Surety Bond Guarantee

SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

Surety Bond Guarantee

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: This final rule revises the regulations found at 13 CFR Part

115, governing the Surety Bond Guarantee (SBG) Program. It eliminates

inconsistencies, clarifies procedures, accommodates program experience

and industry changes, and provides for more efficient program

operation. It also clarifies and shortens regulations where

appropriate, eliminates redundant provisions, consolidates and

reorganizes sections, and clarifies ambiguous language.

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

FOR FURTHER INFORMATION CONTACT: Barbara Brannan, Office of Surety

Guarantees, (202) 205-6540.

SUPPLEMENTARY INFORMATION: In response to a Memorandum from President

Clinton for all federal agencies to simplify their regulations, SBA

published a proposed rule on November 27, 1995, to revise the

regulations governing the Surety Bond Guarantee Program. See 60 FR

58263 (November 27, 1995). The public was afforded a thirty-day period

in which to submit comments on the proposed rule to SBA. During that

period, SBA received 12 comment letters. After giving careful

consideration to the concerns raised in those letters, SBA is today

finalizing the proposed rule with certain modifications discussed

below.

General Comments

Those comment letters that addressed the proposed renumbering and

reorganization of Part 115 commended the rewrite for its clarity and

comprehensibility. Those aspects of the proposed rule are being

finalized as proposed. In this final rule, SBA has continued its effort

to simplify Part 115 by creating smaller sections out of the largest

proposed section (Sec. 115.60). Subsequent sections (Secs. 115.61

through 115.64) have been renumbered to accommodate this change.

Definitions--Contract, etc.

All three of the comments received on the proposed change to the

definition of ``contract'' objected to the exclusion of maintenance

agreements covering defective materials. Under the proposal, a

maintenance agreement covering defective workmanship would be

considered a contract, but a maintenance agreement covering defective

materials would not. It was argued in the comments that the typical

maintenance agreement in use today covers both defective workmanship

and defective materials. On reconsideration, SBA agrees that the

definition of contract should permit coverage of defective materials

since that accords with standard practice in the industry today. The

definition is finalized accordingly. The final version also clarifies

that maintenance agreements of longer than two years duration can be

considered contracts if they meet the requirements set forth in the

definition.

A new defined term has also been added to the final rule: ``final

bond''. The term means a performance bond and/or a payment bond. This

is one of several non-substantive changes SBA is making in the final

rule to make the regulations clearer.

Eligibility of Payment Bonds

Proposed Sec. 115.12(b) would have allowed payment bonds to be

guaranteed by SBA only if performance bonds were issued at the same

time. As four comment letters pointed out, recent amendments to the

Miller Act eliminate the bonding requirement for federal contracts of

less than $100,000, but allow for certain alternatives to protect

subcontractors and suppliers against non-payment by the general

contractor. As one alternative, the contracting officer may require a

payment bond on the contract. Under SBA's proposed change to

Sec. 115.12(b), contractors in the SBG Program would have been unable

to bid on those small public contracts that require payment bonds only.

Given the recent Miller Act changes, SBA agrees that payment bonds

should not automatically be considered ineligible for guaranteed

bonding when no performance bond is issued. The final version of

Sec. 115.12(b), therefore, does not restrict the eligibility of payment

bonds. However, SBA does not intend to guarantee payment bonds that are

essentially forfeiture bonds. If a payment bond allows the claimant to

receive the full amount of the bond from the surety regardless of the

amount of the damage or loss the claimant has

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actually suffered, the bond is a forfeiture bond. The definition of

payment bond has been changed in this final rule to clarify that no

forfeiture bonds will be guaranteed by SBA.

In response to a comment from the Surety Association of America, a

technical change to proposed Sec. 115.12(b) is also being adopted. The

reference in the current and proposed regulation to the Surety

Association's ``Rating Manual'' has been changed to its ``Manual of

Rules, Procedures and Classifications'' to conform to the Association's

current name for its publication.

Transfer of Surety's Files

SBA's proposal to prohibit the transfer or sale of surety files and

accounts is finalized with certain changes to clarify SBA's intent. As

the commenters surmised, the provision (proposed Sec. 115.12(f)) was

not intended to apply to the sale of a surety's entire property and

casualty operations. SBA does not want to restrict the sale of a

surety's entire book of business. In addition to this clarification,

the final rule now provides that when the prohibition against the

transfer or sale of files and accounts does apply, it can be overridden

with SBA's prior approval.

Principal's Eligibility

Several comment letters expressed concern regarding SBA's proposal

to exclude from participation in the SBG Program those principals who

are primarily brokers or construction managers. SBA recognizes that

many small general contractors subcontract out a high percentage of the

work under a contract. This is not necessarily objectionable. Rather,

SBA is trying to weed out those principals whose subcontracting results

in the principal losing control over the project. In the most egregious

cases, the principal may be fronting for the subcontractor. This

objectionable activity may not be discernible solely from the

percentage of work subcontracted on a project, although that is often a

good indicator. To clarify SBA's position, proposed Sec. 115.13(e) has

been rewritten to delete the reference to ``construction managers''.

Instead, the final version excludes from participation in the SBG

Program principals who are brokers or who, through subcontracting out

work under the contract, have effectively lost control over the

project. The final version (now designated Sec. 115.13(a)(5)) still

requires principals to specify the percentage of work under the

contract to be subcontracted.

Proposed Sec. 115.13(g) seems to have created a misunderstanding.

It was not SBA's intent to prohibit a contractor whose spouse works for

a surety company from obtaining bonds through the SBG Program. Such

``conflicts of interest'' would not preclude contractors from

participating in the program, but they might bar contractors from

obtaining guaranteed bonds through the ``affiliated'' surety. For

example, if the spouse of a contractor (1) is ``empowered to act on

behalf of the surety'' (and is therefore included under the definition

of ``surety'') and (2) is considered to own at least 10% of the

contractor business, then that surety company can not issue a

guaranteed bond for that contractor. Any other surety company in the

SBG Program, however, could issue a guaranteed bond for that principal.

The final version of the subsection (now designated Sec. 115.13(b))

clarifies that it addresses the eligibility of a principal to receive

guaranteed bonds issued by a particular surety, not by all sureties in

the SBG Program. The other paragraphs in the section have been

relettered accordingly.

Loss of Principal's Eligibility

Subsections (1) and (2) of proposed Sec. 115.14(a) provided that

principals would lose eligibility for further SBA bond guarantees if

legal action under the bond had been initiated or if the principal had

been declared in default under the contract. The comments received on

these two paragraphs questioned the wisdom of an automatic loss of

eligibility under these two situations. It was argued that taking such

action could cause financial hardship to the contractor and might even

put the contractor out of business. The suggestion was made that the

surety company's underwriter or claims department should make the

determination as to loss of a principal's eligibility in these two

cases.

SBA believes that the subsections governing a principal's loss of

eligibility must be read in conjunction with the section on reinstating

the principal's eligibility (proposed Sec. 115.36(b)). SBA is rewording

proposed Sec. 115.36(b) to allow for reinstatement of the principal's

eligibility in the event SBA and the surety agree to reinstate. With

that change, if legal action is initiated under the bond, or if any of

the other events in Sec. 115.14(a) occurs, the principal still loses

eligibility for further guaranteed bonding, but reinstatement of

eligibility can occur almost immediately if both SBA and the surety

agree it is appropriate. SBA expects that, with that mechanism in

place, frivolous lawsuits and baseless claims under the bond will not

stand in the way of further guaranteed bonding of an otherwise eligible

principal. Subsections (1) and (2) of proposed Sec. 115.14(a) are

therefore unchanged in the final rule.

Subsection (3) of proposed Sec. 115.14(a) provided that a

principal's eligibility would be lost if the surety established a claim

reserve for the bond in excess of $100. All five of the comments

received on this subsection objected to the $100 threshold as too low.

The argument was made that some sureties routinely set up a claim

reserve in excess of $100 every time a trouble notice is received on a

project, and that claim reserves do not necessarily reflect actual loss

potential. Two of the comments recommended a $500 claim reserve as the

minimum level which indicated the potential for serious loss.

SBA's proposal had been intended as a liberalization of the current

regulation (Sec. 115.34(a)), which provides that a claim reserve of any

amount results in automatic loss of the principal's eligibility. SBA

believes, though, that with the other triggers for loss of eligibility

in place in Sec. 115.14(a), it is appropriate to increase the minimum

claim reserve threshold. SBA has concluded that claim reserves below

$1000 should not result in the loss of the principal's eligibility. The

rule is finalized accordingly.

A new provision has been added to Sec. 115.14(b) to clarify that in

the PSB Program a principal's eligibility is reinstated upon the

surety's own determination that reinstatement is appropriate.

Underwriting and Servicing Standards

Four comments were received on the proposed rewrite of the

program's underwriting standards (proposed Sec. 115.15(a)). All were

opposed to the proposed 150% limit on contracts for contractors new to

the SBG Program. SBA had intended the 150% limit as general guidance

for underwriting decisions, not as an absolute requirement. Upon

reconsideration, SBA believes that underwriting guidelines need not

appear in the regulations. Accordingly, the guidance on limits for

contractors new to the SBG Program is being moved to an SBA Standard

Operating Procedure (SOP) for the SBG Program. Also moved to the SOP

are SBA's recommendations as to type and size of contract for

guaranteed bonding and other general underwriting guidelines. SBA

expects that sureties will follow the recommendations in the SOP when

making their underwriting determinations. The balance of Sec. 115.15(a)

is finalized as proposed.

Four comments were also received on the proposed rewrite of the

program's

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servicing standards (proposed Sec. 115.15(b)). All four addressed the

requirement for sureties to obtain job status reports from obligees on

final bonds guaranteed by SBA. The comments pointed out the difficulty

in obtaining job status reports from an obligee who refuses to respond

to job status inquiries. SBA agrees that sureties should not be held to

a requirement that is outside of their control. Instead of requiring

sureties to obtain job status reports, therefore, the final rule

provides that sureties must request job status reports and document the

request in their files.

Determination of Loss

Two comment letters asked for clarification of the terms ``mark-up

on expenses'' and ``overhead,'' as used in the computation of the

surety's ``loss'' in proposed Sec. 115.16(f)(1). The proposal would

have prohibited reimbursement from SBA for any mark-up on expenses or

any overhead of ``the surety, its attorney or any other party.'' SBA

believes the terms in question are generally understood business terms,

but that some confusion may have been generated by the words ``or any

other party.'' SBA is remedying that problem by changing the words to

``or any other party hired by the Surety or the attorney.'' In

particular, consultants hired by either the surety or the surety's

counsel cannot indirectly charge SBA for their overhead or for anything

over their actual costs.

Using photocopying costs as an example, the restriction on mark-up

on expenses would mean that if the surety's attorney copies documents

on its office xerox machine and charges the surety for its actual per

copy cost, plus 20%, the surety cannot include in ``loss'' the 20%

excess over the attorney's actual cost of making those copies. The same

would be true of photocopying by the surety itself; only the actual per

copy cost could be included in loss. If the surety or the attorney has

documents copied at a photocopying store, however, the amount of the

copying expense included in the surety's loss is the full amount the

store charges the surety or the attorney, regardless of the actual cost

to the store of that job. The retailer's markup is a permitted expense

because the retailer has not been ``hired'' by the surety.

In general, SBA would consider ``mark-up on expenses'' to include

any add-on to the actual cost of an expense item. ``Overhead'' means

the general costs of running a business. Some examples of overhead

include rent, electricity, and heating and air conditioning costs.

Salvage and Recovery

SBA received three comments on proposed Sec. 115.17(b)(2), the

subsection establishing SBA's share of the salvage and recovery

received by a surety when a principal defaults on a bonded contract

that SBA has guaranteed. The three comments opposed SBA's proposal that

it share not only in any recovery received by the surety in connection

with the guaranteed bond for the principal, but also in any recovery

received in connection with any other bond issued by the surety on

behalf of that principal. The commenters suggested that the surety be

allowed to apply contract funds from the defaulted non-guaranteed

project to that project's losses first, and then give SBA any excess it

receives. Ordinarily, the excess would be paid over to the principal.

Upon reconsideration, SBA believes its proposal was overly broad.

Under the final rule, SBA will not share in contract proceeds and other

forms of salvage and recovery that are clearly identifiable as related

solely to a bonded contract that SBA has not guaranteed. On the other

hand, if the surety's recovery could apply to both a contract without a

guaranteed bond and a contract with a guaranteed bond, SBA will be

entitled to its share of the entire amount of that recovery. For

example, if the surety collects from an individual who has indemnified

the surety for its losses under both a guaranteed bond and a non-

guaranteed bond, the entire recovery from that party will be assumed to

relate to the guaranteed bond for purposes of determining SBA's share.

Renegotiation of guarantee percentage

Several comment letters requested clarification of SBA's ability

under proposed Sec. 115.18(a)(3) to renegotiate a surety's guarantee

percentage in the event the surety experiences excessive losses. In

response to those requests, SBA assures the participants in the SBG

Program that the guarantee percentage for bonds already written by a

surety cannot be renegotiated. In the event a surety's losses are

determined to be excessive by SBA, the surety may be required to

renegotiate the guarantee percentage for bonds issued after that date.

The final version of proposed Sec. 115.18(a)(3), now designated

Sec. 115.18(a)(4), clarifies this point.

Denial of Liability--Excess Bond Amount

Under proposed Sec. 115.19(a), SBA would not be liable under its

guarantee if the bond amount at any time exceeded the total contract

amount determined at the time of the bond's execution. The four

comments received on this subsection made two points. The first point

was that certain public (government) projects require bonding in excess

of 100% of the contract amount. An exception for such projects was

requested. SBA's proposal limiting bonds to 100% of the contract

amount, while new to the regulations, has long been a policy of the SBG

Program. The restriction has been a part of the Program's Standard

Operating Procedure for over ten years. See SOP 50 45, Revision 1, page

22. The reason for the restriction is that SBA has determined that any

situation in which the surety and SBA have a greater liability than the

obligee is inherently not reasonable in light of the risks involved. It

would be statutorily impermissible for SBA to issue a guarantee under

those circumstances. See 15 USC 694b(a)(4)(D). Public projects

requiring bonding in excess of 100% will have to continue to be bonded

outside of the SBG Program.

The second point raised in the comment letters was that as contract

amounts increase by change order, bond amounts may increase as well. If

the bond can never exceed the original contract amount, there is no

possibility for increases in the bond amount when the contract amount

is increased. SBA has reconsidered its position on this issue. The

final rule permits the bond amount to exceed the original contract

amount but, as discussed in the preceding paragraph, the bond amount

must never exceed the contract amount measured at the same time.

Denial of Liability--Substantial Regulatory Violation

Under proposed Sec. 115.19(d), SBA would not be liable under its

guarantee if the surety committed a substantial violation. A

substantial violation was proposed to include a violation which caused

an increase in the contract or bond amount of 25% or $50,000. Upon

consideration of the one comment received on this paragraph, SBA has

concluded that it is extremely unlikely that a regulatory violation

could cause an increase in the contract amount. SBA's real concern is

with increases in the bond amount. The final rule deletes the reference

to the contract amount in Sec. 115.19(d).

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Denial of Liability--Alteration

Under proposed Sec. 115.19(e), SBA would not be liable under its

guarantee if the surety agreed to or acquiesced in any material

alteration of the contract or bond without SBA's prior written

approval. This differs from the current regulation, Sec. 115.13(e),

which does not include alterations in the contract as a basis for SBA

to deny liability. The single comment received on proposed

Sec. 115.19(e) pointed out that the standard bond form in the surety

industry provides that the surety waives notice of changes to the

contract. Changes to the contract frequently occur without any approval

from the surety. Accordingly, SBA has decided to remove contract

alterations as a basis for denial of liability in the final rule.

Denial of Liability--Timeliness

Under proposed Sec. 115.19(f), SBA would not be liable under its

guarantee if the surety executed the bond before SBA's guarantee was

executed. This provision complies with the statutory requirement that

an SBA bond guarantee may be issued only if the principal is not able

to obtain the bond on reasonable terms and conditions without the

guarantee. See 15 USC 694b(a)(4)(C). A bond dated prior to SBA's

guarantee is a bond that is obtainable without such guarantee.

The two comments received on this subsection expressed concern that

the current industry practice of back-dating the bond at the request of

the obligee could result in an SBA determination to deny liability

under the guarantee. Apparently, many obligees require that the bond be

dated the same date as the contract, regardless of the actual execution

date of the bond. SBA does not object to a bond carrying an ``effective

date'' (e.g., ``dated as of July 1, 1996'') that is earlier than its

execution date (e.g., ``signed July 20, 1996'') as long as there is

proper documentation of the actual date of execution of the bond and

such execution date is no earlier than the date of SBA's guarantee. SBA

does not believe that any change to the proposed language in

Sec. 115.19(f) is necessary, as the proposal speaks only of execution

of the bond. The provision is finalized as proposed.

Denial of Liability--Other Regulatory Violations

In accordance with the suggestion in the one comment received on

proposed Sec. 115.19(h)(6), SBA is correcting the language of the

proposed subsection to clarify that sureties are permitted to make

payments under payment bonds even though such payments may not result

from the principal's breach of the bonded contract. SBA had not

intended for the proposal to be interpreted any other way. The final

version of Sec. 115.19(h)(6) makes this technical correction.

Audits and Investigations

In connection with the requirement under the final version of

Sec. 115.15(b) for sureties to document the job status inquiries they

make, SBA is including such documentation, together with any job status

reports received by the surety, in the list of records required to be

maintained by the surety under the final version of Sec. 115.21(b).

Prior Approval Program--SBA Approval

SBA is finalizing proposed Sec. 115.30(b) without change. The

proposal, which provided that SBA's written approval of a guarantee

application would control over any conflicting verbal approval, was not

different substantively from the current regulation (Sec. 115.31(a)).

Nevertheless, SBA appreciates the concern of the two commenters who

requested some protection for sureties relying on a verbal approval

from an SBA officer, only to learn that the guarantee agreement was not

signed until the following day. SBA intends to make clear to all SBG

Program personnel that no verbal approval of a guarantee application

may be communicated unless the guarantee application has already been

executed by an authorized official. Sureties requiring greater

certainty than the regulation affords are advised to request a telecopy

of the signed guarantee form as confirmation.

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

Ten of the eleven comments received on the proposed increase in the

principal's fee (proposed Sec. 115.32(b)) were opposed to the increase.

The eleventh comment commended SBA's attempt to make the program self-

financing and recommended an even greater increase in the principal's

fee than had been proposed by SBA. The vast majority of the comments on

this topic, however, cited the adverse impact on the contractors and on

the SBG Program. In particular, there was concern that the increase

would impose a financial burden on the contractors in the program and

would result in a dramatic cut-back in program participation. Only the

higher risk contractors--those without collateral or other alternatives

to the SBG Program--were predicted to remain in the program.

Ten comments were also received on the proposed increase in SBA's

charge to the surety (proposed Sec. 115.32(c))--all opposed. According

to several sureties, writing bonds in the SBG Program already costs the

surety more than writing equivalent bonds with standard reinsurance. It

was predicted that some sureties would leave the program and that

sureties remaining in the program would attempt to pass the increase on

to the contractor by raising premium rates.

SBA has given careful consideration to the concerns surrounding the

proposed increases in the principal's fee and the surety's fee. SBA

continues to believe that the long-term goals of the SBG Program will

be best served if the program can become self-financing. However, the

costs of any transition to a self-funding program should not outweigh

the benefits to be derived from the change.

To allow time for further consideration, SBA has decided to keep

the fees at their current levels (.06% of the contract amount for the

principal fee; 20% of the bond premium for the surety fee) at this

time. Future changes in the fee percentages will be published by SBA in

the form of a Notice in the Federal Register. SBA is completing an

analysis of the performance of the SBG Program and evaluating whether

changes in the fees are warranted, and will publish a Notice within 30

days of the date of publication.

Prior Approval Program--Contract Increases/Decreases

Proposed Sec. 115.32(d) elicited nine comments from readers, none

of which supported the proposal. The proposal contained several

components. First, sureties would be required to notify SBA of all

increases or decreases in the contract or bond amount as soon as the

surety learned of the change. All notifications of increases would have

to be accompanied by the associated increase in the principal's fee.

The increase in the surety's fee would be payable in the ordinary

course of business. Under the current regulation, by contrast,

notification is required only when the changes in the contract or bond

amount aggregate at least $10,000 (current Sec. 115.35(c)). No increase

in the principal's or the surety's fee is computed at that time.

Second, under the proposal, any single change in the contract or

bond amount of at least 25% or $50,000 would require prior SBA

approval. Under the current regulation, changes in the bond amount

aggregating at least

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25% or $50,000 require SBA's approval and simultaneous payment of any

increase in the principal's fee. The increase in the surety's fee is

payable in the normal course of business.

Third, under the proposal, payment for the increased fees would be

due and payable regardless of the size of the check. No exception would

be made for small sums. Under the current regulation, if the increase

in the principal's or the surety's fee is less than $40, the amount is

``disregarded''.

Fourth, under both the proposal and the current regulation,

decreases in the contract or bond amount are treated the same as

increases of an equivalent amount would be treated. Decreases resulting

in refunds from SBA of a portion of the principal's fee, however, are

paid directly to the principal under the proposal, but are paid to the

surety (who then transmits the refund to the principal) under the

current regulation.

The comment letters uniformly registered objections to the greater

administrative burden considered to be imposed by the proposed

notification and payment requirements. Opposition to the removal of the

$40 threshold was also expressed consistently, although some commenters

suggested a $100 threshold in its place. No objection was raised to the

proposed mechanism for refunding the excess principal's fee.

SBA has reconsidered its proposal in light of the comments

received. Instead of requiring notification of all increases and

decreases in the contract or bond amount, and the payment of associated

fees, the final rule requires notification of increases or decreases

only when they aggregate 25% of the contract or bond amount or $50,000.

Such notification must be accompanied by the increase in the

principal's fee; however, increases (or decreases) in the principal's

or the surety's fee will not be due and payable until they aggregate at

least $40. Increases in the surety's fee will be payable in the

ordinary course of business, as they are presently. Any single change

order that increases the bond amount by 25% or $50,000 will require the

prior approval of SBA. Except for the changes discussed in this

paragraph, Sec. 115.32(d) is finalized as proposed.

Prior Approval Program--Events Requiring Notification

Under proposed Sec. 115.35(a)(1)(iv), SBA would require sureties in

the Prior Approval Program to notify SBA if the surety were to receive

any adverse information concerning the principal's financial condition

or possible inability to complete the project or to pay laborers or

suppliers. One commenter expressed concern that if such notification

were to be the cause of a principal's loss of eligibility for the

program, lawsuits against the surety by the principal could follow. SBA

believes such concern to be unfounded. Section 115.14 of this final

rule details the grounds for a principal's loss of eligibility to

participate in the program; adverse information, absent anything else,

is not among the permitted grounds. SBA's proposal to require

notification of adverse information is adopted without change.

PSB Program--Premium Rates

The Surety Association of America has advised SBA that it no longer

keeps advisory premium rates for the surety industry. Proposed

Sec. 115.60(a)(2), as well as current Sec. 115.10(d)(2), require that

PSB Sureties charge principals no more than the Association's advisory

premium rates. The Association suggested using their advisory premium

rates in effect on August 1, 1987, as the standard. SBA considers that

a satisfactory solution for now, but will continue to explore

alternatives. The final version of Sec. 115.60(a)(2) incorporates that

change.

PSB Program--Retention of Information

SBA agrees with the two comment letters received on proposed

Sec. 115.60(g)(1). PSB Sureties should not be required to keep a record

of the time of execution of each bond. A record of the date of

execution of the bond is sufficient. The final version of the

subsection, redesignated Sec. 115.65(a), reflects this correction.

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

The proposal to increase the principal's and surety's fees in the

PSB Program (Sec. 115.60(g)(4)) is being revised in the same manner as

the equivalent provisions in the Prior Approval Program. See the

discussion above under ``Prior Approval Program--Principal's and

Surety's fees.''

PSB Program--Contract Increases/Decreases

The final version of Sec. 115.60(g)(5), redesignated Sec. 115.67,

mirrors the changes made to the equivalent provision in the Prior

Approval Program (Sec. 115.32 (b) and (c)), as discussed above under

``Prior Approval Program--Contract increases/decreases.''

Miscellaneous

A comment from one of the surety trade associations was received on

the substitution of SBA form names for SBA form numbers in the proposed

rule. According to the comment, sureties refer to SBA documents by

their respective SBA form numbers, not names. SBA recognizes that the

names of its forms are not as familiar to program participants as its

form numbers. In order to avoid confusion, SBA has retained the form

numbers in the final rule.

In the Supplementary Information section of the proposed rule, SBA

discussed the proposed deletion of current Sec. 115.30(b), including

the requirement for the principal to file SBA Form 1624 (Lower Tier

Certification form) with its initial guarantee application. As SBA

explained, the requirement would be removed from the regulations and

would be issued as internal guidance, with the following change: the

Lower Tier Certification would have to be submitted with each

application for a principal, not simply the principal's first

application. One commenter objected to the change as overly burdensome.

Nevertheless, as was explained in the proposed rule, SBA believes the

change is necessary to comply with Part 146 of Title 13 of the Code of

Federal Regulations and that it is consistent with current practice in

SBA field offices.

Except as discussed above, SBA adopts as final its proposal to

amend Part 115.

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

Flexibility Act and the Paperwork Reduction Act

SBA certifies that this final rule will not constitute a

significant regulatory action for purposes of Executive Order 12866,

since it is not likely to result in an annual effect on the economy of

$100 million or more.

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

has determined that this rule will not have a significant impact on a

substantial number of small entities. Final action on the proposed

increases in the principal's and the surety's fees has been deferred

until further study of the issue has been completed. There are no fee

increases in this final rule.

There are no reporting, recordkeeping and other compliance

requirements not approved by the Office of Management and Budget which

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

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

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

Order 12778.

SBA certifies that this regulation does not warrant the preparation

of a Federal

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Assessment in accordance with Executive Order 12612.

List of Subjects in 13 CFR Part 115

Small business, Surety bonds.

For the above reasons, SBA is revising part 115, title 13 of the

Code of Federal Regulations, to read as follows:

PART 115--SURETY BOND GUARANTEE

Sec.

115.1 Overview of regulations.

115.2 Savings clause.

Subpart A--Provisions For All Surety Bond Guarantees

115.10 Definitions.

115.11 Applying to participate in the Surety Bond Guarantee

Program.

115.12 General program policies and provisions.

115.13 Eligibility of Principal.

115.14 Loss of Principal's eligibility for future assistance.

115.15 Underwriting and servicing standards.

115.16 Determination of Surety's Loss.

115.17 Minimization of Surety's Loss.

115.18 Refusal to issue further guarantees; suspension and

termination of PSB status.

115.19 Denial of liability.

115.20 Insolvency of Surety.

115.21 Audits and investigations.

Subpart B--Guarantees Subject to Prior Approval

115.30 Submission of Surety's guarantee application.

115.31 Guarantee percentage.

115.32 Fees and Premiums.

115.33 Surety bonding line.

115.34 Minimization of Surety's Loss.

115.35 Claims for reimbursement of Losses.

115.36 Indemnity settlements and reinstatement of Principal.

Subpart C--Preferred Surety Bond (PSB) Guarantees

115.60 Selection and admission of PSB Sureties.

115.61 Duration of PSB Program.

115.62 Prohibition on participation in Prior Approval Program.

115.63 Allotment of guarantee authority.

115.64 Timeliness requirement.

115.65 General PSB procedures.

115.66 Fees.

115.67 Changes in Contract or bond amount.

115.68 Guarantee percentage.

115.69 Imminent Breach.

115.70 Claims for reimbursement of Losses.

115.71 Denial of liability.

Authority: 5 U.S.C. app. 3; 15 U.S.C. 687b, 687c, 694a, 694b;

Pub. L. 101-574, 104 Stat. 2823 (1990).

Sec. 115.1 Overview of regulations.

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

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

of 1958, as amended. Subpart A of this part contains regulations common

to both the program requiring prior SBA approval of each bond guarantee

(the Prior Approval Program) and the program not requiring prior

approval (the PSB Program). Subpart B of this part contains the

regulations applicable only to the Prior Approval Program. Subpart C of

this part contains the regulations applicable only to the PSB Program.

Sec. 115.2 Savings clause.

Transactions affected by this part 115 are governed by the

regulations in effect at the time they occur.

Subpart A--Provisions for All Surety Bond Guarantees

Sec. 115.10 Definitions.

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

Affiliate is defined in part 121 of this chapter.

Ancillary Bond means a bond incidental and essential to the

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

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

entering into the Contract, and furnishing the required Payment and

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

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

requires forfeiture bonds for public works.

Contract means a written obligation of the Principal requiring the

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

equipment, or construction. A Contract must not prohibit a Surety from

performing the Contract upon default of the Principal. A Contract does

not include a permit, subdivision contract, lease, land contract,

evidence of debt, financial guarantee (e.g., a contract requiring any

payment by the Principal to the Obligee), warranty of performance or

efficiency, warranty of fidelity, or release of lien (other than for

claims under a guaranteed bond). It includes a maintenance agreement of

2 years or less which covers defective workmanship or materials only.

With SBA's written approval, it can also include a longer maintenance

agreement covering defective workmanship or materials, or a maintenance

agreement covering something other than defective workmanship or

materials. To qualify for such approval, the agreement must be

ancillary to the Contract for which SBA is guaranteeing a bond, must be

required to be performed by the same Principal, and must be customarily

required in the relevant trade or industry.

Execution means signing by a representative or agent of the Surety

with the authority and power to bind the Surety.

Final Bond means a Performance Bond and/or a Payment Bond.

Imminent Breach means a threat to the successful completion of a

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

under the bond appear to be inevitable.

Investment Act means the Small Business Investment Act of 1958 (15

U.S.C. 661), as amended.

Loss has the meaning set forth in Sec. 115.16.

Obligee means:

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

the performance of a Contract; or

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

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

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

Principal.

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

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

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

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

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

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

liability of the Surety under the bond.

OSG means SBA's Office of Surety Guarantees.

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

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

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

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

Payment Bond can not require the Surety to pay an amount which exceeds

the claimant's actual loss or damage.

Performance Bond means a bond conditioned upon the completion by

the Principal of a Contract in accordance with its terms.

Person means a natural person or a legal entity.

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

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

and 115.60(a)(2)) to the bond or contract amount. The Premium does not

include surcharges for extra services, whether or not considered part

of the ``premium'' under local law.

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

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

Bonds, Principal means the Person primarily liable to complete the

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

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

Principal may be a prime contractor or a subcontractor.

Prior Approval Agreement means the Surety Bond Guarantee Agreement

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

under which SBA agrees to guarantee a specific bond.

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

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

Approval Agreements with SBA.

PSB Agreement means the Preferred Surety Bond Guarantee Agreement

entered into between a PSB Surety and SBA.

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

Surety Bond (PSB) Program.

Surety means a company which:

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

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

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

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

Principal breaches the conditions of the Contract; and

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

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

including those who have furnished labor, materials, equipment and

supplies in the performance of the Contract.

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

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

behalf of the Surety.

Sec. 115.11 Applying to participate in the Surety Bond Guarantee

Program.

Sureties interested in participating as Prior Approval Sureties or

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

SW., Washington, DC 20416. OSG will determine the eligibility of the

applicant considering its standards and procedures for underwriting,

administration, claims and recovery. Each applicant must be a

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

connection with Federal procurement contracts.

Sec. 115.12 General program policies and provisions.

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

Sureties participating in the Surety Bond Guarantee Programs against a

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

breach of the terms of a Bid Bond, Final Bond or Ancillary Bond, on any

eligible Contract. In the Prior Approval Program, the Surety must

obtain SBA's approval before a guaranteed bond can be issued. In the

PSB Program, selected Sureties may issue, monitor, and service SBA

guaranteed bonds without further SBA approval.

(b) Eligibility of bonds. Bid Bonds and Final Bonds are eligible

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

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

section of the current Manual of Rules, Procedures and Classifications

of the Surety Association of America (100 Wood Avenue South, Iselin,

New Jersey 08830). Ancillary Bonds may also be eligible for SBA's

guarantee. A Performance Bond must not prohibit a Surety from

performing the Contract upon default of the Principal.

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

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

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

required. The notification must include the new expiration date.

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

guarantee agreements, including the guarantee percentage, may vary from

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

guarantee percentage is not fixed by the Investment Act, it is

determined by OSG after considering, among other things, the rating or

ranking assigned to the Surety by recognized authority, and the

Surety's Loss rate, average Contract amount, average bond penalty per

guaranteed bond, and ratio of Bid Bonds to Final Bonds, all in

comparison with other Sureties participating in the same SBA Surety

Bond Guarantee Program (Prior Approval or PSB) to a comparable degree.

Any guarantee agreement under this part is made exclusively for the

benefit of SBA and the Surety, and does not confer any rights (such as

a right of action against SBA) or benefits on any other party.

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

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

time of the bond's Execution.

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

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

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

the prior bond is released before the beginning of each succeeding

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

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

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

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

performance at the same location, regardless of job title or nature of

the work to be performed.

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

covering more than a 1 year period is eligible for an SBA guaranteed

bond if neither the annual Contract amount nor the penal sum of the

bond exceeds $1,250,000 at any time.

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

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

default by the Principal has occurred, without the prior written

approval of SBA. A violation of this provision is grounds for

termination from participation in the program. This provision does not

apply to the sale of an entire business division, subsidiary or

operation of the Surety.

Sec. 115.13 Eligibility of Principal.

(a) General eligibility. In order to be eligible for a bond

guaranteed by SBA, the Principal must comply with the following

requirements:

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

business under part 121 of this title.

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

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

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

possesses good character and reputation. A Person's good character and

reputation is presumed absent when:

(i) The Person is under indictment for, or has been convicted of a

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

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

regulation protecting the integrity of business transactions or

business relationships; or

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

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

(iii) The Person has obtained a bond guarantee by fraud or material

misrepresentation (as described in Sec. 115.19(b)), or has failed to

keep the Surety informed of unbonded contracts or of a contract bonded

by another Surety, as required by a bonding line commitment under

Sec. 115.33.

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

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

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

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

obtainable on reasonable terms and conditions without SBA's guarantee.

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

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

for Principals who are primarily brokers or who have effectively

transferred control over the project to one or more subcontractors.

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

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

voluntarily excluded from transactions with any Federal department or

agency, under governmentwide debarment and suspension rules.

(b) Conflict of interest. A Principal is not eligible for an SBA-

guaranteed bond issued by a particular Surety if that Surety, or an

Affiliate of that Surety, or a close relative or member of the

household of that Surety or Affiliate owns, directly or indirectly, 10%

or more of the Principal. This prohibition also applies to ownership

interests in any of the Principal's Affiliates.

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

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

for further SBA bond guarantees if any of the following occurs under an

SBA-guaranteed bond issued on behalf of the Principal:

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

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

the Contract.

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

least $1000.

(4) The Surety has requested reimbursement for Losses incurred

under the bond.

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

(6) The Principal committed fraud or material misrepresentation in

obtaining the guaranteed bond.

(b) Reinstatement of Principal's eligibility. Prior Approval

Sureties should refer to Sec. 115.36(b) for provisions on reinstatement

of the Principal's eligibility. A PSB Surety may reinstate a

Principal's eligibility upon the Surety's determination that

reinstatement is appropriate.

Sec. 115.15 Underwriting and servicing standards.

(a) Underwriting. (1) Sureties must evaluate the credit, capacity,

and character of a Principal using standards generally accepted by the

surety industry and in accordance with SBA's Standard Operating

Procedures on underwriting and the Surety's principles and practices on

unguaranteed bonds. The Principal must satisfy the eligibility

requirements set forth in Sec. 115.13. The Surety must reasonably

expect that the Principal will successfully perform the Contract to be

bonded.

(2) The terms and conditions of the bond and the Contract must be

reasonable in light of the risks involved and the extent of the

Surety's participation. The bond must satisfy the eligibility

requirements set forth in Sec. 115.12(b). The Surety must be satisfied

as to the reasonableness of cost and the feasibility of successful

completion of the Contract.

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

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

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

and must request job status reports from Obligees of Final Bonds

guaranteed by SBA. Documentation of the job status requests must be

maintained by the Surety.

Sec. 115.16 Determination of Surety's Loss.

Loss is determined as follows:

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

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

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

amounts the Surety recovers by reason of the Principal's defenses

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

sums the Surety recovers from indemnitors and other salvage.

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

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

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

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

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

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

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

against laborers, materialmen, subcontractors, suppliers, or other

rightful claimants, and by any amounts recovered from indemnitors and

other salvage.

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

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

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

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

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

defenses or causes of action against the Obligee, and by any amounts

recovered from indemnitors and other salvage.

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

which is attributable to the Contract for which guaranteed Final Bonds

were Executed.

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

documented and attributable solely to the Loss under the guaranteed

bond:

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

allocable to the investigation, adjustment, negotiation, compromise,

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

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

must be reasonable and must comply with generally accepted accounting

principles; and

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

reasonable attorney's fees incurred to mitigate any Loss under

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

sums due from Obligees, indemnitors, Principals and others.

(f) Loss does not include the following expenses:

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

any overhead, of the Surety, its attorney, or any other party hired by

the Surety or the attorney;

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

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

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

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

filed;

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

suit by or against SBA or its Administrator; and

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

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

against the Surety.

Sec. 115.17 Minimization of Surety's Loss.

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

Surety must take all reasonable action to minimize risk of Loss

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

indemnity agreement which covers actual Losses under the Contract and

Imminent Breach payments under Sec. 115.34(a) or Sec. 115.69. The

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

SBA finds appropriate. Indemnity

[[Page 3274]]

agreements from other Persons, secured or unsecured, may also be

required by the Surety or SBA.

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

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

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

guaranteed by SBA.

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

possible sources of salvage and recovery. Salvage and recovery includes

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

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

are not reimbursable by SBA.

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

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

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

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

behalf of the Principal unless such recovery is unquestionably

identifiable as related solely to the non-guaranteed bond. The Surety

must reimburse or credit SBA (in the same proportion as SBA's share of

Loss) within 90 days of receipt of any recovery by the Surety.

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

concerning recovery under SBA guaranteed bonds, the dispute must first

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

settlement.

Sec. 115.18 Refusal to issue further guarantees; suspension and

termination of PSB status.

(a) Improper surety bond guarantee practices.--(1) Imprudent

practices. SBA may refuse to issue further guarantees to a Prior

Approval Surety or may suspend the preferred status of a PSB Surety, by

written notice stating all reasons for such decision and the effective

date. Reasons for such a decision include, but are not limited to, a

determination that the Surety (in its underwriting, its efforts to

minimize Loss, its claims or recovery practices, or its documentation

related to SBA guaranteed bonds) has failed to adhere to prudent

standards or practices, including any standards or practices required

by SBA, as compared to those of other Sureties participating in the

same SBA Surety Bond Guarantee Program to a comparable degree.

(2) Regulatory violations, fraud. Acts of wrongdoing such as fraud,

material misrepresentation, breach of the Prior Approval or PSB

Agreement, or regulatory violations (as defined in Secs. 115.19(d) and

115.19(h)) also constitute sufficient grounds for refusal to issue

further guarantees, or in the case of a PSB Surety, termination of

preferred status.

1(3) Audit; records. The failure of a Surety to consent to SBA's

audit or to maintain and produce records constitutes grounds for SBA to

refuse to issue further guarantees for a Prior Approval Surety, to

suspend a PSB Surety from participation, and to refuse to honor claims

submitted by a Prior Approval or PSB Surety until the Surety consents

to the audit.

(4) Excessive Losses. If a Surety experiences excessive Losses on

SBA guaranteed bonds relative to those of other Sureties participating

in the same SBA Surety Bond Guarantee Program to a comparable degree,

SBA may also require the renegotiation of the guarantee percentage and/

or SBA's charge to the Surety for bonds executed thereafter.

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

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

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

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

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

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

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

the preceding Persons.

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

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

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

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

applicable, in that jurisdiction or in other jurisdictions.

Ineligibility or suspension from the Surety Bond Guarantee Programs is

for at least the duration of the license suspension.

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

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

participate in the Surety Bond Guarantee Programs, the participation of

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

conviction, participation may be denied or terminated.

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

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

protecting the integrity of business transactions or relationships,

participation may be denied or terminated.

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

willfully false statement in the presentation of oral or written

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

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

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

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

be denied or terminated.

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

from, or declared ineligible for participation in Federal programs,

participation may be denied or terminated.

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

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

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

paragraph (b) of this section does not, or ceases to, qualify as a

Surety. SBA may require submission of a Statement of Personal History

(SBA Form 912) from any of these Persons.

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

participation in, or deny reinstatement in the Surety Bond Guarantee

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

of suspensions and terminations with the SBA Office of Hearings and

Appeals (OHA) under part 134 of this chapter. SBA's Administrator may,

pending a decision pursuant to Part 134 of this chapter, suspend the

participation of any Surety for any of the causes listed in paragraphs

(b) (1) through (5) of this section.

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

suspension or termination under this section remains in effect, subject

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

Sec. 115.19 Denial of liability.

In addition to equitable and legal defenses and remedies under

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

liable under a Prior Approval or PSB Agreement if any of the

circumstances in paragraphs (a) through (h) of this section exist.

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

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

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

Contract amount.

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

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

fraud or material misrepresentation. Material misrepresentation

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

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

necessary to make a statement not

[[Page 3275]]

misleading in light of the circumstances in which it was made. Material

misrepresentation also includes the adoption by the Surety of a

material misstatement made by others which the Surety knew or under

generally accepted underwriting standards should have known to be false

or misleading. The Surety's failure to disclose its ownership (or the

ownership by any owner of at least 20% of the Surety's equity) of an

interest in a Principal or an Obligee is considered the omission of a

statement of material fact.

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

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

A material breach is considered to have occurred if:

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

increase in the Contract amount or in the bond amount of at least 25%

or $50,000; or

(2) One of the conditions under Part B of Title IV of the

Investment Act is not met.

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

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

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

increase in the bond amount of at least 25% or $50,000 in the

aggregate, or is contrary to the purposes of the Surety Bond Guarantee

Programs.

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

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

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

conditions, or provisions of the bond, including but not limited to the

following acts:

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

qualify as an Obligee under Sec. 115.10; or

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

alteration to the bond which would increase the bond amount by at least

25% or $50,000.

(f) Timeliness. (1) Either:

(i) The bond was Executed prior to the date of SBA's guarantee; or

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

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

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

Form 991) after receiving all of the following from the Surety:

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

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

bond requirement was contained in the original Contract, or other

documentation satisfactory to SBA, showing why a bond was not

previously obtained and is now being required;

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

are current, and listing all suppliers and subcontractors, indicating

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

each; or an explanation satisfactory to SBA why such documentation

cannot be produced; and

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

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

satisfactorily completed to date.

(2)(i) For purposes of paragraph (f)(1)(ii) of this section, work

under a Contract is considered to have begun when a Principal takes any

action at the job site which would have exposed its Surety to liability

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

Surety is legally bound by such approval) at the time.

(ii) For purposes of this paragraph (f), the Surety must maintain a

contemporaneous record of the Execution and approval of each bond.

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

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

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

or Sec. 115.66 for PSB Sureties. SBA may reinstate the guarantee upon a

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

exists why a timely submission was not made.

(h) Other regulatory violations. The occurrence of any of the

following:

(1) The Principal on the bonded Contract is not a small business;

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

original Contract;

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

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

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

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

under Sec. 115.16; or

(6) The Surety's loss under a Performance Bond did not result from

the Principal's breach or Imminent Breach of the Contract.

Sec. 115.20 Insolvency of Surety.

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

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

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

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

receiver of the insolvent Surety except for the guaranteed portion of

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

receiver under the guaranteed bonds.

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

quarterly status reports accounting for all funds received and all

settlements being considered.

Sec. 115.21 Audits and investigations.

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

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

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

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

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

Prior Approval or PSB Surety. See Sec. 115.18(a)(3) for consequences of

failure to comply with this section.

(2) Frequency of PSB audits. Each PSB Surety is subject to audit at

least once each year by examiners selected and approved by SBA.

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

paragraph (b) for the term of each bond, plus any additional time

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

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

If there are any unresolved audit findings in relation to a particular

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

are resolved. The records to be maintained include the following:

(1) A copy of the bond;

(2) A copy of the bonded Contract;

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

the bond;

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

Principal's application;

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

Sec. 115.35(a) or Sec. 115.65(c)(2);

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

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

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

judgments, settlement agreements and court or arbitration decisions,

consultants' reports, Contracts and receipts;

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

including documentation required by Sec. 115.34(a) or Sec. 115.69

concerning Imminent Breach;

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

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

under the

[[Page 3276]]

bond, and any other trust accounts, and any reconciliations of such

accounts;

(9) Job status reports received from Obligees and documentation of

each unanswered request for a job status report; and

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

available to the Surety.

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

limited to:

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

credit analysis, its documentation of claims and claims settlement

procedures and activities, and its recovery procedures and practices;

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

bond options upon Contract default; and

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

participating in the same SBA Surety Bond Guarantee Program to a

comparable degree.

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

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

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

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

programs and operations of SBA.

Subpart B--Guarantees Subject to Prior Approval

Sec. 115.30 Submission of Surety's guarantee application.

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

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

Principal meets the eligibility requirements set forth in Sec. 115.13

and that the underwriting standards set forth in Sec. 115.15 have been

met.

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

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

officer may provide telephone notice before the Prior Approval Surety

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

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

notice and the written form, the written form controls.

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

Surety may request reconsideration of a decline from the SBA officer

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

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

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

make the final decision.

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

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

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

with the Principal's payment for its guarantee fee (see Sec. 115.32(b))

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

business days (see Sec. 115.33(d)(2)) after Execution of the bond.

Sec. 115.31 Guarantee percentage.

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

of the Loss incurred and paid if:

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

the bond is $100,000 or less; or

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

controlled by socially and economically disadvantaged individuals. See

part 124 of this chapter for applicable definitions and criteria.

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

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

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

disadvantaged concerns.

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

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

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

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

provision applies only to guarantees which qualify under paragraph

(a)(1) of this section.

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

increases above the statutory limit of $1,250,000 after Execution of

the bond, SBA's share of the Loss is limited to that percentage of the

increased Contract amount which the statutory limit represents,

multiplied by the guarantee percentage approved by SBA. For example, if

a Contract amount increases to $1,375,000, SBA's share of the Loss

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

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

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

decreases to $100,000 or less after Execution of the bond, SBA's

guarantee percentage increases to 90% if the Surety provides SBA with

evidence supporting the decrease and any other information or documents

requested.

Sec. 115.32 Fees and Premiums.

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

Principal an amount greater than that authorized by the appropriate

insurance department. The Surety must not require the Principal to

purchase casualty or other insurance or any other services from the

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

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

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

law, and the Principal agrees to the fee.

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

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

the Principal must pay a guarantee fee equal to a certain percentage of

the Contract amount. The percentage is determined by SBA and is

published in Notices in the Federal Register from time to time. The

Principal's fee is rounded to the nearest dollar and is to be remitted

to SBA by the Surety together with the form required under

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

requirements when the Contract amount changes.

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

or Bid Bond guarantee fees. Subject to Sec. 115.18(a)(4), the Surety

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

Bond) in the ordinary course of business. The fee is a certain

percentage of the bond Premium, determined by SBA and published in

Notices in the Federal Register from time to time. The fee is rounded

to the nearest dollar. SBA does not receive any portion of a Surety's

non-Premium charges. See paragraph (d) of this section for additional

requirements when the bond amount or the Contract amount changes.

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

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

decreases in the Contract or bond amount that aggregate 25% or $50,000,

as soon as the Surety acquires knowledge of the change. Whenever the

original bond amount increases as a result of a single change order of

at least 25% or $50,000, the prior written approval of such increase by

SBA is required on a supplemental Prior Approval Agreement

(Supplemental Form 990) and is conditioned upon payment by the Surety

of the increase in the Principal's guarantee fee as set forth in

paragraph (d)(2) of this section.

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

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

the increase in the Principal's guarantee fee computed on the increase

in the Contract amount. If the increase in the Principal's fee is less

than $40, such

[[Page 3277]]

increase is not due until all unpaid increases in the Principal's fee

aggregate at least $40. The Surety's check for payment of the increase

in the Surety's guarantee fee, computed on the increase in the bond

Premium, may be submitted in the ordinary course of business. Increases

in the Surety's fee are not due until they aggregate at least $40.

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

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

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

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

course of business. If the amount to be refunded or rebated is less

than $40, such refund or rebate will not be made until the amounts to

be refunded or rebated, respectively, aggregate at least $40. Upon

receipt of the refund, the Surety must promptly pay a proportionate

amount of its Premium to the Principal.

Sec. 115.33 Surety bonding line.

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

Approval Surety which provides for the Surety's Execution of multiple

bonds for a specified small business strictly within pre-approved

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

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

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

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

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

Principal only if the underwriting evaluation is satisfactory. The

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

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

unbonded, during the term of the bonding line.

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

on the following:

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

renewal in writing;

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

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

of the bonding line;

(3) The number of such bonded and unbonded contracts outstanding at

any time during the term of the bonding line;

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

Contract;

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

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

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

under Sec. 115.19(f)(1)(ii); and

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

geographical area, or credit.

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

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

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

to SBA under regular procedures.

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

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

Surety must submit a ``Surety Bond Guarantee Underwriting Review'' (SBA

Form 994B) to SBA for approval. If that form is already on file with

SBA and no new financial statements are required or have been received

from the Principal, a ``Surety Bond Guarantee Review Update'' (SBA Form

994C) may be submitted instead. If the Surety fails to submit either

form within this time period, SBA's guarantee of the bond will be void

from its inception unless SBA determines otherwise upon a showing that

a valid reason exists why the timely submission was not made.

(2) Final Bonds. Within 15 business days after the Execution of any

Final Bonds under a bonding line, the Surety must submit a signed Prior

Approval Agreement and a ``Surety Bond Guarantee Underwriting Review''

(SBA Form 994B) to SBA for approval. If that form is already on file

with SBA and no new financial statements are required or have been

received from the Principal, a ``Surety Bond Guarantee Review Update''

(SBA Form 994C) may be submitted instead. If the Surety fails to submit

these forms together with the Principal's payment for its guarantee fee

within this time period, SBA's guarantee of the bond will be void from

its inception unless SBA determines otherwise upon a showing that the

Contract is not in default and a valid reason exists why the timely

submission was not made.

(3) Additional information. The Surety must submit any other data

SBA requests.

(e) Cancellation of bonding line.--(1) Optional cancellation.

Either SBA or the Surety may cancel a bonding line at any time, with or

without cause, upon written notice to the other party. Upon the receipt

of any adverse information concerning the Principal, the Surety must

promptly notify SBA, and SBA may cancel the bonding line.

(2) Mandatory cancellation. Upon the occurrence of a default by the

Principal, whether under a contract bonded by the same or another

surety or an unbonded contract, the Surety must immediately cancel the

bonding line.

(3) Effect of cancellation. Cancellation of a bonding line by SBA

is effective upon receipt of written notice by the Surety. Bonds issued

before the effective date of cancellation remain guaranteed by SBA.

Upon cancellation by SBA or the Surety, the Surety must promptly notify

the Principal in writing.

Sec. 115.34 Minimization of Surety's Loss.

(a) Imminent Breach.--(1) Prior approval requirement. SBA will

reimburse its guaranteed share of payments made by a Surety to avoid or

attempt to avoid an Imminent Breach of the terms of a Contract covered

by an SBA guaranteed bond only if the payments were made with the prior

approval of OSG. OSG's prior approval will be given only if the Surety

demonstrates to SBA's satisfaction that a breach is imminent and that

there is no other recourse to prevent such breach.

(2) Amount of reimbursement. The aggregate of the payments by SBA

to avoid Imminent Breach cannot exceed 10% of the Contract amount,

unless the Administrator finds that a greater payment (not to exceed

the guaranteed share of the bond penalty) is necessary and reasonable.

In no event will SBA make any duplicate payment pursuant to this or any

other provision of this part 115.

(3) Recordkeeping requirement. The Surety must keep records of

payments made to avoid Imminent Breach.

(b) Salvage and recovery. A Prior Approval Surety must pursue all

possible sources of salvage and recovery until SBA concurs with the

Surety's recommendation for a discontinuance or for a settlement. The

Surety must certify that continued pursuit of salvage and recovery

would be neither economically feasible nor a viable strategy in

maximizing recovery. See also Sec. 115.17(b).

Sec. 115.35 Claims for reimbursement of Losses.

(a) Notification requirements.--(1) Events requiring notification.

A Prior Approval Surety must notify OSG of the occurrence of any of the

following:

(i) Legal action under the bond has been initiated.

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

the Contract.

(iii) The Surety has established a claim reserve for the bond.

(iv) The Surety has received any adverse information concerning the

[[Page 3278]]

Principal's financial condition or possible inability to complete the

project or to pay laborers or suppliers.

(2) Timing of notification. Notification must be made in writing at

the earlier of the time the Surety applies for a guarantee on behalf of

an affected Principal, or within 30 days of the date the Surety

acquires knowledge, or should have acquired knowledge, of any of the

listed events.

(b) Surety action. The Surety must take all necessary steps to

mitigate Losses resulting from any of the events in paragraph (a) of

this section, including the disposal at fair market value of any

collateral held by or available to the Surety. Unless SBA notifies the

Surety otherwise, the Surety must take charge of all claims or suits

arising from a defaulted bond, and compromise, settle and defend such

suits. The Surety must handle and process all claims under the bond and

all settlements and recoveries as it does on non-guaranteed bonds.

(c) Claim reimbursement requests. (1) Claims for reimbursement for

Losses which the Surety has paid must be submitted (together with a

copy of the bond, the bonded Contract, and any indemnity agreements)

with the initial claim to OSG on a ``Default Report, Claim for

Reimbursement and Record of Administrative Action'' (SBA Form 994H),

within 1 year from the time of each disbursement. Claims submitted

after 1 year must be accompanied by substantiation satisfactory to SBA.

The date of the claim for reimbursement is the date of receipt of the

claim by SBA, or such later date as additional information requested by

SBA is received.

(2) The Surety must also submit evidence of the disposal of all

collateral at fair market value.

(3) SBA may request additional information prior to reimbursing the

Surety for its Loss.

(4) Subject to the offset provisions of part 140, SBA pays its

share of the Loss incurred and paid by the Surety within 90 days of

receipt of the requisite information.

(5) Claims for reimbursement and any additional information

submitted are subject to review and audit by SBA, including but not

limited to the Surety's compliance with SBA's regulations and forms.

(d) Status updates. The Surety must submit semiannual status

reports on each claim 6 months after the initial default notice, and

then every 6 months. The Surety must notify SBA immediately of any

substantial changes in the status of the claim or the amounts of Loss

reserves.

(e) Reservation of SBA rights. The payment by SBA of a Surety's

claim does not waive or invalidate any of the terms of the Prior

Approval Agreement, the regulations set forth in this part 115, or any

defense SBA may have against the Surety. Within 30 days of receipt of

notification that a claim or any portion of a claim should not have

been paid by SBA, the Surety must repay the specified amounts to SBA.

Sec. 115.36 Indemnity settlements and reinstatement of Principal.

(a) Indemnity settlements. (1) An indemnity settlement occurs when

a defaulted Principal and its Surety agree upon an amount, less than

the actual loss under the bond, which will satisfy the Principal's

indebtedness to the Surety. Sureties must not agree to any indemnity

settlement proposal or enter into any such agreement without SBA's

concurrence.

(2) Any settlement proposal submitted for SBA's consideration must

include current financial information, including financial statements,

tax returns, and credit reports, together with the Surety's written

recommendations. It should also indicate whether the Principal is

interested in further bonding.

(3) The Surety must pay SBA its pro rata share of the settlement

amount within 90 days of receipt. Prior to closing the file on a

Principal, the Surety must certify that SBA has received its pro rata

share of all indemnity recovery.

(b) Conditions for reinstatement. At any time after a Principal

becomes ineligible for further bond guarantees under Sec. 115.14(a),

the Surety may recommend that such Principal's eligibility be

reinstated. OSG may agree to reinstate the Principal and its Affiliates

if:

(1) The Principal's guarantee fee has been paid to SBA and SBA

receives evidence that the Principal has paid all delinquent amounts

due to the Surety (including amounts for Imminent Breach); or

(2) The Surety has settled its claim with the Principal for an

amount and on terms accepted by OSG; or

(3) The Principal contests a claim and provides collateral,

acceptable to the Surety and OSG, which has a liquidation value of at

least the amount of the claim including related expenses; or

(4) The Principal's indebtedness to the Surety is discharged by

operation of law (e.g., bankruptcy discharge); or

(5) OSG and the Surety determine that further bond guarantees are

appropriate.

(c) Underwriting after reinstatement. A guarantee application

submitted after reinstatement of the Principal's eligibility is subject

to a very stringent underwriting review.

Subpart C--Preferred Surety Bond (PSB) Guarantees

Sec. 115.60 Selection and admission of PSB sureties.

(a) Selection of PSB Sureties. SBA's selection of PSB Sureties will

be guided by, but not limited to, these factors:

(1) An underwriting limitation of at least $1,250,000 on the U.S.

Treasury Department list of acceptable sureties;

(2) An agreement to charge Principals no more than the Surety

Association of America's advisory premium rates in effect on August 1,

1987;

(3) Premium income from contract bonds guaranteed by any government

agency (Federal, State or local) of no more than one- quarter of the

total contract bond premium income of the Surety;

(4) The vesting of underwriting authority for SBA guaranteed bonds

only in employees of the Surety;

(5) The vesting of final settlement authority for claims and

recovery under the PSB program only in employees of the Surety's

permanent claims department; and

(6) The rating or ranking designations assigned to the Surety by

recognized authority.

(b) Admission of PSB Sureties. A Surety admitted to the PSB program

must execute a PSB Agreement before approving SBA guaranteed bonds. No

SBA guarantee attaches to bonds approved before the AA/SG or designee

has countersigned the Agreement.

Sec. 115.61 Duration of PSB program.

The PSB program terminates on September 30, 1997, unless extended

by legislation. SBA guarantees effective under this program on or

before September 30, 1997, will remain in effect after such date.

Sec. 115.62 Prohibition on participation in Prior Approval program.

Neither a PSB Surety nor any of its Affiliates is eligible to

submit applications under subpart B of this part.

Sec. 115.63 Allotment of guarantee authority.

(a) General. SBA allots to each PSB Surety a periodic maximum

guarantee authority. No SBA guarantee attaches to bonds approved by a

PSB Surety if the bonds exceed the allotted authority for the period in

which the bonds are approved. No reliance on future authority is

permitted. An allotment can be increased only by prior written

permission of SBA.

[[Page 3279]]

(b) Execution of Bid Bonds. When the PSB Surety Executes a Bid

Bond, SBA debits the Surety's allotment for an amount equal to the

guarantee percentage of the estimated penal sum of the Final Bond SBA

would guarantee if the Contract were awarded. If the Contract is then

awarded for an amount other than the bid amount, or if the bid is

withdrawn or the Bid Bond guarantee has expired (see Sec. 115.12(c)),

SBA debits or credits the Surety's allotment accordingly.

(c) Execution of Final Bonds. If the PSB Surety Executes a

guaranteed Final Bond, but not the related Bid Bond, SBA debits the

Surety's allotment for an amount equal to the guarantee percentage of

the penal sum of the Final Bond. SBA will debit the allotment for

increases, and credit the allotment for decreases, in the bond amount.

(d) Release and non-issuance of Final Bonds. The release of Final

Bonds upon completion of the Contract does not restore the

corresponding allotment. If, however, a PSB Surety approves a Final

Bond but never issues the bond, SBA will credit the Surety's allotment

for an amount equal to the guarantee percentage of the penal sum of the

bond. In that event, the Surety must notify SBA as soon as possible,

but in no event later than 5 business days after the non-issuance has

been determined. Until the Surety has so notified SBA, it cannot rely

on such credit.

Sec. 115.64 Timeliness requirement.

There must be no Execution or approval of a bond by a PSB Surety

after commencement of work under a Contract unless the Surety obtains

written approval from the AA/SG. To apply for such approval, the Surety

must submit a completed ``Surety Bond Guarantee Agreement Addendum''

(SBA Form 991), together with the evidence and certifications described

in Sec. 115.19(f)(1)(ii).

Sec. 115.65 General PSB procedures.

(a) Retention of information. A PSB Surety must comply with all

applicable SBA regulations and obtain from its applicants all the

information and certifications required by SBA. The PSB Surety must

document compliance with SBA regulations and retain such certifications

in its files, including a contemporaneous record of the date of

approval and Execution of each bond. See also Sec. 115.19(f). The

certifications and other information must be made available for

inspection by SBA or its agents and must be available for submission to

SBA in connection with the Surety's claims for reimbursement. The PSB

Surety must retain the certifications and other information for the

term of the bond, plus such additional time as may be required to

settle any claims of the Surety for reimbursement from SBA and to

attempt salvage or other recovery, plus an additional 3 years. If there

are any unresolved audit findings in relation to a particular bond, the

Surety must maintain the related certifications and other information

until the findings are resolved.

(b) Usual staff and procedures. The approval, Execution and

administration by a PSB Surety of SBA guaranteed bonds must be handled

in the same manner and with the same staff as the Surety's activity

outside the PSB program. The Surety must request job status reports

from Obligees in accordance with its own procedures.

(c) Notification to SBA. (1) Approvals. A PSB Surety must notify

SBA by electronic transmission or monthly bordereau, as agreed between

the Surety and SBA, of all approved Bid and Final Bonds, and of the

Surety's approval of increases and decreases in the Contract or bond

amount. The notice must contain the information specified from time to

time in agreements between the Surety and SBA. SBA may deny liability

with respect to Final Bonds for which SBA has not received timely

notice.

(2) Other events requiring notification. The PSB Surety must notify

SBA within 30 calendar days of the name and address of any Principal

against whom legal action on the bond has been instituted; whenever an

Obligee has declared a default; whenever the Surety has established or

added to a claim reserve; of the recovery of any amounts on the

guaranteed bond; and of any decision by the Surety to bond any such

Principal again.

Sec. 115.66 Fees.

The PSB Surety must pay SBA a certain percentage of the Premium it

charges on Final Bonds. The PSB Surety must also remit to SBA the

Principal's payment for its guarantee fee, equal to a certain

percentage of the Contract amount. The fee percentages are determined

by SBA and are published in Notices in the Federal Register from time

to time. Each fee is rounded to the nearest dollar. The Surety must

remit SBA's Premium share and the Principal's guarantee fee with the

bordereau listing the related Final Bond, as required in the PSB

Agreement.

Sec. 115.67 Changes in Contract or bond amount.

(a) Increases. The PSB Surety must process Contract or bond amount

increases within its allotment in the same manner as initial guaranteed

bond issuances (see Sec. 115.65(c)(1)). The Surety must present checks

for additional fees due from the Principal and the Surety on increases

aggregating 25% of the contract or bond amount or $50,000, and attach

such payments to the respective monthly bordereau. If the additional

Principal's fee or Surety's fee is less than $40, such fee is not due

until all unpaid increases in such fee aggregate at least $40.

(b) Decreases. If the Contract or bond amount is decreased, SBA

will refund to the Principal a proportionate amount of the guarantee

fee, and adjust SBA's Premium share accordingly in the ordinary course

of business. No refund or adjustment will be made until the amounts to

be refunded or rebated, respectively, aggregate at least $40.

Sec. 115.68 Guarantee percentage.

SBA reimburses a PSB Surety in an amount not to exceed 70% of the

Loss incurred and paid. Where the Contract amount, after the Execution

of the bond, increases beyond the statutory limit of $1,250,000, SBA's

share of the Loss is limited to that percentage of the increased

Contract amount which the statutory limit represents, multiplied by the

guarantee percentage approved by SBA. For an example, see

Sec. 115.31(d).

Sec. 115.69 Imminent Breach.

(a) No prior approval requirement. SBA will reimburse a PSB Surety

for the guaranteed portion of payments the Surety makes to avoid or

attempt to avoid an Imminent Breach of the terms of a Contract covered

by an SBA guaranteed bond. The PSB Surety does not need SBA approval to

make Imminent Breach payments.

(b) Amount of reimbursement. The aggregate of the payments by SBA

under this section cannot exceed 10% of the Contract amount, unless the

Administrator finds that a greater payment (not to exceed the

guaranteed portion of the bond penalty) is necessary and reasonable. In

no event will SBA make any duplicate payment under any provision of

these regulations in this part.

(c) Recordkeeping requirement. The PSB Surety must keep records of

payments made to avoid Imminent Breach.

Sec. 115.70 Claims for reimbursement of Losses.

(a) How claims are submitted. A PSB Surety must submit claims for

reimbursement on a form approved by SBA no later than 1 year from the

date the Surety paid the amount. Loss is determined as of the date of

receipt by

[[Page 3280]]

SBA of the claim for reimbursement, or as of such later date as

additional information requested by SBA is received. Subject to the

offset provisions of part 140, SBA pays its share of Loss within 90

days of receipt of the requisite information. Claims for reimbursement

and any additional information submitted are subject to review and

audit by SBA.

(b) Surety responsibilities. The PSB Surety must take all necessary

steps to mitigate Losses when legal action against a bond has been

instituted, when the Obligee has declared a default, and when the

Surety has established a claim reserve. The Surety may dispose of

collateral at fair market value only. Unless SBA notifies the Surety

otherwise, the Surety must take charge of all claims or suits arising

from a defaulted bond, and compromise, settle or defend the suits. The

Surety must handle and process all claims under the bond and all

settlements and recoveries in the same manner as it does on non-

guaranteed bonds.

(c) Reservation of SBA's rights. The payment by SBA of a PSB

Surety's claim does not waive or invalidate any of the terms of the PSB

Agreement, the regulations in this part 115, or any defense SBA may

have against the Surety. Within 30 days of receipt of notification that

a claim or any portion of a claim should not have been paid by SBA, the

Surety must repay the specified amounts to SBA.

Sec. 115.71 Denial of liability.

In addition to the grounds set forth in Sec. 115.19, SBA may deny

liability to a PSB Surety if:

(a) The PSB Surety's guaranteed bond was in an amount which,

together with all other guaranteed bonds, exceeded the allotment for

the period during which the bond was approved, and no prior SBA

approval had been obtained;

(b) The PSB Surety's loss was incurred under a bond which was not

listed on the bordereau for the period when it was approved; or

(c) The loss incurred by the PSB Surety is not attributable to the

particular Contract for which an SBA guaranteed bond was approved.

Dated: January 22, 1996.

John T. Spotila,

Acting Administrator.

[FR Doc. 96-1347 Filed 1-30-96; 8:45 am]

BILLING CODE 8025-01-P