An amendment tucked into the reauthorization of federal highway and transit programs approved by the U.S. Senate in mid-March could significantly change the way the nation's truck freight is booked and moved, and could put as many as 80 percent of the nation's 20,000 property brokers out of business, critics warn.
The amendment, added by Senate Majority Leader Harry Reid (D-Nev.) to a two-year, $109 billion funding program that passed the chamber by a 75-22 margin, is designed to crack down on allegedly fraudulent behavior by unscrupulous truck brokers and trust companies that issue surety bonds to pay carrier claims. Most of those claims are submitted by small trucking companies like one-person independent owner-operators.
The amendment requires that brokers licensed by the Federal Motor Carrier Safety Administration (FMCSA) renew their licenses every five years instead of just one time. It establishes stricter regulations on surety companies that issue bonds. And it sets harsh monetary penalties totaling in the thousands of dollars for conducting brokerage operations without a bond or a license.
For example, an unlicensed broker that books a load without paying the carrier would be liable for the full amount of its payables, while a licensed broker would have its liability capped, under the legislation.
But the most controversial provision would increase the surety bond minimums to at least $100,000 from $10,000. Because brokers would be required to either make a $100,000 upfront cash payment or supply a bank letter of credit attesting to the availability of funds, about 17,000 small to mid-sized brokers that lack the cash to make an upfront payment or the resources to persuade their lenders to agree to terms would be driven out of business or become agents of larger brokers, according to critics. This would allow big brokers to eventually control the market and remove a robust source of competitive options from the trucking supply chain, critics said.
It could also produce long-term downward pressure on freight rates, as there would be more loads concentrated with fewer but larger brokers exercising greater leverage with carriers, critics said.
Established brokers would have four years to comply with the amendment's provisions. New entrants would be required to comply immediately.
Following the ocean model
The amendment's supporters, which include big truckers, owner-operators, and the largest brokerage trade group, the Transportation Intermediaries Association (TIA), contend that the broker bond requirement had not been adjusted for nearly 30 years and that the higher figure actually represented a reasonable compromise. According to TIA, some trucker groups were calling for a $500,000 broker bond.
TIA contended it is following the model of the ocean freight industry, where companies that operate as ocean freight forwarders and non-vessel operating common carriers (NVOCCs), carrier-neutral companies that aggregate and book freight, must already maintain a combined $125,000 bond with the Federal Maritime Commission (FMC), the federal agency that regulates these entities. A robust market exists for bonds to underwrite those operations, and the FMC issued more than 700 new licenses in 2010, according to TIA. Association executives contend that property brokers should have the same experience obtaining surety bonds as their brethren in the ocean freight business.
"This is not about big companies versus small companies as some will suggest," TIA said in a briefing paper describing the bill. "This legislation is about well-run companies of all sizes that follow the rules against those that think they can skate on thin ice."
TIA also said that brokers certified under the group's strict underwriting criteria could immediately obtain a $100,000 bond for a $10,000 "trust deposit" and a $2,000 annual premium. This has fueled concerns from opponents, notably the Pacific Financial Association (PFA)—a group that claims it provides one-quarter of all financial instruments to property brokers—that TIA is more interested in expanding its share of the surety bond market than in protecting its broker members.
TIA strongly denies the allegation. Selling surety bonds "is not a priority for us," said E. Nancy O'Liddy, director of policy and TIA services.
TIA said it would make little sense to support a bill that disadvantages small brokers, noting that 70 percent of its members have annual revenues of $5 million or less, classifying them as small businesses. However, opponents such as the PFA and the Association of Independent Property Brokers & Agents (AIPBA), a group formed in 2010 to represent smaller brokers, said the TIA is actually controlled by a group of large brokers that contribute most of the dues, call most of the regulatory shots, and stand to gain the most from the amendment.
In a statement issued March 26, AIPBA President James Lamb said TIA's actions amount to little more than a "power play" to corner the broker market and accused TIA of committing "premeditated murder" of 17,000 small, independently owned brokers.
Legislative limbo
The broker language is also included in the House version of the highway bill, which has been approved by the House Transportation and Infrastructure Committee but remains well short of the 218 votes needed to pass the House. House Speaker John Boehner (R-Ohio) is reportedly leaning toward adopting the Senate version as a means of moving the legislative needle.
On March 29, the House and Senate agreed to a 90-day extension of the current legislation to keep highway projects going beyond March 31, the date the latest temporary extension of highway programs expires. The action marked the ninth temporary extension since the most recent law expired in 2009.
Because the broker language is in both versions, it may complicate efforts by opponents to strip it from the final report that House-Senate conferees would vote on before sending a reconciled bill to President Obama's desk for signature. Ironically, stand-alone broker legislation similar to what is included in the Senate's highway bill and the House's version had been introduced in both chambers during the past two to three years, only to wither and die on the legislative vine.
Opponents of the Reid amendment are furious over the Senate's action, saying the proposal couldn't pass muster as a stand-alone bill and has no place in legislation to reauthorize the nation's highway projects.
Shady dealings
One thing both sides agree on is that the U.S. property broker industry, which consists of between 14,000 and 20,000 companies, has a long-held reputation for unsavory activity. There have also been concerns that banks and trust companies are offering broker trusts—the vehicle used to deposit broker money to pay claims—without those trusts being fully funded in accordance with the law. Stories abound of truckers not being paid for loads booked and delivered, and of funds that should have been placed and kept in trust not being available to pay a carrier in the event of a legitimate claim.
By law, banks and trust companies issuing broker bonds are required to collect and hold the full face amount of $10,000 before issuing the trust that ensures that a claim will be paid. However, many trust companies issue broker bonds either based on the value of receivables, or with little or nothing down. Many do not pay claims, or, if they do, they first deduct their costs from the $10,000 amount before paying, according to TIA.
Under the Reid amendment, trust companies would be responsible for paying claims equivalent to the face value of the bond. They will have to publish the list of payments on their respective websites, make pro-rated payments so everyone gets some money, and submit to regular public audits. In addition, they will be forbidden from deducting their costs from the bond amount.
"We believe these reforms are more important to carriers than the amount of the bond," TIA said in its briefing paper.
Opponents of the Reid amendment said Congress need do nothing more than require that existing laws be enforced that make it illegal to use the funds earmarked to pay legitimate claims for any other purpose. If that were the case, the $10,000 surety minimums in place for decades would be more than adequate, opponents said.
Opponents said they could possibly support an increase in the surety minimums to $25,000 as an inflation-cost adjustment. But anything higher than that would be unacceptable, they said.
Gartner, Inc.