Surety Bond Guarantee

SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

Surety Bond Guarantee

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: SBA proposes to revise the rules governing the Surety Bond

Guarantee Program. It seeks to eliminate inconsistencies, clarify

procedures, accommodate program experience and industry changes, and

provide for more efficient program operation. It also seeks to clarify

and shorten regulations where appropriate, eliminate redundant

provisions, consolidate and reorganize sections, and clarify ambiguous

language.

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

1995.

ADDRESSES: Comments should be sent to David R. Kohler, Regulatory

Reform Initiative Team Leader (115), U.S. Small Business

Administration, 409 3rd Street, S.W., Suite 13, Washington, D.C.,

20416.

FOR FURTHER INFORMATION CONTACT: Barbara Brannan, Office of Surety

Guarantees, (202) 205-6540.

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a

Memorandum to all federal agencies, directing them to simplify their

regulations. In response to this

[[Page 58264]]

directive, SBA has completed a page-by-page, line-by-line review of all

of its existing regulations to determine which might be revised or

eliminated. As a result of its review of the regulations governing the

Surety Bond Guarantee Program, SBA is proposing to eliminate obsolete

or redundant regulations, substantively revise others, and reorganize

all of Part 115 in a more readable format.

As background, the following analysis discusses the anticipated

effect of this proposed rule on SBA's current regulations.

Changes to Part 115 are being proposed which would reorganize and

re-word some of the sections, and consolidate others. Sections, as well

as subsections within the sections, have been reordered into a more

logical sequence so that they are easier to follow. The major

consolidations consist of (1) combining Secs. 115.39 and 115.62 from

Subparts B and C, respectively, and moving the new section to Subpart A

(where provisions are applicable to both the Prior Approval and

Preferred Surety Bond Programs) as new Sec. 115.18 ``Refusal to issue

further guarantees'' and (2) combining Secs. 115.40 and 115.63 and

moving the new section to Subpart A as new Sec. 115.21 ``Audits and

investigations.''

Substantive changes are also proposed. The most significant change

is an increase in the fees paid to SBA by participating sureties and

principals. This is being proposed in an attempt to make the program

self-financing to overcome uncertainties and fluctuations in the

funding of the program. In addition, all increases in the contract or

bond amount will require the payment of additional fees by the

principal and the surety, and the $40.00 threshold under which fees do

not need to be paid is proposed to be eliminated. Conversely, all

decreases in the contract or bond amount will require SBA to reimburse

the proportionate amount of fees paid by the principal and the surety.

A brief summary of the primary changes follows.

Proposed Sec. 115.10, which sets forth definitions of terms used in

this part, eliminates some current definitions, adds definitions, and

changes others. ``Investment Act'' is added as a defined term for the

Small Business Investment Act of 1958, as amended. ``Amount of

contract'' is eliminated as a defined term and moved to Sec. 115.12(e).

``Approval or approved'' is proposed to be deleted. ``Contract'' is

clarified to mean a written obligation and could include an agreement

to cover defective workmanship, but not defective materials, unless

agreed to by SBA. ``Contractor'' is eliminated and replaced in the text

of the regulations by ``Principal,'' which is already defined in the

current regulations. ``Issuance or issued'' is proposed to be deleted

because the meaning is vague, and replaced with ``Execution'' which

more clearly pinpoints the time at which a certain action is taken. In

the proposed regulations, conforming changes are made throughout the

text.

The definition of ``Obligee'' would make clear that the addition of

co-obligees does not increase the liability of the surety under the

bond. A new term, ``Prior Approval Surety,'' would be added to refer to

those sureties that are participants in SBA's program requiring prior

SBA approval on guarantees. Two new definitions would be added for the

guarantee agreements in the Prior Approval Program and the PSB Program:

``Prior Approval Agreement'' would be defined as the guarantee

agreement (Current SBA Form 990) entered into between a Prior Approval

Surety and SBA for a specific bond; ``PSB Agreement'' would be defined

as the agreement authorizing a PSB Surety to participate in the PSB

program.

Proposed Sec. 115.11, ``Applying to participate in the Surety Bond

Guarantee Program,'' is a new section which provides general guidance

about applying to the Prior Approval and PSB programs.

Proposed Secs. 115.12 (c) and (d) are currently found in

Sec. 115.10(c). The latter is proposed to be rewritten into two

subsections, one concerning the ``Eligibility of Sureties'' and the

other, the ``Guarantee agreement.''

Proposed Sec. 115.12(e), ``Amount of Contract,'' is proposed to be

moved from current Sec. 115.11. This would eliminate the phrase as a

defined term although the substantive provisions remain the same.

Within this section, the term ``issuance'' is replaced with

``Execution'' since this substitution of terms is proposed in

Sec. 115.10.

Proposed Sec. 115.12(f) would be a new provision which prohibits

the sale or transfer of surety files or accounts. This is proposed to

maintain SBA's control over the accounts in accordance with its

guarantee agreement with the surety. Without this prohibition, in the

event of a transfer of files or accounts, SBA might have no control

over a purchaser's methods of recovery.

Proposed Sec. 115.13(c) clarifies that a principal must certify

that a bond is expressly required by the bid solicitation or the

original contract.

Proposed Sec. 115.13(e) clarifies the concept that SBA will not

guarantee bonds for principals who are primarily brokers or

construction managers, replacing the term ``packagers.''

Proposed Sec. 115.13(g) is a new provision which reflects current

practice. This provision states that SBA will not issue a guarantee on

bonds where the surety, or any of its affiliates, close relatives or

members of its household, owns 10% or more of the principal.

The substance of proposed Sec. 115.14 ``Loss of Principal's

eligibility for future assistance,'' is derived from current

Sec. 115.34, but is re-worded, and several other instances whereby a

principal will be ineligible for guaranteed bonds are added. It is

relocated to Subpart A so that it will apply to both the Prior Approval

and the PSB Surety Bond Guarantee Programs.

Proposed Sec. 115.15(a), currently Sec. 115.32(a), specifies the

underwriting standards to be adhered to by sureties rather than

requiring sureties to consult the SOP as the current regulation does.

Proposed Sec. 115.15(b), currently Sec. 115.32(b) concerning

servicing, imposes a new requirement that sureties monitor the progress

of principals on bonded contracts guaranteed by SBA to insure that

additional guarantees are not issued if there are problems with the

work on hand.

Proposed Sec. 115.16, ``Calculation of Loss,'' is a new section

bringing together all provisions dealing with loss amount. ``Loss after

excess contract amount'' is eliminated as a defined term and the

substantive provisions moved to new Secs. 115.31(d) and 115.61. ``Loss

adjustment expense,'' ``Loss from litigation cost'' and ``Loss from

attorneys' fees and damages'' are restructured into two paragraphs

setting forth the expenses included in the calculation of loss and

those that are not. The new paragraphs specify that allowable expenses

must be itemized and documented and must be attributable solely to the

loss under the guaranteed bond. In addition, overhead and mark-up on

expenses are explicitly excluded.

Proposed Sec. 115.17(a), currently Sec. 115.37(a), is rewritten and

relocated to Subpart A to apply to both the Prior Approval and

Preferred Programs. There are also some new provisions. One prohibits

sureties from separately collateralizing the non-guaranteed portion of

the bond. Without this provision, a surety would have no incentive to

pursue recovery since it might be able to recoup 100% of its losses

from SBA and the collateral securing the unguaranteed portion. Sureties

would also be prohibited from entering into an agreement by which they

indemnify a principal since such

[[Page 58265]]

an agreement would create a conflict of interest; nor could an

indemnity agreement be obtained from an agent or other representative

of the surety.

Proposed Sec. 115.17(b), currently Sec. 115.37(c), makes clear that

SBA is entitled to its guaranteed share of all salvage and recovery

related to the guaranteed bond or any other bond provided by the surety

on behalf of the principal.

Proposed Sec. 115.18, ``Refusal to issue further guarantees,''

would be a consolidation of current Secs. 115.39 and 115.62. In

addition, the provisions in current Secs. 115.39(a) and 115.62(a) that

a surety may file a petition for review of certain agency actions is

proposed to be modified to provide that only suspensions and

terminations of surety bond guarantee participants are reviewable by

the SBA Office of Hearings and Appeals.

Grounds on which SBA may deny liability are scattered throughout

the current regulations. Proposed Sec. 115.19, ``Denial of liability,''

consolidates these provisions (currently found at Secs. 115.10(g),

115.13, 115.31(c)(2) and 115.64(b)), and some new ones are added.

Proposed Sec. 115.19(a), ``Excess Contract or bond amount,'' adds, as a

new reason for denial of liability, the circumstance where the bond

amount exceeds the contract amount.

Current Secs. 115.13 (d) and (e)(2) provide that regulatory

violations or alterations to a bond or contract by a surety which cause

an increase in the bond liability by more than 25% or $50,000 in the

aggregate, whichever is less, are grounds on which SBA may deny

liability under its guarantee. Proposed Secs. 115.19 (d) and (e)(2)

would provide that such actions which cause an increase in bond

liability of at least 25% or $50,000 are grounds for denying liability.

Also proposed Sec. 115.19(e)(2) provides that the sanction applies when

the increase occurs at one time rather than in the aggregate.

Current Sec. 115.13(c) provides that material breaches which cause

an increase in the bond liability in the stated amount are grounds for

denial. Proposed Secs. 115.19 (c), (d) and (e) would change current

Secs. 115.13 (c), (d) and (e) by adding, as grounds for denial,

enumerated actions which cause an increase in the contract amount of at

least 25% or $50,000.

Proposed Sec. 115.19(e) rewords current Sec. 115.13(e) and allows

SBA to deny liability if the surety acquiesces to a material change in

the contract, in addition to such changes in the bond, as currently

provided. Proposed Sec. 115.19(e)(2) makes clear that this applies only

to Prior Approval sureties since PSB sureties do not need SBA's

approval to make alterations causing increases in the bond liability or

contract amount.

Proposed Secs. 115.19 (f) and (g) are moved from current

Secs. 115.10(g) and 115.31(c)(2), respectively. Proposed Sec. 115.19(f)

also allows SBA to deny liability if the bond was executed prior to the

date of SBA's guarantee. The term ``Executed'' is used in place of

``issuance'' to conform to the changes made in proposed Sec. 115.10

``Definitions.''

Proposed Sec. 115.19(h) sets forth ``other regulatory violations''

as a basis for SBA to deny liability. These provisions are moved from

current Sec. 115.64(b) and made applicable to both the Prior Approval

and PSB programs.

Proposed Sec. 115.20, ``Insolvency of Surety,'' expands on the

provision currently in Sec. 115.10(a) concerning insolvent sureties.

The proposed section would provide that in the event of a surety's

insolvency, any rights or benefits conferred on a surety under a valid

Surety Bond Guarantee Agreement (either Prior Approval or PSB) would

accrue only to the trustee or receiver of the surety and to no other

party. This provision is currently stated on SBA Form 990. The proposed

section would also add a new requirement that the trustee or receiver

submit quarterly status reports to SBA concerning funds received and

settlements under consideration. This is necessary in order to properly

monitor claims and recovery situations handled by persons other than

the surety.

Proposed Sec. 115.21 is a consolidation of current Secs. 115.40 and

115.63, both titled ``Audits and investigations.'' This section is

placed in Subpart A since it is applicable to both Surety Bond

Guarantee Programs. In addition, the provisions in current

Secs. 115.40(a) and 115.63(a) that a surety may file a petition for

review of certain agency actions is proposed to be modified and moved

into proposed Sec. 115.18. It would provide that only suspensions and

terminations of PSB sureties are reviewable by the SBA's Office of

Hearings and Appeals.

Current Sec. 115.30(b), ``Application for guarantee,'' is proposed

to be deleted from the regulations and issued as internal guidance. In

addition, a change would be made to require that an approved form

(Current Form 1624--Lower Tier Certification form regarding debarment,

etc.) be submitted for a principal with each application for a bond

guarantee, not just the initial application. This change is being made

to reflect the current practice and to be consistent with Part 146 of

this Title (governing lobbying activities) which mandates the

submission of information relative to any proposal submitted in

connection with a lower tier covered transaction.

Current Sec. 115.30(c), which provides information on the different

guarantee percentages provided by SBA under the Prior Approval program,

would be moved to its own section--proposed Sec. 115.31. Section

115.31(a)(2), which would provide for a 90% guarantee for concerns

owned and controlled by disadvantaged individuals, refers the reader to

Part 124 of SBA regulations for information on social and economic

disadvantage.

Proposed Sec. 115.30(d) (currently Secs. 115.31(c) and 115.36(f))

consolidates the time deadlines and information to be submitted to SBA

when a final bond has been issued under the Prior Approval program,

including bonds issued under a bonding line. The Prior Approval

Agreement (SBA Form 990) would be required, rather than the Surety Bond

Guarantee Review Update (Form 994C), which is currently suggested to be

used when final bonds are issued under a bonding line. Because Form 990

asks for the amount of the premium being charged, and Form 994C does

not, SBA can use the Form 990 for information it needs to determine the

fee to be charged to the surety. This change would formalize current

practice. In the case of final bonds issued other than under a bonding

line, the deadline for submission of the forms would be changed from 45

days from award of the contract or issuance of the bond, to 45 days

from execution of the bond. Forms for bonds issued under a bonding line

would be required to be submitted within 15 days of execution. This is

a technical correction to current Sec. 115.31(c) which provides for a

45 day deadline. (The current provision is contrary to current

Sec. 115.36(f), which provides 15 days for submission to SBA of final

bonds issued under a bonding line).

Proposed Sec. 115.31(b), currently Sec. 115.30(c)(2), clarifies

that the 80% guarantee applies to contracts, not bonds, of more than

$100,000.

The definition of ``Loss after excess contract amount'' which is

currently under Sec. 115.11, is proposed to be moved to Sec. 115.31(d)

and renamed ``Contract increase to over $1,250,000.''

Proposed Sec. 115.31(e), ``Contract decrease to $100,000 or less,''

would be a new subsection that provides for an increase in SBA's

guarantee percentage if the surety demonstrates that the contract

amount has decreased to $100,000 or less.

[[Page 58266]]

Most of the provisions found at current Sec. 115.33 are proposed to

be deleted since the concepts are covered under proposed Sec. 115.15,

``Underwriting and servicing standards.'' The prohibition against

guaranteeing forfeiture bonds is proposed to be incorporated within the

definition of ``Bid Bond.''

Proposed Sec. 115.32(b), current Sec. 115.35(b), has several

changes. First, the fee charged to principals would be raised from

$6.00 to $8.00 per thousand dollars of the contract amount. Because of

uncertainties and fluctuations in SBA's budget, an attempt is being

made to make this program self-financing. Another change involves the

rounding of the principal's guarantee fee. Currently the contract

amount is rounded and the fee calculated from that figure. SBA proposes

to calculate the fee and then round that figure to the nearest dollar.

This will eliminate cents in the fee and simplify the accounting

process.

Proposed Sec. 115.32(c), currently Sec. 115.35(c)(1), would

likewise raise the surety fee from 20% to 25% of the bond premium. In

addition, Sec. 115.32(d) would revise the notification requirement

concerning increases and decreases in the contract or bond amount. The

surety would be required to notify SBA of every increase or decrease,

and each increase would require payment of additional fees, unlike the

current requirement which mandates payment of increased fees only when

the increases reach a certain threshold. When the original contract or

bond amount increases at one time by more than 25% or $50,000,

whichever is less, the prior written approval of the authorized SBA

officer would be required on a supplemental Form 990. Approval would be

conditioned on the surety's payment of the additional principal's fee.

Whether there is an increase or decrease, the proposed rules eliminate

the current $40.00 threshold before payment is required or reimbursed.

The threshold is proposed to be eliminated for administrative

convenience.

Current Sec. 115.36(c) is proposed to be moved from the regulations

as not needed and issued in internal guidance.

Proposed Sec. 115.33(d)(1) is new. It would require sureties to

submit a ``Surety Bond Guarantee Underwriting Review'' (Current Form

994B) to SBA for approval within 15 business days after execution of a

bid bond under a bonding line. If this deadline is not met, this

section provides that SBA's guarantee is void from its inception unless

SBA determines otherwise upon a showing that a valid reason exists for

the delay.

Proposed Sec. 115.33(d)(2), which sets forth a 15 day deadline for

submission of what is now Form 994B (or 994C if 994B is already on

file) on final bonds, is moved from current Sec. 115.36(f).

Proposed Sec. 115.33(e), ``Cancellation,'' is moved from current

Sec. 115.36(h) and clarifies that the surety is required to notify SBA

of any adverse information concerning a principal. Upon receipt, SBA

may cancel the principal's bonding line.

Proposed Sec. 115.34(a), ``Imminent Breach,'' would provide that

the aggregate of payments made by SBA to a surety to avoid imminent

breach cannot exceed 10% of the contract price. This would be a change

from current Sec. 115.37(b)(1) which provides that no payment by SBA to

avoid imminent breach will exceed 10%. The current provision that the

Administrator can approve payments exceeding 10%, and that in no event

will SBA pay an amount exceeding its guaranteed share of the bond

penalty, is likewise changed to reflect that amounts will be aggregated

in determining when the Administrator's approval is needed and when

SBA's guaranteed share of the bond penalty will be exceeded.

Proposed Sec. 115.34(b), ``Salvage and recovery,'' (currently

Sec. 115.37(c)) adds a new requirement. If a surety recommends

settlement to SBA or recommends that pursuit of salvage or recovery be

discontinued, the surety would have to certify that pursuing recovery

is neither economically feasible nor a viable strategy in maximizing

recovery.

Proposed Sec. 115.35 ``Claims for Losses,'' is based on current

Secs. 115.38 and 115.34, but also adds some new provisions. First,

there is a requirement that the surety notify SBA within 30 days of

acquiring knowledge of specified adverse circumstances concerning a

principal. Another subsection requires the surety to take action to

mitigate losses and expenses due to such adverse circumstances and to

handle claims and suits arising from a defaulted bond. The requirement

that the surety submit semiannual status reports on claims is retained,

but a requirement that SBA also be notified immediately of any

substantial changes, is added. Lastly, proposed Sec. 115.35(e) provides

that payment by SBA on a claim submitted by a surety does not waive or

invalidate the terms of the Prior Approval Agreement or any defenses

SBA may have. In addition, if SBA determines that it should not have

paid any portion of a claim, the surety must reimburse SBA that amount

within 30 days of being so notified.

Proposed Sec. 115.36, ``Indemnity settlements and reinstatement of

Principal,'' has two subsections taken from current Sec. 115.34

concerning conditions for reinstatement of a principal that has become

ineligible for further bond guarantees, and guidance on underwriting

for a principal after reinstatement. It also has a new section on

indemnity settlements, requiring a Prior Approval surety to provide SBA

with certain documents relevant to making a determination on a

settlement proposal. The surety would also have to obtain SBA's

concurrence before agreeing to a settlement. This section retains the

provision in current Sec. 115.38 that the surety must pay SBA its pro

rata share of the settlement amount within 90 days of receipt. A new

provision is proposed which would require the surety to certify that

SBA has received its share of all indemnity recovery before closing the

file.

Current Sec. 115.39, ``Refusal to issue further guarantees,'' is

proposed to be combined with Sec. 115.62, ``Qualifications of surety,''

and moved to Subpart A and renumbered Sec. 115.18.

Current Sec. 115.40, ``Audits and investigations,'' is proposed to

be combined with Sec. 115.63, and moved to Subpart A and renumbered

Sec. 115.21.

The information on applying to be a PSB surety currently found at

Sec. 115.60(a) is proposed to be moved to new Sec. 115.11 which sets

forth information on applying to either the Prior Approval or PSB

program.

Proposed Secs. 115.60 (a), (c) and (d) set forth under Subpart C

the provisions stated at current Secs. 115.10 (d), (e) and (f)

regarding the selection of sureties for the PSB program, duration of

the program and prohibition of PSB sureties against participating in

the Prior Approval program. This also serves to consolidate certain

information concerning the preferred program found currently in Subpart

A. The sunset provision at proposed Sec. 115.60(c) has been changed to

September 30, 1997, which is when the PSB program is currently set to

expire unless extended by Congress.

Proposed Sec. 115.60(e), ``Allotment of guarantee authority,'' is

moved from current Sec. 115.60(b). The proposed subsection clarifies

that where a bid bond is executed by the PSB surety and (1) the

contract is awarded for an amount other than the bid amount, (2) the

bid is withdrawn or (3) the bond has expired, the allotment will be

debited or credited accordingly. Where the surety did not execute a

related bid bond, a new provision provides that the

[[Page 58267]]

guarantee percentage of the penal sum of a guaranteed final bond will

count against the allotment.

Proposed Sec. 115.60(f), ``Timeliness,'' is new, and provides that

a PSB surety may not execute a bond after commencement of work under a

contract unless the surety receives the written approval of the

Associate Administrator for Surety Guarantees.

Proposed Sec. 115.60(g)(1), currently Sec. 115.60(c)(1), concerning

the retention of certifications and records for inspection by SBA, has

a new provision requiring such documents to be retained for the term of

the bond, plus time required to settle claims and an additional three

years thereafter. This requirement corresponds with the current

document retention requirement for purposes of SBA-conducted audits.

(See current Secs. 115.40(b) and 115.63(b), and proposed

Sec. 115.19(b)). The proposed section also provides that documentation

must be retained until any unresolved audit findings are resolved.

Proposed Sec. 115.60(g)(4), currently Sec. 115.60(c)(3), would

raise the PSB surety's fee and principal's guarantee fee to 25% of the

premium and $8.00 per thousand dollars of the contract amount,

respectively. As with the Prior Approval program, these fee increases

are being recommended in an attempt to make the program self-financing.

The proposed rules at Sec. 115.60(g)(5)(i) would eliminate the

provision at current Sec. 115.60(c)(6)(i) which requires payment of

additional fees only when aggregate increases of the bond liability

exceed 25% or $50,000, whichever is less. Instead, additional fees will

be required to be paid on any amount of increase. Correspondingly,

under proposed Sec. 115.60(g)(5)(ii), any amount of decrease in fees

will be reimbursed by SBA. These sections also make clear that the

provisions apply to increases in either the contract or bond amount.

Whether there is an increase or decrease in the fees, the proposed

rules eliminate the current $40.00 threshold (see current

Secs. 115.60(c)(6)(i) and (6)(ii)) before payment is required or

reimbursed. The threshold is proposed to be eliminated for

administrative convenience.

The substance of proposed Sec. 115.61 is moved from current

Sec. 115.64(a), ``Percentage of indemnification,'' given its own

section number and renamed ``Guarantee percentage.''

Current Sec. 115.62 is proposed to be consolidated with current

Sec. 115.39, moved to Subpart A and renumbered as Sec. 115.18.

Proposed Sec. 115.62, ``Imminent Breach,'' is moved from current

Sec. 115.61(b) and given its own section number. A provision would be

added limiting SBA's aggregate payments to PSB sureties to avoid

imminent breach to 10% of the contract price. Also added is a provision

that the Administrator could approve payments exceeding the 10%

ceiling, and that in no event would SBA reimburse imminent breach

payments in an aggregate amount exceeding its guaranteed share of the

bond penalty. These are added to conform to the limitations set by

statute. The current provision that SBA's guaranteed share of the

aggregate of imminent breach payments and of indemnification against

loss is limited to SBA's guaranteed share of the bond penalty, is

proposed to be deleted. This provision is unnecessary in light of the

restrictions on imminent breach payments discussed above.

Current Sec. 115.63 is proposed to be consolidated with current

Sec. 115.40, moved to Subpart A and renumbered as Sec. 115.21 ``Audits

and investigations.''

Proposed Sec. 115.63, ``Claims for Losses,'' would have two new

subsections, taken from the Prior Approval program. Subsection (b)

directs the surety to take the necessary steps for mitigation of losses

and expenses and to take charge of claims and suits arising from

defaulted bonds, both in a manner consistent with the surety's

practices on non-guaranteed bonds. This is consistent with current

practice. Subsection (c) provides that payment by SBA on a claim

submitted by a surety does not waive or invalidate the terms of the PSB

Agreement or any defenses SBA may have. This subsection also provides

that if SBA determines that it should not have paid any portion of a

claim, the surety must reimburse SBA that amount within 30 days of

being so notified.

Proposed Sec. 115.64, ``Denial of liability,'' would be moved from

current Sec. 115.64(b) and given its own section number. Redundant

provisions would be deleted.

Compliance With Executive Orders 12778, 12612 and 12866, the Regulatory

Flexibility Act and the Paperwork Reduction Act

SBA certifies that this proposed rule, if adopted, would not

constitute a significant regulatory action for purposes of Executive

Order 12866, since it is not likely to result in an annual effect on

the economy of $100 million or more.

For purposes of the Regulatory Flexibility Act, 5 U.S.C. 604, SBA

has determined that these rules would not have a significant impact on

a substantial number of small entities. Although fee increases are

proposed, it is SBA's opinion that the increases would not have a

significant impact on either the principals or the sureties. The fees

paid by principals (small business contractors requiring guaranteed

bonds) would increase from $6.00 to $8.00 per thousand dollars of the

contract to be bonded. Under this increase, an average contract of

$161,251 would impose a fee of $1290 rather than $968, a $322 increase.

A surety company typically charges a contractor a bond premium of 2.15%

of the bond amount. SBA currently charges the surety 20% of the premium

for SBA's guarantee. It is proposed that this fee be raised to 25%. On

an average final bond, SBA's charge to the surety would increase from

$694 to $867, a $173 increase.

There are no reporting, recordkeeping and other compliance

requirements not approved by the Office of Management and Budget which

would come under the Paperwork Reduction Act, 44 U.S.C. Ch. 35.

SBA certifies that this rule is drafted, to the extent practicable,

in accordance with the standards set forth in Section 2 of Executive

Order 12778.

SBA certifies that these rules do not warrant the preparation of a

Federal Assessment in accordance with Executive Order 12612.

List of Subjects in 13 CFR Part 115

Small business, Surety bonds.

For the above reasons, SBA proposes to revise Part 115, Title 13 of

the Code of Federal Regulations, as follows:

PART 115--SURETY BOND GUARANTEE

115.1 Overview of regulations.

115.2 Savings clause.

Subpart A--Provisions For All Surety Bond Guarantees

115.10 Definitions.

115.11 Applying to participate in the Surety Bond Guarantee

Program.

115.12 Program Provisions.

115.13 Eligibility of Principal.

115.14 Loss of Principal's eligibility for future assistance.

115.15 Underwriting and servicing standards.

115.16 Determination of Loss.

115.17 Minimization of Surety's Loss.

115.18 Refusal to issue further guarantees; suspension and

termination of PSB status.

115.19 Denial of liability.

115.20 Insolvency of Surety.

115.21 Audits and investigations.

Subpart B--Guarantees Subject to Prior Approval

115.30 Submission of Surety's guarantee application.

115.31 Guarantee percentage.

[[Page 58268]]

115.32 Fees and Premiums.

115.33 Surety bonding line.

115.34 Minimization of Surety's Loss.

115.35 Claims for reimbursement of Losses.

115.36 Indemnity settlements and reinstatement of Principal.

Subpart C--Preferred Surety Bond (PSB) Guarantees

115.60 Procedures for PSB Program.

115.61 Guarantee percentage.

115.62 Imminent Breach.

115.63 Claims for reimbursement of Losses.

115.64 Denial of liability.

Authority: Title IV, Part B, and sections 310(a) and 311, of the

Small Business Investment Act of 1958, as amended (15 U.S.C. 687b

and c, 694a, 694b), the Inspector General Act of 1978 (5 U.S.C. app.

3), Pub. L. 100-590, Title II, and Pub. L. 101-574, Sec. 216.

Sec. 115.1 Overview of regulations.

The regulations in this part cover the SBA's Surety Bond Guarantee

Programs under Part B of Title IV of the Small Business Investment Act

of 1958, as amended (the Investment Act). Subpart A contains

regulations common to both the program requiring prior SBA approval of

each bond guarantee (the Prior Approval Program) and the program not

requiring prior approval (the PSB Program). Subpart B contains the

regulations applicable only to the Prior Approval Program. Subpart C

contains the regulations applicable only to the PSB Program.

Sec. 115.2 Savings clause.

Transactions affected by this Part 115 are governed by the

regulations in effect at the time they occur.

Subpart A--Provisions for all Surety Bond Guarantees

Sec. 115.10 Definitions.

AA/SG means SBA's Associate Administrator for Surety Guarantees.

Affiliate is defined in part 121.

Ancillary Bond means a bond incidental and essential to the

performance of a Contract for which there is a guaranteed Final Bond.

Bid Bond means a bond conditioned upon the bidder on a Contract

entering into the Contract, and furnishing the required Payment and

Performance Bonds. The term does not include a forfeiture bond unless

it is issued for a jurisdiction where statute or settled decisional law

requires forfeiture bonds for public works.

Contract means a written obligation of the Principal requiring the

furnishing of services, supplies, labor, materials, machinery,

equipment, or construction. The term does not include a permit,

subdivision contract, lease, land contract, evidence of debt, financial

guarantee (e.g., a contract requiring any payment by the Principal to

the Obligee), warranty of performance or efficiency, warranty of

fidelity, or release of lien (other than for claims under a guaranteed

bond). It can include an agreement of 2 years or less solely to cover

defective workmanship. It can also include an agreement to cover

defective workmanship which is ancillary to another Contract described

in this paragraph if it must be performed by the same Principal, is

customarily required in the relevant trade or industry, and SBA's

written approval has been obtained.

Execution means signing by a representative or agent of the Surety

with the authority and power to bind the Surety.

Final Bond means a Performance Bond or a Payment Bond.

Imminent Breach means a threat to the successful completion of a

bonded Contract which, unless remedied by the Surety, makes a default

under the bond appear to be inevitable.

Investment Act means the Small Business Investment Act of 1958, as

amended.

Loss has the meaning set forth in Sec. 115.16.

Obligee means:

(1)(i) In the case of a Bid Bond, the Person requesting bids for

the performance of a Contract; or

(ii) In the case of a Final Bond, the Person who has contracted

with a Principal for the completion of the Contract and to whom the

primary obligation of the Surety runs in the event of a breach by the

Principal.

(2) In either case, no Person (other than a Federal department or

agency) may be named co-Obligee or Obligee on a bond or on a rider to

the bond unless that Person is bound by the Contract to the Principal

(or to the Surety, if the Surety has arranged completion of the

Contract) to the same extent as the original Obligee. In no event may

the addition of one or more co-Obligees increase the aggregate

liability of the Surety under the bond.

OSG means SBA's Office of Surety Guarantees.

Payment Bond means a bond which is conditioned upon the payment by

the Principal of money to persons who have a right of action against

such bond, including those who have furnished labor, materials,

equipment and supplies for use in the performance of the Contract.

Performance Bond means a bond conditioned upon the completion by

the Principal of a Contract in accordance with its terms.

Person means a natural person or a legal entity.

Premium means the amount charged by a Surety to issue bonds. The

Premium is determined by applying an approved rate (see Secs. 115.32(a)

and 115.60(a)) to the bond or contract amount. The Premium does not

include surcharges for extra services, whether or not considered part

of the ``premium'' under local law.

Principal means, in the case of a Bid Bond, the Person bidding for

the award of a Contract. In the case of Final Bonds and Ancillary

Bonds, Principal means the Person primarily liable to complete the

Contract, or to make Contract-related payments to other persons, and is

the Person whose performance or payment is bonded by the Surety. A

Principal may be a prime contractor or a subcontractor.

Prior Approval Agreement means the Surety Bond Guarantee Agreement

(SBA Form 990) entered into between a Prior Approval Surety and SBA

under which SBA agrees to guarantee a specific bond.

Prior Approval Surety means a Surety which must obtain SBA's prior

approval on each guarantee and which has entered into one or more Prior

Approval Agreements with SBA.

PSB Agreement means the Preferred Surety Bond Guarantee Agreement

entered into between a PSB Surety and SBA.

PSB Surety means a Surety that has been admitted to the Preferred

Surety Bond (PSB) Program.

Surety means a company which

(1)(i) Under the terms of a Bid Bond, agrees to pay a sum of money

to the Obligee if the Principal breaches the conditions of the bond;

(ii) Under the terms of a Performance Bond, agrees to pay a sum of

money or to incur the cost of fulfilling the terms of a Contract if the

Principal breaches the conditions of the Contract; and

(iii) Under the terms of a Payment or an Ancillary Bond, agrees to

make payment to all who have a right of action against such bond,

including those who have furnished labor, materials, equipment and

supplies in the performance of the Contract.

(2) The term Surety includes an agent, independent agent,

underwriter, or any other company or individual empowered to act on

behalf of the Surety.

Sec. 115.11 Applying to participate in the Surety Bond Guarantee

Program.

Sureties interested in participating as Prior Approval Sureties or

PSB Sureties should apply in writing to the AA/SG at 409 3rd Street,

SW, Washington, DC 20416. OSG will determine the

[[Page 58269]]

eligibility of the applicant considering its standards and procedures

for underwriting, administration, claims recovery, and whether it is a

corporation listed by the U.S. Treasury as eligible to issue bonds in

connection with Federal procurement contracts.

Sec. 115.12 Program provisions.

(a) Description of Surety Bond Guarantee Programs. SBA guarantees

Sureties participating in the Surety Bond Guarantee Programs against a

portion of their Losses incurred and paid as a result of a Principal's

breach of the terms of a Bid, Payment, Performance or Ancillary Bond,

on any eligible Contract. A Contract must not prohibit a Surety from

performing the Contract upon default of the Principal. In the Prior

Approval Program, the Surety must obtain SBA's approval before a

guaranteed bond can be issued. In the PSB Program, selected Sureties

may issue, monitor, and service SBA guaranteed bonds without further

SBA approval.

(b) Eligibility of bonds. Bid, Performance, and Payment Bonds

(other than bonds in the nature of a financial guarantee) are eligible

for an SBA guarantee if they are executed in connection with a Contract

and are of a type listed in the ``Contract Bonds'' section of the

current Rating Manual of the Surety Association of America (100 Wood

Avenue South, Iselin, New Jersey 08830). Ancillary Bonds may also be

eligible for SBA's guarantee. A Payment Bond cannot be issued unless a

Performance Bond is issued at the same time. A Performance Bond must

not prohibit a Surety from performing the Contract upon default of the

Principal.

(c) Expiration of Bid Bond Guarantee. A Bid Bond guarantee expires

120 days after Execution of the Bid Bond, unless the Surety notifies

SBA in writing before the 120th day that a later expiration date is

required. The notification must include the new expiration date.

(d) Guarantee agreement. The terms and conditions of SBA's bond

guarantee agreements, including the guarantee percentage, may vary from

Surety to Surety, depending on past experience with SBA. If the

guarantee percentage is not fixed by the Act, it is determined by OSG

after considering, among other things, the rating or ranking assigned

to the Surety by recognized authority, and the Surety's Loss rate,

average Contract amount, average bond penalty per guaranteed bond, and

ratio of Bid Bonds to Final Bonds, all in comparison with other

Sureties participating in the same SBA Surety Bond Guarantee Program

(Prior Approval or PSB) to a comparable degree. Any guarantee agreement

under this part is made exclusively for the benefit of SBA and the

Surety, and does not confer any rights (such as a right of action

against SBA) or benefits on any other party.

(e) Amount of Contract. (1) Statutory ceiling. The amount of the

Contract to be bonded must not exceed $1,250,000 in face value at the

time of the bond's Execution.

(2) Aggregation of Contract amounts. The amounts of two or more

Contracts for a ``single project'' are aggregated to determine the

Contract amount unless the Contracts are to be performed in phases and

the prior bond is released before the beginning of each succeeding

phase. A bond may be considered released even if the warranty period it

is covering has not yet expired. For purposes of this paragraph, a

``single project'' means one represented by two or more Contracts of

one Principal or its Affiliates with one Obligee or its Affiliates for

performance at the same locality, irrespective of job title or nature

of the work to be performed.

(3) Service and supply contracts. A service or supply Contract

covering more than a 1 year period is eligible if the annual Contract

amount and the penal sum of the bond do not exceed $1,250,000 at any

time.

(f) Transfers or sales by Surety. Sureties must not sell or

otherwise transfer their files or accounts, whether before or after a

default by the Principal has occurred. A violation of this provision is

grounds for termination from participation in the program.

Sec. 115.13 Eligibility of Principal.

In order to be eligible for a bond guaranteed by SBA, the Principal

must comply with the following requirements:

(a) Size. Together with its Affiliates, it must qualify as a small

business under part 121 of this title.

(b) Character. It must possess good character and reputation. A

Principal meets this standard if each owner of 20% or more of its

equity, and each of its officers, directors, or general partners

possesses good character and reputation. Good character and reputation

is presumed absent when:

(1) Any such Person is under indictment for, or has been convicted

of a felony, or a final civil judgment has been entered stating that

such Person has committed a breach of trust or has violated a law or

regulation protecting the integrity of business transactions or

business relationships; or

(2) A regulatory authority has revoked, canceled, or suspended a

license of such Person which is necessary to perform the Contract; or

(3) Any such Person has obtained a bond guarantee by fraud or

material misrepresentation (as described in Sec. 115.18(b)), or has

failed to keep the Surety informed of unbonded contracts or of a

contract bonded by another Surety as required by a bonding line

commitment under Sec. 115.33.

(c) Need for bond. It must certify that a bond is expressly

required by the bid solicitation or the original Contract in order to

bid on the Contract or to serve as a prime contractor or subcontractor.

(d) Availability of bond. It must certify that a bond is not

obtainable on reasonable terms and conditions without SBA's bond

guarantee assistance.

(e) Partial subcontract. It must certify the percentage of work

under the Contract to be subcontracted. SBA will not guarantee bonds

for Principals who are primarily brokers or construction managers.

(f) Debarment. It must certify that the Principal is not presently

debarred, suspended, proposed for debarment, declared ineligible, or

voluntarily excluded from transactions with any Federal department or

agency, under governmentwide debarment and suspension rules.

(g) Conflict of interest. Neither the Surety, nor an Affiliate of

the Surety, or a close relative or member of the household of the

Surety or Affiliate can own, directly or indirectly, 10% or more of the

Principal. This prohibition also applies to ownership interests in any

of the Principal's Affiliates. Where such ownership equals or exceeds

10%, SBA will not issue a guarantee.

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

(a) Ineligibility. A Principal and its Affiliates lose eligibility

for further SBA bond guarantees if any of the following occurs:

(1) Legal action under the guaranteed bond has been initiated.

(2) The Obligee has declared the Principal to be in default under

the Contract.

(3) The Surety has established a claim reserve for the bond in

excess of $100.

(4) The Surety has requested reimbursement for Losses incurred

under the bond.

(5) The guarantee fee has not been paid by the Principal.

(6) The Principal has committed fraud or material misrepresentation

in obtaining a guaranteed bond.

(b) Reinstatement. Prior Approval Sureties should refer to

Sec. 115.36(b) for provisions on reinstatement of the Principal's

eligibility.

[[Page 58270]]

Sec. 115.15 Underwriting and servicing standards.

(a) Underwriting. Sureties must evaluate the credit, capacity, and

character of a Principal using standards generally accepted by the

surety industry and in accordance with SBA's principles and practices

and the Surety's principles and practices on unguaranteed bonds. There

must be a reasonable expectation that the Principal will successfully

perform the Contract to be bonded. The terms and conditions of the bond

and the Contract must be reasonable in light of the risks involved and

the extent of the Surety's participation. The Principal must satisfy

the eligibility requirements set forth in Sec. 115.13. The bond must

satisfy the eligibility requirements set forth in Sec. 115.12(b). The

Surety and SBA must be satisfied as to the reasonableness of cost and

the feasibility of successful completion of the Contract. The Contract

should be the same in type and size as those contracts previously

completed by the Principal. Contracts for those who have not previously

had SBA guaranteed bonds should not exceed 150% of that Principal's

largest successfully completed contract. The work to be performed

should be within the Principal's normal geographical area of operations

and area of expertise.

(b) Servicing. The Surety must ensure that the Principal remains

viable and eligible for SBA's Surety Bond Guarantee Program, must

monitor the Principal's progress on bonded Contracts guaranteed by SBA,

and must obtain job status reports from Obligees of Final Bonds

guaranteed by SBA.

Sec. 115.16 Determination of Loss.

(a) Loss under Bid Bond is the lesser of the penal sum or the

amount which is the difference between the bonded bid and the next

higher responsive bid. In either case, the Loss is reduced by any

amounts recovered by reason of the Principal's defenses against the

Obligee's demand for performance by the Principal and any sums

recovered from indemnitors and other salvage.

(b) Loss under Payment Bond is, at the Surety's option, the sum

necessary to pay all just and timely claims against the Principal for

the value of labor, materials, equipment and supplies furnished for use

in the performance of the bonded Contract and other covered debts, or

the penal sum of the Payment Bond. In either case, the Loss includes

interest (if any), but Loss is reduced by any amounts recovered

(through offset or otherwise) by reason of the Principal's claims

against laborers, materialmen, subcontractors, suppliers, or other

rightful claimants, and by any amounts recovered from indemnitors and

other salvage.

(c) Loss under Performance Bond is, at the Surety's option, the sum

necessary to meet the cost of fulfilling the terms of a bonded Contract

or the penal sum of the bond. In either case, the Loss includes

interest (if any), but Loss is reduced by any amounts recovered

(through offset or otherwise) by reason of the Principal's defenses or

causes of action against the Obligee, and by any amounts recovered from

indemnitors and other salvage.

(d) Loss under Ancillary Bond is the amount covered by such bond

which is attributable to the Contract for which guaranteed Payment or

Performance Bonds were Executed.

(e) Loss includes the following expenses if they are itemized,

documented and attributable solely to the Loss under the guaranteed

bond:

(1) Amounts actually paid by the Surety which are specifically

allocable to the investigation, adjustment, negotiation, compromise,

settlement of, or resistance to a claim for Loss resulting from the

breach of the terms of the bonded Contract. Any cost allocation method

must be reasonable and must comply with generally accepted accounting

principles; and

(2) Amounts actually paid by the Surety for court costs and

reasonable attorney's fees incurred to mitigate any Loss under

paragraphs (a) through (e)(1) of this section including suits to obtain

sums due from Obligees, indemnitors, Principals and others.

(f) Loss does not include the following expenses:

(1) Any unallocated expenses, or any mark-up on expenses or any

overhead of the Surety, its attorney, or any other party;

(2) Expenses paid for any suits, cross-claims, or counterclaims

filed against the United States of America or any of its agencies,

officers, or employees unless the Surety has received, prior to filing

such suit or claim, written concurrence from SBA that such suit may be

filed;

(3) Attorney's fees and court costs incurred by the Surety in a

suit by or against SBA or its Administrator; and

(4) Fees, costs, or other payments, including tort damages, arising

from a successful tort suit or claim by a Principal or any other Person

against the Surety.

Sec. 115.17 Minimization of Surety's Loss.

(a) Indemnity agreements and collateral. (1) Requirements. The

Surety must take all reasonable action to minimize risk of Loss

including, but not limited to, obtaining from each Principal a written

indemnity agreement which covers actual Losses under the Contract and

Imminent Breach payments under Sec. 115.34(a) or Sec. 115.62. The

indemnity agreement must be secured by such collateral as the Surety or

SBA finds appropriate. Indemnity agreements from other Persons, secured

or unsecured, may also be required by the Surety or SBA.

(2) Prohibitions. No indemnity agreement may be obtained from the

Surety, its agent or any other representative of the Surety. The Surety

must not separately collateralize the portion of its bond which is not

guaranteed by SBA.

(b) Salvage and recovery. (1) General. The Surety must pursue all

possible sources of salvage and recovery. Salvage and recovery includes

all payments made in settlement of the Surety's claim, even though the

Surety has incurred other losses as a result of that Principal which

are not reimbursable by SBA.

(2) SBA's share. SBA is entitled to its guaranteed percentage of

all salvage and recovery from a defaulted Principal, its guarantors and

indemnitors, and any other party, received by the Surety in connection

with the guaranteed bond or any other bond issued by the Surety on

behalf of the Principal. The Surety must reimburse or credit SBA (in

the same proportion as SBA's share of Loss) within 90 days of receipt

of any recovery by the Surety.

(3) Multiple Sureties. In any dispute between two or more Sureties

concerning recovery under SBA guaranteed bonds, the dispute must first

be brought to the attention of OSG for an attempt at mediation and

settlement.

Sec. 115.18 Refusal to issue further guarantees; suspension and

termination of PSB status.

(a) Improper surety bond guarantee practices. (1) SBA may refuse to

issue further guarantees to a Prior Approval Surety or may suspend the

preferred status of a PSB Surety, by written notice stating all reasons

for such decision and the effective date. Reasons for such a decision

include, but are not limited to, a determination that the Surety (in

its underwriting, its efforts to minimize Loss, its claims or recovery

practices, or its documentation related to SBA guaranteed bonds) has

failed to adhere to prudent standards or practices, including any

standards or practices required by SBA, as compared to those of other

Sureties participating in the same SBA Surety Bond Guarantee Program to

a comparable degree. Acts of wrongdoing such as fraud, material

misrepresentation, breach of the Prior

[[Page 58271]]

Approval or PSB Agreement, or regulatory violations (as defined in

Secs. 115.19(d) and 115.19(h)) also constitute sufficient grounds for

refusal to issue further guarantees, or in the case of a PSB Surety,

termination of preferred status.

(2) The failure of a Surety to consent to SBA's audit or to

maintain and produce records constitutes grounds for SBA to refuse to

issue further guarantees for a Prior Approval Surety, to suspend a PSB

Surety from participation, and to refuse to honor claims submitted by a

Prior Approval or PSB Surety until the Surety consents to the audit.

(3) SBA may also require the renegotiation of the guarantee

percentage and/or SBA's charge to the Surety if a Surety experiences

excessive Losses on SBA guaranteed bonds relative to those of other

Sureties participating in the same SBA Surety Bond Guarantee Program to

a comparable degree.

(b) Lack of business integrity. A Surety's participation in the

Surety Bond Guarantee Programs may be denied, suspended, or terminated

upon the occurrence of any event in paragraphs (b) (1) through (5) of

this section involving any of the following Persons: the Surety or any

of its officers, directors, partners, or other individuals holding at

least 20% of the Surety's voting securities, and any agents,

underwriters, or any individual empowered to act on behalf of any of

the preceding Persons.

(1) If a State or other authority has revoked, canceled, or

suspended the license required of such Person to engage in the surety

business, the right of such Person to participate in the SBA Surety

Bond Guarantee Program may be denied, terminated, or suspended, as

applicable, in that jurisdiction or in other jurisdictions.

Ineligibility or suspension from the Surety Bond Guarantee Programs is

for the duration of the license suspension.

(2) If such Person has been indicted or otherwise formally charged

with a misdemeanor or felony bearing on such Person's fitness to

participate in the Surety Bond Guarantee Programs, the participation of

such Person may be suspended pending disposition of the charge. Upon

conviction, participation may be denied or terminated.

(3) If a final civil judgment is entered holding that such Person

has committed a breach of trust or violation of a law or regulation

protecting the integrity of business transactions or relationships,

participation may be denied or terminated.

(4) If such Person has made a material misrepresentation or

willfully false statement in the presentation of oral or written

information to SBA in connection with an application for a surety bond

guarantee or the presentation of a claim, or committed a material

breach of the Prior Approval or PSB Agreement or a material violation

of the regulations (all as described in Sec. 115.19), participation may

be denied or terminated.

(5) If such Person is debarred, suspended, voluntarily excluded

from, or declared ineligible for participation in Federal programs,

participation may be denied or terminated.

(c) Notification requirement. The Prior Approval or PSB Surety must

promptly notify SBA of the occurrence of any event in paragraphs (b)

(1) through (5) of this section, or if any of the Persons described in

paragraph (b) does not, or ceases to, qualify as a Surety. SBA may

require submission of a Statement of Personal History from any of these

Persons.

(d) SBA proceedings. Decisions to suspend, terminate, deny

participation in, or deny reinstatement in the Surety Bond Guarantee

program are made by the AA/SG. A Surety may file a petition for review

of suspensions and terminations with the SBA Office of Hearings and

Appeals (OHA) under part 134. SBA's Administrator may, pending a

decision pursuant to Part 134, suspend the participation of any Surety

for any of the causes listed in paragraphs (b) (1) through (5) of this

section.

(e) Effect on guarantee. A guarantee issued by SBA before a

suspension or termination under this section remains in effect, subject

to SBA's right to deny liability under the guarantee.

Sec. 115.19 Denial of liability.

In addition to equitable and legal defenses and remedies under

contract law, the Act and the regulations in this part, SBA is not

liable under any actual or purported Prior Approval or PSB Agreement if

any of the circumstances in paragraphs (a) through (h) exist.

(a) Excess Contract or bond amount. The total Contract amount at

the time of Execution of the bond(s) exceeds $1,250,000 in face value

(see Sec. 115.12(e)), or the bond amount at any time exceeds the total

Contract amount as established at the time of the bond's Execution.

(b) Misrepresentation or fraud. The Surety obtained the Prior

Approval or PSB Agreement, or applied for reimbursement for losses, by

fraud or material misrepresentation. Material misrepresentation

includes (but is not limited to) both the making of an untrue statement

of material fact and the omission of a statement of material fact

necessary to make a statement not misleading in light of the

circumstances in which it was made. Material misrepresentation also

includes the adoption by the Surety of a material misstatement made by

others which the Surety knew or under generally accepted underwriting

standards should have known to be false or misleading. The Surety's

failure to disclose its ownership (or the ownership by any owner of at

least 20% of the Surety's equity) of an interest in a Principal or an

Obligee is considered the omission of a statement of material fact.

(c) Material breach. The Surety has committed a material breach of

one or more terms or conditions of its Prior Approval or PSB Agreement.

A material breach is considered to have occurred if:

(1) Such breach (or such breaches in the aggregate) causes an

increase in the Contract amount or in SBA's bond liability of at least

25% or $50,000, whichever is less; or

(2) One of the statutory conditions is not met.

(d) Substantial regulatory violation. The Surety has committed a

``substantial violation'' of SBA regulations. For purposes of this

paragraph, a ``substantial violation'' is one which causes an increase

in the Contract amount or SBA's bond liability of at least 25% or

$50,000 in the aggregate, whichever is less, or is contrary to the

purposes of the Surety Bond Guarantee Programs.

(e) Alteration. Without obtaining prior written approval from SBA

(which may be conditioned upon payment of additional fees), the Surety

agrees to or acquiesces in any material alteration in the terms,

conditions, or provisions of the Contract or bond, including but not

limited to the following acts:

(1) Naming as an Obligee or co-Obligee any Person that does not

qualify as an Obligee under Sec. 115.10; or

(2) In the case of a Prior Approval Surety, acquiescing in any

alteration to the Contract or bond which would increase the Contract

amount or SBA's bond liability by at least 25% or $50,000, whichever is

less.

(f) Timeliness. (1) The bond was Executed prior to the date of

SBA's guarantee; or

(2)(i) The bond was Executed (or approved, if the Surety is legally

bound by such approval) after the work under the Contract had begun,

unless SBA executes a ``Surety Bond Guarantee Agreement Addendum''

after receiving all of the following from the Surety:

(A) Satisfactory evidence, including a certified copy of the

Contract (or a sworn affidavit from the Principal) showing that the

bond requirement was

[[Page 58272]]

contained in the original job Contract, or other documentation

satisfactory to SBA, showing why a bond was not previously obtained and

is now being required;

(B) Certification by the Principal that all taxes and labor costs

are current, and listing all suppliers and subcontractors, indicating

that they are all paid to date, and attaching a waiver of lien from

each; or an explanation satisfactory to SBA why such documentation

cannot be produced; and

(C) Certification by the Obligee that all payments due under the

Contract to date have been made and that the job has been

satisfactorily completed to date.

(ii) For purposes of this paragraph (f)(2), work under a Contract

is considered to have begun when a Principal takes any action at the

job site which would have exposed its Surety to liability under

applicable law had a bond been Executed (or approved, if the Surety is

legally bound by such approval) at the time. For purposes of this

paragraph (f), the Surety must maintain a contemporaneous record of the

Execution and approval of each bond.

(g) Principal fee. The Surety has not remitted to SBA the

Principal's payment for the full amount of the guarantee fee within the

time period required under Sec. 115.30(d) for Prior Approval Sureties

or Sec. 115.60(g)(4) for PSB Sureties. SBA may reinstate the guarantee

upon a showing that the Contract is not in default and that a valid

reason exists why a timely submission was not made.

(h) Other regulatory violations. (1) The Principal on the bonded

Contract is not a small business;

(2) The bond was not required under the bid solicitation or the

original Contract;

(3) The bond was not eligible for guarantee by SBA because the

bonded contract was not a Contract as defined in Sec. 115.10;

(4) The loss occurred under a bond that was not guaranteed by SBA;

(5) The loss incurred by the Surety was not a Loss as determined

under Sec. 115.16; or

(6) The Surety's loss did not result from the Principal's breach or

Imminent Breach of the Contract for which the guaranteed bond was

approved.

Sec. 115.20 Insolvency of Surety.

(a) Successor in interest. If a Surety becomes insolvent, all

rights or benefits conferred on the Surety under a valid and binding

Prior Approval or PSB Agreement will accrue only to the trustee or

receiver of the Surety. SBA will not be liable to the trustee or

receiver of the insolvent Surety except for the guaranteed portion of

any Loss incurred and actually paid by such Surety or its trustee or

receiver under the guaranteed bonds.

(b) Filing requirement. The trustee or receiver must submit to SBA

quarterly status reports accounting for all funds received and all

settlements being considered.

Sec. 115.21 Audits and investigations.

(a) Audits. (1) Scope of audit. SBA may audit in the office of a

Prior Approval or PSB Surety, the Surety's attorneys or consultants, or

the Principal or its subcontractors, all documents, files, books,

records, tapes, disks and other material relevant to SBA's guarantee,

commitments to guarantee a surety bond, or agreements to indemnify the

Prior Approval or PSB Surety. See Sec. 115.18 for consequences of

failure to comply with this section.

(2) Frequency of audits. Each PSB Surety is audited at least once

each year by examiners selected and approved by SBA.

(b) Records. The Surety must maintain the records listed in this

paragraph for the term of each bond, plus such additional time as may

be required to settle any claims of the Surety for reimbursement from

SBA and to attempt salvage or other recovery, plus an additional 3

years. If there are any unresolved audit findings in relation to a

particular bond, the Surety must maintain the related records until the

findings are resolved. The records to be maintained include the

following:

(1) A copy of the bond;

(2) A copy of the bonded Contract;

(3) All documentation submitted by the Principal in applying for

the bond;

(4) All information gathered by the Surety in reviewing the

Principal's application;

(5) All documentation of any of the events set forth in

Sec. 115.35(a) or Sec. 115.60(g)(6);

(6) All records of any transaction for which the Surety makes

payment under or in connection with the bond, including but not limited

to claims, bills (including lawyers' and consultants' bills),

judgments, settlement agreements and court or arbitration decisions,

consultants' reports, Contracts and receipts;

(7) All documentation relating to efforts to mitigate Losses,

including documentation required by Sec. 115.34(a) or Sec. 115.62

concerning Imminent Breach;

(8) All records of any accounts into which fees and funds obtained

in mitigation of Losses were paid and from which payments were made

under the bond, and any other trust accounts, and any reconciliations

of such accounts; and

(9) All documentation relating to any collateral held by or

available to the Surety.

(c) Purpose of audit. SBA's audit will determine, but not be

limited to:

(1) The adequacy and sufficiency of the Surety's underwriting and

credit analysis, its documentation of claims and claims settlement

procedures and activities, and its recovery procedures and practices;

(2) The Surety's minimization of Loss, including the exercise of

bond options upon Contract default; and

(3) The Surety's loss ratio in comparison with other Sureties

participating in the same SBA Surety Bond Guarantee Program to a

comparable degree.

(d) Investigations. SBA may conduct investigations to inquire into

the possible violation by any Person of the Small Business Act or the

Investment Act, or of any rule or regulation under these Acts, or of

any order issued under these Acts, or of any Federal law relating to

programs and operations of SBA.

Subpart B--Guarantees Subject to Prior Approval

Sec. 115.30 Submission of Surety's guarantee application.

(a) Legal effect of application. By submitting an application to

SBA for a bond guarantee, the Prior Approval Surety certifies that the

Principal meets the eligibility requirements set forth in Sec. 115.13

and that the underwriting standards set forth in Sec. 115.14 have been

met.

(b) SBA's determination. SBA's approval or decline of a guarantee

application is made in writing by an authorized SBA officer. The

officer may provide telephone notice before the Prior Approval Surety's

receives SBA's guarantee approval form if the officer has already

signed the form. In the event of a conflict between the telephone

notice and the written form, the written form controls.

(c) Reconsideration-appeal of SBA determination. A Prior Approval

Surety may request reconsideration of a decline from the SBA officer

who made the decision. If the decision on reconsideration is negative,

the Surety may appeal to an individual designated by the AA/SG. If the

decision is again adverse, the Surety may appeal to the AA/SG, who will

make the final decision.

(d) Notice and payment to SBA. When the Surety has Executed a Final

Bond,

[[Page 58273]]

including a Final Bond under a bonding line, the Surety must complete

the Prior Approval Agreement, and submit the form, together with the

Principal's payment for its guarantee fee (see Sec. 115.32(b)) to SBA

within 45 days, or in the case of a bonding line, within 15 business

days (see Sec. 115.33(d)) after Execution of the bond.

Sec. 115.31 Guarantee percentage.

(a) Ninety percent. SBA reimburses a Prior Approval Surety for 90%

of the Loss incurred and paid if:

(1) The total amount of the Contract at the time of Execution of

the bond is $100,000 or less; or

(2) The bond was issued on behalf of a small business concern owned

and controlled by socially and economically disadvantaged individuals.

See part 124 of this title for applicable definitions and criteria.

(b) Eighty percent. SBA reimburses a Prior Approval Surety in an

amount not to exceed 80% of the Loss incurred and paid on bonds for

Contracts in excess of $100,000 which are executed on behalf of non-

disadvantaged concerns.

(c) Contract increase to over $100,000. Where the Contract amount,

after Execution of the bond, increases to more than $100,000, the

guarantee percentage decreases by one percentage point for each $5,000

of increase or part thereof, but it does not decrease below 80%. This

provision applies only to guarantees which qualify under paragraph

(a)(1) of this section.

(d) Contract increase to over $1,250,000. Where the Contract

amount, after Execution of the bond, increases beyond the statutory

limit of $1,250,000, SBA's share of the Loss is limited to that

percentage of the increased Contract amount which the statutory limit

represents, multiplied by the guarantee percentage approved by SBA. For

example, if a Contract amount increases to $1,375,000, SBA's share of

the Loss under an 80% guarantee is limited to 72.73% [1,250,000 /

1,375,000 = 90.91% x 80% = 72.73%].

(e) Contract decrease to $100,000 or less. Where the Contract

amount, after Execution of the bond, decreases to $100,000 or less,

SBA's guarantee percentage increases to 90% if the Surety provides SBA

with evidence supporting the decrease and any other information or

documents requested.

Sec. 115.32 Fees and Premiums.

(a) Surety's Premium. A Prior Approval Surety must not charge a

Principal an amount greater than that authorized by the appropriate

insurance department. The Surety must not require the Principal to

purchase casualty or other insurance or any other services from the

Surety or any Affiliate or agent of the Surety. The Surety must not

charge non-Premium fees to a Principal unless the Surety performs other

services for the Principal, the additional fee is permitted by State

law, and the Principal agrees to the fee.

(b) SBA charge to Principal. SBA does not charge Principals

application or Bid Bond guarantee fees. If SBA guarantees a Final Bond,

the Principal must pay a guarantee fee of $8 per thousand dollars of

the Contract amount (unless SBA agrees otherwise in writing). The fee

is rounded to the nearest dollar. Example: If the Contract amount is

$100,100, the Principal's guarantee fee is $801.00 (.008 times

$100,100, or $800.80, rounded off to $801.00). The Principal's fee is

to be remitted to SBA by the Surety together with the notice required

under Sec. 115.30(d). See paragraph (d) of this section for additional

requirements when the Contract amount changes.

(c) SBA charge to Surety. SBA does not charge Sureties application

or Bid Bond guarantee fees. Subject to Sec. 115.17(a)(2), the Surety

must pay SBA a guarantee fee on each guaranteed bond (other than a Bid

Bond), computed at 25% of the bond Premium, in the ordinary course of

business. The fee is rounded to the nearest dollar. SBA does not

receive any portion of a Surety's non-Premium charges. See paragraph

(d) of this section for additional requirements when the bond

obligation or the Contract amount changes.

(d) Contract or bond increases/decreases. (1) Notification and

approval. The Prior Approval Surety must notify SBA of any increases or

decreases in the Contract or bond amount as soon as the Surety acquires

knowledge of the change. Whenever the original Contract or bond amount

increases by a change order of at least 25% or $50,000, whichever is

less (see Sec. 115.18(e)), the prior written approval of such increase

by SBA is required on a supplemental Prior Approval Agreement and is

conditioned upon payment by the Surety of the increase in the

Principal's guarantee fee as set forth in paragraph (d)(2) of this

section.

(2) Increases; fees. Notification of increases in the Contract or

bond amount under this paragraph (d) must be accompanied by payment of

the increase in the Principal's guarantee fee of $8 per thousand

dollars of increase in the Contract amount. The Surety's check for

payment of the increase in the Surety's guarantee fee of 25% of the

increase in the bond Premium may be submitted in the ordinary course of

business.

(3) Decreases. Whenever SBA is notified of a decrease in the

Contract or bond amount, SBA will refund to the Principal a

proportionate amount of the Principal's guarantee fee and rebate to the

Surety a proportionate amount of SBA's Premium share in the ordinary

course of business. Upon receipt of the refund, the Surety must

promptly pay a proportionate amount of its Premium to the Principal.

Sec. 115.33 Surety bonding line.

A surety bonding line is a written commitment by SBA to a Prior

Approval Surety which provides for the Execution of multiple bonds for

a specified small business strictly within pre-approved terms,

conditions and limitations. In applying for a bonding line, the Surety

must provide SBA with information on the applicant as requested. In

addition to the other limitations and provisions set forth in this part

115, the following conditions apply to each surety bonding line:

(a) Underwriting. A bonding line may be issued by SBA for a

Principal only if the underwriting evaluation is satisfactory. The

Prior Approval Surety must require the Principal to keep it informed of

all its contracts, whether bonded by the same or another surety or

unbonded, during the term of the bonding line.

(b) Bonding line conditions. The bonding line contains limitations

on the following:

(1) The term of the bonding line, not to exceed 1 year subject to

renewal in writing;

(2) The total dollar volume of the Principal's bonded and unbonded

work on hand at any one time, including outstanding bids, during the

term of the bonding line;

(3) The number of such contracts during the term of the bonding

line;

(4) The maximum dollar amount of any single guaranteed bonded

Contract;

(5) The timing of Execution of bonds under the bonding line--bonds

must be dated and Executed before the work on the underlying Contract

has begun, or the Surety must submit to SBA the documentation required

under Sec. 115.18(f)(2); and

(6) Any other limitation related to type, specialty of work,

geographical area, or credit.

(c) Excess bonding. If, after a bonding line is issued, the

Principal desires a bond and the Surety desires a guarantee exceeding a

limitation of the bonding line, the Surety must submit an application

to SBA under regular procedures.

(d) Submission of forms to SBA. (1) Bid Bonds. Within 15 business

days

[[Page 58274]]

after the Execution of any Bid Bonds under a bonding line, the Surety

must submit a ``Surety Bond Guarantee Underwriting Review'' to SBA for

approval. If that form is already on file with SBA and no new financial

statements are required or have been received from the Principal, a

``Surety Bond Guarantee Review Update'' may be submitted instead. If

the Surety fails to submit either form within this time period, SBA's

guarantee of the bond will be void from its inception unless SBA

determines otherwise upon a showing that a valid reason exists why the

timely submission was not made.

(2) Final Bonds. Within 15 business days after the Execution of any

Final Bonds under a bonding line, the Surety must submit a signed Prior

Approval Agreement and a ``Surety Bond Guarantee Underwriting Review''

to SBA for approval. If that form is already on file with SBA and no

new financial statements are required or have been received from the

Principal, a ``Surety Bond Guarantee Review Update'' may be submitted

instead. If the Surety fails to submit these forms together with the

Principal's payment for its guarantee fee within this time period,

SBA's guarantee of the bond will be void from its inception unless SBA

determines otherwise upon a showing that the Contract is not in default

and a valid reason exists why the timely submission was not made.

(3) Additional information. The Surety must submit any other data

SBA requests.

(e) Cancellation of bonding line. (1) Optional cancellation. Either

SBA or the Surety may cancel a bonding line at any time, with or

without cause, upon written notice to the other party. Upon the receipt

of any adverse information concerning the Principal, the Surety must

promptly notify SBA, and SBA may cancel the bonding line.

(2) Mandatory cancellation. Upon the occurrence of a default,

whether under a contract bonded by the same or another surety or an

unbonded contract, the Surety must immediately cancel the bonding line.

(3) Effect of cancellation. Cancellation of a bonding line by SBA

is effective upon receipt of written notice by the Surety. Bonds issued

before the effective date of cancellation remain guaranteed by SBA.

Upon cancellation by SBA or the Surety, the Surety must promptly notify

the Principal in writing.

Sec. 115.34 Minimization of Surety's Loss.

(a) Imminent Breach. (1) Prior approval requirement. SBA will

reimburse its guaranteed share of payments made by a Surety to avoid or

attempt to avoid an Imminent Breach of the terms of a Contract covered

by an SBA guaranteed bond only if the payments were made with the prior

approval of OSG. The Surety must demonstrate to SBA's satisfaction that

the breach is, in fact, imminent and that there is no other recourse to

prevent such breach.

(2) Amount of reimbursement. The aggregate of the payments by SBA

to avoid Imminent Breach cannot exceed 10% of the Contract price,

unless the Administrator finds that a greater payment (not to exceed

the guaranteed share of the bond penalty) is necessary and reasonable.

In no event will SBA make any duplicate payment pursuant to this or any

other provision of this part 115.

(3) Recordkeeping requirement. The Surety must keep records of

payments made to avoid Imminent Breach.

(b) Salvage and recovery. A Prior Approval Surety must pursue all

possible sources of salvage and recovery until SBA concurs with the

Surety's recommendation for a discontinuance or for a settlement. The

Surety must certify that continued pursuit of salvage and recovery

would be neither economically feasible nor a viable strategy in

maximizing recovery. See also Sec. 115.17(b).

Sec. 115.35 Claims for reimbursement of Losses.

(a) Notification requirements. (1) Events requiring notification. A

Prior Approval Surety must notify OSG of the occurrence of any of the

following:

(i) Legal action under the bond has been initiated.

(ii) The Obligee has declared the Principal to be in default under

the Contract.

(iii) The Surety has established a claim reserve for the bond.

(iv) The Surety has received any adverse information concerning the

Principal's financial condition or possible inability to complete the

project or pay laborers or suppliers.

(2) Timing of notification. Notification must be made in writing

at the time the Surety applies for a guarantee on behalf of an affected

Principal or, if no guarantee application is being filed, within 30

days of the date the Surety acquires knowledge, or should have acquired

knowledge, of any of the listed events.

(b) Surety action. The Surety must take all necessary steps to

mitigate Losses resulting from any of the events in paragraph (a) of

this section, including the disposal at fair market value of any

collateral held by or available to the Surety. Unless SBA notifies the

Surety otherwise, the Surety must take charge of all claims or suits

arising from a defaulted bond, and compromise, settle and defend such

suits. The Surety must handle and process all claims under the bond and

all settlements and recoveries as it does on non-guaranteed bonds.

(c) Claim reimbursement requests. (1) Claims for reimbursement for

Losses which the Surety has paid must be submitted (together with a

copy of the bond, the bonded Contract, and any indemnity agreements)

with the initial claim to OSG on a ``Default Report, Claim for

Reimbursement and Record of Administrative Action'', within 1 year from

the time of each disbursement. Claims submitted after 1 year must be

accompanied by substantiation satisfactory to SBA. The date of the

claim for reimbursement is the date of receipt of the claim by SBA, or

such later date as additional information requested by SBA is received.

(2) The Surety must also submit evidence of the disposal of all

collateral at fair market value.

(3) SBA may request additional information prior to reimbursing the

Surety for its Loss.

(4) Subject to the offset provisions of part 140, SBA pays its

share of Loss within 90 days of receipt of the requisite information.

(5) Claims for reimbursement and any additional information

submitted are subject to review and audit by SBA, including but not

limited to the Surety's compliance with SBA's regulations and the

requirements of governing SBA forms.

(d) Status updates. The Surety must submit semiannual status

reports on each claim 6 months after the initial default notice and

then every 6 months. SBA must be notified immediately of any

substantial changes in the status of the claim or the amounts of Loss

reserves.

(e) Reservation of SBA rights. The payment by SBA of a Surety's

claim does not waive or invalidate any of the terms of the Prior

Approval Agreement, the regulations set forth in this part 115, or any

defense SBA may have against the Surety. Within 30 days of receipt of

notification that a claim or any portion of a claim should not have

been paid by SBA, the Surety must remit the specified amounts to SBA.

Sec. 115.36 Indemnity settlements and reinstatement of Principal.

(a) Indemnity settlements. (1) An indemnity settlement occurs when

a defaulted Principal and its Surety agree upon an amount, less than

the actual loss under the bond, which will satisfy

[[Page 58275]]

the Principal's indebtedness to the Surety. Sureties must not agree to

any indemnity settlement proposal or enter into any such agreement

without SBA's concurrence.

(2) All settlement proposals submitted for SBA's consideration must

include current financial information, including financial statements,

tax returns, and credit reports, together with the Surety's written

recommendations. It should also indicate whether the Principal is

interested in further bonding.

(3) The Surety must pay SBA its pro rata share of the settlement

amount within 90 days of receipt. Prior to closing the file on a

Principal, the Surety must certify that SBA has received its pro rata

share of all indemnity recovery.

(b) Conditions for reinstatement. At any time after a Principal

becomes ineligible for further bond guarantees under Sec. 115.36, the

Surety may recommend that such Principal's eligibility for further bond

guarantees be reinstated. OSG may agree to reinstate the Principal if:

(1) The Principal's guarantee fee has been paid to SBA and SBA

receives evidence that the Principal has paid all delinquent amounts

due to the Surety (including amounts for Imminent Breach); or

(2) The Surety has settled its claim with the Principal for an

amount and on terms accepted by OSG; or

(3) The Principal contests a claim and provides collateral

acceptable to the Surety and SBA, which has a liquidation value of at

least the amount of the claim including related expenses; or

(4) The Principal's indebtedness to the Surety is discharged by

operation of law (e.g., bankruptcy discharge); or

(5) OSG and the Surety determine that further bond guarantees will

assist in the prevention or elimination of Loss to SBA.

(c) Underwriting after reinstatement. A guarantee application

submitted after reinstatement of the Principal's eligibility is subject

to a very stringent underwriting review.

Subpart C--Preferred Surety Bond (PSB) Guarantees

Sec. 115.60 Procedures for PSB Program.

(a) Selection of sureties for the PSB program. SBA's selection of

PSB Sureties will be guided by, but not limited to, these factors:

(1) An underwriting limitation of at least $1,250,000 on the U.S.

Treasury Department list of acceptable sureties;

(2) An agreement to charge Principals no more than the advisory

premium rates of the Surety Association of America;

(3) Premium income from contract bonds guaranteed by any government

agency (Federal, State or local) of no more than one-quarter of the

total contract bond premium income of the Surety;

(4) The vesting of underwriting authority for SBA guaranteed bonds

only in employees of the Surety;

(5) The vesting of final settlement authority for claims and

recovery under the PSB program only in employees of the Surety's

permanent claims department; and

(6) The rating or ranking designations assigned to the Surety by

recognized authority.

(b) Execution of PSB Agreement. A Surety admitted to the PSB

program must execute a PSB Agreement before approving SBA guaranteed

bonds. No SBA guarantee attaches to bonds approved before the AA/SG or

designee has countersigned the agreement.

(c) Duration of PSB program. The PSB program terminates on

September 30, 1997, unless extended by legislation. SBA guarantees

effective under this program on or before September 30, 1997, will

remain in effect after such date.

(d) Prohibition on participation in Prior Approval program. Neither

a PSB Surety nor any of its Affiliates is eligible to submit

applications under subpart B of this part.

(e) Allotment of guarantee authority. (1) General. SBA allots to

each PSB Surety a periodic maximum guarantee authority. No SBA

guarantee attaches to bonds approved by a PSB Surety if the bonds

exceed the allotted authority for the period in which the bonds are

approved. No reliance on future authority is permitted. An allotment

can be increased only by prior written permission of SBA.

(2) Execution of Bid Bonds. When the PSB Surety Executes a Bid

Bond, SBA debits the Surety's allotment for an amount equal to the

guarantee percentage of the estimated penal sum of the Final Bond SBA

would guarantee if the Contract were awarded. If the Contract is then

awarded for an amount other than the bid amount, or if the bid is

withdrawn or the Bid Bond has expired (see definition in Sec. 115.11),

SBA debits or credits the Surety's allotment accordingly.

(3) Execution of Final Bonds. If the PSB Surety Executes a

guaranteed Final Bond, but not the related Bid Bond, SBA debits the

Surety's allotment for an amount equal to the guarantee percentage of

the penal sum of the Final Bond. SBA will debit the allotment for

increases, and credit the allotment for decreases, in the bond amount.

(4) Release and non-issuance of Final Bonds. The release of Final

Bonds upon completion of the Contract does not restore the

corresponding allotment. If, however, a PSB Surety approves a Final

Bond but never issues the bond, SBA will credit the Surety's allotment

for an amount equal to the guarantee percentage of the penal sum of the

bond. In that event, the Surety must notify SBA as soon as possible,

but in no event later than 5 business days after the non-issuance has

been determined. Until the Surety has so notified SBA, it cannot rely

on such credit.

(f) Timeliness. A PSB Surety may not Execute or approve a bond

after commencement of work under a Contract unless the Surety submits a

completed ``Surety Bond Guarantee Agreement Addendum'', together with

the evidence and certifications described in Sec. 115.18(f)(2), and

obtains written approval from the AA/SG.

(g) Operations. (1) Retention of information. A PSB Surety must

comply with all applicable SBA regulations and obtain from its

applicants all the information and certifications required by SBA. The

PSB Surety must document compliance with SBA regulations and retain

such certifications in its files, including a contemporaneous record of

the date and time of approval and Execution of each bond. The

certifications and other information must be made available for

inspection by SBA or its agents and must be available for submission to

SBA in connection with the Surety's claims for reimbursement. The PSB

Surety must retain the certifications and other information for the

term of the bond, plus such additional time as may be required to

settle any claims of the Surety for reimbursement from SBA and to

attempt salvage or other recovery, plus an additional 3 years. If there

are any unresolved audit findings in relation to a particular bond, the

Surety must maintain the related certifications and other information

until the findings are resolved. See also Sec. 115.19(f).

(2) Usual staff and procedures. A PSB Surety must approve, Execute

and administer SBA guaranteed bonds in the same manner and with the

same staff as the Surety's activity outside the PSB program. The Surety

must request job status reports from the Obligees in accordance with

its own procedures.

(3) Notification to SBA. A PSB Surety must advise SBA by electronic

transmission or monthly bordereau, as agreed between the Surety and

SBA, of all approved Bid and Final Bonds, and of the Surety's approval

of increases and

[[Page 58276]]

decreases in the Contract or bond amount. The notice must contain the

information specified from time to time in agreements between the

Surety and SBA. SBA may deny liability with respect to Final Bonds for

which SBA has not received timely notice.

(4) Fees. The PSB Surety must pay SBA 25% of the Premium it charges

on Final Bonds. The fee is rounded to the nearest dollar. The PSB

Surety must also remit to SBA the Principal's payment for its guarantee

fee of $8 per thousand dollars of the Contract amount. This fee is also

rounded to the nearest dollar. The Surety must remit SBA's Premium

share and the Principal's guarantee fee with the bordereau listing the

related Final Bond, as required in the PSB Agreement.

(5) Increases/decreases in Contract or bond amount. (i) The PSB

Surety must process Contract or bond amount increases within its

allotment in the same manner as initial guaranteed bond issuances (see

paragraph (g)(3) of this section). The Surety must present checks for

additional fees due from the Principal and the Surety on the increases

(computed under paragraph (g)(4) of this section), and attach such

payments to the respective monthly bordereau.

(ii) If the Contract or bond amount is decreased, SBA will refund

to the Principal a proportionate amount of the guarantee fee, and

adjust SBA's Premium share accordingly in the ordinary course of

business.

(6) Events requiring notification. The PSB Surety must advise SBA

within 30 calendar days of the name and address of a Principal against

whom legal action on the bond has been instituted, or when the Obligee

has declared a default, or when the Surety has established a claim

reserve. The Surety must also notify SBA within 30 days of the recovery

of any amounts on the guaranteed bond, or if the Surety determines to

bond such Principal again.

Sec. 115.61 Guarantee percentage.

SBA reimburses a PSB Surety in an amount not to exceed 70% of the

Loss incurred and paid. Where the Contract amount, after the Execution

of the bond, increases beyond the statutory limit of $1,250,000, SBA's

share of the Loss is limited to that percentage of the increased

Contract amount which the statutory limit represents, multiplied by the

guarantee percentage approved by SBA. For an example, see

Sec. 115.31(d).

Sec. 115.62 Imminent Breach.

(a) No prior approval requirement. SBA will reimburse a PSB Surety

for the guaranteed portion of payments the Surety makes to avoid or

attempt to avoid an Imminent Breach of the terms of a Contract covered

by an SBA guaranteed bond. The PSB Surety does not need SBA approval to

make Imminent Breach payments.

(b) Amount of reimbursement. The aggregate of the payments by SBA

cannot exceed 10% of the Contract price, unless the Administrator finds

that a greater payment (not to exceed the guaranteed portion of the

bond penalty) is necessary and reasonable. In no event will SBA make

any duplicate payment pursuant to this or any other provision of the

regulations in this part.

(c) Recordkeeping requirement. The PSB Surety must keep records of

payments made to avoid Imminent Breach.

Sec. 115.63 Claims for reimbursement of Losses.

(a) How claims are submitted. A PSB Surety must submit claims for

reimbursement on a form approved by SBA no later than 1 year from the

date the Surety paid the amount. Loss is determined as of the date of

receipt by SBA of the claim for reimbursement, or as of such later date

as additional information requested by SBA is received. Subject to the

offset provisions of part 140, SBA pays its share of Loss within 90

days of receipt of the requisite information. Claims for reimbursement

and any additional information submitted are subject to review and

audit by SBA.

(b) Surety action. The PSB Surety must take all necessary steps to

mitigate Losses when legal action against a bond has been instituted,

when the Obligee has declared a default, or when the Surety has

established a claim reserve. When the Surety disposes of any

collateral, it must do so at fair market value. Unless SBA notifies the

Surety otherwise, the Surety must take charge of all claims or suits

arising from a defaulted bond, and compromise, settle or defend the

suits. The Surety must handle and process all claims under the bond and

all settlements and recoveries in the same manner as it does on non-

guaranteed bonds.

(c) Reservation of rights. The payment by SBA of a PSB Surety's

claim does not waive or invalidate any of the terms of the PSB

Agreement, the regulations in this part 115, or any defense SBA may

have against the Surety. Within 30 days of receipt of notification that

a claim or any portion of a claim should not have been paid by SBA, the

Surety must pay the specified amounts to SBA.

Sec. 115.64 Denial of liability.

In addition to the grounds set forth in Sec. 115.19, SBA may deny

liability to a PSB Surety if:

(a) The PSB Surety's guaranteed bond was Executed in an amount

which, together with all other guaranteed bonds, exceeded the allotment

for the period during which the bond was approved, and no prior SBA

approval had been obtained;

(b) The PSB Surety's loss was incurred under a bond which was not

listed on the bordereau for the period when it was approved; or

(c) The loss incurred by the PSB Surety is not attributable to the

particular Contract for which an SBA guaranteed bond was approved.

Dated: November 16, 1995.

Philip Lader,

Administrator.

[FR Doc. 95-28549 Filed 11-24-95; 8:45 am]

BILLING CODE 8025-01-P