Don't Be Fooled By Underfunded Freight Broker Trusts
Underfunded Trusts Can Cost You Your License
There are trust fund providers out there that are offering underfunded trust funds to freight brokers. If you're unfamiliar with trust funds, they are one of the options you can choose to meet the $75,000 FMCSA requirement to get your freight broker license. True trust funds require either 100% collateral or an ILOC (which is a guarantee from a bank that you have the $75,000 to pay potential claims), as the freight brokers are guaranteeing they will follow all FMCSA rules with their own cash held by a bank. If rules are broken and claims are caused, the collateral is used to pay them.
However, a company named Oasis Capital, Inc. was recently indicted because they were offering trust funds, but requiring small amounts of collateral. The problem was that the small amounts of collateral placed in the trust funds didn't meet FMCSA standards, as there were not enough reserves in the trust funds to pay the high amount of claims that occur in the freight broker industry. Unfortunately, the FMCSA does not verify that trust funds are fully funded when they are filed in its system.
Once the FMCSA got word about these underfunded trusts, all of the trust funds held by Oasis were revoked with no refund provided to the freight brokers. This left the freight brokers (about 500 altogether) with the options of spending more money to meet the FMCSA's requirements, or close down their businesses. The FMCSA no longer allows Oasis Capital, Inc. to offer trust funds to freight brokers.
Avoid Group Bonds/Trust Funds
Some freight brokers have been sold group bonds/trust funds, which are not the same as BMC-85 trust funds. Unlike BMC-85 trust funds, group bonds/trust funds have recently been declared unacceptable by the FMCSA. If you purchased a group bond/trust fund, it's crucial that you replace it with a security that is accepted by the FMCSA to get your license.
Why You Must Verify Your Own Trust
As stated above, all trust funds must be fully funded with 100% collateral, or with an ILOC. Since the FMCSA doesn't verify that trusts are fully funded as they are filed, you must verify trusts are funded on your own to avoid having your trust fund revoked. If you get a freight broker bond, you don't have to worry about verifying anything because the Department of Insurance and A.M. Best ensures that surety companies backing your bond are financially strong enough to do so and pay any potential bond claims.
Author: Eric Weisbrot
Eric is an industry expert that specializes in taking complex surety concepts and explaining them in terms that make sense to the general public. He also manages the JW Surety Bonds website and works with various partners to help further educate the public on suretyship using various mediums.
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