Opinion: Congress Should Tread Lightly With Brokers

By James Lamb

President

DOTAuthority.com Inc.

This Opinion piece appears in the May 24 print edition of Transport Topics. Click here to subscribe today.

As a former New York Department of Transportation regulator and a current player in the motor carrier transportation industry, I have followed the concerns voiced by members of the Owner-Operator Independent Drivers Association and the Transportation Intermediaries Association, which represents property brokers and other third-party intermediaries.

I watched OOIDA ask the Federal Motor Carrier Safety Administration in 2004 to radically increase the property broker bond from its current $10,000 level to somewhere between $350,000 and $500,000. TIA protested at that time. FMCSA commenced rulemaking in 2004, but the agency has not promulgated a final rule to date.

TIA recently announced it would accept a $100,000 bond on behalf of its constituency and essentially has invited the same.

I speak for my little-guy clients in both trucking and brokering when I caution Congress and FMCSA to tread lightly in this matter.

The main purpose of a property broker surety bond is to ensure that financial security exists for the protection of the motor carriers and independent carriers with whom brokers do business, i.e., duly licensed trucking firms that accept loads from brokers and perform transportation services at the request of brokers on a credit basis in the hopes these brokers will pay them upon receipt of the carriers’ bills of lading.

Sometimes brokers pay — and sometimes they don’t.

The trucking side’s argument is that $10,000 just doesn’t cut it when a broker goes bad, and they are absolutely right. But the trade groups are irresponsibly overlooking the larger picture, and that could have an effect on the industry commensurate with that meteor thought to have wiped out the dinosaurs.

A review of the current premium costs for property broker bonds suggests they are already relatively high-cost compared with professions similarly regulated. For example, under current market conditions, a one-year federal $10,000 property broker surety bond goes for $350 to $550 per year. In comparison, the premium for a private investigator’s $10,000 New York state bond is $100 to $175 for a two-year bond. Because of the inherently high-claims nature of these property broker bonds, they are expensive enough already.

What will happen when the bond issuers’ risk exposure increases tenfold?

The current recession’s dwindling freight volume has taken trucks off the road. But leading economic indicators such as the Consumer Confidence Index, which is up compared with January 2009, and American Trucking Associations’ recent report that trucking tonnage increased in December 2009 by 6.6% year-over-year, indicate signs of recovery. If that’s the case, consumers will begin spending again, and the need for trucks quickly will increase.

That means now is the time for new broker entrants, because brokers in place when the consumer-demand tsunami hits will ride the wave and make substantial amounts of fast money. Stores will need trucks to replenish stock, and manufacturer-shippers will need more of them to distribute products. The supply-and-demand cycle will mean trucks in short supply and a huge demand for brokers to find them.

However, comparing the current property broker applications published in the FMCSA Daily Register with pre-recession numbers reveals they are drastically lower, and raising the bond now can only make things worse.

Entrepreneur Magazine’s website lists its freight brokerage start-up book as its No. 2 bestseller, second only to import/export, and it’s been that way for more than three years. Freight brokering previously came in at No. 5 because of the low start-up and operating costs associated with brokering freight from home and the potential to earn big money — $100,000 or more a year.

At $10,000, the current bond’s reasonable cost is one reason small business freight brokerage owners can open up and operate under current market conditions. Raise the bond and bond premium amounts drastically, and that all will change.

We know OOIDA represents the “little guys” in trucking, and major truckload carriers have American Trucking Associations to protect their interests. But who looks out for small brokerages?

If TIA and OOIDA secure the significantly higher property broker bond they either seek or support, high bond costs eventually will leave the major players in brokering with distinct — and unfair — economic advantages and put the mom-and-pop brokers out of business.

Smaller brokers will be unable to afford and/or collateralize a $100,000 property broker bond, preventing would-be newcomers from entering the industry and causing broker license revocations to quickly outnumber new applicants.

OOIDA members will be left to beg loads from the surviving mega-brokerages, which in turn will be free to play rate games with the owner-operators. We don’t need Nostradamus to predict the antitrust climate change that will follow.

Instead of that scenario for disaster, here’s what should happen: The bond’s cost would still go up, to protect independent truckers, but for the general well-being of the little players, Congress should consider a $25,000 bond rather than the $100,000 option.

And with the little-guy brokers abandoned, in effect, by existing trade groups, it may be time to create a new association for independent property brokers.

DOTAuthority.com, New York, is a business-to-business transportation regulatory consulting firm.