[Obligation of SBA To Pay Surety Claim]

The Small Business Administration (SBA) requested a legal opinion as to whether it may honor claims of surety bond companies under its surety bond guarantee program when the surety company has not paid the surety bond guarantee fee. SBA accounting officers expressed concern that approval of such a claim would be an unauthorized and illegal act for which the certifying officer could be held personally liable. GAO noted that the surety bond guarantee program is authorized by the Small Business Investment Act under which SBA is authorized, subject to certain terms and conditions, to guarantee a surety bond against loss resulting from a breach of the terms of the bid, performance, or payment bond provided on behalf of an eligible small business principal on any contract up to $1 million. GAO concluded in a related decision that an approved loan is not covered until the lender pays the guarantee fee. This fee should be paid within 5 days of loan disbursement. GAO also stated that SBA could accept late payment, after the normal 5-day period, provided a default had not yet occurred or become imminent. GAO believes that the legal detriment incurred by the surety in issuing a bond that it would not have issued without an SBA guarantee, coupled with the surety's continuing legal obligation to pay the required guarantee fee, constitutes adequate and valid consideration that would support SBA obligation as guarantor under the agreement. GAO concluded that the requirement that sureties pay a quarantee fee is not a condition precedent to the SBA obligation to guarantee the surety against loss and, therefore, the SBA guarantee should remain in effect, even if a loss occurs before the guarantee fee has been paid. GAO further believes that, whenever this situation occurs, SBA should set off and deduct the unpaid guarantee fees from the surety's claim. GAO noted that SBA might consider adopting the same kind of guarantee fee requirement for its surety guarantee program that it is currently following in its business loan program.