New FMCSA Rules Stiffen Freight Brokers' Financial Requirements
The Federal Motor Carrier Safety Administration (FMCSA) has finalized new rules for freight brokers that will begin to go into effect in January 2024. A goal of the FMCSA is to incentivize quick and complete payment to freight carriers, which prompted revisions to the procedures for reporting claims from motor carriers to the FMCSA. Separately and probably more impactful, the FMCSA provided significant clarity as to the assets that can collateralize the BMC-85 trust fund and the types of entities that can offer them.
The number one takeaway from the new rules is that most of the approximately 4,500 freight brokers will need to replace their BMC-85 trust fund with the BMC-84 surety bond. In addition, the new FMCSA reporting system will bolster the visibility of freight broker bond claims, providing motor carriers with a tool to screen unreliable freight brokers, which is especially important given the rise of criminal activity involving brokered loads.
Is the BMC-85 Trust Fund Obsolete?
Essentially, yes. While the BMC-85 trust fund option will continue to exist, we believe most BMC-85s will be replaced by BMC-84 surety bonds. Our assumption is based on the current prevalence of unfunded BMC-85 trust funds provided by specialty finance companies, which the new rules will no longer allow.
Freight brokers must satisfy the $75,000 security requirement by either purchasing a surety bond (form BMC-84) from an insurance company or by “funding” a trust account with a financial institution (form BMC-85). We assume the regulators originally intended for the trust account to be fully funded by cash, high-quality marketable securities, such as those issued by the U.S. Treasury Department, or an irrevocable letter of credit from a qualified financial institution. Freight brokers are therefore presented with a trade-off - either pay a surety bond premium (usually $1,000 to $2,000 per year) to purchase a $75,000 guarantee from an insurance company, or transfer $75,000 to an account held by a trust administrator for the benefit of the FMCSA. One would assume those who chose the trust option were stronger financially and looking to save the annual bond premium. However, that is not how the market has been operating over the past several years.
The FMCSA and its predecessor, the Interstate Commerce Commission (ICC) inadvertently created a loophole that resulted in a cottage industry of insurance agents that issued the form BMC-85 backed by glorified IOUs from lightly regulated “specialty finance companies” with limited capital that are owned by the agents. Rather than the agent receiving a commission from an insurance company as a percentage of the surety bond premium, the agent receives the entire fee charged for providing the unfunded BMC-85. Because these specialty finance companies face almost zero regulations or capital requirements, they can charge less than the premium for the alternative, a BMC-84 surety bond, which is provided by heavily regulated and well-capitalized insurance companies.
Recognizing the massive risk to the motor carrier community in the event of a bankruptcy of one of these thinly capitalized and relatively unregulated finance companies, the FMCSA issued rules specifying what assets qualify as collateral for the BMC-85 trusts as well as the entities that are permitted to issue them. Per the changes to Title 49 Volume 5 §387.307, as shown below, the entire fund promised by the BMC-85 provider to pay claims needs to be available for each trust fund administered:
“...trust funds under this section must contain assets aggregating to $75,000 that can be liquidated to cash within 7 calendar days. As of this date, acceptable assets included in any trust fund filed under this section are limited to cash, irrevocable letters of credit issued by a federally insured depository institution, and Treasury bonds.”
Freight brokers with unfunded BMC-85 trusts have two choices: (1) add $75,000 of their funds to the trust. Based on our experience in the marketplace, we believe very few brokers have chosen to fully fund a BMC-85 trust over the years, an option that has been available at a substantially lower cost than the BMC-84 bond premium or the fee on an unfunded BMC-85 trust. Therefore, we believe most freight brokers with unfunded BMC-85 trusts will (2) seek to purchase BMC-84 surety bonds, increasing demand for the BMC-84 by approximately 20% (based on the current number of BMC-85s in force) at a time when the supply of BMC-84 surety credit has been rapidly shrinking.
FMCSA Introduces Claims Reporting Procedure
To ensure unpaid motor carriers receive compensation for their services on time, a claims reporting function is being added to the FMCSA filing process.
Currently, a surety company can cancel the surety bond by sending a notice electronically to the FMCSA. A “pending insurance cancellation” notice is placed under that freight broker’s license on the FMCSA Licensing & Insurance Public interface. The surety bond is not canceled immediately. The cancellation takes effect 30 days after the date of the initial notice. There is no reason given as to the nature of the surety bond cancellation, leaving the public to infer what the reasoning may be.
Effective January 16, 2025, if a surety company receives a legitimate claim on a freight broker bond, the surety can take action to suspend the broker’s license in as little as 16 days. The new rules provide the freight broker with seven business days to respond to the surety’s notification. If the broker does not respond or the surety company deems the response insufficient, the surety can notify the FMCSA of a claim payment to, or intention to pay, a motor carrier.
“…in any case in which the broker does not respond within 7 business days to address the validity of the claim, and the surety provider or financial institution determines that the claim is valid, and the payment causes the surety bond or trust fund to fall below $75,000…notification to FMCSA must be made (by the surety) within 2 business days of payment or determination…FMCSA will provide written notice to the broker that its operating authority registration issued…will be suspended within 7 business days”
Per Joseph Pappalardo, Executive Vice President of Jet Insurance Company, “The danger of getting your license suspended in such a small window highlights the need to work with a surety company that acts more like a partnership than an agency. A surety should make every attempt to get their principal’s position on a matter as serious as a claim before reporting it to a regulator."
The changes to the legislation can be found in the Federal Register.