Opinion: Higher Bonds Still Not the Answer
President and Chief Operating Officer
Pacific Financial Association Inc.
This Opinion piece appears in the June 18 print edition of Transport Topics. Click here to subscribe today.
As Robert Voltmann, president of the Transportation Intermediaries Association, said in a Transport Topics “Opinion” column eight years ago, “Higher bonds are not the answer” (TTNews.com, 5-13-2004).
Since that 2004 article, TIA has reversed its position completely, to the extent that in the March 26 edition of this newspaper, Voltmann said requiring “higher bonds” for transportation brokers in “[t]he Senate bill is our exact language, and we fully support it” (3-26, p. 29).
Our firm, Pacific Financial Association, maintains Federal Motor Carrier Safety Administration BMC-85 (Property Broker or Household Goods Broker Trust Fund Agreements). We provide surety instruments on behalf of almost 5,000 licensed transportation brokers — approximately 25% of the entire industry. That means we are in a unique position to comment on two key issues with the legislation:
• The proposed increase in surety requirements would eliminate at least 75% of the transportation broker industry.
• There is no justification for this 1,000% increase.
With respect to the first key issue, whether many brokers would be eliminated, PFA’s research to that effect is based on communications with our own broker clients and is fully consistent with TIA’s own online poll taken in 2010.
The results of TIA’s survey indicated that 79% of that association’s own membership was opposed to any such $100,000 bonds. It appears that, since 2004, TIA has become more concerned with the anti-competitive interests of a few larger brokers rather than the vast majority of its members.
Our central argument is that the measure is designed to put small brokers out of business by requiring them to obtain a surety that no bonding company would give them because small brokers rarely have the collateral necessary for a surety requirement of that type, which actually guarantees payment to vendors.
Furthermore, as the legislation clearly states, the surety requirement would remain the same for brokers of all sizes, no matter how many separate offices or agents they have. The unavoidable consequence of that regulatory language would be to force small-to-midsize brokers, such as the majority of our clients, to sign on as agents for those large brokerage operations that actually call the shots in TIA’s lobbying efforts.
For example, it is obvious that to force even 100 brokers formerly holding individual $10,000 FMCSA BMC-84s (a bond product issued by an insurance company) or BMC-85s (a trust agreement issued by a financial institution) to accept employment as agents for some larger broker holding only a single $100,000 BMC-84 or BMC-85 would reduce the total amount of surety actually available to pay claims to motor carriers by 90%.
Anyone who thinks large organizations are somehow more fiscally responsible than smaller ones should consider the case of Enron. That company’s truck broker division maintained a $10,000 BMC-85 issued by Chase Bank. Estimates of claim activity, even when most carriers didn’t bother to file, were forecast in the $10 million to $15 million range. In any event, a $100,000 surety instrument wouldn’t have made any difference.
With respect to the second issue, the entire rationale for incorporating such controversial amendments in the proposed highway bill is to put an end to broker “fraud.” Given TIA’s questionable motives in furtherance of its largest clientele, our company does not see the urgency in creating such extraneous legislation.
If there is such a dire need to immediately stop broker “fraud” in the transportation industry, wouldn’t the claim statistics illustrate this emergency? We handle on average roughly 10,000 claim inquiries per year, indicating a total of 40,000 claims addressed to all the BMC-84 and BMC-85 issuers annually. Combine that with the fact that there are approximately 400,000 “authorized” motor carriers entitled to such indemnification annually.
Remarkably, then, when correlated with the reality that some 90% of such inquiries are resolved with a telephone call encouraging the broker to pay the valid claim instead of risking their authority being revoked, that would indicate an average of only one actionable claim per year for each 100 possible motor carrier claimants. Does that sound like an emergency to you? Does that sound like a valid reason to eliminate 75% of the entire transportation brokerage industry to you?
Motor carriers will not be protected with this legislation. Fewer brokers will control the market, and they will squeeze even more from the amount paid to carriers. Fewer surety instruments among an increased use of agents will provide even less funds available for carriers. And most important, while Congress debates add-on ad hoc legislation to presumably protect carriers — who protects the brokers? Call and write your members of Congress. Make sure your voice is heard.
Founded in 1998, Pacific Financial Association Inc., San Diego, is a major provider of BMC-85 broker surety instruments in the United States.
