February 17, 2023

FMCSA Proposes New Financial Security Requirements

Holland & Knight Transportation Blog
William P. Byrne | Jameson B. Rice | Kristine Orozco Little
Transportation Blog

The Federal Motor Carrier Safety Administration (FMCSA) on Jan. 5, 2023, issued a notice of proposed rulemaking (NPRM) to implement financial security requirements on brokers and freight forwarders. The proposed changes to the regulation are being made pursuant to the Moving Ahead for Progress in the 21st Century Act (MAP-21), which was signed into law in 2012. The FMCSA had previously implemented a MAP-21 requirement to increase a broker's financial responsibility from $10,000 ($25,000 for household goods brokers) to $75,000 and extended those requirements to freight forwarders.

The NPRM is intended to address situations where a motor carrier provides transportation services but the broker or freight forwarder fails to pay the carrier what it is owed. Brokers and freight forwarders are required to maintain a $75,000 surety bond in readily available assets and must provide evidence of its surety bond in order to register with the FMCSA. Currently, a motor carrier can submit its claim(s) to the financial responsibility provider to receive payment. However, in the event claims against an individual broker exceed $75,000, the financial responsibility provider will submit the motor carrier claims to a court in an interpleader action to determine how the surety bond or trust should be allocated amongst the various motor carriers. This can be a costly and time-consuming process for motor carriers and, depending on the number of claims, can result in the motor carrier receiving a prorated amount.

While the FMCSA acknowledge that "most brokers operate with integrity and uphold the contracts made with motor carriers and shippers … a minority of brokers with unscrupulous business practices can create unnecessary financial hardship for unsuspecting motor carriers." Implementing the changes in the regulations should "mitigate the need to initiate interpleader proceedings and alleviate the concern of broker non-payment of claims."

Assets Readily Available

The NPRM proposes to allow brokers and freight forwarders to maintain trusts that meet certain criteria to meet MAP-21's "assets readily available" requirements. The trust must consist of assets that can be liquidated within seven days of an event that triggers payment from the trust. The FMCSA had initially proposed defining "assets readily available" as including cash and letters of credit from FDIC-approved banks. But to allow for greater flexibility, the FMCSA is instead proposing to provide a list of prohibited assets (e.g., real property, intercorporate agreements or guarantees, internal letters of credit, illiquid assets) that cannot be maintained under the trust. Currently, the FMCSA requires only that a broker or freight forwarder provide evidence of a trust and does not specify what assets the trust must contain.

Immediate Suspension of Broker/Freight Forwarder Operating Authority

The FMCSA proposes a different process for immediate suspension of a broker or freight forwarder's operating authority. If there is a drawdown on a broker or freight forwarder's surety bond or trust, the FMCSA will provide notice to the broker or freight forwarder that it will have seven days to replenish the surety bond or trust.

A drawdown would be defined as one of the following:

  1. A broker or freight forwarder consents to the drawdown and the instrument value drops below $75,000
  2. A broker or freight forwarder does not respond to adequate notice of a claim by a surety or trust fund provider, the surety or trust provider pays the claim, and the instrument value drops below $75,000
  3. A claim is reduced to a judgment, the surety or trust fund provider pays the judgment, and the instrument value drops below $75,000

If the broker or freight forwarder fails to replenish the surety bond or trust within seven days, the FMCSA will immediately suspend its operating authority via a second notice.

Surety or Trust Responsibilities in Cases of Broker/Freight Forwarder Financial Failure or Insolvency

The FMCSA is proposing to define "financial failure or insolvency" as a bankruptcy filing or state insolvency filing. Once a surety/trustee has been notified of a broker or freight forwarder's insolvency, it is required to notify the FMCSA, which also satisfies a surety/trustee's obligation under MAP-21 to "publicly advertise" for claims.

Enforcement Authority

Under MAP-21, the FMCSA has authority to suspend noncompliant surety providers from 1) providing brokers or freight forwarders financial responsibility for three years; 2) assess penalties against surety providers; and 3) sue noncompliant surety providers in federal court. Accordingly, the "FMCSA proposes to implement MAP-21's surety provider suspension authority provision by providing notice of suspension to the surety or trust fund provider, allowing 30 calendar days (extended to the next business day if the final day of the period falls on a weekend or Federal holiday) for the surety or trust provider to respond, before the agency makes a final decision."

Entities Eligible to Provide Trust Funds for BMC-85 Filings

The FMCSA proposes to remove the rule allowing loan and finance companies to serve as BMC-85 trustees, citing robust feedback that loan or finance companies are not adequately regulated.

Comments on the NPRM are due by March 6, 2023. View the Jan. 5 Federal Register notice.

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