACTION: Final rule.

SUMMARY: In response to President

Clinton’s government-wide regulatory

reform initiative, the Small Business

Administration (SBA) has completed a

page-by-page, line-by-line review of all

of its existing regulations. As a result,

SBA is clarifying and streamlining its

regulations. This final rule improves the

Agency’s size program by simplifying

and clarifying language in the existing

rules, conforming these rules to present

SBA policies and practices, and

providing some substantive

modifications to streamline the delivery

of services to the public. The revised

regulations will be more understandable

and much easier to use, and will reduce

the number of sections comprising Part

121 from eighteen to thirteen. The rule

improves language, but does not change

the existing size standards which apply

to particular industries.

EFFECTIVE DATE: This rule is effective on

March 1, 1996.

FOR FURTHER INFORMATION CONTACT: John

W. Klein, Chief Counsel for Special

Programs, Office of General Counsel, at

(202) 205–6645.

SUPPLEMENTARY INFORMATION: On

November 24, 1995, SBA published a

proposed rule in the Federal Register

(60 FR 57982) to completely revise its

regulations governing the size

determination program. SBA’s intent in

finalizing that rule is to streamline the

size standards operation by simplifying

and clarifying existing regulatory

language and by eliminating

unnecessary, irrelevant, or obsolete

provisions. The final rule amends office

titles to reflect a previous reorganization

of functions within the structure of

SBA. SBA has attempted to rewrite Part

121 in plain English in order to make

the regulations more readable and less

confusing.

The proposed rule contained

eligibility requirements for

organizations for the handicapped to

receive awards of contracts set aside for

small business and procedures for filing

protests regarding the status of

handicapped organizations (proposed

§§ 121.1201–121.1206). Those sections

have been removed from this final rule

because the authority for such eligibility

has expired. As a consequence,

§§ 121.1301–121.1305 of the proposed

rule have been renumbered as

§§ 121.1201–121.1205 in this final rule.

SBA received and considered 25

timely comments in response to the

proposed rule. The comments, as well

as SBA’s response to them, are

discussed below. Other than the

changes identified below in response to

the comments and the elimination of

proposed §§ 121.1201–121.1206 (as

discussed above), the regulatory text of

Part 121 has not been changed from the

proposed rule. For a section by section

analysis of the revised Part 121 and

SBA’s rationale for any changes from

the pre-existing regulations, see the

supplementary information published

as part of the proposed rule (60 FR

57982).

Analysis of Comments Received

SBA received and considered eight

comments to the proposed text for its

affiliation regulation (proposed

§ 121.103). Six of these comments

responded to the proposed exclusion

from affiliation coverage afforded

certain private investors that are

engaged in the business of providing

equity and/or debt financing to third

parties. In addition to the existing

exclusion from affiliation for Small

Business Investment Companies (SBICs)

and Development Companies, the

proposed rule added an exclusion, for

purposes of SBIC assistance only, for

concerns owned by certain venture

capital firms, pension funds, and

charitable entities exempt from federal

taxation under § 501(c) of the Internal

Revenue Code. The proposed rule

imposed the same control limitations on

these investors as those imposed by

SBA on SBICs under 13 CFR Part 107.

While the commenters supported

SBA’s intent to add an exclusion from

affiliation for the listed investors, they

thought that the proposal did not go far

enough. One commenter agreed with the

proposal to include venture capital

operating companies (VCOCs) in the list

of investors which would not be

affiliated with applicant concerns, but

felt that limiting the exception to

financial investors that technically

qualify as VCOCs might not achieve the

desired goal. The commenter pointed

out that a fund which resembles a VCOC

because it has at least 50% of its

portfolio in ‘‘qualified venture capital

investments’’ and it obtains and

exercises certain ‘‘management rights’’

with respect to those investments may

nevertheless fail to qualify as a VCOC if

its first investment was a passive

investment. The commenter suggested

that the affiliation exemption should be

made available to any investing

company that (1) has 50% of its

portfolio in ‘‘qualified venture capital

investments’’ at the time size is

determined, or (2) would qualify as a

VCOC but for its first investment.

SBA has considered the suggestion

but has decided to limit

§ 121.103(b)(5)(i) to VCOCs, as

proposed. SBA understands that other

investors may exist whose investment

goals, policies and activities are