[Federal Register Volume 59, Number 49 (Monday, March 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5740]


[[Page Unknown]]

[Federal Register: March 14, 1994]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF AGRICULTURE

Rural Electrification Administration

7 CFR Part 1703

RIN 0572-AA87

 

Rural Economic Development Loan and Grant Program; Grants

AGENCY: Rural Electrification Administration, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Electrification Administration (REA) hereby amends 
its regulation on the Rural Economic Development Loan and Grant 
Program. This amended regulation establishes procedures for approving 
and administering grants, clarifying the eligible uses of grant funds, 
supplemental funds requirements, and administrative requirements for 
grant funds. The amendments contained in this final rule will 
facilitate the process whereby REA borrowers can apply to REA for 
community development grant funding.

EFFECTIVE DATE: This regulation is effective April 13, 1994.

FOR FURTHER INFORMATION CONTACT: Blaine D. Stockton, Jr., Assistant 
Administrator, Economic Development and Technical Services, Rural 
Electrification Administration, telephone number (202) 720-9552.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be not significant for purposes of 
Executive Order 12866 and therefore has not been reviewed by OMB.

Executive Order 12778

    This rule has been reviewed under Executive Order 12778, Civil 
Justice Reform. This rule: (1) Will not preempt any State or local 
laws, regulations, or policies, unless they present an irreconcilable 
conflict with this rule; (2) will not have any retroactive effect; and 
(3) will not require administrative proceedings before parties may file 
suit challenging the provisions of this rule.

Regulatory Flexibility Act

    The Administrator certifies that this final rule will not have a 
significant economic impact on a substantial number of small entities 
as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). 
Based on current and historical funding levels for this program and a 
projected average size loan and/or grant in the range of $300,000 to 
$400,000, it is estimated that 50 to 60 loans and/or grants will be 
made nationwide each year. It is projected that the Rural Economic 
Development Loan and Grant Program will have a limited impact upon 
small businesses because of the program's unique delivery system; i.e., 
loans and grants will be made through REA financed electric and 
telephone cooperatives or companies. These entities do not operate as 
credit institutions, thus they do not seek funds for the expressed 
purpose of loan portfolio expansion. Rather, REA financed entities 
request REA funding through this program to enhance economic 
development in rural areas by funding a limited number of selected 
development projects. Since credit is channeled to areas which are 
generally underdeveloped and financially depressed, job creation and 
economic development resulting from newly emerging businesses and 
community facilities funded by REA does not pose undue competition or 
other adverse effects upon existing businesses. Therefore, this final 
rule will have no effect upon businesses or entities other than those 
to be funded through this program.

National Environmental Policy Act Certification

    The Administrator has determined that this final rule will not 
significantly affect the quality of the human environment as defined by 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). 
Therefore, this action does not require an environmental impact 
statement or assessment.

Intergovernmental Review

    The program is subject to the provisions of Executive Order 12372, 
which requires intergovernmental consultation with State and local 
officials, with the exception of applications for Project Feasibility 
Studies. A notice informing the public of the intergovernmental review 
coverage was published in the Federal Register on March 20, 1989, at 54 
FR 11426.

Catalog of Federal Domestic Assistance

    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.854, Rural Economic Development Loans and 
Grants. This catalog is available on a subscription basis from the 
Superintendent of Documents, the United States Government Printing 
Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

    In compliance with the Office of Management and Budget (OMB) 
regulations (5 CFR part 1320) which implement the Paperwork Reduction 
Act of 1980 (Pub. L. 9609511) and section 3504 of that Act, the 
information collection and recordkeeping requirements contained in this 
final rule have been approved by OMB under control number 0572-0090. 
Comments concerning these requirements should be directed to the Office 
of Information and Regulatory Affairs of OMB, Attention: Desk Officer 
for USDA, room 3201, NEOB, Washington, DC 20503.

Background

    On February 15, 1989, REA published the final rule, 7 CFR 1709, 
subpart B, in the Federal Register (54 FR 6867), implementing the Rural 
Economic Development Loan and Grant Program to provide funds to REA 
Borrowers under the Rural Electrification Act of 1936, as amended (7 
USC 901 et seq.) (Act). This program provides zero-interest loans to 
REA Borrowers for the promotion of rural economic development and job 
creation projects. On September 27, 1990, REA changed the designation 
of this rule from 7 CFR part 1709 to part 1703 (55 FR 39394). On 
September 25, 1992, REA published a final rule in 7 CFR 1703 subpart B 
(57 FR 44317) to revise the loan program. The revision provided 
additional information to potential applicants on the selection factors 
and rating criteria, allowed monthly submittal of applications and 
established a maximum amount of project funding as a fixed percentage 
of allocated funds. Subsequently, a proposed rule was published on 
October 12, 1993 (58 FR 52688), to establish procedures for approving 
and administering grants and make minor changes to enhance the overall 
program delivery for the zero-interest loan and grant program. This 
final rule contains the provisions set forth in the proposed rule 
published October 12, 1993.
    This rule contains provisions for grant funds to be used for the 
following purposes:
    1. The establishment and/or operation of a revolving loan fund by 
REA Borrowers; and,
    2. Pass-through grants in conjunction with loans for: (a) Project 
feasibility studies and technical assistance for community development, 
business start-ups, business planning, and market research, (b) 
business incubators established by non-profit organizations, (c) 
community development assistance by non-profit organizations, (d) 
projects operated on a profit or non-profit basis that enhance the 
overall quality of medical care of rural residents, and (e) projects by 
profit or non-profit organizations which encourage the use of advanced 
telecommunications for educational and medical services.
    Several conditions for grant making have been established under 
this program in order to maximize the benefits of the grant program, 
conserve the limited funds available, and provide for the efficient 
administration of grant making by REA:
    1. With the exception of the establishment and/or operation of a 
revolving loan program, grants will be made only in conjunction with 
rural development loans. For grants to REA Borrowers to establish 
revolving loan funds, REA Borrowers will be required to commit their 
funds in an amount no less than 20 percent of the REA grant. For all 
other projects eligible for loan and grant funding, that portion of 
project cost eligible for REA funding may be funded up to 20 percent 
with grant funds.
    2. As with zero-interest loans, all REA projects funded with grants 
will require a minimum of 20 percent supplemental funding for project 
costs. Supplemental funds may come from the project owner in the form 
of equity funds, private sources, state and local government sources, 
other Federal Government sources, the borrower, or other sources.
    3. For grants made in conjunction with zero-interest loans, grant 
funding will be provided only in sufficient amount necessary for a 
feasible project. A project which generates sufficient revenue to show 
feasibility without grant funds is not eligible for a grant.
    4. In determining the eligible amount of a grant, REA will base the 
appropriate amount of grant funding on a typical year of operation, 
when the project has generally reached its target income earning 
potential.
    5. Grant funding will be channeled, to the extent practicable, to 
non-profit entities which have a broad impact on rural economies. 
However, grant funding will be available for project feasibility 
studies and technical assistance irrespective of entity status. Also, 
grant funding will be provided irrespective of entity status for 
enhancement of medical care and advanced telecommunications for 
educational and medical services.
    In addition to grant making provisions, several changes have been 
made to the loan provisions of the Rural Economic Development Loan and 
Grant Program. These changes, addressed in detail in the proposed rule 
published on October 12, 1993, are as follows:
    (1) Paragraph (d) of Sec. 1703.21 has been revised to require 
Borrowers to deposit zero-interest loan funds into their construction 
accounts.
    (2) Paragraph (b) of Sec. 1703.28 has been revised to eliminate the 
$400,000 limitation on the size of zero-interest loans and grants and 
set the maximum amount not to exceed 3 percent of the projected amount 
of zero-interest loan and grant funds available each year. However, the 
REA Administrator will retain the authority to limit funding below the 
3 percent level, and a decision in this regard will be published in the 
Federal Register for each fiscal year. For fiscal year 1994, the REA 
Administrator has determined the maximum amount of a loan and grant to 
be $400,000.
    (3) To provide REA Borrowers additional flexibility to fund 
worthwhile community development projects, paragraph (e) of 
Sec. 1703.46 has been eliminated to remove the prohibition against 
funding recreational facilities unless they convincingly demonstrate 
that they would be an integral part of a tourism industry in their 
area.
    (4) Paragraph (b) of Sec. 1703.61 has been amended to clarify that 
the grant portion of the zero-interest loan and grant will be disbursed 
to the borrower only upon completion of the project. This will ensure 
that grant funds are handled so as to minimize the time between 
disbursement and authorized use to comply with USDA's Federal 
Assistance Uniform Regulation, 7 CFR parts 3015 and 3016.
    (5) Paragraph (b) of Sec. 1703.66 has been revised to require the 
recipients of pass-through loans and grants to furnish a record of 
receipts showing total project costs to verify that no greater than 80 
percent of project costs have been funded with REA zero-interest loan 
and grant funds.
    (6) Paragraph (e) of Sec. 1703.66 has been revised to allow REA 
field accountants to provide a rural economic development review of 
zero-interest loans and grant funds. This revision will, in many cases, 
save REA Borrowers thousands of dollars by eliminating costs of formal 
audits which were previously required in accordance with the provisions 
of 7 CFR part 1773, ``REA Policy on Audits of Electric and Telephone 
Borrowers.''
    (7) Paragraph (g) of Sec. 1703.66 has been revised to clarify that 
for pass-through zero-interest loans and grants, REA Borrowers must 
require project owners to provide sufficient financial, accounting and 
budget information, and other records deemed necessary to facilitate 
audits in accordance with 7 CFR part 3015 and 7 CFR part 3016, as 
appropriate for non-profit entities, and REA rural economic development 
loan reviews for projects in a for-profit status. Likewise, paragraph 
(g) has been revised to require REA Borrowers receiving grants for 
establishment of revolving loan funds to furnish information to allow 
audits in accordance with USDA departmental grant regulations. Copies 
of these grant regulations are available to REA Borrowers by request.

Comments

    REA received 24 comments regarding the proposed rule which were 
taken into consideration in preparing the final rule. Comments were 
received from the following:

    (1) Visions Five Group.
    (2) Southeast Alabama Regional Planning and Development 
Commission.
    (3) Coastal Area District Development Authority.
    (4) LaCreek Electric Association, Inc.
    (5) Nebraska Rural Electric Association.
    (6) National Rural Electric Cooperative Association.
    (7) National Telephone Cooperative Association.
    (8) Edison Electric Institute.
    (9) East River Electric Power Cooperative.
    (10) Carolina Electric Cooperatives.
    (11) Sequachee Valley Electric Cooperative.
    (12) Mid-Cumberland Area Development Corporation.
    (13) Mid-East Commission.
    (14) McIntosh Trail Regional Development Center.
    (15) North Dakota Association of Rural Electric Cooperatives/
North Dakota Association of Telephone Cooperatives.
    (16) Greater Egypt Regional Planning.
    (17) Southwest Tennessee Development District.
    (18) Southwest Arkansas Planning and Development District.
    (19) Eastern Panhandle Regional Planning and Development 
Council.
    (20) Northeast South Dakota Energy Conservation Corporation.
    (21) National Association of Development Organizations.
    (22) North Dakota Commissioner of Agriculture.
    (23) Region Nine Development Commission.
    (24) Purchase Area Development District.

    The comments from various organizations including REA Borrowers, 
electric and telephone utility trade organizations, economic 
development organizations and state governments reflected broad support 
for the proposed rule.
    Most of the organizations made specific recommendations on the 
proposed rule. REA has considered all comments in finalizing this 
regulation.
    A number of the comments were from entities that administer 
existing Revolving Loan Funds (RLFs) or organizations representing 
entities that administer revolving loan programs. These organizations 
feel that grants should not be directed to REA Borrowers exclusively, 
but also to existing organizations not financed by REA that operate 
RLFs, since REA Borrowers do not serve all of rural America. They also 
are concerned that they would be unable to compete with the REA 
Borrowers' revolving funds zero-interest rate loans.
    First, grants, as well as zero-interest loans administered 
exclusively through REA Borrowers are in accordance with directives 
established in the Omnibus Reconciliation Act of 1987, (Pub. L. 100-
102, 101 Stat. 1330-20). This law was created in a context where 
electric and telephone Borrowers who had made prepayments on loans into 
cushion of credit accounts could utilize a Rural Development Subaccount 
to collectively draw from the interest earnings from the Borrowers' 
cumulative credit resources to reinvest into local economic development 
projects. The provisions of the proposed rule making grant funds 
available exclusively to REA Borrowers, as a result of their 
prepayments, are governed by legislation.
    REA acknowledges, however, that many rural development 
organizations are well qualified to administer grant funds, and they 
provide a valuable resource for local or regional rural economic 
development efforts. REA will strongly encourage Borrowers operating 
revolving loan funds to collaborate with existing organizations 
involved in rural development activities, and those organizations are 
urged to work with REA Borrowers in facilitating rural development 
projects. This collaboration and assistance could include performing 
local or regional studies to identify area economic development needs, 
assisting community leaders and other project owners in planning and 
implementing projects, loan packaging, technical assistance to REA 
Borrowers in reviewing loan applications and administering the 
revolving loan fund, and coordinating efforts between other entities, 
including public and private lending institutions, that provide 
assistance and/or funding to rural development projects. REA also 
encourages state Rural Development Councils to become active 
participants in planning rural development projects and coordinating 
activities between local governments, economic development districts, 
REA Borrowers and other entities operating RLFs. However, although 
collaboration between REA Borrowers and other enitities is strongly 
encouraged, legislation requires that REA Borrowers retain the ultimate 
decision-making authority and responsibility for REA rural development 
loan and grant funds.
    Regarding possible competition between REA Borrowers and other 
lenders, it should be emphasized that REA does not intend for REA 
Borrowers to compete with or replace existing services of RLFs, or 
other public or private lenders, but merely to augment or supplement 
those sources of funds. To clarify this policy, and ensure effective 
implementation, Sec. 1703.22(b) has been revised to require Borrowers, 
within their RLF rural development plan, to document coordination of 
lending activities with local organizations operating RLFs and other 
area lenders. The rule requires such documentation to indicate that 
Borrowers will not compete with, but will supplement other legal 
sources of financing. Rural development plan documentation which 
complies with REA policy will be stipulated in RLF agreements between 
Borrowers and REA.
    Some commenters expressed concern that the administrative burden 
for operating RLFs would be too great and REA Borrowers may choose not 
to participate. REA has minimized administrative requirements; thus the 
burden should be no greater for the RLFs than for zero-interest loans. 
Although the REA Borrowers will decide whether or not to establish 
RLFs, REA believes the potential of significant benefits to rural 
residents through the RLF provisions will encourage participation.
    There were a number of recommendations concerning purposes eligible 
for funding, including comments that REA should make grant funds 
available for businesses in a for-profit status. REA believes there is 
adequate flexibility with the rule as written regarding eligible 
projects. The quality of the proposal and the degree of benefit to the 
rural community or the potential for economic development are 
determining factors in application approval. It should be noted that 
rural for-profit and non-profit projects alike may be able to obtain 
grant funds in conjunction with zero-interest loans for feasibility 
studies and technical assistance. In addition, for-profit as well as 
non-profit entities that enhance the overall quality of medical care or 
provide advanced telecommunications services or computer networks for 
medical and educational services may be considered for grants because 
they may facilitate projects which will improve the rural communities 
overall and provide needed services to rural America. However, 
generally, REA desires to fund non-profit entities, since grants to 
for-profit entities for direct business start-up costs could result in 
the possibility or perception that grants would provide certain for-
profit entities an unfair competitive advantage over those entities not 
receiving REA funding.
    It was also suggested that housing be included as eligible for 
funding under the regulation. REA recognizes the value of adequate 
housing in developing rural areas. However, REA believes other federal 
programs are available to provide housing, and grant funds will be 
better utilized to provide broader community-wide facilities and 
infrastructure improvements. REA Borrowers may, in accordance with a 
rural development plan for a revolving loan fund, provide housing 
assistance from those funds classified as non-Federal.
    Further, it was suggested that grant funds be used for venture 
capital purposes. The focus of the rural economic development loan and 
grant program is to allow REA Borrowers to assist projects that will 
promote rural development. REA intends to be flexible in meeting this 
objective; thus, applications will be evaluated on a case by case 
basis.
    There were several objections to linking grants to zero-interest 
loans. Some comments urged direct grants for feasibility studies and 
technical assistance be provided to non-profit entities and that grants 
be made outright, without loans, to economically distressed local 
governments. REA feels that grants for feasibility studies or technical 
assistance will most likely be effectively used in conjunction with 
loans. Grants in conjunction with loans strengthen the loan program and 
maximize the benefits derived from the limited amount of grant funding 
available. No change is being made to allow direct grants to 
economically distressed local governments; however, provisions of the 
program as written will enable REA Borrowers to facilitate economic 
development in distressed rural areas by funding worthwhile community 
development and job creation projects.
    Two commenters suggested that the 10 percent limitation for using 
grant funds for administrative costs of the RLFs be revised to provide 
more flexibility in determining these costs. No change is being made to 
the program at this time. REA feels that limiting the funds used for 
administrative costs will be an incentive to encourage REA Borrowers to 
stress prudent management of the funds and maximize the benefits for 
rural development. REA encourages interested rural development 
organizations to work with REA Borrowers to minimize overhead costs.
    Some commenters felt REA's grant funding limitation of 80 percent 
of the cost of establishing the revolving fund, which will require 20 
percent supplemental funding to the revolving loan fund by the 
Borrower, is overly restrictive. These organizations stated that this 
Borrower supplemental funding requirement, and the supplemental funding 
requirement for individual projects, was too burdensome. Additionally, 
commentors objected to requiring projects be funded by REA Borrowers 
``up-front.'' This requirement was set forth in the proposed rule's 
preamble paragraph entitled ``The establishment and/or Operation of a 
Revolving Loan Fund by REA Borrowers'', Sec. 1703.22(a)(3) relating to 
supplemental funding requirements, and Sec. 1703.22(h)(2), 
``Requisition requirements'', which requires Borrowers be reimbursed 80 
percent of funds expended for approved projects. REA believes the 
supplemental funding requirement should remain applicable for Borrowers 
establishing revolving loan funds, as well as supplemental funding for 
individual projects presently required for zero-interest pass-through 
loans. REA has found that the supplemental funding requirement 
specified in Sec. 1703.23 of the regulation, as applied to individual 
projects, has been beneficial for the zero-interest loan program by 
maximizing the use of outside funds. Likewise, REA believes the 
Borrower supplemental funding requirement for the revolving loan fund 
will be equally beneficial for the grant selection process by 
evidencing a degree of Borrower support and commitment to the revolving 
loan fund, and it will provide REA adequate assurance of effective 
project review and oversight resulting in projects having a high 
probability of success.
    However, REA recognizes that reimbursing Borrowers only 80 percent 
of funds expended ``up front'' for community development projects, in 
order to achieve Borrowers' 20 percent required contribution to RLFs, 
may place an undue financial burden upon some Borrowers and discourage 
program participation. In addition, REA recognizes that requiring 
Borrowers to initially exhaust their financial resources, as well as 
the REA grant funds, will result in no available funds for Borrowers' 
revolving funds during the first year or two of operation until 
payments from the funded community development projects are received. 
Therefore, REA has modified the proposed rule in Sec. 1703.22(h)(2), 
``Requisition requirements'', to remove the 80 percent reimbursement 
provision and allow for full reimbursement of Borrowers' expended funds 
for approved projects funded. However, consistent with the supplemental 
funding requirements for individual projects, as well as revolving loan 
funds set forth in the proposed rule, Borrowers' supplemental funding 
requirements to the revolving loan fund will be maintained. 
Accordingly, paragraph (a)(5) in Sec. 1703.22 of the final rule has 
been added to require REA Borrowers establishing RLFs to submit a 
commitment, in the form of a board resolution, to provide supplemental 
funding, referred to as ``additional funding'' in an amount no less 
than 20 percent of the REA grant approved. The Borrower will be 
required to provide documentation that the additional funding has been 
deposited in the appropriate account in Sec. 1703.22(h)(1) of this 
final rule prior to grant disbursement. This paragraph also reiterates 
the requirement in Sec. 1703.22(g)(2) in the proposed rule requiring 
additional funding be retained within the revolving loan fund. 
Additional funding for revolving loan funds may be retained initially 
as non-Federal funds for any rural economic development project(s), 
subject to the normal requirements outlined in Sec. 1703.22(g). For 
example, for a $400,000 revolving loan fund grant from REA, the 
Borrower may requisition 100 percent of REA's portion of eligible 
project costs. However, the REA Borrower will commit at least $80,000 
(20 percent of $400,000) of additional funds to be used for rural 
economic development projects in accordance with an approved rural 
development plan for non-Federal funds. Since the Borrower's funds 
provided as additional funds may be considered non-Federal monies and 
not subject to ``Federal monies'' restrictions for the Rural Economic 
Loan and Grant Program as outlined in the regulation, the REA Borrower 
can retain a worthwhile degree of flexibility to fund projects during 
the first year of the revolving loan fund. It should be noted, however, 
that as with pass-through zero-interest loans and grants, projects 
funded with Federal grant funds under the revolving loan provision will 
be subject to the supplemental funding requirements as outlined in 
Sec. 1703.23 of the Rural Economic Loan and Grant Program regulation. 
As pointed out in the comments, REA recognizes that many projects may 
have limited sources of supplemental funding available. In this regard, 
therefore, REA has provided a provision in Sec. 1703.22(a)(5), whereby 
Borrowers, with prior approval from REA, may use all or a portion of 
their additional funding to assist project owners receiving funding 
through the revolving loan provisions to meet their supplemental 
funding requirements required by Sec. 1703.23. In this case, such 
additional funding will be considered as Federal funds and subject to 
the requirements and restrictions of the regulation.
    Finally, several technical changes have been made to the proposed 
regulation for clarification as follows: (1) Section 1703.21(d) has 
been revised to clarify that excess interest returned to REA will not 
be used to reduce principal indebtedness. (2) For revolving loan funds, 
Sec. 1703.22(a)(4) has been revised to clarify that reasonable 
servicing fees may be charged regardless of whether Federal or non-
Federal funds are involved. (3) Section 1703.20(a)(8) has been revised 
to clarify that the overall restriction for using zero-interest loan 
and grant funds for payment of Borrower salaries is subject to the 
operating expense allowance for revolving loan funds. (4) Section 
1703.22(h)(1) has been revised to add to the accounting requirements, 
additional ledger accounts to record interest income. (5) Section 
1703.22(g)(2) has been clarified to require Borrowers to retain 
interest earned from non-Federal funds within the revolving fund to be 
used in accordance with their approved Rural Development Plan and Scope 
of Work Plan. (6) Section 1703.22(g)(3) has been revised to require REA 
Borrowers that terminate the revolving loan program without obtaining 
approval by the REA Administrator to return the amount of the original 
grant to REA. (7) Section 1703.22(h)(2) has been revised to delete the 
requirement for account ledgers to be submitted as a prerequisite for 
requisitioning grant funds for revolving loan funds. (8) Section 
1703.66(g) has been revised to require REA Borrowers to include in 
their legal documents the requirement for project owners to provide 
sufficient financial, accounting and budget information and other 
records deemed necessary to facilitate audits in accordance with 7 CFR 
part 3015 and 7 CFR part 3016 for non-profit entities, and REA rural 
economic development loan reviews for projects in a for-profit status.

List of Subjects in 7 CFR Part 1703

    Community development, Grant programs--housing and community 
development, Loan programs--housing and community development, 
Reporting and recordkeeping requirements, Rural areas.

    For the reasons set out in the preamble, chapter XVII of title 7 of 
the Code of Federal Regulations is amended as follows:

PART 1703--RURAL DEVELOPMENT

    1. The authority citation for 7 CFR part 1703 continues to read as 
follows:

    Authority: 7 U.S.C. 901 et seq. and 950aaa et seq.

Subpart B--Rural Economic Development Loan and Grant Program

    2. In Sec. 1703.12 of this subpart B, the following definitions are 
added in alphabetical order to read as follows:


Sec. 1703.12  Definitions.

* * * * *
    Revolving loan program--a program established and operated by the 
Borrower, using grant funds, the Borrower's contribution and loan 
repayments to make loans to businesses or others for rural economic 
development and job creation purposes.
    RTB--the Rural Telephone Bank, established as a body corporate and 
an instrumentality of the United States, to obtain supplemental funds 
from non-Federal sources and utilize them in making loans, for the 
purposes of financing, or refinancing, the construction, improvement, 
expansion, acquisition, and operation of telephone lines, facilities, 
or systems, for REA Borrowers financed under sections 201 and 408 of 
the Act.
* * * * *
    Rural economic development--job creation or preservation or 
community facilities improvement projects in rural areas.
* * * * *
    Scope of work--a detailed plan, which has been approved by the 
Administrator, covering the work to be performed by the loan and/or 
grant recipient using the loan and/or grant funds.
* * * * *
    Technical assistance--analysis of facilities or processes, 
managerial, financial and operational consultation by independent 
qualified entities to assist project owners to identify and evaluate 
problems or potential problems and provide training to enable project 
owners to successfully implement, manage, operate and maintain viable 
projects.
* * * * *
    3. Paragraph (c) of Sec. 1703.17 is added to read as follows:


Sec. 1703.17  Uses of zero-interest loans and grants.

* * * * *
    (c) Zero-interest loans and grants may be used for Projects that 
enhance rural economic development by providing advanced 
telecommunications services and computer networks for medical and 
educational services, as follows: (1) For telecommunications end use 
and/or transmission facilities; and (2) Other portions of the project, 
such as modifications to buildings necessary to accommodate 
telecommunications equipment for medical care and other services, 
public or private education, and employment training.
    4. Sections 1703.18 and 1703.19 are added to read as follows:


Sec. 1703.18  Types of projects eligible for grant funding.

    Grants may be made for the following purposes:
    (a) The establishment and operation of a revolving loan program by 
Borrowers in accordance with Sec. 1703.22;
    (b) Project feasibility studies to assist for-profit and non-profit 
entities in conjunction with a loan for an authorized project. 
Feasibility studies will include management assistance, consultation, 
and research for planning individual projects that the Borrower has 
determined will benefit the rural community. Feasibility studies which 
may be financed under this section must be performed by qualified 
entities subject to Sec. 1703.19(i), General requirements for grant 
funding. Feasibility studies must address the important aspects of 
project assessment and planning to ensure, to the extent practicable, 
the success of projects. These include the market, technical, economic, 
financial, and managerial issues related to project feasibility. 
Feasibility studies may be funded in connection with viable projects as 
a reimbursement to the project owner for expenses incurred during the 
initial planning stages of the project prior to project funding by REA;
    (c) The acquisition of technical assistance in conjunction with 
projects funded with zero-interest loans to enable for-profit and non-
profit entities to obtain analysis of facilities and processes, 
managerial, financial and operational consultation. Grant funds may 
also be used in conjunction with zero-interest loans to enable non-
profit business incubators to provide technical assistance. Technical 
assistance will enable project owners to identify and evaluate problems 
or potential problems and provide training in order that they may 
ultimately implement, manage, operate and maintain viable projects 
which are financed with zero-interest loan funds. Technical assistance 
financed under this section must be performed by qualified entities 
which are independent of the project owner subject to Sec. 1703.19(i), 
General requirements for grant funding;
    (d) Business incubators established by non-profit organizations to 
assist in developing emerging enterprises. Business incubators funded 
in conjunction with zero-interest loans will include those facilities 
in which single or multiple businesses may use premises, support staff, 
computer software, hardware, telecommunications equipment, machinery, 
janitorial services, utilities, or other overhead facilities. Grant 
funding may also be provided to allow business incubators to provide 
feasibility studies and technical assistance in accordance with 
paragraphs (b) and (c) of this section;
    (e) Community development assistance to non-profit entities and 
public bodies for employment creation projects, or other projects which 
provide needed community facilities and services;
    (f) Facilities and equipment to public, for-profit and non-profit 
entities to provide education and training to rural residents to 
facilitate economic development. Equipment and facilities may be funded 
to enable rural businesses to provide educational and job enhancement 
skills to employees;
    (g) Facilities and equipment to public, for-profit and non-profit 
entities to provide medical care to rural residents. Equipment and 
facilities may be funded to enable eligible entities to provide medical 
training and related professional health care skills to rural health 
care providers;
    (h) Projects which utilize advanced telecommunications and/or 
computer networks to facilitate medical or educational services or job 
training in accordance with paragraphs (f) and (g) of this section.


Sec. 1703.19  General requirements for grant funding.

    (a) Grants made under Sec. 1703.18(a), establishment and operation 
of a revolving loan program by Borrowers, will be limited to Borrowers 
and can be made without zero-interest loans. Grants made under 
Sec. 1703.18 (b) through (h) will be made only in conjunction with 
zero-interest loans, and on a pass-through basis.
    (b) Pass-through grant funding for projects under Sec. 1703.18 (b), 
(c), (f), (g) and (h) will be available for non-profit and for-profit 
entities. Pass-through grant funding for projects under Sec. 1703.18 
(d) and (e) will be available only for non-profit entities.
    (c) All projects funded with zero-interest loans and grants will 
require supplemental funding in accordance with Sec. 1703.23. For 
grants made under Sec. 1703.18(a), the portion eligible for REA funding 
may be fully funded with grant funds. For all other grants funded under 
=1703.18, the portion of project costs eligible for REA funding may be 
funded up to 20 percent with grant funds.
    (d) Grant funding will be provided only to the extent necessary for 
a feasible project. A feasible project is a project which expects to 
generate sufficient income to pay operating expenses and debts and 
compensate for depreciation of equipment and facilities for the project 
which is to be funded by REA. Depreciation must be based on allowable 
depreciation schedules as set forth by the United States Internal 
Revenue Service. Borrowers whose analyses of projects show feasibility 
without grant funds should not apply for grant funding. Borrowers 
requesting pass-through grant funds will base grant funding requests on 
borrower projected income and expense projections for the project, and 
documentation regarding depreciation of the equipment and facilities 
for the project. The Administrator will determine whether the 
Borrower's projections of income, expenses and depreciation are 
reasonable.
    (e) For projects that project insufficient operating revenue the 
first two years to show feasibility, borrowers should first consider 
the deferral provisions set forth in Sec. 1703.29(b) before determining 
the appropriate level of requested grant funding. Zero-interest loan 
and grant funding will be approved in accordance with paragraph (d) of 
this section based on the option which results in the lowest required 
grant percentage.
    (f) The owner of the pass-through project that receives grant funds 
will be encouraged to commit that the project will be a demonstration 
project.
    (g) Borrowers or project owners must demonstrate the availability 
and commitment of other sources of funding needed to complete a project 
in addition to REA loan and/or grant funds, prior to the first advance 
of REA funds.
    (h) Feasibility studies and/or technical assistance funded with 
grants under Sec. 1703.18 (b) and (c) must be performed by entities 
which are independent of the Borrower and qualified to provide such 
services. The project owner, if deemed qualified in accordance with 
this paragraph, may furnish a feasibility study under Sec. 1703.18(b). 
Entities furnishing technical assistance under Sec. 1703.18(c), must be 
independent of the project owner. To be deemed qualified, entities 
providing feasibility studies and/or technical assistance must:
    (1) Provide sufficient documentation evidencing their proven 
ability, background and experience to furnish such services; and
    (2) Provide sufficient documentation evidencing their legal 
authority and capacity to furnish such services.
    5. Section 1703.20 is revised to read as follows:


Sec. 1703.20  Ineligible uses of zero-interest loans and grants.

    (a) Zero-interest loans and grants must not be used:
    (1) To fund or assist projects of which any director, officer, 
general manager or significant stockholder of the Borrower, or close 
relative thereof, is an owner, stockholder, partner or director, or 
which would, in the judgment of the Administrator, create a conflict of 
interest or the appearance of a conflict of interest. The Borrower must 
disclose to the Administrator information regarding any conflict of 
interest, potential conflict of interest or any appearance of a 
conflict of interest. The Administrator will determine whether there is 
a conflict of interest or whether any potential conflict of interest or 
appearance of a conflict of interest may adversely affect REA's 
interests. A Borrower organized as, or consisting of a cooperative, 
widely held mutual corporation, tribal government, municipal power 
corporation, public power district, or a similar widely held 
organization would ordinarily be able to have an ownership interest in 
or manage a project operated on either a for-profit or non-profit 
basis. A Borrower organized as a closely held, for-profit corporation 
with more than 5 percent of its stock held by one legal person, its 
subsidiary or an affiliate, would ordinarily be able to own or manage a 
project operated on a non-profit basis only;
    (2) For any costs incurred on the project: (i) Prior to receipt of 
the Borrower's completed application by REA during an application 
period unless the Administrator has specifically approved such usage in 
writing; or
    (ii) For site development, the destruction or alteration of 
buildings, or other activities that would adversely affect the 
environment or limit the choice of reasonable alternatives prior to 
satisfying the requirements of Sec. 1703.32;
    (3) By the Borrower to purchase or lease any real property, 
materials, equipment, or services from its subsidiary, an affiliate, or 
significant stockholders, officers, managers or directors of the 
Borrower, or close relatives thereof, where the purchase or lease has 
not been fully disclosed to the Administrator and received the 
Administrator's prior written approval;
    (4) By the recipient of a pass-through-loan or pass-through-grant 
to purchase or lease any real property, materials, equipment, or 
services from the Borrower, its subsidiary, an affiliate of the 
Borrower, or significant stockholders, officers, managers or directors 
of the Borrower, or close relatives thereof, where the purchase or 
lease has not been fully disclosed to the Administrator and received 
the Administrator's prior written approval;
    (5) To pay off or refinance existing indebtedness incurred prior to 
receipt of the Borrower's completed application by REA or for 
refinancing or repaying a loan made under the Act or a program 
administered by the Administrator;
    (6) For any electric or telephone purpose, as determined by the 
Administrator;
    (7) For the Borrower's electric or telephone operations or for any 
operations affiliated with the Borrower unless the Administrator has 
specifically informed the Borrower in writing that the operations are 
part of the approved purposes;
    (8) To pay the salaries of any employee or owner of the Borrower, 
its subsidiaries, or affiliates. This restriction does not prohibit the 
use of loan or grant funds for printing and similar costs for project 
feasibility studies it has prepared, commissioned or purchased if 
specifically approved by the Administrator. This restriction is subject 
to the operating expense allowance for revolving loan funds set forth 
in Sec. 1703.22 (a)(6);
    (9) To fund feasibility studies and technical assistance as set 
forth in Sec. 1703.18 independently of projects which are funded under 
the zero-interest loan and grant program;
    (10) For proposed projects located in areas covered by the Coastal 
Barrier Resources Act (16 U.S.C. 3501 et seq.); or
    (11) For anything other than an approved purpose.
    (b) [Reserved]
    6. Section 1703.21 is amended by adding a sentence at the end of 
paragraph (b) and revising paragraph (d) to read as follows:


Sec. 1703.21  Limitations on the use of zero-interest loan and grant 
funds.

* * * * *
    (b) * * * Grant funds will be disbursed to the Borrower in 
accordance with Sec. 1703.61(b).
* * * * *
    (d) The Borrower may not requisition zero-interest loan funds 
unless those funds are deposited into the Borrower's REA construction 
fund trustee account. The Borrower will be required to set up a 
separate Federally insured account called the Rural Economic 
Development Account, if loan funds are not expected to be disbursed 
within two months after receipt from REA. All interest earned on 
temporarily deposited zero-interest loan funds in excess of $500 per 
12-month period must be used for approved purposes or returned to REA. 
Interest earned in excess of $500 per 12 month period and returned to 
REA will not be used to reduce the Borrower's principal indebtedness. 
Grant funds will be disbursed by REA in accordance with 7 CFR parts 
3015 and 3016, and Sec. 1703.61 (b).
* * * * *
    7. Section 1703.22 is added to read as follows:


Sec. 1703.22  Revolving loan program.

    Grant funds under this section will be provided only to REA 
Borrowers on a non pass-through basis. REA Borrowers will, in turn, 
provide loans to foster rural economic development in accordance with 
this subpart and the specific requirements of this section.
    (a) General. Grant funds disbursed to REA Borrowers to establish 
revolving loan programs under this section are subject to the following 
requirements: (1) The uses, restrictions and limitations for zero-
interest loans set forth in Secs. 1703.17, 1703.20 and 1703.21 
respectively;
    (2) Loans made by REA Borrowers initially lending grant funds 
disbursed by REA are limited to types of projects specified in 
Sec. 1703.18 (d), (e), (f), (g) and (h). Loans may also be made for 
feasibility studies and technical assistance in accordance with 
Sec. 1703.18 (b) and (c), respectively, but only for those types of 
projects specified in this paragraph (a)(2). Loans made from repayments 
of the initial loans made by REA Borrowers may be used for any rural 
economic development purpose in accordance with a prior agreement 
between the Borrower and REA;
    (3) All other requirements relevant to zero-interest pass-through 
loans and grants outlined in this subpart, except the minimum size of a 
zero-interest loan as specified in Sec. 1703.28(f);
    (4) The initial loans made from the revolving loan fund using the 
grant funds must carry an interest rate of zero percent; however, loans 
made from repayments of the initial loan may carry an interest rate in 
accordance with prior agreement with REA. In either case, the Borrower 
may charge reasonable loan servicing fees;
    (5) The Borrower will provide a board resolution certifying a 
commitment to provide and maintain additional funding to the revolving 
loan fund in an amount no less than 20 percent of the REA grant 
approved. The Borrower will provide documentation that the additional 
funding has been deposited in the appropriate account in 
Sec. 1703.22(h)(1) prior to grant disbursement. This requirement does 
not pertain to supplemental funding requirements for individual 
projects as set forth in Sec. 1703.23. Additional funding required in 
this paragraph pertains only to borrowers establishing revolving loan 
funds, with the following provisions: (i) Use of additional funding is 
subject to requirements set forth in paragraph (b) of this section and 
with REA concurrence;
    (ii) Individual projects funded under this section are subject to 
supplemental funds requirements set forth in Sec. 1703.23;
    (iii) At the Borrower's option with REA concurrence, all or a 
portion of the additional funding may be used to assist project owners 
receiving funding from Federal grant funds under this section to meet 
their supplemental funding requirements set forth in Sec. 1703.23 of 
this subpart. Such additional funding will be deemed as Federal funds 
and accounted for in accordance with paragraph (h)(1)(i)(A) of this 
section for electric borrowers or paragraph (h)(1)(ii)(A) of this 
section for telephone borrowers, as appropriate;
    (iv) At the Borrower's option, all or a portion of the additional 
funding may be retained as non-Federal funds, for any rural economic 
development project(s), subject to paragraph (g) of this section and 
REA concurrence. Additional funding committed as non-Federal will be 
accounted for in accordance with paragraph (h)(1)(i)(E) of this section 
for electric borrowers or paragraph (h)(1)(ii)(E) of this section for 
telephone borrowers, as appropriate;
    (6) Grant funds will only be provided to an REA Borrower for a 
revolving loan program when a proposed budget submitted to REA 
demonstrates and the Borrower agrees in writing that no more than 10 
percent of grant funds received are used to cover operating expenses of 
the revolving loan program. Operating expenses include the costs of 
administering the revolving loan fund and the provision of technical 
assistance to project owners. All proceeds in excess of those needed to 
cover authorized expenses, as described above, must revert to the 
revolving fund and be available for re-lending for eligible projects. 
Budgets which reflect expenses incurred in operating the fund must be 
submitted to REA annually;
    (7) The Borrower may charge reasonable loan servicing charges. For 
purposes of this section, loan servicing charges must not exceed an 
amount equal to the sum of one percent per year of the outstanding 
principal on the first day of each year on each project owner's zero-
interest loan which is made from the REA grant proceeds;
    (8) The Borrower will submit documentation indicating that 
potential projects which are eligible for funding have sufficiently 
progressed in the planning stage to allow grant funding approved for a 
revolving loan program to be requisitioned by the Borrower, disbursed 
by REA, and loaned to recipients within 3 years of the date of grant 
approval by REA. Grant funds that have not been requisitioned within 3 
years will be cancelled, unless the Administrator has approved an 
extension in writing. Grant funds will be disbursed by REA in 
accordance with paragraphs (d) and (g) of this section;
    (9) If the revolving loan program is terminated, further 
disbursement of grant funds will be cancelled. Repayments of loans made 
using grant funds which have been disbursed will be used in accordance 
with the Borrower's rural development plan;
    (10) Payment of creditors which provide interim or construction 
financing to a viable project for eligible purposes as set forth in 
Sec. 1703.17 of this subpart may be authorized. Refinancing for the 
sole purpose of replacing higher interest conventional financing with 
zero-interest revolving loan funds is not authorized.
    (b) The Borrower's rural development plan. REA requires that the 
revolving loan program be administered in accordance with a rural 
development plan, developed by the Borrower and approved by REA. The 
plan must be of sufficient detail to provide REA with a complete 
understanding of what the Borrower intends to accomplish by 
administering a revolving loan program. The rural development plan will 
provide the mechanics of how the revolving loan funds will be disbursed 
to the project owner. The rural development plan must outline the 
Borrower's plans for administering the revolving loan program, during 
the initial period when REA grant funds are lent by the Borrower and 
after the revolving fund becomes non-Federal in accordance with 
paragraph (g) of this section. The plan must outline the following: (1) 
Specific objectives for the revolving loan program, revolving loan 
operating procedures, lending parameters, maximum and minimum loan 
amount, and types of projects to be funded;
    (2) Documentation of Borrower's coordination of lending activities 
with other local entities that provide financing for rural economic 
development projects. Such documentation will indicate that the 
Borrower will not compete with, but supplement other sources of legal 
financing;
    (3) Eligibility criteria if other than outlined in this subpart;
    (4) The application process and method of disposition of the funds 
to the project owner; and
    (5) A procedure for monitoring the project owner's accomplishments 
and reporting requirements by the project owner's management.
    (c) The Borrower's scope of work. Borrowers applying for grant 
funding under this section must submit a scope of work to REA. 
Applications for grants under this section will be evaluated for 
funding based on the Borrower's rural development plan in paragraph (b) 
of this section and the scope of work. The scope of work must contain 
the following items: (1) Documented need for grant funds. The Borrower 
must identify a sufficient number of rural development projects of the 
type specified in Sec. 1703.18 (d), (e), (f), (g), and (h) which are 
currently being planned requiring zero-interest loans equal to the 
amount of grant assistance requested from REA. These projects may be 
supported with a community facilities plan, or other development plan, 
prepared by local community leaders in cooperation with the Borrower. 
For each project, the Borrower will submit information required under 
Sec. 1703.34;
    (2) Documented authority and ability of the Borrower to administer 
a revolving rural development loan program in accordance with the 
provisions of this subpart. The Borrower must provide a complete 
listing of all personnel responsible for administering this program 
along with a statement of their qualifications and experience;
    (3) Documented ability of the Borrower to commit financial 
resources under the control of the Borrower to assist in the 
establishment of a rural development revolving loan program. This 
should include a statement of the sources of funding for the 
administration of the Borrower's operations, as well as financial and 
technical assistance for projects;
    (4) Documentation that the Borrower has secured commitments of 
significant financial support from public agencies and/or private 
organizations for supplemental funding to support a rural development 
loan program;
    (5) A list of proposed fees and other charges the Borrower will 
assess the projects it funds; and
    (6) The Borrower's rural development policy for non-Federal funds 
in accordance with paragraphs (b) and (g) of this section.
    (d) Grant processing and approval. Applications for grants to 
establish revolving loan funds will be reviewed in accordance with 
Secs. 1703.45 and 1703.46, and with the Borrower's rural development 
plan and scope of work outlined in paragraphs (b) and (c) of this 
section. Grants will be processed in accordance with Secs. 1703.58 and 
1703.59.
    (e) Disbursement of grant funds. Borrowers are not authorized to 
commence projects to be funded under this section until those projects 
have been submitted for authorization in accordance with paragraph 
(c)(1) of this section, or the projects have been submitted for 
authorization subsequent to grant approval in accordance with paragraph 
(e)(2) of this section. REA grant funds will be disbursed in accordance 
with the provisions of 7 CFR part 3015, Uniform Federal Assistance 
Regulations, on a reimbursement basis, the applicable requirements of 
this subpart, the administrative provisions outlined in paragraph (g) 
of this section, and the following requirements:
    (1) Only projects authorized by REA in accordance with paragraphs 
(c)(1) and (e)(2) of this section, for which adequate documentation, 
including receipts for expenditures and certification of approved 
purposes, are submitted will be considered for reimbursement;
    (2) A project which was not submitted prior to grant approval in 
accordance with paragraph (c)(1) of this section, may be authorized for 
funding subsequent to grant approval. A project which is authorized for 
funding under this paragraph will be considered for disbursement at the 
first allowable time period after project authorization in accordance 
with paragraphs (e)(3) and (e)(4) of this section. Project 
authorization after grant approval is subject to the following 
requirements: (i) The project meets the specific objectives for the 
Borrower's revolving loan program as outlined in paragraph (b)(1) of 
this section;
    (ii) The Borrower presents evidence that the project requested for 
authorization can be funded prior to projects which were authorized 
prior to grant approval in accordance with paragraph (b)(1) of this 
section; and
    (iii) REA approves the project for funding in accordance with 
Sec. 1703.34;
    (3) Grant funds requisitioned for individual projects in increments 
of less than $100,000, or less than 25 percent of the amount approved 
for the revolving loan fund, whichever is less, may be reimbursed semi-
annually. Submission periods for requisitioning grant funds on a semi-
annual disbursement basis will be 14 days commencing from the 6-month 
anniversary date of grant approval;
    (4) Grant funds requisitioned for individual projects in increments 
of $100,000 or greater, or at least 25 percent of the amount approved 
for the revolving loan fund, whichever is less, may be submitted for 
reimbursement at any time.
    (f) Reporting requirements. (1) The Borrower must maintain 
financial management systems and retain financial records in accordance 
with 7 CFR part 3015, Uniform Federal Assistance Regulations.
    (2) Borrower records must include an accurate accounting and source 
documentation to support each transaction involving the revolving loan 
fund. Records are subject to a rural economic loan review as set forth 
in Sec. 1703.66(g).
    (3) SF-269, ``Financial Status Report,'' and a revolving loan 
program activity report will be required of all Borrowers on an annual 
basis. Reports will be submitted no later than 90 days after December 
31 of each year. The program activity report will contain an aggregate 
list of projects funded, the amount funded for each project, the 
project repayment schedule, a brief description of each project, the 
project objectives, whether or not the project has been completed, and 
the projected number of jobs created or saved by each project. Reports 
under this paragraph will be required until all grant funds have been 
disbursed and projects completed.
    (4) A performance report will be required for each project funded 
on an annual basis. Performance reports will be due no later than 90 
days after December 31 of each year. Performance reports will be 
submitted until one year after project completion. Project performance 
reports will contain the following: (i) A comparison of actual 
accomplishments during the reporting period to the objectives 
established for the project and, if not attained, reasons why 
established objectives were not met;
    (ii) Problems, delays, or adverse conditions which will materially 
affect attainment of planned project objectives, prevent the meeting of 
time schedules or objectives, or preclude the attainment of project 
work elements during established time periods. This disclosure shall be 
accompanied by a statement of the action taken or contemplated to 
resolve the situation;
    (iii) Projected accomplishments for the next reporting period, if 
applicable; and
    (iv) Status of compliance with any special conditions for project 
funding, if applicable.
    (5) Borrowers must report and remit interest earned on advances of 
grant funds deposited in interest accounts to REA on a quarterly basis 
in accordance with 7 CFR part 3015, Uniform Federal Assistance 
Regulations.
    (g) Non-Federal funds. Once all REA-derived grant funds have been 
utilized by the Borrower to fund rural development projects according 
to the provisions of this section and the applicable provisions of this 
subpart, loans made by the Borrower thereafter from repayments to the 
revolving loan fund shall not be considered as being derived from 
Federal funds and the requirements of these regulations will not be 
imposed on the Borrower or project owners. However, the Borrower will, 
as a condition for receiving a grant under this section, agree to the 
following conditions: (1) To maintain a revolving loan account to 
promote rural economic development in accordance with the Borrower's 
rural development plan for non-Federal funds submitted in accordance 
with paragraph (b) of this section;
    (2) To maintain the additional funding supplied by the Borrower in 
accordance with paragraph (a)(5) of this section and interest earnings 
within the revolving loan fund;
    (3) Approval may be granted by the Administrator to terminate the 
revolving loan program, or modify the requirements set forth in 
paragraphs (g)(1) and (g)(2) of this section, upon written request and 
justification by the Borrower. Should the Borrower terminate the 
revolving loan program without obtaining approval by the REA 
Administrator, the Borrower will return the amount of the original 
grant to REA.
    (h) Administrative provisions. The requirements of this paragraph 
set forth the procedures for accounting, requisitioning and 
disbursement of Federal funds, those funds initially disbursed for 
projects which may be funded in accordance with an approved rural 
development plan and scope of work submitted by the Borrower. 
Disbursement of grant funds will be approved on a reimbursement basis 
after the grant agreement is executed by REA and the Borrower, the 
applicable provisions of this subpart are met, subject to disbursement 
restrictions in paragraph (e) of this section, and the requirements in 
paragraphs (h) (1) through (3) of this section.
    (1) Accounting requirements. Accounting will be performed in 
accordance with 7 CFR part 1767, Accounting Requirements for REA 
Electric Borrowers, or 7 CFR part 1770, Accounting Requirements for REA 
Telephone Borrowers, as appropriate. The Borrower will maintain 
accounts for the revolving funds as follows:
    (i) REA electric Borrowers. (A) A general ledger Account 131.13, 
``Cash-General--Economic Development Grant Funds.'' The Borrower will 
debit this account in an amount equal to the amount of the grant 
received from REA, any additional funds deemed Federal from the 
Borrower as required by paragraph (a)(5)(iii) of this section, and all 
other funds advanced for the project, regardless of the source, if 
controlled by the Borrower. The Borrower will credit this account for 
all expenditures made with Federal funds on behalf of the rural 
development project.
    (B) A general ledger Account 124.1, ``Other Investments--Federal 
Economic Development Loans.'' The Borrower will debit this account in 
the amount of Federal funds the Borrower advances to non-associated 
organizations for authorized rural economic development projects. For 
each debit in this account, a corresponding credit will be made in 
Account 131.13 in paragraph (h)(1)(i)(A) of this section. This account 
will be credited with repayments of loans made with Federal economic 
development grant funds.
    (C) A general ledger Account 123.3, ``Investment in Associated 
Companies--Federal Economic Development Loans.'' The Borrower will 
debit this account in the amount of Federal funds the Borrower advances 
to associated organizations for authorized rural economic development 
projects. For each debit in this account, a corresponding credit will 
be made in Account 131.13 in paragraph (h)(1)(i)(A) of this section. 
This account will be credited with repayments of loans made with 
Federal economic development grant funds.
    (D) Account 421, ``Miscellaneous Non-operating Income.'' The 
Borrower will credit this account in the amount of grant funds 
disbursed by REA resulting from an approved requisition request in 
accordance with paragraph (h)(2) of this section.
    (E) A general ledger Account 131.14, ``Cash-General--Economic 
Development Non-Federal Revolving Funds.'' The Borrower will debit this 
account with any additional funds deemed non-Federal from the borrower 
as required by paragraph (a)(5)(iv) of this section, cash received from 
the repayment of loans made from accounts in paragraphs (h)(1)(i)(B), 
(h)(1)(i)(C), (h)(1)(i)(F), and (h)(1)(i)(G) of this section. The 
Borrower will credit this account to reflect loans made for rural 
economic development projects from non-Federal funds from accounts 
specified in paragraphs (h)(1)(i)(F) and (h)(1)(i)(G) of this section.
    (F) A general ledger Account 124.2, ``Other Investments--Non-
Federal Economic Development Loans.'' The Borrower will debit this 
account in the amount of non-Federal funds the Borrower advances to 
non-associated organizations for authorized rural economic development 
projects. For each debit in this account, a corresponding credit will 
be made in Account 131.14, in paragraph (h)(1)(i)(E) of this section. 
This account will be credited with repayments of loans made from non-
Federal economic development funds.
    (G) A general ledger Account 123.4, ``Investment in Associated 
Companies--Non-Federal Economic Development Loans.'' The Borrower will 
debit this account in the amount of non-Federal funds the Borrower 
advances to associated organizations for authorized rural economic 
development projects. For each debit in this account, a corresponding 
credit will be made in Account 131.14, in paragraph (h)(1)(i)(E) of 
this section. This account will be credited with repayments of loans 
made from non-Federal economic development funds.
    (H) A general ledger Account 171 ``Interest and Dividends 
Receivable.'' The Borrower will debit this account with the amount of 
interest earned on the revolving loan fund. The Borrower will credit 
this account and debit the appropriate cash account when the cash is 
received.
    (I) A general ledger Account 419, ``Interest and Dividend Income.'' 
The Borrower will credit this account with the amount of interest 
earned on the revolving loan fund.
    (ii) REA telephone Borrowers. (A) A general ledger Account 1130.4, 
``Cash--General Fund--Economic Development Grant Funds (Class A 
Companies)'', or Account 1120.14, ``Cash-General Fund--Economic 
Development Grant Funds (Class B Companies).'' The Borrower will debit 
the appropriate account in an amount equal to the amount of the grant 
received from REA, any additional funds deemed Federal from the 
Borrower required by paragraph (a)(5)(iii) of this section, and all 
other funds advanced for the project, regardless of the source, if 
controlled by the Borrower. The Borrower will credit the appropriate 
account for all expenditures made with Federal funds on behalf of the 
rural development project.
    (B) A general ledger Account 1402.4, ``Other Investments in 
Nonaffiliated Companies--Federal Economic Development Grant Loans.'' 
The Borrower will debit this account in the amount of Federal funds the 
Borrower advances to nonaffiliated organizations for authorized rural 
economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(A) of this section. This account will be credited 
with repayments of loans made from Federal economic development grant 
funds.
    (C) A general ledger Account 1401.1, ``Other Investments in 
Affiliated Companies--Federal Economic Development Grant Loans.'' The 
Borrower will debit this account in the amount of Federal funds the 
Borrower advances to affiliated organizations for authorized rural 
economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(A) of this section. This account will be credited 
with repayments of loans made from Federal economic development grant 
funds.
    (D) Account 7360, ``Other Non-operating Income (Class A 
Companies)'', or Account 7300, Non-operating Income and Expense (Class 
B Companies), as appropriate. The Borrower will credit these accounts, 
as appropriate, in the amount of grant funds disbursed by REA resulting 
from an approved requisition request in accordance with paragraph 
(h)(2) of this section.
    (E) A general ledger Account 1130.5, ``Cash--General Fund--Economic 
Development Non-Federal Revolving Funds (Class A Companies)'', or 
Account 1120.15, ``Cash--General Fund--Economic Development Non-Federal 
Revolving Funds (Class B Companies)'', as appropriate. The Borrower 
will debit the appropriate account with any additional funds deemed 
non-Federal from the Borrower as required by paragraph (a)(5) of this 
section, cash received from the repayment of loans made from accounts 
in paragraphs (h)(1)(ii)(B), (h)(1)(ii)(C), (h)(1)(ii)(F), and 
(h)(1)(ii)(G) of this section. The Borrower will credit the appropriate 
account to reflect loans made for rural economic development projects 
from non-Federal funds from accounts specified in paragraphs 
(h)(1)(ii)(F) and (h)(1)(ii)(G) of this section.
    (F) A general ledger Account 1402.5, ``Other Investments in 
Nonaffiliated Companies-Non-Federal Economic Development Grant Loans.'' 
The Borrower will debit this account in the amount of non-Federal funds 
the Borrower advances to nonaffiliated organizations for authorized 
rural economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(E) of this section. This account will be credited 
with repayments of loans made from non-Federal economic development 
funds.
    (G) A general ledger Account 1401.2, ``Other Investments in 
Affiliated Companies--Non-Federal Economic Development Grant Loans.'' 
The Borrower will debit this account in the amount of non-Federal funds 
the Borrower advances to affiliated organizations for authorized rural 
economic development projects. For each debit in this account, a 
corresponding credit will be made in the appropriate account in 
paragraph (h)(1)(ii)(E) of this section. This account will be credited 
with repayments of loans made from non-Federal economic development 
funds.
    (H) A general ledger Account 1210, ``Interest and Dividends 
Receivable.'' The Borrower will debit this account with the amount of 
interest earned on the revolving fund loan. The borrower will credit 
this account and debit the appropriate cash account when the cash is 
received.
    (I) A general ledger Account 7320, ``Interest Income (Class A 
Companies)'', or Account 7300.2, ``Interest Income (Class B 
Companies)'', as appropriate. The Borrower will credit this account 
with the amount of interest earned on the revolving fund loans.
    (2) Requisition requirements. Grant funds may be requisitioned by 
REA Borrowers in accordance with disbursement requirements in paragraph 
(e) of this section. Borrowers will be fully reimbursed for funds 
expended for approved projects funded. For each completed project, the 
Borrower will submit the following for reimbursement: (i) Standard Form 
270, ``Request for Advance of Reimbursement'';
    (ii) Copies of cancelled checks and other verifiable source records 
supporting the transactions; and
    (iii) Certification and evidence that the project costs to be 
reimbursed are for a project which has been authorized by REA and are 
authorized costs for that project.
    (3) REA review. Requisition requests will be evaluated for 
compliance with loan purposes previously submitted by the Borrower for 
project authorization in accordance with paragraphs (c)(1) or (e)(2) of 
this section, compliance with the Borrower's rural development plan, 
accounting documentation submitted in paragraph (h)(1) of this section, 
and the cancelled checks and source records submitted.
    8. Paragraph (b) of Sec. 1703.28 is revised to read as follows:


Sec. 1703.28  Maximum and minimum sizes of a zero-interest loan or 
grant application.

* * * * *
    (b) Regardless of the projected total amount that will be 
available, the maximum size may not be lower than $200,000.
* * * * *
    9. Section 1703.30 is amended by revising the parenthetical 
containing the OMB control number at the end of the section to read as 
follows:


Sec. 1703.30  Approval of agreements.

* * * * *
(Approved by the Office of Management and Budget under control 
number 0572-090090)

    10. Section 1703.34 is amended by revising paragraphs (b)(5) (ii) 
and (iii), and adding paragraphs (b)(5) (iv) and (v) to read as 
follows:


Sec. 1703.34  Applications.

* * * * *
    (b) * * *
    (5) * * *
    (ii) A section entitled ``Project Description'' as set forth in 
Sec. 1703.36;
    (iii) Except for applications for project feasibility studies, a 
section entitled ``Environmental Impact of the Project'' as set forth 
in Sec. 1703.37;
    (iv) Monitoring plan. For a pass-through loan and/or grant, a copy 
of the Borrower's plan to monitor the loan and/or grant and ensure that 
the requirements of this subpart are met; and
    (v) Scope of work. For an application for a loan and/or grant, a 
proposed scope of work for the project.
* * * * *
    11. Section 1703.46 is amended by revising the first sentence of 
paragraph (a); by removing paragraph (e), and redesignating paragraphs 
(f), (g), (h), (i), (j), (k), and (l) as paragraphs (e), (f), (g), (h), 
(i), (j), and (k), respectively; and by adding a sentence at the end of 
newly designated paragraph (g)(6)(iv) to read as follows:


Sec. 1703.46  Documenting the evaluation and selection of applications 
for zero-interest loans and grants.

    (a) The Administrator will only consider for selection applications 
that request funds for purposes as set forth in Sec. 1703.17 and 
Sec. 1703.18 and are not ineligible under Sec. 1703.20, as determined 
by the Administrator. * * *
* * * * *
    (g) * * *
    (6) * * *
    (iv) * * * For a pass-through loan and grant, the quality of the 
Borrower's plan to monitor the loan and grant and assure that the 
requirements of this subpart and 7 CFR parts 3015 and 3016 are met will 
also be considered.
* * * * *
    12. Section 1703.61 is amended by adding two sentences at the end 
of paragraph (a) and three sentences at the end of paragraph (b) to 
read as follows:


Sec. 1703.61  Disbursement of zero-interest loan and grant funds.

    (a) * * * The Borrower or project owner's share in the cost of the 
project must be utilized in advance of REA zero-interest loan funds, or 
upon REA approval, on a pro-rata distribution basis with loan funds 
during the disbursement period. The Borrower or project owner will not 
be permitted to provide its contribution at the end of the loan 
disbursement period.
    (b) * * * Prior to the disbursement of grant funds under this 
subpart, the Borrower will provide evidence of fidelity bond coverage 
as required by 7 CFR 3015.17. The grant portion of a pass-through zero-
interest loan and grant will be disbursed to the Borrower on a 
reimbursement basis after all other project funds have been utilized 
and evidence is provided that the project has been completed. Grants to 
Borrowers for establishment of revolving loan funds will be disbursed 
in accordance with Sec. 1703.22 of this subpart.
* * * * *
    13. Section 1703.66 is amended by revising paragraphs (b), (d), (e) 
and (g), and by adding paragraphs (h), (i), and (j), to read as 
follows:


Sec. 1703.66  Review and other requirements.

* * * * *
    (b) The Borrower must require the recipient of a pass-through loan 
and grant to provide an itemized list to the Borrower that shows the 
expenditures made on the project for approved purposes, including a 
certification to that effect. The Borrower will also require the 
recipient to attach invoices, receipts, bills of sale, and other 
evidence representing the items on the list of expenditures that at 
least total the amount of the REA zero-interest loan and grant. In 
addition, the Borrower will also require the recipient to furnish a 
record of itemized receipts showing total project costs in such detail 
that will permit auditors to establish the REA funding percentage. 
REA's legal agreements will include the terms and conditions that the 
Borrower must require in its agreement with the recipient of a pass-
through loan and grant covering the use and intended schedule of 
expenditures of the loan funds.
* * * * *
    (d) The legal documents executed between the Borrower and the 
Administrator in connection with a zero-interest loan and/or grant must 
contain certain provisions giving the Administrator discretionary 
rights and remedies in the event a Borrower fails to comply with this 
subpart, other Federal regulations and statutes, or the terms, 
conditions and requirements of the executed legal documents. Regardless 
of any right or remedy the Administrator chooses to assert, if the 
Borrower uses any zero-interest loan and/or grant funds other than for 
approved purposes, the Borrower will be required to return to REA the 
amount used for unapproved purposes. An unauthorized zero-interest loan 
amount which is returned will be considered a prepayment on the REA 
note.
    (e) Borrowers receiving zero-interest loans and/or grants will be 
subject to a rural economic development review of zero-interest loan 
and grant funds.
* * * * *
    (g) Grants provided under this program will be administered in 
accordance with 7 CFR part 3015 and 7 CFR part 3016, as appropriate. 
Copies of these USDA Uniform Assistance regulations can be obtained by 
contacting REA in Washington, DC. A Borrower that receives a grant for 
the establishment of a revolving loan fund, or project owner that 
receives a pass-through loan and grant, will be subject to requirements 
under these regulations which cover, among other things, financial 
reporting, accounting records, budget controls, record retention and 
audit requirements. For pass-through loans and grants, REA Borrowers 
will be required to include in their legal documents the requirement 
for project owners to provide sufficient financial, accounting and 
budget information and other records deemed necessary to facilitate 
audits in accordance with 7 CFR part 3015 and 7 CFR part 3016 for non-
profit entities, and REA rural economic development loan reviews for 
projects in a for-profit status.
    (h) For pass-through loans and grants awarded under this subpart, 
the Borrower must diligently monitor performance to ensure that time 
schedules are being met, projected work by time periods is being 
accomplished, and other performance objectives are being achieved. The 
Borrower must submit an original and one copy of each report to REA on 
an annual basis. The project performance reports shall include, but not 
be limited to, the following:
    (1) A comparison of actual accomplishments to the objectives 
established for that period;
    (2) Reasons why any established objectives were not met;
    (3) A description of any problems, delays, or adverse conditions 
which have occurred, or are anticipated, and which may affect the 
attainment of overall project objectives, prevent meeting of time 
schedules or objectives, or preclude the attainment of particular 
project work elements during established time periods. This disclosure 
shall be accompanied by a statement of the action taken or planned to 
resolve the situation; and
    (4) Objectives and timetable established for the next reporting 
period.
    (i) For pass-through loans and grants, a final project performance 
report will be required with the last SF 269, ``Financial Status 
Report,'' available from REA in Washington, DC. The final report also 
must provide an evaluation of the success of the project in meeting the 
objectives of the program. The final report may serve as the last 
annual report.
    (j) Monitoring requirements for Borrowers receiving grants for 
revolving loan funds are specified in Sec. 1703.22.
    14. Sections 1703.67 and 1703.68 are added to read as follows: 
Sec. 1703.67  Changes in project objective or scope. 
    For loans and grants awarded under this subpart, the Borrower must 
obtain prior approval for any material change to the scope or 
objectives of the approved project, including changes to the scope of 
work or budget. Failure to obtain prior approval of changes can result 
in suspension or termination of grant funds. 
Sec. 1703.68  Loan and grant termination provisions. 
    (a) Termination for cause. The Administrator may terminate any loan 
and/or grant in whole, or in part, at any time before the date of 
completion of loan and/or grant disbursement, whenever the Borrower has 
failed to comply with the conditions of the loan and/or grant. The 
Administrator will promptly notify the Borrower in writing of the 
determination and the reasons for the termination, together with the 
effective date. The termination date will be no less than 30 days 
following receipt of the termination notice. The Borrower will have 
such time to cure the default, or to state why it feels the loan and/or 
grant should not be terminated. The Administrator will stay the 
termination upon the curing of the default, and may delay termination 
if, sufficient cause has been given by the Borrower.
    (b) Termination for convenience. The Administrator or the Borrower 
may terminate a loan and/or grant in whole, or in part, when both 
parties agree that the continuation of the project would not produce 
beneficial results commensurate with further expenditure of funds. The 
two parties will agree upon termination conditions, including the 
effective date, and in the case of partial terminations, the portion to 
be terminated. The Borrower will not incur new obligations for the 
terminated portion after the effective date, and will cancel as many 
outstanding obligations as possible. The Administrator will allow full 
credit to the Borrower for the Federal share of unfulfilled contractual 
obligations which were incurred in good faith by the Borrower prior to 
grant termination.

Subpart C--[Amended]


Secs. 1703.80-1703.99  [Reserved]

    15. Sections 1703.80 through 1703.99, which are presently reserved 
in subpart B, are transferred to subpart C.

    Dated: March 7, 1994.
Bob J. Nash,
Under Secretary, Small Community and Rural Development.
[FR Doc. 94-5740 Filed 3-11-94; 8:45 am]
BILLING CODE 3410-15-P