[Federal Register Volume 59, Number 55 (Tuesday, March 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6647]


[[Page Unknown]]

[Federal Register: March 22, 1994]


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Part VIII





Department of Agriculture





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Rural Electrification Administration



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7 CFR Part 1786




Discounted Prepayments on REA Electric Loans; Final Rule
DEPARTMENT OF AGRICULTURE

Rural Electrification Administration

7 CFR Part 1786

 
Discounted Prepayments on REA Electric Loans

AGENCY: Rural Electrification Administration, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Electrification Administration (REA) is adding a new 
regulation to allow electric borrowers to prepay their REA notes at a 
discounted present value. The new subpart establishes policies and 
procedures to implement the provisions of the ``Rural Electrification 
Administration Improvement Act of 1992,'' and will provide REA policies 
and procedures regarding REA borrowers who wish to prepay REA loans at 
a discounted present value.

EFFECTIVE DATE: This final rule is effective March 22, 1994.

FOR FURTHER INFORMATION CONTACT: Patrick Shea, Financial Analyst, 
Program Support Staff, U.S. Department of Agriculture, Rural 
Electrification Administration, room 2234-S, 14th and Independence 
Avenue, SW., Washington, DC 20250-1500, telephone number (202) 720-
0736, FAX (202) 720-4120.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This final rule has been determined to be not-significant for 
purposes of Executive Order 12866, Regulatory Planning and Review, and 
therefore has not been reviewed by the Office of Management and Budget. 
However, the proposed rule was reviewed by the Office of Management and 
Budget in conformance with Executive Order 12291 and Departmental 
Regulation 1512-1.

Executive Order 12778

    This final rule has been reviewed under Executive Order 12778, 
Civil Justice Reform. This final 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 any parties may file suit challenging the provisions of this 
rule.

Regulatory Flexibility Act Certification

    This action does not fall within the scope of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.).

Information Collection and Recordkeeping Requirements

    In compliance with the Office of Management and Budget (OMB) 
regulations (5 CFR part 1320) which implements the Paperwork Reduction 
Act of 1980 (Pub. L. 96-511) and section 3504 of that Act, the 
information collection and recordkeeping requirements contained in this 
final rule have been submitted to OMB for review. 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.

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.

Catalog of Federal Domestic Assistance

    The program described by this final rule is listed in the Catalog 
of Federal Domestic Assistance Programs under number 10.850 Rural 
Electrification Loans and Loan Guarantees. This catalog is available on 
a subscription basis from the Superintendent of Documents, the United 
States Government Printing Office, Washington, DC 20402-9325.

Executive Order 12372

    This final rule is excluded from the scope of Executive Order 
12372, Intergovernmental Consultation. A Notice of Final Rule entitled 
Department Programs and Activities Excluded from Executive Order 12372 
(50 FR 47034) exempts REA loans from coverage under this Order.

Background

    The proposed rule for Discounted Prepayments on REA Electric Loans 
was published on September 16, 1993, at 58 FR 48465 under 7 CFR part 
1786. Comments were requested and a total of 15 organizations and 
individuals responded within the 30-day comment period. All comments 
were considered and some revisions were made in response to those 
comments.
    REA is adding a new subpart to part 1786 to implement Public Law 
102-428 cited as the ``Rural Electrification Administration Improvement 
Act of 1992.'' Section 2 of Public Law 102-428 amended Section 306B of 
the Rural Electrification Act of 1936 (RE Act)(7 U.S.C. 901 et seq.) to 
enable a borrower of REA electric loans to prepay its REA direct and 
insured loans at the lesser of: (A) The outstanding principal balance 
of the loan or; (B) the present value of the loan discounted from the 
face value of each payment at maturity at the rate established by the 
Administrator. The discount rate applicable to the prepayment of a loan 
shall be the then current cost of funds to the Department of the 
Treasury for obligations of comparable maturity to the remaining term 
of the loan. Before this new legislation was enacted a direct or 
insured loan made under the Act could not be sold or prepaid at a value 
that was less than the outstanding principal balance on the loan.
    A prior law (Pub. L. 99-509) allowed for a prepayment of REA 
electric and telephone loans at a discounted present value, but that 
prepayment had to take place prior to October 1, 1987. Twenty nine REA 
electric borrowers took advantage of that prepayment law. Later, 
another amendment (Pub. L. 101-624) was passed allowing borrowers that 
had merged with one of the 29 previous borrowers of electric loans who 
had prepaid, to prepay at a discounted present value. This prepayment 
had to take place within one year of the merger.
    The new law (Pub. L. 102-428) does not have any deadline or 
expiration date. The regulations implementing the prior prepayment 
programs required that borrowers prepay all of their outstanding REA 
debt obligations and agree not to apply for any additional REA 
financial assistance, unless they first repaid the amount of the 
discount, plus interest. Public Law 102-428 allows borrowers who prepay 
at a discount to remain eligible for REA financial assistance, other 
than direct or insured loans, including rural development loans and 
grants and loan guarantees.
    Borrowers may prepay at a discount all, or a portion of, 
outstanding REA debt provided the loan funds were advanced prior to May 
1, 1992, or have been advanced for not less than 2 years. Borrowers may 
apply for direct or insured loans 120 months after the date of the most 
recent prepayment. During the 120-month period, the Administrator may 
consider providing such a loan if, among other matters: (1) The loan is 
necessary to assure repayment of, or protect the Government's security 
for any outstanding direct loans, insured loans, or loan guarantees; or 
(2) the borrower's system has suffered severe physical plant related 
damage due to conditions beyond its control and the borrower is unable 
to obtain financing at reasonable terms to restore the system from non-
REA sources, including the Federal Emergency Management Agency, and 
from private sources.
    This new law also allows those borrowers who prepaid under the 
prior laws to remain eligible for financial assistance under the RE Act 
in the same manner as other borrowers who take advantage of this new 
law. If a prior prepayer wishes to apply for direct or insured REA 
loans, it must first wait 180 months from the date of the prepayment 
and then, if the discount was based on the average rate on utility 
bonds bearing a rating of ``Aa'' as set forth in Moody's Public Utility 
News Reports, pay the difference between that discount and the amount 
of discount that would have been allowed using the discount rate 
specified in this regulation which is based on the cost of funds to the 
U.S. Treasury at the time of prior prepayment plus interest on said 
difference from the date of that prepayment.
    Several section numbers and headings of the final rule have been 
added and modified and others have been reserved. One of these reserved 
sections will be used to describe the methodology for prepayments of 
the new municipal rate loan program. Details of this loan program are 
set forth in REA regulations published December 20, 1993, at 58 FR 
66260, as an interim rule. It would be premature to determine a 
methodology for the prepayment of these loans until the regulation 
governing this loan program is finalized.
    Finally, this regulation sets out the procedure for borrowers who 
wish to take advantage of this prepayment program.

Comments

    The comments are discussed under the appropriate section number and 
heading of the proposed rule. Some of these section numbers and 
headings have been changed in this final rule. Generally, many of the 
comments indicate a misunderstanding that the regulation was written 
for a single prepayment of all outstanding REA debt. This rule 
describes the process for prepayments of all or a part of outstanding 
REA debt. There will be one prepayment agreement pursuant to which a 
borrower may prepay all or a part of its REA debt through one or more 
closings. The regulation has been revised to make clear that the 
prepayment agreement contemplates an initial prepayment and at the 
borrower's discretion, subsequent prepayments.

Section 1786.153  Discounted Present Value

    Comment: A comment was received that suggested that the use of the 
State and municipal bond interest rate from the Federal Reserve 
Statistical Release was inappropriate for the purpose of the tax exempt 
financing adjustment. This interest rate is based on 20-year tax exempt 
bonds while it is being subtracted from an interest rate based on ``A'' 
rated utility bonds of 30 years.
    Response: The tax exempt adjustment for the discount rate has been 
changed to correct the inappropriate match caused by subtracting a 20-
year issue rate from a 30-year issue rate. Instead, the interest rate 
for the new municipal rate REA loan program, as set forth in 7 CFR 
1714.5 published December 20, 1993, at 58 FR 66266, will be used as the 
discount rate when this adjustment for tax exempt financing is 
necessary. See Sec. 1786.153(b).
    Comment: Several commenters suggested that the timeframe of setting 
the discount rate is too short. One commenter stated that ``The time 
between the public offering of debt and closing on the issue is usually 
3 weeks. In order to properly size the refinancing, the borrower needs 
to know the date and amount of the prepayment. The proposed regulations 
@ (sic.) 1786.158(e), only give 3 - 8 business days notice of the 
amount, and undefined notice of the date.''
    Response: The timeframe set for selecting the discount rate and 
calculating the amount of discounted present value prepayment has been 
determined based on REA experience. It is the same timeframe (8 
business days) that was used in the last REA discounted prepayment 
regulation found at 1786 subpart E. REA must set the discount rate as 
close as possible to closing because the legislation provides that the 
discount rate shall be the cost of borrowing to the U.S. Treasury at 
the time of prepayment. If a public debt issuance is going to be used 
to finance a prepayment REA will try to facilitate the timing of that 
transaction. REA has added new sections to the regulation at 
Secs. 1786.159 and 1786.160 to provide a preclosing notice not less 
than 10 business days prior to closing to notify the borrower of the 
closing date.

Section 1786.155  Eligible Borrower

    Comment: Restructured loans should not be restricted from prepaying 
at a discount.
    Response: The terms and conditions of existing restructure 
agreements vary from borrower to borrower. Some restructured loans no 
longer have the same term to maturity. Some of these agreements 
consolidated all debt into one note which included direct REA loans and 
guaranteed loans. REA guaranteed loans are not eligible for a 
discounted prepayment under this section. In many cases the interest 
rate and term to maturity were arrived at considering all of this 
consolidated debt. The original notes may have been granted an extended 
maturity and, in some cases, some of the restructured debt was put 
under new notes with an indefinite maturity and no accumulated 
interest. In other cases the original REA notes remained intact and 
other debt was restructured. Any prepayment of any portion of the debt 
would require that all remaining debt be reevaluated.
    However, REA recognizes that in some cases the terms of restructure 
agreements might not be inconsistent with or preclude prepayment under 
this regulation. Section 1786.155 has been changed to allow REA to 
consider the eligibility of borrowers with restructured loans on a 
case-by-case basis.
    Comment: A comment was submitted regarding the requirement that no 
REA loan funds could be left in the Construction Fund Account at the 
time of closing. The commenter suggested that the regulation be 
modified to allow the borrower to simply repay these funds at full 
value.
    Response: REA agrees that a borrower may simply repay these funds 
at face value and then proceed with the prepayment of all other 
advanced funds. This restriction, as required by the legislation, 
prevents borrowers from receiving any REA direct or insured loan funds 
during the 120-month period after a prepayment. REA direct or insured 
loan funds in the Construction Fund must be expended for approved 
purposes or repaid at face value to REA before a prepayment at a 
discount. It is the borrower's choice to meet this eligibility 
requirement with either of the two suggested methods.
    Comment: The rescission of unadvanced loan funds should be required 
at closing rather than at the time of application.
    Response: The regulation has been modified to reflect this comment. 
See Sec. 1786.158 (j) of this final rule.

Section 1786.156  Application Procedure

    Comment: A comment was received concerning the requirement that the 
source of financing should be identified. The comment questions the 
need of the borrower to provide evidence that it has the ability to 
obtain the necessary financing because the REA is ``unlikely to incur 
any costs or processing burden'' if the financing is not obtained. REA 
should accept a certification of the General Manager that it has the 
ability to obtain the necessary funds to repay rather than the 
requirement that the borrower provide ``evidence'' that it has this 
ability.
    Response: It is important for REA to know that the borrower has the 
ability to obtain financing and to identify the source of that 
financing. If the financing is to be tax exempt, REA must make an 
adjustment in its discount rate. REA will normally accept a 
certification of the General Manager as ``evidence'' of the ability to 
obtain the necessary financing.
    Comment: Several commenters stated that the application period is 
too long (60 days) considering that commercial banks only extend credit 
for 30 days and bond purchase agreements on privately placed debt 
issues only last 1 to 3 weeks.
    Response: The application procedure at Sec. 1786.156 has been 
changed to address the timing of the processing of prepayments. REA 
will respond to an application within 30 days and the borrower will 
then have the right to request a closing date. However in selecting a 
closing date the borrower should ensure that it will have sufficient 
time to meet all conditions of closing. For example, if the borrower 
needs to process a lien accommodation it may take 50 days as provided 
for a normal review under the lien accommodation rule found at 7 CFR 
part 1717 subpart R. Utility companies must have available credit 
arrangements and it is assumed that any REA borrower who wishes to 
prepay at a discount and not be eligible for additional REA financial 
assistance for 120 months would not prepay unless it had secured 
adequate credit arrangements.
    Comment: One commenter stated that borrowers using outside 
financing will have to obtain a lien accommodation and inquired about 
REA policies regarding lien accommodations.
    Response: The Lien Accommodations and Subordinations regulation, 7 
CFR subpart R was published as a final rule October 19, 1993. The 
borrower is responsible for obtaining the appropriate lien 
accommodation and it should apply for that lien accommodation within 
the timeframes specified in that regulation.
    Comment: Several comments questioned whether REA had the legal 
authority to disapprove an application.
    Response: REA must reserve the right to review and approve 
applications under its prepayment program. If a borrower executes a 
prepayment agreement and only prepays a portion of its REA loans and at 
a later date elects to prepay some or all of its remaining REA loans, 
then REA must review the borrowers request because circumstances could 
have changed to make it ineligible to prepay. Examples of a change in 
circumstances after a partial prepayment include the borrower's failure 
to honor its wholesale power contract or a default on the repayment of 
outstanding REA loans.
    Comment: One commenter objected to the Administrator having the 
right to request additional information for an incomplete application.
    Response: REA must retain some flexibility to address particular 
situations including those not contemplated in the legislation. It 
should be noted that this is consistent with other regulations, such as 
7 CFR 1710.150, which require that additional information may be 
necessary for the Administrator to make certain findings required by 
the RE Act and prudent lending practice.

Section 1786.158  Terms and Conditions of Prepayment Agreement

    There were many comments concerning the terms and conditions of the 
prepayment agreement including:
    Comment: The 60-day application period and the 60-day closing 
notice are too long.
    Response: The application procedures have been changed to reflect 
this concern. However, REA needs a reasonable time to process a 
prepayment request and agreement and the borrower needs time to meet 
other regulatory and contractual requirements. If the borrower has its 
paperwork in order and there are no complications with approvals of 
other lenders and state regulatory authorities, then the execution date 
may not require as much time as contemplated in the proposed rule. See 
Sec. 1786.159 of this final rule. After the initial prepayment closing, 
subsequent prepayments will not normally require more than 30 days 
notice. See Sec. 1786.160 of this final rule. If a borrower wishes to 
make a prepayment of less than all outstanding REA debt and use outside 
financing, the borrower may need to get an REA lien accommodation. The 
timeframes for obtaining a lien accommodation, described in 7 CFR part 
1717, are approximately 15 to 30 days for Advance approval and 20 to 50 
days for Normal review. Obtaining a lien accommodation is the 
borrower's responsibility.
    Comment: The ability of the Administrator to reschedule closings to 
meet administrative considerations should not be allowed.
    Response: The Administrator must have this discretion because of 
the varying demands and increased borrower flexibility of the REA loan 
program. REA does not expect to change any scheduled closing dates 
except in extraordinary circumstances.
    Comment: REA should include a consent to issue refunding debt when 
a public debt offering is going to be used to fund a prepayment.
    Response: This regulation has been written to address the typical 
REA discounted prepayment, which does not involve a public debt 
offering. REA will try to accommodate the special needs of a public 
debt refinancing where necessary on a case-by-case basis.
    Comment: REA should specify when it will make available a release 
of lien.
    Response: Sec. 1786.161 of the rule has been revised to clarify 
that REA will normally provide required releases simultaneously with 
the prepayment of all REA debt.
    Comment: An objection was submitted concerning REA's ability to 
terminate the right of a borrower to prepay.
    Response: If a borrower is interested in making a prepayment of 
less than all outstanding REA loans, then the prepayment agreement will 
give the borrower the right to make a series of partial prepayments 
over an indefinite period of time. If the borrower's conditions change 
after the agreement is executed that would make the borrower ineligible 
to make a prepayment, such as a default in the repayment of outstanding 
REA loans, REA must retain the capacity to terminate the right of a 
borrower to prepay.
    Comment: What security instrument will be necessary if a borrower 
wants or has outstanding rural development loans after all REA debt has 
been paid off?
    Response: The security required for rural development loans held by 
borrowers prepaying REA debt will be addressed on a case-by-case basis.

Section 1786.160 (Sec. 1786.163 in This Final Rule)  Existing Wholesale 
Power Contracts

    Comment: Several commenters questioned the need for and basis of 
the requirement that a prepaying borrower enter into a supplement to 
its wholesale power contract. One commenter suggested that the 
requirement represented an attempt to restrict the business and freedom 
of contract of the prepaying borrower and will frustrate the purpose of 
the RE Act to allow cooperatives to finance their activities from 
private capital sources.
    Response: Since the early days of the REA program, REA has made 
loans to provide electric service in rural areas through a two tiered 
system consisting of distribution borrowers and power supply borrowers. 
The power supply borrowers are owned and controlled by their members, 
the distribution borrowers. The distribution borrowers are bound to the 
power supply borrower by 35-year all-requirements contracts. The 
contracts assure that the power supply facilities financed by REA will 
be dedicated to serving persons in rural areas and that the 
distribution borrowers will financially support the power supplier. 
Wholesale power contracts in the form prescribed by REA are a key part 
of the Government's security for loans to the power supply borrowers. 
For further discussion, see 55 FR 38930.
    The required supplement to the wholesale power contract serves only 
to clarify the rights of the respective parties in the event that a 
distribution borrower undertakes an action, such as the sale of a 
substantial part of its system, that may have an adverse effect on the 
power supply borrower, the integrated distribution/power supply system, 
or REA. The required supplement does not change the fundamental rights 
of the parties to the contract. In the case of Tri-State G & T Assn. v. 
Shoshone River Power & Light, 874 F.2d 1359 (10th Cir. 1989), the court 
concluded that the existing form of contract obligates a distribution 
member to maintain its power requirements and remain in business 
throughout the term of the contract, that interference with the 
contract (in that case, a sell-out by a distribution member to an 
investor-owned utility) would ``constitute an abuse of the federal 
program'' (p. 1360). Rather, the supplement sets forth the procedure 
pursuant to which the borrower may sell out its system or otherwise 
take an action that affects its power requirements. The supplement 
strikes a balance that in effect allows the borrower to buy its way out 
of the contract on terms and conditions to be negotiated between the 
parties and subjected to REA approval and that will be designed to 
avoid adversely impacting the rates of other members or the power 
supply borrower's ability to repay its loans and other obligations. In 
no sense does the supplement discourage borrowers from financing their 
activities from private lending sources.
    REA has concluded that the clarification is in the interests of the 
REA program particularly when a distribution borrower is prepaying all 
REA indebtedness and will no longer be subject to those controls and 
approval rights set forth in the REA loan contract, mortgage and 
regulations. A similar requirement was imposed in the previous REA 
discounted prepayment program implemented in 1986. See 7 CFR subpart C 
Sec. 1786.54(g). The requirement is entirely consistent with the 
prepayment provisions of the RE Act which provide that ``the 
Administrator may establish (terms and conditions) that are reasonable 
and necessary to carry out this subsection.'' (section 306B(a)(4)). REA 
has, however, added a provision permitting the Administrator to grant 
an exemption to the requirement that a borrower enter into a supplement 
to its wholesale power contract in appropriate circumstances.
    Comment: Several commenters suggested that, because the 
supplemental contract requires payments made pursuant to a buyout by a 
distribution borrower to be paid directly to a noteholder, the power 
supplier could incur costly prepayment penalties and other problems. 
The commenters suggested that alternative payment arrangements be 
permitted.
    Response: REA has modified the language of the supplemental 
contract to allow alternative payment arrangements in applying the 
proceeds of a buyout.
    Comment: There was a comment questioning the need to enter into a 
supplement to the existing wholesale power contract if the borrower is 
already operating under the most current form of contract.
    Response: A new provision has been added to Sec. 1786.163 of this 
final rule which may allow those borrowers who are operating under the 
new form of wholesale power contract, which has a provision like the 
one in this regulation to be exempted from this requirement.

Section 1786.161 (Sec. 1786.164 in This Final Rule)  Loan Fund Audit

    Comment: There was one objection to the requirement that REA 
schedule an audit within 6 months of a prepayment of all REA loan 
funds. The objection was directed at requiring the audit to be 
performed prior to closing.
    Response: It is REA's practice to insure, through an audit, that 
its loan funds are spent only for approved RE Act purposes. The field 
accountant's work load requires a reasonable length of time to schedule 
this audit. REA believes that ``within six months'' of prepayment of 
all outstanding REA debt is a reasonable time. To schedule the loan 
fund audit at or before closing would result in a delay of the closing 
of up to 6 months. If the borrower prefers this option, it can be 
arranged.

Section 1786.162  Records (Sec. 1786.165 Reporting, in This Final Rule)

    Comment: There was one objection to the requirement that a loan 
fund audit of the borrowers' records must be performed, after prepaying 
all REA electric loans, if a borrower continues to have outstanding 
rural development loans. The proposed requirement would leave a 
borrower subject to all of the audit procedures of 7 CFR part 1773. The 
comment suggested that any audit should only be directed at those rural 
development loans.
    Response: This requirement is directed at REA's obligation to see 
that its loan and grant funds are spent in compliance with the 
respective agreements, that loans are repaid to REA according to 
contract, and that the borrower is otherwise in compliance with the 
provisions of its loan and security agreement. This section has been 
modified to relieve the borrower of the auditing procedures prescribed 
in 7 CFR part 1773. The borrowers' records must remain open to an audit 
by REA as long as there are outstanding rural development loans and/or 
grants.

Section 1786.164 (Sec. 1786.167 in This Final Rule)  Restrictions to 
Additional REA Financing

    Comment: Several comments objected to the language limiting the 
Administrator's discretion to only allowing direct or insured loans 
during the 120-month restricted period to protect outstanding 
Government loans.
    Response: REA has revised the language so that the Administrator's 
discretion is not limited. Nonetheless, REA anticipates that the 
discretion will be exercised only in unusual cases examples of which 
are included in the regulatory text.

Section 1786.165 (Sec. 1786.168 in This Final Rule)  Borrowers who 
Prepaid Under This Part Prior to October 21, 1992

    Comment: Several comments argued that former borrowers who prepaid 
at the discount based on the ``Aa'' utility rate prior to October 1, 
1987, must be treated in the same manner as other borrowers with 
respect to reentry into the loan program and that REA had changed the 
meaning of the legislation regarding the requirements that must be met 
to qualify for this reentry after a discounted prepayment.
    Response: REA believes that the intent of this legislation was 
clearly to treat all borrowers equally. As the legislation makes clear, 
this requires first, the repayment of the difference between the deeper 
prepayment discount in 1986 and 1987 and the Treasury-based discount 
required under this regulation. Second, since borrowers who participate 
in the current prepayment program, are restricted from receiving any 
direct or insured REA loan funds for 120 months from the date of that 
prepayment, so too the prior prepayers must also wait 180 months from 
the date of their prepayment which was prior to October 1, 1987. Both 
of these requirements must be met before the prior payers would be on 
an equal playing field with the current borrowers who prepay under this 
regulation.
    Comment: Several comments also argued that former borrowers who 
prepaid at the discount based on the ``Aa'' utility rate prior to 
October 1, 1987, must be treated in the same manner as other borrowers 
with respect to eligibility for loan guarantees and rural development 
loans, without meeting any additional requirements.
    Response: REA has changed Sec. 1786.168(c) in the final rule to 
permit former borrowers who prepaid prior to October 1, 1987, to apply 
for loan guarantees and rural development loans.

List of Subjects in 7 CFR Part 1786

    Accounting, Administrative practice and procedure, Electric 
utilities.

    For reasons set forth in the preamble, REA proposes to amend title 
7 of the Code of Federal Regulations to add a new subpart F to 7 CFR 
part 1786 to read as follows:

PART 1786--PREPAYMENT OF REA GUARANTEED AND INSURED LOANS TO 
ELECTRIC AND TELEPHONE BORROWERS

Subpart F--Discounted Prepayments on REA Electric Loans

Sec.
1786.150  Purpose.
1786.151  Definitions and rules of construction.
1786.152  Prepayments of REA loans.
1786.153  Discounted present value.
1786.154  Qualified Notes.
1786.155  Eligible borrower.
1786.156  Application procedure.
1786.157  Approval of applications.
1786.158  Terms and conditions of prepayment agreement.
1786.159  Initial closing.
1786.160  Subsequent closings.
1786.161  Return of Qualified Notes and release of lien.
1786.162  Outstanding loan documents.
1786.163  Existing wholesale power contracts.
1786.164  Loan fund audit.
1786.165  Reporting.
1786.166  Approvals.
1786.167  Restrictions to additional REA financing.
1786.168  Borrowers who prepaid under this part prior to October 21, 
1992.
1786.169  Liability.
1786.170  Prepayment of loans approved after December 20, 1993. 
[Reserved]
1786.171-1786.199  [Reserved]

Subpart F--Discounted Prepayments on REA Electric Loans

    Authority: 7 U.S.C. 901 et seq.; Delegation of Authority by the 
Secretary of Agriculture, 7 CFR 2.23, Delegation of Authority by the 
Under Secretary for Small Community and Rural Development, 7 CFR 
2.72.


Sec. 1786.150  Purpose.

    This subpart sets forth the policies and procedures of REA whereby 
borrowers may prepay, with private financing or internally generated 
funds, outstanding REA Notes evidencing electric loans at the 
Discounted present value of the REA Notes, pursuant to the provisions 
of section 306(B) of the RE Act as amended by Public Law 102-428, 106 
Stat. 2183, adopted October 21, 1992.


Sec. 1786.151  Definitions and rules of construction.

    (a) Definitions. As used in this subpart:
    Administrator means the Administrator of the Rural Electrification 
Administration (REA).
    Borrower means any organization which has an outstanding note(s) 
evidencing electric loans made by REA, or has previously prepaid such 
notes under subparts C and E of this part.
    Business day means any day on which both the REA and the Federal 
Reserve Bank of New York are open for business.
    Construction Fund Account means the Cash--Construction Fund--
Trustee Account, maintained by the borrower pursuant to the terms of 
the outstanding REA Loan Contract.
    Closing shall mean one of the several contemplated closings of the 
prepayment of the Qualified Notes prescribed by the Prepayment 
agreement.
    Closing date shall mean any business day identified as such by the 
Government in its preclosing notice delivered to the Company pursuant 
to Sec. 1786.158.
    Closing request shall mean a request by the borrower of the 
Government to schedule a closing for certain Qualified Notes on the 
date requested therein.
    Direct loan means a loan made pursuant to section 4 of the RE Act.
    Discounted present value shall have the meaning set forth in 
Sec. 1786.153.
    Distribution borrower means a borrower that sells electric power 
and energy at retail in rural areas.
    Electric loan means a Direct loan or an Insured loan made for the 
purpose of furnishing electric energy to persons in rural areas.
    Final maturity means the final date on which all outstanding 
principal and accrued interest on an electric loan is due and payable.
    Government means the United States of America, acting through the 
Administrator of the Rural Electrification Administration.
    Insured loan means a loan made pursuant to Section 305 of the RE 
Act.
    Lien accommodation means the sharing of the Government's (REA's) 
lien on property, usually all property, covered by the lien of the REA 
Mortgage.
    Loan guarantee means a loan guarantee under Section 306 of the RE 
Act.
    Power supply borrower means a borrower that sells or intends to 
sell electric power at wholesale to distribution or power supply 
borrowers pursuant to REA wholesale power contracts.
    Preclosing notice shall mean a notice delivered by the Government 
to the borrower in response to a closing request, identifying the 
closing date, the Qualified Notes to be prepaid at such closing and 
documents to be delivered by the borrower to the Government prior to 
the closing date.
    Prepayment agreement shall have the meaning set forth in 
Sec. 1786.158.
    Qualified Notes shall have the meaning set forth in Sec. 1786.154.
    RE Act means the Rural Electrification Act of 1936, as amended (7 
U.S.C. 901 et seq.).
    REA means the Rural Electrification Administration, an agency of 
the United States Department of Agriculture.
    REA Loan Contract means the agreement, as amended, supplemented, or 
restated from time to time, between a borrower and REA providing for 
loans or loan guarantees pursuant to the RE Act.
    REA Mortgage means collectively those mortgages and security 
agreements made by and among the borrower, the Government, and third 
parties, if any, securing indebtedness evidencing electric loans or 
loan guarantees made pursuant to the RE Act.
    Rural development loans means loans or grants made pursuant to 
Rural development programs.
    Rural development programs means loan or grant programs under the 
authority of the Administrator pursuant to sections 313, 501, and 502 
of the RE Act.
    Supplemental lender means a private lender whose loan to the 
borrower is secured by the REA mortgage.
    Tax exempt financing means borrowing evidenced by bonds, notes and 
other evidence of indebtedness the income of which is excluded from 
gross income for the purposes of Chapter 1 of the Internal Revenue Code 
of 1986 (26 U.S.C. ch. 1).
    (b) Rules of construction. Unless the context shall otherwise 
indicate, the terms defined in paragraph (a) of this section include 
the plural as well as the singular, and the singular as well as the 
plural.


Sec. 1786.152  Prepayments of REA loans.

    An electric loan made under the RE Act shall not be sold or prepaid 
at a value that is less than the outstanding principal balance, except 
that, on request of a borrower, an electric loan made under the RE Act, 
or a portion of such a loan, that was advanced before May 1, 1992, or 
has been advanced for not less than 2 years, shall be prepaid by the 
borrower at the lesser of the outstanding principal balance of the loan 
or the discounted present value thereof.


Sec. 1786.153  Discounted present value.

    (a) The discounted present value shall be calculated by summing the 
present values of all remaining payments on all Qualified Notes to be 
prepaid according to the following formula and adjusted as provided in 
paragraph (b) of this section if tax exempt financing is used.

TR22MR94.016

Where:

    The Greek letter, Sigma () means the sum of the following 
terms.
    The Greek letter, Pi () means the product of the following 
terms.

Pk=Total payment, including interest due on the Kth payment 
date following the prepayment date.
n=Total number of remaining payment dates to final maturity.
D1i=Number of days in the ith payment period that are in a 
non-leap year (365-day year).
D2i=Number of days in the ith payment period that are in a 
leap year (366-day year).
I=The discount rate applied to each transaction ascertained by using 
data specified in the ``Federal Reserve Statistical Release'' (H.15 
(519)), which is published each Monday. The availability of this 
Release will be announced when the information is available by 
telephone on (202) 452-3206. See adjustment for tax exempt refinancing 
at paragraph (b) of this section. The specific discount rate will be 
based on the discount rate(s) specified in the ``Treasury Constant 
Maturities'' section of this publication 8 business days prior to the 
closing and will be interpolated from that information as follows: 

------------------------------------------------------------------------
          Remaining final maturity of REA loan:                         
----------------------------------------------------------              
                   At least                      But less     Treasury  
-----------------------------------------------    than       constant  
                                               -----------  maturities  
                    # years                      # years                
------------------------------------------------------------------------
0.............................................          2  1-year.      
2.............................................          3  2-year.      
3.............................................          4  3-year.      
4.............................................          5  (1)          
5.............................................          6  5-year.      
6.............................................          7  (2)          
7.............................................          8  7-year.      
8.............................................          9  (3)          
9.............................................         10  (3)          
10............................................         11  10-year.     
11............................................         20  (4)          
20............................................         21  20-year.     
21............................................         30  (5)          
30............................................         36  30-year.     
------------------------------------------------------------------------
Notes: 1The arithmetic mean between the 3-year. and 5-year. Treasury    
  Constant Maturities; i.e., if 3-year. rate is 3.00% and the 5-year.   
  rate is 4.00% then the rate used would be 3.5%.                       
2The arithmetic mean between the 5-year and 7-year Treasury Constant    
  Maturities computed as above.                                         
3A straight line interpolated rate between the 7-year rate and the 10-  
  year rate. (See formula below)                                        
4A straight line interpolated rate between the 10-year note and the 20- 
  year Bond rate. (See formula below)                                   
5A straight line interpolated rate between the 20-year bond and the 30- 
  year bond using the following formula:                                


TR22MR94.017

Where:

I=The discount rate interpolated from the cost of money to the 
Treasury.
A=The Treasury interest rate for the most recently published maturity 
(in years) that is the shortest Treasury term (in years) which is 
greater than the borrower's remaining term (in years) to final 
maturity; i.e., (if the note to be prepaid has a final maturity of more 
than 10 years then this rate is the 20-year Treasury rate)
B=The Treasury interest rate for the most recently published maturity 
(in years) that is the longest Treasury term (in years) which is less 
than the borrower's remaining term (in years) to final maturity; i.e., 
(if the note to be prepaid has a final maturity of more than 10 years 
but less than 20 years then this term is the 10-year Treasury rate)
C=The remaining number of full years to the final maturity of the 
borrower's note. Drop all fractions of a year and use the remaining 
full years.
E=The published Treasury term (in years) to maturity which is the 
longest term to maturity for the published term that is less than the 
remaining term (in years) to final maturity of the borrower's note; 
i.e., (if the note to be prepaid has remaining years to maturity 
between 11 and 20 years then this term would be 10 or if the note to be 
prepaid has remaining years to maturity between 21 years and 30 years 
then this term would be 20).
F=The published Treasury term (in years) to maturity which is the 
shortest term to maturity for the published term that is greater than 
the remaining term (in years) to maturity of the borrower's note; i.e., 
(if the note to be prepaid has remaining years to maturity between 11 
and 20 years then this term would be 20 or if the remaining years to 
maturity is between 21 and 30 years then this term would be 30).

    Note: The percentage terms used in the above formula will be 
truncated to two decimal places. For the purpose of the terms A, B, 
E, and F above the published Treasury rate and term shall mean the 
Treasury Constant Maturities from the Federal Reserve Statistical 
Release for 7 years, 10 years, 20 years, and 30 years.

    (b)(1) In the event that the borrower prepays a loan under 
paragraph (a) of this section using, directly or indirectly, tax exempt 
financing, the discount shall be adjusted to ensure that the borrower 
receives a benefit that is no greater than the benefit the borrower 
would receive if the borrower used financing that was not tax exempt. 
The borrower shall certify in writing whether the financing will be tax 
exempt.
    (2) The discount rate established in paragraph (a) of this section 
shall be adjusted for a tax exempt financing by substituting for the 
``I'' term in the discount rate formula, a discount rate equal to the 
interest rate(s) published pursuant to 7 CFR 1714.5, determination of 
interest rates on municipal rate loans. This is the interest rate 
established for the new REA loan program which is based on municipal 
interest rates for issues of comparable maturity. No interpolation or 
average will be used. If a note is to be prepaid under this subpart and 
is subject to this tax exempt adjustment, the discount rate will be 
determined from the published table in the Federal Register. For 
example, if the note to be discounted matures in the year 1999 then the 
discount rate will be the interest rate for the year 1999. REA will 
publish a schedule of interest rates for municipal rate loans in the 
Federal Register at the beginning of each calendar quarter. The 
published rates in effect eight business days prior to closing will be 
used for the discount rates. All notes to be prepaid that have 
remaining years to maturity of more than 20 years will be discounted at 
the interest rate in effect for new REA municipal rate loans of 
comparable maturity at the time of closing.


Sec. 1786.154  Qualified Notes.

    An eligible borrower may prepay Qualified Notes under this subpart 
at the discounted present value. A Qualified Note is a note evidencing 
an REA electric loan, all advances of which were made prior to May 1, 
1992, or not less than 2 years prior to the date of prepayment closing. 
See Secs. 1786.155(a)(3) and 1786.158 (h) and (j).


Sec. 1786.155  Eligible borrower.

    (a) To be eligible to prepay an electric loan under this subpart, 
the borrower must be in compliance with the following: (1) The borrower 
shall be current on all payment obligations on outstanding loans made 
or guaranteed by REA. For the purpose of determining eligibility for 
prepayment, a default by a power supply borrower from which a 
distribution borrower purchases wholesale power shall not be considered 
a default by the distribution borrower;
    (2) There shall exist no material defaults under the borrower's REA 
Loan Contract and Mortgage;
    (3) The borrower shall have expended all funds advanced pursuant to 
the REA Loan Contract for the purposes for which such funds were 
advanced. A borrower will not be eligible to prepay under this subpart 
if it has any funds advanced pursuant to the REA Loan Contract in its 
Construction Fund Account; and
    (4) The borrower shall be current on all obligations under any 
wholesale power contract with an REA financed power supply borrower.
    (b) The eligibility of borrowers that have had any indebtedness 
representing loans made or guaranteed by REA restructured shall be 
determined on a case by case basis considering the terms and conditions 
of the restructuring agreement.


Sec. 1786.156  Application procedure.

    Any borrower seeking to prepay Qualified Notes under this subpart 
should apply to the appropriate REA Regional Director or the Director 
of the Power Supply Division. The application shall provide the 
following: (a) Borrower's REA designation;
    (b) Borrower's name and address;
    (c) A certified copy of a resolution of the board of directors of 
the borrower that the borrower wishes to enter into a prepayment 
agreement providing for the prepayment of all or a portion of its 
Qualified Notes;
    (d) Listing of each Qualified Note to be prepaid by loan 
designation, REA account number, advance date, maturity date, original 
amount, and outstanding principal balance;
    (e) Evidence that the borrower has the ability to obtain the 
financing necessary to prepay its Qualified Notes listed in paragraph 
(d) of this section and identification of the source of financing and 
the need if any of obtaining a lien accommodation from REA; and
    (f) Such additional information as the Administrator may request.


Sec. 1786.157  Approval of applications.

    (a) Ordinarily, within 30 days of receipt, an application will be 
reviewed and the borrower will be notified as to whether the 
application has been approved. If the application has not been 
approved, the borrower will be informed as to the reasons. If the 
application is approved the borrower shall thereafter be provided with 
a prepayment agreement for execution.
    (b) The Administrator may limit the number of applications approved 
and closings scheduled from time to time, taking into account, among 
other matters, administrative considerations of the REA.


Sec. 1786.158  Terms and conditions of prepayment agreement.

    Upon receipt of a satisfactory application, REA shall provide to 
the borrower for its execution a prepayment agreement, in form and 
substance satisfactory to REA, which may include the following: (a) 
Provide for the prepayment of one or more Qualified Notes from time to 
time, but no more than two closings may be scheduled in any calendar 
year unless a third closing is for the prepayment of all outstanding 
electric loans of the borrower;
    (b) Set forth procedures and forms through which the borrower will 
notify the Government of each election it makes to prepay certain 
Qualified Notes upon a requested closing date and the Government will 
notify the borrower of the established closing date and prepayment 
amount for the Qualified Notes for each closing;
    (c) Reserve to the Administrator the right to reschedule closing 
dates to meet administrative considerations;
    (d) Set forth closing requirements identifying the location and 
manner of payment, and all documentation and information to be 
delivered prior to or at closing, including opinions of counsel and 
certificates from the borrower;
    (e) Provide for notice by either telephone or facsimile to be given 
by REA to the borrower not more than 8 nor less than 3 business days 
before a scheduled closing date of the amount to be paid at closing 
which shall include all accrued interest and the discounted present 
value of the Qualified Notes to be prepaid;
    (f) Provide for notice of the 120 month period during which the 
borrower's eligibility for direct or insured loans will be restricted;
    (g) Set forth representations and warranties;
    (h) Require the borrower to prepay each Qualified Note specified in 
full;
    (i) Require the borrower to identify the source of the financing 
that will be used directly or indirectly to refinance the Qualified 
Notes. If the source is other than internally generated funds, the 
borrower must certify in writing whether such financing will be tax 
exempt, and if tax exempt financing will be used, furnish all 
information on the terms and conditions of the financing as REA may 
require;
    (j) Require the borrower to rescind the unadvanced balance of all 
outstanding electric loans as of the date of initial closing;
    (k) Require the borrower, if it is a party to a wholesale power 
contract with a power supply borrower, to provide the Administrator 
with such assurances as the Administrator may require that it is in 
compliance with and will continue to comply with its obligation to such 
power supply borrower;
    (l) Provide REA, if the Administrator determines it necessary, with 
security for all outstanding rural development loans and amendments to 
any outstanding rural development loan agreements in form and 
substance, and on terms and conditions, satisfactory to REA;
    (m) Prescribe remedies for violating the terms and conditions of 
the prepayment agreement;
    (n) Provide for termination by REA of the right for the borrower to 
prepay thereunder;
    (o) Provide evidence that any approvals required from any 
supplemental lender have been obtained; and
    (p) Set forth such other terms and conditions as the Administrator 
shall deem appropriate.


Sec. 1786.159  Initial closing.

    (a) Upon receipt of the prepayment agreement, the borrower may 
submit, pursuant to the terms of the prepayment agreement, a closing 
request which shall request a closing date no less than 30 business 
days from the date of the request.
    (b) The Government will respond to the borrower's closing request 
by delivering a preclosing notice to the borrower not less than 10 
business days prior to the date which the Government, after reviewing 
the borrower's closing request, selects as a closing date.


Sec. 1786.160  Subsequent closings.

    (a) Each subsequent prepayment after the initial closing shall be 
facilitated with the submission of an additional closing request by the 
borrower. Each closing request must request a closing date no less than 
30 business days from the date of the request.
    (b) The Government will respond to each subsequent closing request 
by delivering a preclosing notice to the borrower not less than 10 
business days prior to the date which the Government, after reviewing 
the borrower's closing request, selects as a closing date in each case.


Sec. 1786.161  Return of Qualified Notes and release of lien.

    Upon payment to REA at closing of the full amount specified in the 
notice delivered by REA to the borrower pursuant to the terms of the 
prepayment agreement (see Sec. 1786.158(e)), REA will deliver to the 
borrower at closing those Qualified Notes which have been paid in full 
at such closing, and upon payment and discharge of all outstanding REA 
debt obligations by the borrower, REA will deliver to the borrower at 
the final closing a release of lien prepared by the borrower pursuant 
to the terms of the prepayment agreement.


Sec. 1786.162  Outstanding loan documents.

    (a) Except as expressly provided in this subpart, the borrower 
shall comply with all provisions of its REA Loan Contract, its 
outstanding notes issued to REA, and the REA Mortgage.
    (b) Nothing in this subpart shall affect any rights of supplemental 
lenders under the REA Mortgage, or other creditors of the borrower.
    (c) Nothing in this subpart shall prohibit a borrower from making 
prepayments of any loans pursuant to the RE Act in accordance with the 
terms of such loans.


Sec. 1786.163  Existing wholesale power contracts.

    (a) If the borrower is a party to a wholesale power contract with a 
power supply borrower financed pursuant to the RE Act, the 
Administrator may require that the borrower and the power supply 
borrower enter into a supplement to the outstanding wholesale power 
contract providing substantially as follows:

Sample Contract Terms

    So long as any of the notes evidencing secured loans of the 
power supply borrower are outstanding, the borrower will not, 
without the approval in writing of the power supply borrower and the 
Administrator, take or suffer to be taken any steps for 
reorganization or dissolution, or to consolidate with or merge into 
any corporation, or to sell, lease or transfer (or make any 
agreement therefor) all or a substantial portion of its assets, 
whether now owned or hereafter acquired. The power supply borrower 
will not unreasonably withhold or condition its consent to any such, 
reorganization, dissolution, consolidation, or merger, or to any 
such sale, lease or transfer (or any agreement therefor) of assets. 
The power supply borrower will not withhold or condition such 
consent except in cases where to do otherwise would result in rate 
increases for the other members of the power supply borrower or 
impair the ability of the power supply borrower to repay its secured 
loans in accordance with their terms, or adversely affect system 
performance in a material way. Notwithstanding the foregoing, the 
borrower may take or suffer to be taken any steps for reorganization 
or dissolution or to consolidate with or merge into any corporation 
or to sell, lease or transfer (or make any agreement therefor) all 
or a substantial portion of its assets, whether now owned or 
hereafter acquired without the power supply borrower's consent, so 
long as the borrower shall pay such portion of the outstanding 
indebtedness on the power supply borrower's notes or other 
obligations as shall be determined by the power supply borrower with 
the prior written consent of the Administrator and shall otherwise 
comply with such reasonable terms and conditions as the 
Administrator and power supply borrower may require either: (1) To 
eliminate any adverse effect that such action seems likely to have 
on the rates of the other members of the power supply borrower, or
    (2) To assure that the power supply borrower's ability to repay 
the secured loans and other obligations of the power supply borrower 
in accordance with their terms is not impaired.
    The Administrator may require, among other things, that any 
payment owed under (2) of the preceding sentence that represents a 
portion of the power supply borrower's indebtedness on Notes shall 
be paid by the borrower in the manner necessary to accomplish a 
defeasance of those obligations in accordance with the loan 
documents relating thereto, or be paid directly to the holders of 
the Notes for application by them as prepayments in accordance with 
the provisions of such documents, or be paid to the power supply 
borrower and held and invested in a manner satisfactory to the 
Administrator.

[End of sample contract terms]

    (b) The Administrator may exempt a borrower from the requirement to 
enter into a supplement to its outstanding wholesale power contract if 
the Administrator determines that such requirement is burdensome and 
unnecessary in light of the provisions of the existing wholesale power 
contract, other security arrangements of the power supply borrower, and 
any other relevant facts and circumstances. Normally such exemption 
will be granted only with the concurrence of the power supply borrower.


Sec. 1786.164  Loan fund audit.

    In the event that a borrower shall prepay all its outstanding 
electric loans REA shall have the right to audit within six (6) months 
of closing transactions involving the REA Construction Fund Account 
established and maintained by the borrower pursuant to the terms of the 
REA Loan Contract and to inspect all books, records, accounts, and 
other documents and papers of the borrower. Should REA determine that 
the borrower has made disbursements of funds advanced pursuant to the 
REA Loan Contracts which do not comply with the requirements thereof, 
the borrower shall be required to pay the REA an amount equal to the 
difference between the amount which the borrower prepaid under this 
subpart with respect to such advances, and the amount which the 
borrower would otherwise have been required to return to the REA as a 
result of noncompliance if the borrower had not prepaid such advances, 
plus interest. (See 7 CFR part 1721, Post-Loan Policies and Procedures 
for Insured Electric Loans.)


Sec. 1786.165  Reporting.

    Borrowers that no longer have any loans made or guaranteed by REA 
and are considering applying for other financial assistance pursuant to 
the RE Act are encouraged to file the end-of-year operating report, REA 
Form 7.


Sec. 1786.166  Approvals.

    The borrower shall be responsible for obtaining all approvals 
necessary to consummate the transaction as required by the prepayment 
agreement, including such approvals as may be required by regulatory 
bodies and other lenders.


Sec. 1786.167  Restrictions to additional REA financing.

    (a) No borrower that prepays an electric loan at a discount as 
provided under this subpart may apply for or receive direct or insured 
loans during the 120 months from the most recent closing date, except 
at the discretion of the Administrator. During the 120 month period the 
Administrator may consider providing an insured loan if, among other 
matters, it is necessary to assure repayment of, or protect the 
Government's security for any outstanding loans or loan guarantees, or 
the borrower's system has suffered severe physical plant related damage 
due to conditions beyond its control and the borrower is unable to 
obtain financing at reasonable terms to restore the system from non-REA 
sources, including the Federal Emergency Management Agency, and from 
private sources. Upon expiration of the 120 months, such borrowers may 
apply for direct or insured loans in the same manner as other borrowers 
provided that such borrowers may not apply for direct or insured loans 
for facilities, construction of which commenced prior to the expiration 
of the 120 months.
    (b) Borrowers that prepay their direct or insured REA loans under 
this subpart remain eligible for certain types of financial assistance 
under the RE Act, including loan guarantees and rural development 
loans.


Sec. 1786.168  Borrowers who prepaid under this part prior to October 
21, 1992.

    (a) A borrower that had prepaid, prior to the date of enactment of 
Public Law 102-428 (106 Stat. 2183) on October 21, 1992, at a discount 
rate as provided at 7 CFR part 1786, subpart C: (1) Shall not be 
eligible except at the discretion of the Administrator as stated in 
paragraph Sec. 1786.167(a), to apply for or receive direct or insured 
loans during the 180-month period beginning on the date of the 
prepayment; and
    (2) Shall not be eligible to apply for or receive direct or insured 
loans from REA until the borrower has repaid to the REA the sum of: (i) 
The amount (if any) by which the discount the borrower received by 
reason of the prepayment exceeds the discount the borrower would have 
received had the discount been based on the cost of funds to the 
Department of the Treasury as calculated at Sec. 1786.153 at the time 
of the prepayment; and
    (ii) Interest on the amount described in paragraph (a)(2)(i) of 
this section for the period beginning on the date of the prepayment and 
ending on the date of the repayment, at a rate equal to the average 
annual cost of borrowing by the Department of the Treasury. This rate 
will be calculated first on the date of prepayment and at one year 
intervals from that date based on the same U.S. Treasury issues 
published in the Federal Reserve Statistical Release closest to that 
date. The Treasury rate of interest to be applied for each year will be 
the rate for the Treasury issue of comparable maturity to the number of 
years from the prepayment date to the repayment date and at one year 
intervals thereafter.
    (b) If a borrower and the Administrator have entered into an 
agreement with respect to a prepayment occurring before October 21, 
1992, this section shall supersede any provision in the agreement 
relating to the restoration of eligibility for loans under the RE Act.
    (c) Borrowers who prepaid prior to October 1, 1987, are eligible 
for assistance under the RE Act in the same manner as other borrowers 
with respect to loan guarantees and the rural development loans.
    (d) During the 180 month period described in paragraph (a)(1) of 
this section the Administrator may consider providing an insured loan, 
if the conditions described in Sec. 1786.167(a) exist.
    (e) Borrowers may not apply for direct or insured loans for 
facilities, construction of which commenced prior to the expiration of 
the 180 month period described in paragraph (a)(1) of this section.


Sec. 1786.169  Liability.

    It is the intent of this subpart that any failure on the part of 
REA to comply with any provisions of this subpart, including without 
limitation, those provisions setting forth specified timeframes for 
action by REA on applications for prepayments or closing requests, 
shall not give rise to liability of any kind on the part of the 
Government or any employees of the Government including, without 
limitation, liability for damages, fees, expenses or costs incurred by 
or on behalf of a borrower, private lender or any other party.


Sec. 1786.170  Prepayment of loans approved after December 20, 1993. 
[Reserved]


Secs. 1786.171-1786.199  [Reserved]

    Dated: March 16, 1994.
Karl N. Stauber,
Acting Under Secretary, Small Community and Rural Development.
[FR Doc. 94-6647 Filed 3-18-94; 10:41 am]
BILLING CODE 3410-15-P