Foundation Surety & Insurance Solutions Issues Public Comment to Treasury Dept.

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WASHINGTON, Sept. 2 -- Foundation Surety and Insurance Solutions LP has issued a public comment to the U.S. Department of the Treasury. The comment was written on Aug. 29, 2022, and posted on Aug. 30, 2022.

The comment was on Docket No. TREAS-DO-2022-0013-0001.

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I respectfully submit these comments to Treasury on the Emergency Capital Investment Program Initial Supplemental Report and Quarterly Supplemental Report docket as President of Foundation Surety & Insurance Solutions, LP.

Foundation surety is the only minority owned Managing General Agent in the United States. I am writing these comments having extensive history operating in the construction surety space and thus having seen the effects of a lack of access to capital for small contractors in limiting these businesses' ability to secure construction projects and grow.

I held the position of the Director the Small Business Administration's (SBA) Surety Bond Guarantee Program for 17 years. Surety bonds help small businesses win contracts by providing the customer with a guarantee that the work will be completed. I achieved multiple milestones while at the helm of the program and I continue to further my impact in the space through Foundation Surety.

Many public and private contracts require surety bonds, which are offered by surety companies. The SBA guarantees surety bonds for certain surety companies, which allows the companies to offer surety bonds to small businesses that might not meet the criteria for other sureties. I also served as the Head of the SBA Small Business Investment Company (SBIC) Impact Program, Impact Investment SBICs had to deploy at least 50% of the total dollar amount of their investments into Impact Investments. Impact investments were defined as investments in Small Business Concerns which target areas of critical national priority including underserved markets and communities facing barriers to access to credit and capital.

A primary barrier for contractors in obtaining surety bonding is a lack of access to capital. Given my experience, I see the tremendous opportunity for ECIP capital to work in tandem with the SBIC program, and SBA debentures therein, in delivering additional capital to small businesses that need it to grow and scale their operations.

Participation goals set out by federal, state and municipal project owners are not enough alone to achieve the goal of increasing participation by Disadvantaged Business Enterprises in public projects. These goals must be paired with access to capital. I have testified to this in Small Business Subcommittee hearings on surety bonding.

By ECIP capital further leveraging the innovative underwriting possible, and SBA leverage, through SBICs and Specialized SBICs more capital can accessed by historically Disadvantaged Business Enterprises which create significant economic impact in underserved communities. The recommendations herein will describe how the Treasury can utilize the Quarterly Supplemental Reports (QSR) to achieve this.

Answers to Related Questions

Below, we repeat in italics the specific questions for which you requested comments, with our observations and comments immediately following each question.

(a) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;

No Comment

(b) the accuracy of the agency's estimate of the burden of the collection of information; No Comment

(c) ways to enhance the quality, utility, and clarity of the information to be collected; Treasury could leverage information collected by other federal agencies from investment vehicles utilized by ECIP recipients to deploy capital, e.g. data from the SBA Office of Investment and Innovation's SBIC program, to increase the quality and clarity of information being collected.

(d) ways to minimize the burden of the collection of information on respondents, including through the use of technology; and

No Comment.

(e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services required to provide information.

No Comment.

1. For the Quarterly Supplemental Report, Treasury is considering updating the datasets used to identify certain place-based targeted communities periodically, based on availability. For example, from time to time, updated Area Median Income data is published by the Census Bureau or other relevant data sources. Recipients would be required to use this new data in order to classify originations going forward. How frequently should Treasury update this data-never, annually, every five years, some other time period? Treasury anticipates that a transition period would be implemented each time such reference data is updated. Would a one-year transition period be sufficient?

No Comment.

2. Treasury welcomes comments on sources of data through which origination data requested by ECIP is already reported to the federal government and for which Treasury may determine that collection of the data by the Quarterly Supplemental Report represents a duplication of reporting.

SSBICs are licensed by the SBA and therefore required to report data that reflects investments in target communities that is more detailed, expansive and encompasses the current data reported through the QSR within current ECIP reporting.

Take for example SBA Form 1031 Portfolio Financing Report. This form contains Portfolio Concern financing and supplementary information that SBA uses to evaluate an SBIC/SSBIC's investments activities and compliance with SBIC program requirements. SBA also pools information provided by individual SBICs/SSBICs to analyze the SBIC program as a whole and the impact of SBIC/SSBIC financings on the growth of small businesses. SSBICs in particularly are solely licensed for the purpose of rendering financial and managerial assistance services to small businesses owned and operated by minority disadvantaged persons - Black American, Hispanic American, Native American, Asian Pacific American or Subcontinent Asian American.

By incorporating required reporting done by SBICs/SSBICs, Treasury will have greater clarity on the flow of capital to minority individuals and businesses and thus better evaluate the effectiveness of the program.

3. Are there additional data points that Treasury should consider collecting, in addition to those proposed?

In addition to the data points currently collected by Treasury, the SBA collects even more granular economic data related to small businesses that receive financing from SSBICs. This data includes, but is not limited to, business revenues, employees, net income, balance sheet items, state and federal taxes paid and jobs created .

4. Treasury seeks comments on the instructions or other guidance that would be helpful to Recipients to better understand their reporting obligations on the Initial Supplemental Report or Quarterly Supplemental Report.

I. Encourage the expansive allocation of capital to Deep Impact activities by ensuring that the ECIP Rate Reduction Credit applied to ECIP recipient institutions includes annual pro rata allocations of SSBIC activities.

The methods for reporting Qualified Lending and Deep Impact activities for the depository institutions and the dividend rate reductions thereafter will significantly influence ECIP recipients' approach to capital deployment. The manner in which the Quarterly Supplemental Reports are currently structured may inadvertently divert long-term capital from target communities that otherwise may have been delivered through SSBICs and other long-term investments.

Since the institutions report originations made in the year they are made, it may encourage the institutions to favor short term investments that allow them to recycle the capital and make new originations in the next year. For a long-term investment, in for example an SSBIC, the bank would report the origination in a single quarter, but this is not representative of the originations the SSBIC is making through multiple investments over the course of several years. Further, the SSBIC's investments will be enhanced by the leverage it obtains from the SBA, and other sources, all of which, per the SSBIC license and regulation, is deployed in MBEs.

The playing field could be leveled in this regard if an ECIP recipient institution may also receive credit during the life of the ECIP recipient's investment in the SSBIC based on a pro rata ownership share of the SSBIC. To accomplish this, we recommend that the ECIP recipient's pro rata share, which is based on its ownership in the SSBIC, of the capital that is deployed in target communities each reporting period through the SSBIC would be accorded credit by Treasury for purposes of its dividend rate reduction.

The following example illustrates this approach:

An ECIP recipient makes a $1 million equity investment in an SSBIC that represents a 10% overall share ownership stake in the SSBIC. The ECIP recipient may receive Deep Impact credit for the $1 million investment in the SSBIC ($2 million towards the rate reduction applying the 2x Deep Impact credit) in the quarter in which the investment is made.

Additionally, the ECIP recipient would also receive further lending credit based on its 10% ownership share of the SSBIC as follows:

Assume in the 2nd year following the investment by the ECIP recipient, the SSBIC deploys $20 million in the form of Deep Impact equity investments and/or debt/loan investments to its designated markets, namely minority business enterprises (MBEs). In this case, the ECIP recipient would receive additional Deep Impact credit toward its dividend rate reduction goals in the 2nd year of $4 million ($20 million in new investments by the SSBIC x 10% ownership x 2).

This lending credit approach related to new SSBIC investment activity allows the ECIP recipient to receive credit for its proportionate amount of the Deep Impact investments made by the SSBIC. If the bank made these investments directly, it would otherwise receive credit, and to ignore it in the context of the SSBIC's activities would fail to recognize the actual impact upon the applicable communities. This would level the playing field for such long-term investments made by the ECIP recipient and, given that SSBICs deploy capital to MBEs in ways that banks do not, it will allow for greater amounts and variety of capital to be delivered to target communities.

SSBIC's are critical solutions to many of the goals supported by the ECIP legislation. In addition to debt, they invest equity as well, which is a necessary form of capital for minority small business enterprises to continue to scale and grow. Due to historical systemic barriers including lack of home equity/personal wealth, the unavailability of family and friends' capital, and a lack of network of venture equity investors, a major challenge for minority entrepreneurs is that they are capitalized almost entirely by debt from inception. This lack of access to equity capital limits their growth prospects and fuels an inability for these small businesses to achieve maximum scale.

Equity capital, combined with appropriate debt, can be utilized to finance product innovation, improve human capital and build out back-office operations, these are all costs and expenditures necessary for growth but are not ideally solely financed by debt. In this manner, equity and debt financing work in concert to optimize growth. The complementary nature in which equity and debt work will provide the same opportunity for minority businesses to scale as it has for scores of small non-minority businesses in the SBIC program for the last 64 years. SSBICs-are uniquely positioned to address this market need.

Long term investment funds are able to invest the necessary equity, alongside debt financings from banks and credit unions, to create maximum impact within the ECIP program, particularly for minority communities. Investments in SSBICs should be supported by according lending credit for their activities on a pro rata basis to ECIP recipient institutions.

II. Participations by ECIP recipient institutions in SSBIC loans should be accorded qualified Rate Reduction Credit in the same manner as participations with non-depository, non-profit CDFls.

Yet another way to incent long term investments of ECIP capital would be to grant SSBICs equal treatment as is given non-depository non-profit CDFls with respect to lending credit related to participation loans. Like non-profit CDFls, SSBICs are non-depository institutions and Public Welfare and Community Development Investments. What is more, SSBICs are mandated by the SBA to invest in minority business enterprises and are more stringently regulated than non-depository CDFls to that mandate.

Deep Impact rate reduction credit should be given to ECIP recipients with respect to purchases of or participations in financings made by SSBICs to Target Communities (in the qualified lending tables), including to diverse and emerging MBE contractors participating under set-aside programs in the Bipartisan Infrastructure Law (BIL), for example.

Additional Comments

ECIP capital has the potential to be transformative in wealth creation in communities of color by delivering much needed capital to diverse, small and emerging contractors trying to obtain contracts from Bipartisan Infrastructure Law.

Surety bonds are important to small businesses interested in competing for federal contracts because the federal government requires prime contractors-prior to the award of a federal contract exceeding $150,000 for the construction, alteration, or repair of any building or public work of the United Statesto furnish a performance bond issued by a surety satisfactory to the contracting officer in an amount that the officer considers adequate to protect the government. Per the 2021 Congressional Research Service Report: "Minority-owned firms were more likely to be asked to provide certain types of financial documentation, provide collateral, funds controls or to meet other conditions; more likely to be denied a bond and to report losing an opportunity to bid because of delays in processing their bond request" .

Long term investment funds like SSBICs, which ECIP banks are statutorily allowed to make equity investments in, which are able to utilize innovative underwriting criteria that ECIP recipients cannot, are well positioned to deliver ECIP capital to this much underserved segment. These financings expand surety bonding capacity and capital for small and emerging businesses, increasing the number, size and scope of construction contracts going to historically underutilized businesses by reducing barriers to compete for contracts that require bid, payment and performance surety bonds. The extended impact of this project has an economic ripple effect on some of the nation's most vulnerable communities through workforce development and job creation efforts.

Contractors in the underserved segment face multiple barriers to contracting opportunities, many of which stem from systemic barriers particular to small businesses, the primary hurdle being access to surety credit and capital. The challenges faced by minority-owned businesses in securing capital from traditional lenders negatively affect their ability to pursue contracting opportunities by constraining their bonding capacity, regardless of their ability to perform and complete the requirements of a contract. These challenges include, but are not limited to, an inability to demonstrate adequate wealth or to provide collateral or assets against prospective loans and insufficient credit scores to meet traditional lenders' underwriting criteria, a particularly pertinent issue as small and emerging businesses recover from the Covid-19 pandemic.

The effects of the lack of access to surety credit and capital flow through to the overall growth and sustainability of small businesses. Due to the inability to access financing and surety credit, small contractors are not able to grow their businesses at a rate like other groups, as their ability to bid on jobs is restricted by available capital and surety credit. This often leads to small businesses resorting to obtaining high-cost capital which negatively impacts their profitability and subsequent sustainability.

With the contracting opportunities that will be arising from the $1.2 trillion Bipartisan Infrastructure Law, it is imperative that obstacles to small and emerging business, especially in the underserved segment, participation in these contracts are addressed in order to allow them to capture the "once in a lifetime" growth opportunities from the small business participation goals therein and create generational wealth in their communities. The $8.75 billion in ECIP capital invested by Treasury in MDI/CDFI depository institutions should be leveraged along with additional capital to position businesses in the underserved segment to capture these opportunities.

Conclusion

I respectfully request that Treasury consider incorporating existing data collected by the SBA to enhance ECIP reporting and as such create a clearer picture of the impact ECIP capital is making in target communities and especially those of color.

In addition, Treasury should consider reflecting in their QSR reporting: (1) direct investments in SSBICs being accorded ECIP recipient rate reduction treatment in their first next reported rate reduction period, thus encouraging immediate investments by ECIP institutions in SSBICs; (2) ECIP recipients being accorded rate reduction credit for their pro rata ownership of SSBIC's related to the SSBIC's originations during such period and (3) ECIP recipients should be accorded rate reduction credit for purchases of, or participations in investments made with SSBICs.

Finally, the Treasury should recognize the great potential of ECIP to further the current administration's goal of leveraging infrastructure spending to build wealth in underserved communities. This can be accomplished by levelling the playing field for ECIP recipients seeking to make long term equity investments in funds that deliver capital to the diverse and emerging contractor segment.

These considerations will further the program's objective of delivering capital to target communities, and the current administrations goals of utilizing infrastructure spending to advance equity, by increasing both the amount of capital deployed and greater variety of forms of such capital.

Peter C. Gibbs

President

Foundation Surety & Insurance Solutions, LP

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Original text here: https://downloads.regulations.gov/TREAS-DO-2022-0013-0029/attachment_1.pdf