The proposed changes by the Federal Motor Carrier Safety Administration (FMCSA) will have major impacts on freight brokers using surety bonds to satisfy financial responsibility requirements. Learn more about the proposed changes and how it could impact bonding for some brokers.
The FMCSA is proposing to make changes in five separate areas relating to freight brokers’ and freight forwarders’ financial responsibility requirements. These include:
The full proposed changes can be read here. A summary of proposed changes is below:
The proposal would require freight brokers or freight forwarders to meet the Moving Ahead for Progress in the 21st Century (MAP-21) requirement to have “assets readily available” by maintaining trusts that meet certain criteria, including that the assets can be liquidated within 7 calendar days of the event that triggers a payment from the trust, and that do not contain certain assets. These assets include personal guarantees or pledged assets.
A BMC-84 Surety Bond would still satisfy the freight broker or freight forwarder’s financial obligation under MAP-21 so long the assets backing the BMC-84 Bond are readily available to pay claims without resorting to personal guarantees or collection of pledge accounts receivable. This was a question answered by FMCSA here.
The proposed law suggests that available financial security” falls below $75,000 when there is a drawdown on the broker or freight forwarder’s surety bond or trust fund.
This would happen when a broker or freight forwarder consents to a drawdown, or if the broker or freight forwarder does not respond to a valid notice of claim from the surety or trust provider, causing the provider to pay the claim, or if the claim against the broker or freight forwarder is converted to a judgment and the surety or trust provider pays the claim.
FMCSA also proposes that, if a broker or freight forwarder does not replenish funds within 7 business days after notice by FMCSA, the agency will issue a notification of suspension of operating authority to the broker or freight forwarder.
FMCSA proposes to define “financial failure or insolvency” as bankruptcy filing or State insolvency filing. This proposal also requires that if the surety/trustee is notified of any insolvency of the broker or freight forwarder, it must notify FMCSA and initiate cancellation of the financial responsibility. In addition, FMCSA proposes to publish a notice of failure in the FMCSA Register immediately.
The proposal to implement MAP-21’s requirement for suspension of a surety provider’s authority, the agency would first provide notice of the suspension to the surety/trust fund provider, followed by 30 calendar days for the surety or trust fund provider to respond before a final Agency decision is issued.
The agency also proposes to add penalties in 49 CFR part 386, appendix B, for violations of the new requirements. These penalties include:
FMCSA proposes to remove the rule allowing loan and finance companies to serve as BMC-85 trustees.
Although most freight brokers and freight forwarders pay with no issues, a small number have caused significant damages. FMCSA estimates that 440 freight brokers or forwarders would have had their surety bond drawn down in 2022. 17% of these would have exceeded the $75,000 penalty.
When these claims exceed the $75,000 financial security, the claims are submitted to a court and interpleader proceedings. This often results in claimants getting significantly less than they are owed.
Finally, the current cancellation time frame allows brokers and forwarders to accumulate additional claims. For example, a freight broker may have exhausted the limits on their BMC-84 Bond. However, if it takes 30 days to cancel their license, they may accumulate significant claims over and above the $75,000 amount before their license is revoked.
The proposed changes will impact the surety bond industry and market for obtaining BMC-84 Surety Bonds.
By allowing immediate suspension of broker and forwarder’s licenses, it could help sureties limit their claims before they can escalate. This would make these freight broker bonds more attractive to surety bond companies.
Requiring liquid assets may make it difficult or impossible for small freight brokers and freight forwarders to get bonding. However, these are also the parties that often cause the claims. These claims have already made obtaining BMC-84 Bonds more challenging for small freight brokers.
These changes could hurt these parties in the short term but could benefit the industry long term by requiring parties to be more financially sound before starting. This will in turn make bonding easier for the small freight brokers who honor their contracts.
At this point, these changes are only proposed by the FMCSA. Comments have been given and are still open. However, both freight brokers/forwarders and their surety bond companies should be preparing for the impacts of these changes.
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