Surety industry wins with NDAA amendments on individual sureties, SBA guarantees

By Kathy Hoffman posted 01-05-2016 05:12 PM

One of NASBP's most significant legislative victories of 2015 was the signing of the National Defense Authorization Act (NDAA). See NASBP press release. That's because its amendments include a provision imposing stricter requirements on individual sureties looking to bond federal construction contracts, while another increases the guarantee provided through the Small Business Administration's Surety Bond Guarantee Preferred Program.

The individual surety provision–which NASBP has sought for the last five years–limits the types of assets that such a surety can pledge to back a federal project. NASBP CEO Mark McCallum says the assets now must be those the U.S. Department of the Treasury has deemed as eligible obligations–essentially, government-backed debt instruments, such as Treasury notes. Such instruments are safe and stable; they do not fluctuate wildly in value, and they can be turned over to the care and custody of the contracting authority and be released once the contracting obligation is completed.

Corporate sureties have been vetted and approved by the U.S. Department of the Treasury before they can write on federal contracts, he says. Not so with individual sureties, he added. With taxpayer dollars funding federal contracts, “the financial integrity of the surety is paramount,” McCallum says.

Regulations on individual sureties backing federal projects had been subject to various interpretations within the government, he says. And contracting officials have not always adhered to them, he says.

“We believe the new law will do a lot to mitigate future fraud related to individual” sureties by curbing instances where “unscrupulous individuals” might “proffer a piece of paper with no real assets behind it,” McCallum says.

Individual surety fraud also hurts downstream parties, such as subcontractors and suppliers, and can jeopardize their existence if a payment bond has no real assets backing it, thereby leaving no payment remedy for these firms by the prime contractor, McCallum says.

The new law is not immediately in effect. “We still want people to be very alert, because the law won't go into effect probably for another year,” he says.

Meanwhile, the NDAA provision relating to the SBA Surety Bond Guarantee Program will raise the guarantee for sureties participating in the Preferred Program from 70% to 90%. Sureties involved with the Preferred Program are licensed, regulated corporate sureties that are approved to write on federal contracts, and the hope is that the higher guarantee will encourage more of them to participate, McCallum says.

The provision, therefore, “expands opportunities for small and emerging contractors to get surety credit through a trustworthy, regulated market,” he says. Having the two surety-related provisions attached to the NDAA was an important strategy.

“There are unfortunately few vehicles that have really moved through Congress over the past few years, but one of the vehicles that Congress will typically agree on at some point are those for defense,” McCallum says. “If you are intent on trying to get your legislation passed, you need to find a vehicle that will be considered and moved. The defense bill is one such vehicle.”

Both provisions are important to small businesses competing for defense contracts, and those factors were evident to lawmakers, he says.

In addition, a Nevada measure that would have allowed individual sureties to back contractors on state projects was defeated in 2015. NASBP plans to vigilantly watch any legislation related to individual sureties that may arise at the federal, state or local level in the years ahead. 

“We do not believe there should be an unregulated surety market in any jurisdiction,” McCallum says. “Proper oversight protects consumers and taxpayers.”