Freight Brokerage Bond Increasing

Ready, Set, Hike! The new highway bill, recently signed into law, has an amendment (largely supported by three trucking organizations that rarely see eye-to-eye), increasing the freight broker bond requirement from $10,000 to $75,000. How will this impact truckers?

Will it reduce the number of freight brokers from the approximate 20,300 listed in 2010 by the FMCSA? If the reduction occurs, will it be due to not only the increased cost of the bond, but the possible requirement by insurance carriers that many brokers must have liquid assets equal to or greater than the $75,000 bond? When some freight brokers close their doors because of the higher cost of doing business, will this actually improve the overall efficiency of the freight brokerage business? Will the ‘bad apples’ that cheat carriers through non-payment just disappear? Or will the amendment cause the departure of many honest, hard-working small brokerages? Will the percentages of the hauling fees retained by the remaining brokers increase, thus reducing the overall revenue to the carriers who haul brokered freight?

While there are many postulating on either side of these questions the answers won’t be known for several months after the increased bond rate is implemented.

The first question that needs to be answered is, “How long will it take the new Broker/Freight Forwarder Law to go into effect?”

I went to an experienced and well-known source to find the answer to this question: Joe Rajkovacz, Director of Governmental Affairs & Communications for the Western Trucking Alliance, an interstate conference of the California Construction Truck Association.

Rajkovacz said, “Well, let’s just say this is an election year, and the last thing any incumbent wants is to be on the receiving side of something that says ‘more government regulation,’ especially in the current anti-regulation environment in Washington. Then there’s the possible ‘end of the world as we know it’ on December 22, 2012. It will also depend on who are the victors in November and what changes to FMCSA’s top personnel occur in Washington post-election. I predict that we won’t see anything for at least a year or longer.”

He continued, “First step will be the FMCSA issuing NPRM (Notice of Proposed Rule Making) or even an ANPRM (Advance Notice of Proposed Rule Making). Then issuing the rule for a comment period and following the process, similar to what we’ve all seen every time they make a change to the HOS. Congress mandated FMCSA to have this done in a year; they rarely complete such rule-making in the “mandated” time. So the short answer is no one knows, not even the FMCSA.”

What does Rajkovacz think we might expect beyond the $75,000 bond increase in this Freight Broker Bond rule-making?

“There’s a lot more in the 600-page MAP21 law concerning freight brokers than just a bond increase. Example: carriers will no longer have the ability to broker freight under their Hauling Authority; they’ll be required to have a separate Property Brokers Authority along with the bond. From all indications, the FMCSA will use the Federal Maritime Commissions rules governing Ocean Freight Forwarders through the Federal Maritime Commission’s Office of Transportation Intermediaries as a guide and template for the Property Brokers and Freight Forwarders rules. This is going to be a major game changer for the entire trucking and logistics community when it comes to be. And it will come to fruition, just exactly when isn’t known at this time,” Rajkovacz responded.

Let’s examine how this all came about.

The original bond requirement dates back to the 1930s. Its purpose was to protect shippers who do business with brokers; however, this protection was extended by a court decision to cover payments owed to carriers by brokers in the 1980s.

In 2004, the Owner-Operator Independent Driver Association (OOIDA) petitioned the United States Department of Transportation’s FMCSA to raise the freight broker bond from the existing $10,000 (set in the late 1970s), to an amount they recommended be between $350,000 and $500,000, fifty times the then-current bond amount. They suggested this was needed to protect their motor carrier members from being cheated by fraudulent freight brokers.

The FMCSA accepted their petition. Then Robert Voltmann, President of the Transportation Intermediaries Association (TIA), wrote in a “Transport Topics” editorial opinion (May 13, 2004), “Fraud exists in both the brokerage and the motor carrier industries, and increasing the bond will have no effect on fraudulent operators. In any business where one company extends credit to another for a service that cannot be repossessed, risk exists. Brokers, like most motor carriers, are small businesses. Brokerage, like trucking, looks easy from the outside; but also like trucking, doing it successfully is not easy. Motor carriers should check out the companies to whom they are extending credit.”

In essence, TIA put the kibosh on OOIDA’s plan. The FMCSA shelved the petition.

OOIDA then took their push for higher broker bonds to Congress and began speaking with Congressional leaders like Rep. Peter DeFazio (D, OR), who suggested OOIDA and TIA negotiate a piece of legislation and present to Congress. The two organizations announced their agreement on a plan to raise the freight broker bond to $100,000 in January, 2010. OOIDA, TIA and then ATA began promoting the increased bond amount to their respective memberships, and as usual in D.C., began lobbying Representatives and Senators to find a bill to which the legislation could be attached.

Also in 2010, the FMCSA issued a change in freight brokers bonds for freight brokers who booked household goods moves. In a sub-paragraph under the property brokers’ rules, it raised the bond for those brokers who deal with consumer household property moves to $25,000 to adjust for inflation.

Interestingly, the FMCSA said anything more would be anti-competitive.

Jump forward two years to the summer of 2012 with the economy still very sluggish; and an intense election year, plus perceived Congressional gridlock and politicians looking to have some legislative kudos to take back to their districts. Enter the MAP21 legislation known as the Highway Bill (approximately 600 pages long), dealing with transportation infrastructure multi-year funding, along with other amendments like the Truck Parking Amendment (Jason’s Law), highway projects funding, and where the TIA and OOIDA freight broker bond amendment was also placed. The Highway Bill was well-supported by both political sides. Through committee negotiations, the bond amount was reduced from $100,000 to $75,000. To make a long story short, the Highway Bill passed and was signed into law by President Obama.

Many of the estimated 20,300 bonded property brokers in the USA are small to micro-operations. How many will be negatively impacted or go out of business? That question is very difficult to answer, because at this point there are a lot of unknowns. The $75,000 bond can’t be changed during rulemaking, but several pieces of the puzzle still remain in flux. These won’t be decided until the process is completed.

That $75,000 bond amount will be no more than pocket change for the large and mega-brokers and carriers. The bond is the same $75,000 for CH Robinson and their 230 offices worldwide and over $10 billion in annual revenue as it is for the one-truck carrier/broker grossing $300,000 in annual revenue.

The bond premium plus the potential liquid asset requirements will represent a significant amount of money to the little guy, which if he can afford the bond and then qualify, will add tremendously to his overall cost of doing business. The question – and huge challenge – each small and micro-carrier broker must answer is, “Will I remain competitive with my hauling rates, even though I’ll be spreading this additional cost over far fewer loads than the large and mega- brokers?”

During the negotiations between TIA, ATA and OOIDA, was the ultimate goal by some in the room to kick the smallest competitors from the market? Did they succeed? I’ll let you be the judge. My opinion? If the law says freight brokers need to be bonded, the bond should be equitable for all players.

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