Surety Bond Guarantee Program-Preferred Surety Bond Surety Qualification, Increased Guarantee for Veteran and Service-Disabled Veteran-Owned Business, Deadline for Payment of Guarantee Fees, Denial of Liability, and Technical Amendments, 56049-56054 [06-8205]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 71, Number 186 (Tuesday, September 26, 2006)]
[Proposed Rules]
[Pages 56049-56054]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-8205]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

RIN 3245-AF39


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

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

ACTION: Proposed rule.

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

SUMMARY: This proposal encompasses six objectives. It would give effect 
to the statutory reduction in the frequency of audits required of 
Preferred Surety Bond (PSB) Sureties. It would obligate SBA to 
guarantee 90 percent of the Loss incurred by a Prior Approval Surety on 
bonds issued on behalf of small businesses owned and controlled by 
veterans, including service-disabled veterans. It would impose a 45-day 
deadline on Sureties for the remission of surety fees to SBA in lieu of 
the present requirement of payment in the ordinary course of business, 
and would allow SBA to deny liability if payment is not timely made. It 
would allow PSB Sureties to charge premiums in accordance with 
applicable state ceilings, as presently permitted under the Prior 
Approval Program. It would delete the existing reference to the 
expiration of the PSB Program and, finally, it would allow Affiliates 
of a PSB Surety to participate in the Prior Approval Program.

DATES: Comments must be received on or before October 26, 2006.

ADDRESSES: You may submit comments, identified by RIN number 3245-AF39, 
by any of the following methods: (1) Federal eRulemaking Portal: http:/
/www.regulations.gov. Follow the instructions for submitting comments; 
(2) Fax: 202-205-7600; (3) Mail: Barbara Brannan, Special Assistant, 
Office of Surety Guarantees, U.S. Small Business Administration, 409 
3rd Street, SW., Washington, DC 20416; or (4) Hand Delivery/Courier to 
Office of Surety Guarantees, U.S. Small Business Administration, 409 
3rd Street, SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Frank Lalumiere, Associate

[[Page 56050]]

Administrator, Office of Surety Guarantees, (202) 205-6540 or 
frank.lalumiere@sba.gov.

SUPPLEMENTARY INFORMATION: The U.S. Small Business Administration (SBA) 
can guarantee bonds for contracts up to $2 million, covering bid, 
performance and payment bonds for small and emerging contractors who 
cannot obtain surety bonds through regular commercial channels. SBA's 
guarantee gives sureties an incentive to provide bonding for small 
businesses and thereby strengthens their ability to obtain bonding and 
greater access to contracting opportunities. SBA's guarantee is an 
agreement between a surety and the SBA that provides that SBA will 
assume a predetermined percentage of loss in the event the contractor 
should breach the terms of the contract.
    Several changes to the regulations governing SBA's Surety Bond 
Guarantee (SBG) Program are proposed in this rulemaking. The purpose of 
these amendments is to improve the operation of the SBG Program and to 
make it easier for sureties and small business concerns to participate.
    Section 411(g)(3) of the Small Business Investment Act of 1958 (the 
Act) formerly required PSB Sureties to be audited every year. 15 U.S.C. 
694b(g)(3). As amended by Public Law 108-447, Div. K, section 203, the 
Small Business Reauthorization and Manufacturing Assistance Act of 
2004, the Act now requires audits to be made at least once every three 
years. The proposed rule would contain the regulations to this 
statutory change.
    In relevant part, Section 4(b)(1) of the Small Business Act 
provides that SBA ``shall give special consideration to veterans of the 
Armed Forces of the United States and their survivors and dependents.'' 
15 U.S.C. 633(b)(1). Accordingly, the proposed rule would encourage the 
issuance of bonds on behalf of small business concerns owned and 
controlled by veterans, and small business concerns owned and 
controlled by service-disabled veterans, by SBA's guaranty to pay 90 
percent of a Prior Approval Program Surety's Loss, thus affording such 
concerns more opportunity to obtain contracts generally.
    Section 411(h) of the Small Business Investment Act mandates the 
operation of the program ``on a prudent and economically justifiable 
basis'' and authorizes SBA to impose fees on both small business 
concerns and sureties, ``to be payable at such time'as may be 
determined by [SBA].'' In accordance with its statutory obligation, SBA 
proposes to establish a clearer deadline for a Prior Approval Surety's 
payment of the guarantee fees owed to SBA. Under the present 
regulation, such fees are payable in the ordinary course of the Prior 
Approval Surety's business. The proposed regulation, if adopted, would 
require the payment of such fees within 45 calendar days of SBA's 
approval of the Prior Approval Agreement, and the failure to make 
timely payment would allow SBA to deny liability under its guarantee. 
No changes are contemplated in the comparable regulations covering a 
PSB Surety's payment of guarantee fees, since such fees are forwarded 
with the PSB's monthly bordereau.
    The proposed rule would change one of the standards by which SBA 
admits Sureties to the PSB Program. PSB Program Sureties are currently 
required to charge no more than the Surety Association of America's 
advisory premium rates in effect August 1, 1987. The proposed rule 
would allow PSB Program Sureties to charge no more than the premium 
rates permitted under applicable state law, as Prior Approval Sureties 
are now allowed to do.
    Public Law 100-590 established the Preferred Surety Bond (PSB) 
program on a pilot basis in 1988, meaning that its continued existence 
depended upon affirmative Congressional action. The initial regulations 
for the program specified that the premium rates charged by PSB 
Sureties could not exceed the Surety Association of America's advisory 
premium rates in effect on August 1, 1987. The Surety Association of 
America (SAA) is the trade association to which most, if not all, the 
prospective PSB Sureties belonged, and the 1987 rates were the latest 
rates. SAA discontinued its rate setting function shortly after 
promulgating the 1987 rates, and participating surety companies have 
been obligated to use the 1987 SAA rates for the past eighteen years 
despite economic and market place changes.
    Now that Public Law 108-447 has put the PSB program on a permanent 
legal basis, SBA considers it necessary to allow PSB Sureties to charge 
rates that reflect present economic conditions and thereby encourage 
those Sureties now in the PSB program to continue their participation, 
and to encourage others to participate. Under the Prior Approval 
Program, SBA's other surety bond program, surety companies are 
permitted to use rates approved by the individual States. This proposed 
change will put the Preferred and Prior Approval Programs on the same 
footing by relying on the individual State oversight bodies.
    As previously mentioned, from its creation in 1988 until 2004, the 
PSB program was a pilot program, subject to automatic termination in 
the absence of affirmative Congressional action. Indeed, for several 
months in 2004 the PSB program ceased to exist. Now that the PSB 
program has been made permanent, the present regulation that speaks of 
the termination of the program will be removed and reserved.
    Finally, this proposed rule would allow Affiliates, as defined in 
13 CFR Part 121, of PSB Sureties to participate in the Prior Approval 
program, from which they are presently barred. The term ``Affiliate'' 
is defined at length in 13 CFR Part 121, but in the context of the 
present discussion it means a relationship in which one Surety owns or 
otherwise controls another Surety, or in which two or more Sureties are 
commonly owned by, or under common control with, a third party. A 
series of mergers and acquisitions in the surety industry in recent 
years has caused Sureties previously eligible to participate in the 
Prior Approval Program to become Affiliates of PSB Sureties and, under 
the present regulations, to lose their eligibility. To encourage and 
increase participation in the Prior Approval Program by otherwise 
qualified Sureties that are Affiliates of PSB Sureties, SBA proposes to 
abolish the present prohibition on their participation.
    Section-by-Section Analysis:
    In connection with its proposed amendment of Sec.  115.31(a)(2), 
SBA proposes to amend Sec.  115.10 by adding definitions of ``Service-
Disabled Veteran'', ``Small Business Owned and Controlled by Service-
Disabled Veterans'', ``Small Business Owned and Controlled by 
Veterans'', and ``Veteran''.
    In connection with its proposed establishment of a clear deadline 
for payment of a Prior Approval Surety's guaranty fee to SBA, SBA 
proposes to amend Sec.  115.19(g) to make the lack of timely payment of 
this fee a ground for denial of liability on the same terms as the 
regulation now allows such denials by reason of the Surety's failure to 
make timely remittance of the Principal's fee.
    Current Sec.  115.21(a)(2) subjects PSB Sureties to annual audits. 
As revised, the paragraph would require audits at least once every 
three years, as the Act now requires.
    Current Sec.  115.31 limits SBA's liability on bonds issued by a 
Prior Approval Surety to 80 percent of the Surety's loss, unless the 
total amount of the contract in question does not exceed $100,000 or 
the small business concern falls within one of the classes enumerated 
in Sec.  115.31(a)(2). SBA is proposing to

[[Page 56051]]

expand the enumerated classes to include small businesses owned and 
controlled by veterans or by service-disabled veterans. SBA believes 
this action is consistent with the special consideration of veterans 
expressed in Section 4(b)(1) of the Small Business Act, as amended. 
Accordingly, this rule would amend Sec.  115.31(a)(2) to add such small 
business concerns to the list of small business concerns for which SBA 
will obligate itself to pay 90 percent of the Prior Approval Surety's 
Loss in the event of a contract default. This proposed amendment would 
not apply to bonds issued by PSB Sureties because the Act does not 
allow SBA's guarantee on such bonds to exceed 70 percent.
    Current Sec.  115.32 (c) requires the Surety to pay a guarantee fee 
to SBA ``in the ordinary course of business.'' The effect of subsequent 
increases in the Contract amount or the bond amount on the fees payable 
to SBA ``in the ordinary course of business'' is covered in Sec.  
115.32(d)(2) and (3), respectively. SBA proposes to revise these 
paragraphs to impose a 45-day deadline upon the Surety for payment of 
the initial guarantee fee and for subsequent payments when increases in 
the Contract or bond amounts require payment to SBA.
    SBA proposes to revise Sec.  115.60(a) to permit PSB Sureties to 
charge premiums no higher than those approved by the applicable state 
regulatory body, as is the practice with the Prior Approval Surety Bond 
Program. Sureties applying to participate as PSB Sureties are now 
required to agree to charge Principals premiums no higher than those 
recommended by the Surety Association of America and in effect August 
1, 1987. 13 CFR 115.60(a)(2). These premiums differ from the premiums 
approved by the various States today in response to inflation, and 
changes in the economy and in the nature of the surety business. The 
proposed change will encourage PSB Sureties to remain in the PSB 
program and will make the PSB program attractive to prospective new 
participants. SBA will allow PSB Sureties that have previously agreed 
to adhere to the Surety Association's recommended 1987 rates to impose 
premium charges approved by the applicable state regulatory body if 
they wish.
    SBA proposes to remove and reserve present Sec.  115.61, in 
conformity with the language of Public Law 108-447 making the PSB 
program permanent and to revise Sec.  115.62 to allow Affiliates of PSB 
Sureties to participate in the Prior Approval Program. A series of 
mergers and acquisitions in the surety industry in recent years has 
caused Sureties previously eligible to participate in the Prior 
Approval Program to become Affiliates of PSB Sureties and, under the 
present regulations, to lose their eligibility. To encourage and 
increase participation in the Prior Approval Program by otherwise 
qualified Sureties that are Affiliates of PSB Sureties, SBA proposes to 
abolish the present prohibition on their participation.

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

Compliance With Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a significant regulatory action for purposes of 
Executive Order 12866. A general discussion of the need for this 
regulatory action and its potential costs and benefits follows.

Regulatory Impact Analysis

A. Regulatory Objective of Proposed Rule
Program Objectives
    The objectives of the Surety Bond Guarantee (SBG) Program are: (1) 
To strengthen the competitive free enterprise system by assisting 
qualified small and disadvantaged contractors obtain bid, performance, 
payment and ancillary bonds who would otherwise be unable to obtain 
them without the SBA guarantee; (2) to enable surety companies to reach 
more small businesses; and (3) to manage the tax payers' dollars at 
risk. The purpose of the program is to assist small, disadvantaged, and 
competitive opportunity gap contractors obtain bonding for public and 
private contracts. SBA's guarantee provides incentives for sureties 
(companies that guarantee the performance of a contractor) to bond 
contractors that are skilled, but lack the financial strength or bonded 
track record to obtain bonding on reasonable terms in the standard 
market. Federal contracts valued at $100,000 or more and many State, 
local and private contracts require bonds. Many small and emerging 
contractors are unable to secure necessary bonding because surety 
companies are unwilling to take 100% of the risk in writing their 
bonds. Emerging small businesses lack the track record or financial 
strength to meet standard surety bonding requirements. SBA's guarantee 
provides the incentive necessary for sureties to issue bonds for these 
contractors, who could not otherwise compete in the contracting 
industry. As a result, small businesses can establish and grow their 
businesses.
    The amendments proposed in this rulemaking would provide fee 
structure parity between Prior Approval Surety (Prior Approval) and 
Preferred Surety Bond (PSB) sureties, thus encouraging PSB sureties to 
remain in the program and promote the SBA-guaranteed bonds. Similarly, 
an amendment allowing affiliates of a PSB to participate in the Prior 
Approval Program provides needed flexibility to surety bond 
participants in the SBG Program to remain in the Program and promote 
its products. The amendments also obligate SBA to reimburse a higher 
percentage of loss incurred by a Prior Approval on bonds issued on 
behalf of a veteran-owned small business, including service-disabled 
veterans. The rulemaking also deletes an obsolete reference to the 
pilot nature of the PSB Program, which became permanent in 2004 
legislation.
The Program
    The SBG Program evolved from a pilot project created in 1971. Since 
its inception, the SBG Program has enabled thousands of small 
businesses to obtain Federal, State and private contracts that they 
would not otherwise have been able to obtain. These small business 
contracts have resulted in the creation of thousands of jobs. The 
Office of Surety Guarantees administers the SBG program through a 
private-public partnership between the Federal Government and the 
surety industry. SBA guarantees bonds issued by surety companies for 
construction, service and supply contracts and reimburses the sureties 
a percentage of the losses sustained if the contractor defaults. SBA's 
guarantee provides the incentive necessary for sureties to issue bonds 
to qualified small businesses.
    The SBG program consists of the Prior Approval Program and the PSB 
Program. The Prior Approval program guarantees up to 90% of a surety's 
loss. Participants must obtain SBA's approval for each bond guarantee 
issued. Under the PSB program, sureties receive a 70% guarantee and are 
empowered to issue, service and monitor bonds without SBA's prior 
approval. The surety bond guarantee programs are acknowledged as a 
major factor in the surety reinsurance and construction industries and 
are recognized as a primary stabilizing influence by those industries.
Cost of an SBA Guaranteed Bond
    The SBA charges fees to both the contractor and the surety company, 
as described in the most recent edition of

[[Page 56052]]

13 CFR Part 115 . SBA does not charge an application or bid bond 
guarantee fee. If SBA guarantees a final bond, the contractor and the 
surety each must pay a guarantee fee equal to a certain percentage of 
the contract amount. The percentages are determined by SBA and are 
published in notices in the Federal Register from time to time. The 
fees were most recently changed in the Federal Register, effective 
April 3, 2006. 71 FR 9632 (February 24, 2006). When the bond is issued, 
the small business also pays the surety company's bond premium. 
Currently, this charge cannot exceed the level approved by the 
appropriate state regulatory body for a Prior Approval Surety or the 
1987 SAA rates for a PSB Surety.
    The rates assessed small businesses will generally increase, as 
surety companies will adopt the rates that are currently filed and 
approved by the individual States, and utilized on their accounts. 
Because different surety companies have different rate structures, it 
is difficult to estimate precisely the cost impact to small businesses. 
Other program costs will decrease, as there will be one not two rate 
structures to track by surety companies and the Government. 
Additionally, this change will have a positive impact on the program 
through increased bond activity for the small business community and 
increased participation in the program by surety companies.
B. Baseline Costs of Existing Regulatory Framework
    In FY2002, the Office of Management and Budget (OMB) developed the 
Program Assessment Rating Tool (PART) to establish a systematic, 
consistent process for rating the performance of programs across the 
Federal government. The SBG Program was evaluated under the PART 
criteria in FY2005. The PART review revealed that program enhancements 
are needed to maximize the effectiveness of the SBG Program and achieve 
performance goals. In particular, it was recommended that the SBG 
Program develop an internet-based electronic application and claims 
processing system, and restructure program outreach. The proposed rule 
is an important component of implementing the PART recommendations. 
These measures will contribute to the sustainability and growth of 
existing and competitive opportunity gaps confronting small businesses 
by increasing their contract revenue and job creation rates. Both of 
these actions are well underway.
    The SBG program routinely tracks the number of surety bond 
guarantees approved, contract revenue, and the number of jobs created 
to measure its progress toward achieving program long-term outcomes. In 
FY 2003, SBA guaranteed a total of 8,974 bonds, which represented $594 
million in final bond contract revenue and 5,123 jobs created. Although 
a temporary expiration of the PSB program in Fiscal Years (FY) 2004 and 
2005 impacted goal accomplishment, SBA guaranteed a total of 7,803 
bonds in FY 2004, which represented $598 million in final bond contract 
revenue and 5,154 jobs created. In FY 2005, SBA guaranteed a total of 
5,678 bonds, which represented $488 million in final bond contract 
revenue and 4,203 jobs.
    The SBG program has specific values assigned for annual program 
targets. The SBG program is included in the Cost Allocation Model that 
SBA has implemented. A cost per bond is calculated using information 
from that model, and is included in the annual Performance and 
Accountability Report (PAR). The increased contract revenue and jobs 
created will contribute to the survivability and growth of the small 
contractors that received SBG assistance. The program's cost per bond 
decreased from $570 in 2002 to $408 in 2003. In FY 2004, the program's 
cost per bond increased slightly to $489 since the program activity 
significantly decreased with the expiration of the PSB program. In FY 
2005, the program's cost per bond increased to $860. The shutdown of 
the PSB Program during the first quarter of FY2005 and the proposed 
surety bond fee increase adversely affected program activity. The total 
cost of the SBG Program to the Federal Government is as follows: 
FY2002--$4.2 million; FY2003--$3.6 million; FY2004--$3.8 million; 
FY2005--$4.8 million.
    The only other Federal bond guarantee program is the Department of 
Transportation's (DOT) Bonding Assistance program authorized under 49 
U.S.C. 332 (Pub. L. 97-449). Under that program, the bonds must be 
issued for transportation related contracts and on behalf of certified 
minority, women-owned, and disadvantaged businesses. SBA guarantees 
bonds for construction, service, and supply contracts not exceeding $2 
million. SBA assistance is not limited to minority, women-owned, and 
disadvantaged contractors. Few states have bonding assistance programs. 
There are no similar programs in the private sector.
    SBA's FY2007 Budget discusses the SBG Program's goals of 7,725 bond 
guarantees in both FY2006 and FY2007, resulting in $447 million in 
final bond contract revenue and creating 3,852 jobs each year. To 
achieve these goals, the FY2007 Budget states that SBA will continue to 
seek increased nationwide program visibility, making the SBG Program 
accessible to more small contractors.
C. Potential Benefits and Costs of the Proposed Rule
    The amendments proposed all offer significant benefits. The rule 
offers incentives to PSB and Prior Approval Sureties to expand 
participation in the SBG Program. Most importantly, the proposed rule 
would allow PSB Sureties to charge the premium rates permitted by 
applicable state law rather than the Surety Association of America's 
advisory premium rates as of August 1, 1987. This provides parity of 
compensation for the PSB Sureties with the Prior Approval Sureties. 
Currently, the PSB Sureties are not able to charge current rates for 
the SBG bonds, as they are limited to rates that are nineteen years 
old. If this proposed rule is adopted without change and PSB Sureties 
take advantage of it, Small Concerns bonded by PSB Sureties will be 
paying the same premium rates as the Small Concerns that receive 
bonding from Prior Approval Sureties. Rate parity means that Prior 
Approval and PSB Sureties will be charging similar rates for the same 
SBG bond. In addition, the other amendments offer a greater SBG bonding 
guarantee to veteran-owned contractors and allow PSB and Prior Approval 
Suretires to be held together in a holding company structure as 
affiliates. These regulatory flexibilities should ensure continued 
surety bond participation in the SBG Program to allow small contractors 
to continue to receive the SBG Program guarantees in the future.
D. Proposed Rule Alternatives
    SBA has analyzed several alternatives to this proposed rule. First, 
SBA could do nothing. SBA believes, however, that this would not 
further the objective of the SBG Program as it could lead to surety 
departures from the SBG Program, directly leading to fewer small 
businesses able to receive a SBG bond. Second, SBA could completely 
overhaul the SBG Program. SBA believes that most of the regulatory 
framework of the SBG Program is working and that drastic changes are 
not needed. As stated in the PART review and FY2007 Budget, the SBG 
Program and the small businesses it serves would most benefit from an 
internet-based application system and more program outreach, not 
regulatory overhaul. Third, SBA could act as it has,

[[Page 56053]]

by proposing amendments conforming the rules to our commitments in the 
PART review and our FY2007 Budget. These amendments will allow SBA to 
retain the surety bond participation it needs in order to operate the 
program and continue providing bonding benefits to small contractors in 
need of bid, payment, performance or ancillary bonds necessary to 
obtain Federal and State contracts.
E. Request for Comments
    SBA requests comment on this Regulatory Impact Analysis (RIA), in 
particular the assumptions made and the projections of costs and 
benefits of this proposed regulatory action. SBA also requests comments 
on all aspects of the RIA.

Compliance With Executive Order 12988

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

Compliance With Executive Order 13132

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

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

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

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

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

List of Subjects in 13 CFR Part 115

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

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

PART 115--SURETY BOND GUARANTEE

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

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

    2. Amend Sec.  115.10 by adding the following definitions at the 
appropriate places:


Sec.  115.10  Definitions.

* * * * *
    Service-Disabled Veteran means a veteran with a disability that is 
service-connected, as defined in Section 101(16) of Title 38, United 
States Code.
    Small Business Owned and Controlled by Service-Disabled Veterans 
means:
    (1) A Small Concern of which not less than 51 percent is owned by 
one or more Service-Disabled Veterans; or a publicly-owned Small 
Concern of which not less than 51 percent of the stock is owned by one 
or more Service-Disabled Veterans; and
    (2) The management and daily business operations of which are 
controlled by one or more Service-Disabled Veterans, or in the case of 
a Service-Disabled Veteran with permanent and severe disability, the 
spouse or permanent caregiver of such Veteran.
    Small Business Owned and Controlled by Veterans means:
    (1) A Small Concern of which not less than 51 percent is owned by 
one or more Veterans; or a publicly-owned Small Concern of which not 
less than 51 percent of the stock is owned by one or more Veterans; and
    (2) The management and daily business operations of which are 
controlled by one or more Veterans.
* * * * *
    Veteran has the meaning given the term in Section 101(2) of Title 
38, United States Code.
    3. Revise Sec.  115.19(g) to read as follows:


Sec.  115.19  Denial of Liability.

* * * * *
    (g) Delinquent fees. The Surety has not remitted to SBA the 
Principal's payment for the full amount of the guarantee fee within the 
time period required under Sec.  115.30(d) for Prior Approval Sureties 
or Sec.  115.66 for PSB Sureties, or has not made timely payment of the 
Surety's fee within the time period required by Sec.  115.32(c). SBA 
may reinstate the guarantee upon a showing that the contract is not in 
default and that a valid reason exists why a timely remittance or 
payment was not made.
* * * * *
    4. Revise Sec.  115.21(a)(2) to read as follows:


Sec.  115.21  Audits and investigations.

    (a) * * *
    (1) * * *
    (2) Frequency of PSB Audits. Each PSB Surety is subject to audit at 
least once every three years by examiners selected and approved by SBA.
* * * * *
    5. Revise Sec.  115.31(a)(2) to read as follows:


Sec.  115.31  Guarantee percentage.

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

[[Page 56054]]

owned and controlled by veterans or a small business owned and 
controlled by service-disabled veterans.
* * * * *
    6. Revise Sec.  115.32(c) and (d)(2) to read as follows:


Sec.  115.32  Fees and Premiums.

* * * * *
    (c) SBA charge to Surety. SBA does not charge Sureties application 
or Bid Bond guarantee fees. Subject to Sec.  115.18(a)(4) the Surety 
must pay SBA a guarantee fee on each guaranteed bond (other than a Bid 
Bond) within 45 calendar days after SBA's approval of the Prior 
Approval Agreement. The fee is a certain percentage of the bond premium 
determined by SBA and published in Notices in the Federal Register from 
time to time. The fee is rounded to the nearest dollar. SBA does not 
receive any portion of a Surety's non-Premium charges. See paragraph 
(d) of this section for additional requirements when the Contract or 
bond amount changes.
    (d) * * *
    (1) * * *
    (2) Increases; fees. Notification of increases in the Contract or 
bond amount under this paragraph (d) must be accompanied by the 
Principal's check for the increase in the Principal's guarantee fee 
computed on the increase in the Contract amount. If the increase in the 
Principal's fee is less than $40 no payment is due until the total 
amount of increases in the Principal's fee equals or exceeds $40. The 
Surety's check for payment of the increase in the Surety's guarantee 
fee, computed on the increase in the bond Premium, must be submitted to 
SBA within 45 calendar days of SBA's approval of the supplemental Prior 
Approval Agreement, unless the amount of such increased guarantee fee 
is less than $40. When the total amount of increases in the guarantee 
fee equals or exceeds $40, the Surety's check must be submitted to SBA 
within 45 calendar days.
* * * * *
    7. Revise Sec.  115.60(a)(2) to read as follows:


Sec.  115.60  Selection and admission of PSB Sureties.

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


Sec.  115.61  [Removed & Reserved]

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


Sec.  115.62  Prohibition on participation in Prior Approval program.

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

    Dated: August 29, 2006.
Steve C. Preston,
Administrator.
[FR Doc. 06-8205 Filed 9-25-06; 8:45 am]
BILLING CODE 8025-01-P