As of July 25, 2007, the U.S. Small Business Administration (SBA) has changed their Surety Bond Guarantee Program. The goal of the SBA’s recent program changes are to help small contractors get surety bond guarantees. Will the changes make it easier for small contractors to get bonded? Is this just a political move by Senator Olympia J. Snowe (R-ME), the 
designer of the changes? We originally started to cover the changes being made to the SBA in an article titled “Surety Bond Improvements Act of 2006“. In this article, we will review what changes are being made to the program and how they will likely effect the surety industry.
Change #1 – Flexible Rates
The SBA now allows “preferred” sureties to have flexible rates rather than be stuck using the states rate schedule, which is outdated by most standards. This should encourage more bonding companies to participate in the program.
Pros: Adding more surety carriers to the field will only make the program more accessible to all. It will also create more competition, which SHOULD benefit small contractors.
Cons: Allowing for more flexible rates really means allowing the sureties to increase their rates. Bonding companies clearly were not participating because they had too much to gain. This means the added competition will not lower pricing for small business owners, but may end up increasing them. However, in my honest opinion it is something that had to be done.
Change #2 – Reduced Surety Audits
The “preferred” sureties will have less audits and a 60-day time period to submit surety fees to the SBA.
Pros: Cutting down on red tape is good for the sureties and the SBA as it will increase efficiency of the program and egg on new bonding companies to consider the program.
Cons: None.
Change #3 – Upcoming Electronic Bond Application
Pros: The use of technology has revolutionized the surety industry as a whole, further implementation should further increase efficiency and participation by sureties and more importantly, agents.
Cons: The SBA website is not always the easiest to navigate. If the online application is not done correctly it potentially could create new problems rather than solving old ones.
CONCLUSION:
The SBA’s changes will persuade more carriers to take a look at the SBA program, but will this really make it easier for small business to obtain surety guarantees? Personally, I don’t think the changes have gone far enough. The SBA needs to take a step back and take a look at the big picture…
Most bonding companies require principals to obtain their bond through an appointed agency. As an agent, I can tell you we did not have problems placing clients in the SBA’s Surety Guarantee program due to lack of participating bonding companies. However, as an agency we choose to rarely work with the SBA. Why? They are an inefficient government agency that is extremely time consuming. It is unfortunate, as the program is a good idea, but it seems that the employees of the SBA’s Surety Program desperately need retraining. The changes made will not change the red tape and inefficient SBA employees that agents have to deal with. Therefore, our agency will not actively pursue writing SBA accounts. In fact, we only consider it for contractors that we have worked with for years that have fallen on hard times.
On the bright-side, the increased premium rates some of the “preferred” sureties will be charging will increase the commissions made for agents participating in the program. However, our agency still feels that our time can be better spent working strictly with the private sector.
The recent housing market boom brought about a boom in the mortgage industry. Many mortgage brokers and lenders decided to open their own shops. Most brokers and lenders quickly discovered a bond was required when applying for licensing from the states in which they chose to operate. Bonding companies backing mortgage brokers and lenders were liberally writing bonds for them due to the financial prosperity brought upon them from the large amount of home sales and refinanced loans. Both lenders and brokers had relatively low claim rates when compared to other bonded occupations. This allowed the surety market to offer more surety capacity and at a lower rate.
As stated above, many brokers and lenders no longer qualify for the aggregate amount of surety bonding they did at the peak of the boom, which is to be expected, as that is how surety underwriting works. However, some of the sureties that were once the most eager to bond brokers and lenders are changing their overall underwriting guidelines for these lines of business. As of recent, our agency has seen a drastic difference in underwriting methods for top carriers like The Hartford Financial Services Group, Inc. and Liberty Mutual Insurance Company. The Hartford in particular was previously known for writing mortgage brokers and lenders very freely at low rates. Now they are no longer willing to consider start-up mortgage broker businesses. A brokerage must be in business for a minimum of two years for them to consider writing a bond. These changes are significant, as limiting surety capacity will force those in the mortgage industry to be very careful about what states they choose to operate in, as they will likely not qualify for all the bond backing needed to operate legally. More importantly, if other carriers in the industry follow The Hartford’s path, start-up mortgage brokers would have to produce letters of credit rather than a bond; a much costlier alternative. This will allow for only start-ups with deep pockets to get licensed and bonded properly.
Dog breeds listed as “dangerous” are becoming more difficult to insure every year. Many municipalities, including our agency’s home state of Pennsylvania also require a “violent” dog to be bonded (see: 
Sureties may differ many ways when evaluating your assets and deciding them acceptable. Some may look for common stock that is traded in on the National Securities Exchange while others prefer certificates of deposits. All agree that the more you can liquidate your assets into cash, the better. Tangible assets that are easily converted are most acceptable. A good guideline is to follow which is acceptable to the government standards as well as which are unacceptable. Your surety can help you with this list. Common sense will tell you that your car, home, capitol equipment, or any asset that could fluctuate or depreciate over time is an unacceptable asset. Some bonding companies will even find real estate unacceptable as an asset so consult with them before making your list of assets. All your assets are favorable and establish your net worth. The assets that you use as collateral are the gems that underwriters seek. By accepting these assets, the surety “identifies� your assets as collateral.
As mentioned above, a general indemnity agreement may be for several bonds. This agreement covers a wide spectrum of costs that are considered relevant or not relevant to the claim such as sanctions or fines bestowed upon the surety. The surety has a right to call in the debt from the principal before the surety pays the claim. This common law right is called exoneration. When a surety becomes exonerated, the principal pays the cost of the claim and as a result, liability is removed from the surety. Some general indemnity agreements require principals to pay for claims as soon as they are made against the bond.
home sales plummeting many developers are in a bad spot, as they purchased the land when real estate was more costly. The developers have loans out on land that is no longer worth what they originally paid. Obviously, this eats into their bottom line. Worse off, the houses are also worth less and must be reduced to sell in the current market. However, the developers can only reduce the price of the homes so far until they are losing money on the project. Smaller developers with little equity may not be able to survive the hit, which would result in bankruptcy.
