TITLE IV-PART B-SURETY BOND GUARANTEES DEFINITIONS

SEC. 410. As used in this part

(1) The term "bid bond" means a bond conditioned upon the bidder on a contract entering into the contract, if he receives the award thereof, and furnishing the prescribed payment bond and performance bond.

(2) The term "payment bond" means a bond conditioned upon the payment by the principal of money to persons under contract with him.

(3) The term "performance bond" means a bond conditioned upon the completion by the principal of a contract in accordance with its terms.

(4) The term "surety" means the person who, (A) under the terms of a bid bond, undertakes to pay a sum of money to the obligee in the event the principal breaches the conditions of the bond, (B) under the terms of a performance bond, undertakes to incur the cost of fulfilling the terms of a contract in the event the principal breaches the conditions of the contract, or (C) under the terms of a payment bond, undertakes to make payment to all persons supplying labor and material in the prosecution of the work provided for in the contract if the principal fails to make prompt payment.

(5) The term "obligee" means (A) in the case of a bid bond, the person requesting bids for the performance of a contract, or (B) in the case of a payment bond or performance bond, the person who has contracted with a principal for the completion of the contract and to whom the obligation of the surety runs in the event of a breach by the principal of the conditions of a payment bond or performance bond.

(6) The term "principal" means (A) in the case of a bid bond, a person bidding for the award of a contract, or (B) the person primarily liable to complete a contract for the obligee, or to make payments to other persons in respect of such contract, and for whose performance of his obligation the surety is bound under the terms of a payment or performance bond. A principal may be a prime contractor or a subcontractor.

(7) The term "prime contractor" means the person with whom the obligee has contracted to perform the contract.

(8) The term "subcontractor" means a person who has contracted with a prime contractor or with another subcontractor to perform a contract.

AUTHORITY OF THE ADMINISTRATION

SEC. 411. (a) The Administration may, in consultation with the Secretary of Housing and Urban Development and upon such terms and conditions as it may prescribe, guarantee and enter into commitments to guarantee any surety against loss, as hereinafter provided, as the result of the breach of the terms of a bid bond, payment bond, or performance bond by a principal on any

contract up to $500,000 in amount, subject to the following conditions:

(1) The person who would be the principal of the bond is a small business concern.

(2) The bond is required in order for such person to bid on a contract or to serve as a prime contractor or subcontractor thereon.

(3) Such person is not able to obtain such bond on reasonable terms and conditions without a guarantee under this section.

(4) The Administration determines that there is a reasonable expectation that such person will perform the covenants and conditions of the contract with respect to which the bond is required.

(5) The contract meets requirements established by the Administration for feasibility of successful completion and reasonableness of cost.

(6) The terms and conditions of any bond guaranteed under the authority of this part are reasonable in light of the risks involved and the extent of the surety's participation.

(b) Any contract of guarantee under this section shall obligate the Administration to pay to the surety a sum not to exceed 90 per centum of the loss incurred by the surety in fulfilling the terms of his contract as the result of the breach by the principal of the terms of a bid bond, performance bond, or payment bond.

(c) The Administration shall fix a uniform annual fee which it deems reasonable and necessary for any guarantee issued under this section, to be payable at such time and under such conditions as may be determined by the Administration. Such fee shall be subject to periodic review in order that the lowest fee that experience under the program shows to be justified will be placed into effect. The Administration shall also fix such uniform fees for the processing of applications for guarantees under this section as it determines are reasonable and necessary to pay administrative expenses incurred in connection therewith. Any contract of guarantee under this section shall obligate the surety to pay the Administration such portions of the bond fee as the Administration determines to be reasonable in the light of the relative risks and costs involved.

(d) The provisions of section 402 shall apply in the Administration of this section. § 115.2 Policy.

It is the intent of Congress to strengthen the competitive free enterprise system by assisting qualified small business concerns to obtain certain bid, payment or performance bonds that are otherwise not obtainable by authorizing the Small Business Administration to guarantee surety companies up to 90 percent of their losses incurred by reason of the breach of certain surety bonds executed on behalf of such small business concerns on contracts up to $500,000 in amount.

(a) “Administration" shall mean the Small Business Administration.

(b) "Administrator" shall mean the Administrator of the Small Business Administration.

(c) "SBA" means the Small Business Administration.

(d) "Small business concern" means a concern which would qualify as a small business under § 121.3-14 of this chapter.

(e) "Surety" means a corporation with a Certificate of Authority from the Secretary of the Treasury under sections 6 to 13 of title 6 of the United States Code, or as otherwise qualified by the Small Business Administration.

In order to be eligible for a surety bond guarantee, the applicant must:

(a) Qualify as a small business under § 121.3-14 of this chapter.

(b) Operate or propose operation of a business in conformity with Part 120Loan Policy, of this chapter.

(c) Represent that a bond is required in order to bid on a contract or to serve as a prime contractor or subcontractor thereon.

(d) Represent that a bond is not obtainable on reasonable terms and conditions without SBA's bond guarantee assistance.

§ 115.5 Procedure for surety bond guarantee assistance.

(a) An application for surety bond guarantee assistance shall be made on the appropriate SBA forms and shall include any additional information required in supporting schedules and forms. The application shall be submitted to an appropriate surety company agent in triplicate, plus all other supporting material. Except for the District of Columbia, the agent will forward one copy of the same to the SBA District Office and Regional Office serving the area in which the applicant is located, and one copy to the surety company. In the District of Columbia Standard Metropolitan Statistical Area, the agent will forward one copy of the same to the SBA District Office and one copy to the SBA Central Office.

terms and conditions will be in accord with those executed by professional sureties for that type of contract for which such bond or bonds are required to be furnished by principal.

(b) Surety shall affirm that without the SBA guarantee to surety it will not issue any of said bonds to principal.

(c) That the term "loss" shall mean any and all liability, damages, court costs, counsel fees, charges and expenses of whatever kind or nature which the surety shall or may at any time, sustain or incur by reason, or in consequence, of having executed the bond or bonds guaranteed by SBA.

(d) Unless otherwise agreed, surety shall take charge of all claim matters arising under said bonds; determine its liability and the amount thereof; compromise, settle or defend any claim or suit; and, take such action as it deems necessary to minimize loss.

(e) Surety shall pay SBA 10 percent of its bond(s) premium for and in consideration of SBA's agreement to guarantee the bid, payment or performance bond contemplated by this agreement. It is further agreed by SBA and surety that surety will pay SBA an additional like percentage of the additional premiums on any increase in contract price and SBA will make a like percentage refund on any premium reductions resulting from a reduction in the contract price. Where SBA or surety's share of any additional premium increase or decrease is five dollars ($5.00) or less, there shall be no adjustment.

(a) An applicant small business concern, being required to provide a bond for performance or payment equivalent to 100 percent of the contract price shall pay to SBA a guarantee fee of 0.2 percent of the contract price upon obtaining the contract.

(b) An applicant small business concern, being required to provide a bond for performance or payment of less than 100 percent of the contract price shall pay the SBA a guarantee fee of 0.2 percent of the contract price or an amount equal to 20 percent of the premium charged by the surety, whichever is less, upon obtaining the contract.

(c) The surety company shall pay to SBA a guarantee fee of 10 percent of its bond premium.

[37 F.R. 23418, Nov. 3, 1972]

§ 115.8 Approval or decline of applications.

(a) No application for bond guarantee assistance shall be approved unless the following determinations have been made by SBA:

(1) That there is a reasonable expectation that the applicant will perform the covenants and conditions of the contract with respect to which a bond is required;

(2) That the contract meets requirements established by SBA for feasibility of successful completion and reasonableness of cost;

(3) That the terms and conditions of any bond guaranteed under the authority of this legislation are reasonable in light of the risks involved and the extent of the surety's participation.

§ 119.1 Statutory provisions.

STATEMENT OF PURPOSES

SEC. 401. It is the purpose of this title to assist in the establishment, preservation, and strengthening of small business concerns and improve the managerial skills employed in such enterprises, with special attention to small business concerns (1) located in urban or rural areas with high proportions of unemployed or low-income individuals, or (2) owned by low-income individuals; and to mobilize for these objectives private as well as public managerial skills and resources. LOANS, PARTICIPATIONS, AND GUARANTIES SEC. 402. (a) The Administrator of the Small Business Administration is authorized

to make, participate (on an immediate basis) in or guarantee loans, repayable in not more than 15 years, to any small business concern (as defined in section 3 of the Small Business Act (15 U.S.C. 632) and regulations issued thereunder), or to any qualified person seeking to establish such a concern, when he determines that such loans will assist in carrying out the purposes of this title, with particular emphasis on the preservation or establishment of small business concerns located in urban or rural areas with high proportions of unemployed or low-income individuals or owned by low-income individuals: Provided, however, That no such loans shall be made, participated in, or guaranteed if the total of such Federal assistance to a single borrower outstanding at any one time would exceed $50,000. The Administrator of the Small Business Administration may defer payments on the principal of such loans for a grace period and use such other methods as he deems necessary and appropriate to assure the successful establishment and operation of such concern. The Administrator of the Small Business Administration may, in his discretion, as a condition of such financial assistance, require that the borrower take steps to improve his management skills by participating in a management training program approved by the Administrator of the Small Business Administration: Provided, however, That any management training program so approved must be of sufficient scope and duration to provide reasonable opportunity for the individuals served to develop entrepreneurial and managerial selfsufficiency. The administrator of the Small Business Administration shall encourage, as far as possible, the participation of the private business community in the program of assistance to such concerns, and shall seek to stimulate new private lending activities to such concerns through the use of the loan guaranties, participations in loans, and pooling arrangements authorized by this section.

(b) To the extent necessary or appropriate to carry out the programs provided for in this title the Administrator of the Small Business Administration shall have the same powers as are conferred upon the Director by section 602 of this Act. To insure an equitable distribution between urban and rural areas for loans between $3,500 and $25,000 made under this title, the Administrator is authorized to use the agencies and agreements and delegations developed under title III of the Act as he shall determine necessary.

(c) The Administrator shall provide for the continuing evaluation of programs under this section, including full information on the location, income characteristics, and types of business and individuals assisted, and on new private lending activity stimulated, and the results of such evaluation together with recommendations shall be included in the report required by section 608.

LOAN TERMS AND CONDITIONS

SEC. 403. Loans made pursuant to section 402 (including immediate participation in and guaranties of such loans) shall have such terms and conditions as the Administrator of the Small Business Administration shall determine, subject to the following

limitations

(a) There is reasonable assurance of repayment of the loan;

(b) The financial assistance is not otherwise available on reasonable terms from private sources or other Federal, State or local programs;

(c) The amount of the loan, together with other funds available, is adequate to assure completion of the project or achievement of the purposes for which the loan is made;

(d) The loan bears interest at a rate not less than (1) a rate determined by the Secretary of the Treasury, taking into consideration the average market yield on outstanding Treasury obligations of comparable maturity, plus (2) such additional charge, if any, toward covering other costs of the program as the Administrator of the Small Business Administration may determine to be consistent with its purposes: Provided, however, That the rate of interest charged on loans made in redevelopment areas designated under the Area Redevelopment Act (42 U.S.C. 2501 et seq.) shall not exceed the rate currently applicable to new loans made under section 6 of that Act (42 U.S.C. 2505); and

(e) Fees not in excess of amounts necessary to cover administrative expenses and probable losses may be required on loan guaranties.

DISTRIBUTION OF FINANCIAL ASSISTANCE

SEC. 404. The Administrator of the Small Business Administration shall take such steps as may be necessary to insure that, in any fiscal year, at least 50 per centum of the amounts loaned or guaranteed pursuant to this part are allotted to small business concerns located in urban areas identified by the Director, after consideration of any recommendations of the Administrator of the Small Business Administration, as having high concentrations of unemployed or lowincome individuals or to small business concerns owned by low-income individuals. The Administrator of the Small Business Administration, after consideration of any recommendations of the Director, shall define the meaning of low income as it applies to owners of small business concerns eligible to be assisted under this part, and such definition need not correspond to the definition of low income as used elsewhere in this Act.

LIMITATION OF FINANCIAL ASSISTANCE

SEC. 405. No financial assistance shall be extended pursuant to this title where the Administrator of the Small Business Administration determines that the assistance will be used in relocating establishments from

(a) The principal purpose of the Economic Opportunity Loan Program is to make funds available on reasonable terms and maturities to small business concerns located in areas with high proportions of unemployment or low-income individuals, or small business concerns owned by or to be established by persons with low incomes; and to provide management assistance to such persons.

(b) Particular emphasis will be placed on the preservation or establishment of small business concerns located in urban and rural areas with high proportions of unemployed or low-income individuals or owned by low-income individuals or those, who due to social or economic disadvantage, have been denied the opportunity to acquire adequate business financing through normal lending channels on reasonable terms. At least 50 percent of these loans will be made in each fiscal year in certain designated urban areas and to low-income individuals in urban or rural areas.

(c) Although certain of the credit standards used in the regular business loan program have been modified for the economic opportunity loan program, there must be a reasonable assurance of repayment. The maximum participation of the private business community in all phases of this program is to be encouraged. The program shall be administered to promote and facilitate this private participation.

For purposes of this part:

(a) "Director" means the Director, Office of Economic Opportunity.

(b) "Administrator" means the Administrator of the Small Business Administration.

(c) "SBA" means the Small Business Administration.

(d) "Small-business concern" means a business concern which would qualify as a small business under § 121.3-10 of this chapter.

(e) The "Act" means the Economic Opportunity Act of 1964, as amended. (f) "Economic Opportunity Loans" (EOL) means a loan authorized under section 402 (a) of the Economic Opportunity Act of 1964, as amended.

(a) In order to be eligible to apply for an EOL, a business must qualify under Parts 120 and 121 of this chapter, except where inconsistent with specific provisions in this part.

(b) The applicant must be at least 50 percent owned by a person or persons who either (1) has or have individual annual family income (s) (other than welfare) which is not sufficient to satisfy the basic need of each such individual family, or (2) has or have been denied the opportunity to have access to adequate financing on reasonable terms, through normal lending channels because of economic or social disadvantage. Businesses located in urban or rural areas with a high proportion of unemployed or low-income individuals may be considered economically disadvantaged.

(c) Financial assistance may be used to effect a change in ownership of a business where such a change will further the objectives of the EOL program.

(d) A cooperative association is eligible provided that its members are eligible, small business concerns. Consumer cooperatives are not eligible.

(e) Financial assistance shall not be extended when it is determined that the loan funds will be used in relocating establishments from one area to another if the relocation would result in an increase in unemployment in the area of original location. (Relocation within a community or local area shall not be considered relocation from one area to another.)

(f) Financial assistance shall not be extended if funds are otherwise available on reasonable terms from private sources or other Federal, State, or local programs. The applicant's bank of account, if any, will be contacted to determine its willingness to finance the applicant independently, to participate with SBA, or to make a loan with a guaranty by SBA. New private lending activity should be sought.

§ 119.31 Terms and conditions.

(a) An EOL shall not be made, participated in, or guaranteed if the total amount of the Government's share of such assistance to a single borrower at any one time exceeds a total outstanding of $50,000. The $50,000 loan limit applies collectively to all EOL loans to

business entities owned or controlled by affiliated ownership.

(b) Repayment will be required at the earliest feasible date giving consideration to the use to be made of the funds and indicated ability to repay. Working capital loans will be limited to 10 years. Longer terms up to 15 years may be provided where the proceeds are for acquisition of realty or other fixed assets. Where a combination of purposes is involved, the period for repayment will be adjusted accordingly. When deemed necessary, grace periods for payment of principal may be provided. Interest payments must be as soon after the loan is disbursed as possible and will be required during any grace period. A fluctuating repayment schedule may be established for seasonal businesses.

(c) (1) Interest on direct loans varies from time to time, based on a statutory formula. On immediate participation loans, the interest rate on SBA's share is the same as for direct loans.

(2) Subject to the approval of SBA, the participant's share of immediate participation loans, and on guaranteed loans prior to SBA's purchase, the interest rate shall be at a legal and reasonable rate. Maximum allowable rates may be published in the FEDERAL REGISTER from time to time.

(3) The interest rate on SBA's share of a guaranteed loan after purchase by SBA becomes the same as the rate for direct loans in effect at the time the loan was approved by SBA. SBA's payment to the guaranteed participant of accrued interest to the date of purchase shall be at the interest rate established by participant but shall not exceed an effective. rate of interest of 8 percent per annum, and without any future adjustment for any unpaid accrued interest in excess of 8 percent per annum.

(d) There are no statutory requirements with respect to collateral for loans. Inadequate collateral shall not be used as a reason to decline unless the applicant refuses to pledge whatever worthwhile collateral is available. § 119.41

Participation.

(a) The amount of SBA guaranty may be up to 100 percent of the EOL, but shall not exceed $50,000.

(b) In immediate participation loans, SBA participation shall not exceed $50,000 or 90 percent of the loan, whichever is the lesser. The service fees

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