[Federal Register Volume 62, Number 118 (Thursday, June 19, 1997)]
[Rules and Regulations]
[Pages 33462-33511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13445]



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Part II





Department of Agriculture





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Rural Utilities Service



Rural Housing Service



Rural Business-Cooperation Service



Farm Service Agency



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7 CFR Parts 1775, 1777, 1778, et al.



Streamlining the Rural Utilities Service Water and Waste Program 
Regulations; Final Rule

  Federal Register / Vol. 62, No. 118 / Thursday, June 19, 1997 / Rules 
and Regulations  

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DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1775, 1777, 1778, 1780, and 1781

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Parts 1901, 1940, 1942, 1951, and 1956

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Part 4284

RIN 0572-AB20


Streamlining the Rural Utilities Service Water and Waste Program 
Regulations

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service, 
Rural Utilities Service, and Farm Service Agency; USDA.

ACTION: Final rule.

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SUMMARY: The Rural Utilities Service (RUS) hereby amends the 
regulations utilized to administer the water and waste loan and grant 
programs. The final rule will combine the water and waste loan and 
grant regulations into one regulation. Unnecessary and burdensome 
requirements for entities seeking water and waste loan and grant 
financial assistance under the program are eliminated. The streamlining 
of the water and waste loan and grant regulation will allow RUS to 
provide better service to rural entities needing assistance in 
correcting and alleviating health and sanitary problems in their 
communities, and in general improve the quality of life in rural areas. 
This rule incorporates changes in the water and waste loan and grant 
program, the emergency community water assistance grant program, and 
the resource conversation and watershed loan programs mandated by the 
1996 Farm Bill.
    This rule also amends the regulations originally published by the 
former Farmers Home Administration (FmHA) and the former Rural 
Development Administration (RDA). These amendments implement 
legislation directing the Secretary of Agriculture to establish the 
Rural Utilities Service (RUS) with responsibility for the water and 
waste programs formerly administered by FmHA and RDA. The amendments 
published in this document consist solely of nomenclature changes 
required by law and of amendments necessary to conform to these 
nomenclature changes. The substance of the regulations is not affected 
by these amendments.
    This rule could impact the amount of water and waste loan and grant 
funds an applicant could receive. Therefore, RUS will honor all written 
commitments of water and waste loan and grant amounts issued prior to 
the effective date of this rule.

EFFECTIVE DATE: June 19, 1997.

FOR FURTHER INFORMATION CONTACT: Jerry W. Cooper, Loan Specialist, 
Water and Waste Division, Rural Utilities Service, USDA, South 
Agriculture Building, Room 2229, STOP 1570, Washington, DC 20250, 
telephone: (202) 720-9589.

SUPPLEMENTARY INFORMATION:

Classification

    We are issuing this final rule in conformance with Executive Order 
12866 and the Office of Management and Budget has determined that it is 
a ``significant regulatory action''.

Intergovernmental Review

    These programs are listed in the Catalog of Federal Domestic 
Assistance under numbers 10.760, Water and Waste Disposal Systems For 
Rural Communities; 10.763, Emergency Community Water Assistance Grants; 
10.764, Resource Conversation and Development Loans; 10.765, Watershed 
Protection and Flood Preventation Loans; and 10.770, Water and Waste 
Disposal Loans and Grants (Section 306C) and are subject to the 
provisions of Executive Order 12372 which requires intergovernmental 
consultation with State and local officials.

Environmental Impact Statement

    This action has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It has been determined that the 
action does not constitute a major Federal action significantly 
affecting the quality of the human environment, and in accordance with 
the National Environmental Policy Act of 1969, Pub. L. 91-190, an 
Environmental Impact Statement is not required.

Compliance With Executive Order 12778

    The regulation has been reviewed in light of Executive Order 12778 
and meets the applicable standards provided in sections 2(a) and 
(2)(b)(2) of that Order. Provisions within this part which are 
inconsistent with State law are controlling. All administrative 
remedies pursuant to 7 CFR part 11 must be exhausted prior to filing 
suit.

Information Collection and Paperwork Requirements

    The recordkeeping and reporting burden in this rule, under OMB 
control number 0575-0015, is not fully effective until approved by OMB.
    For further information contact Jerry W. Cooper, Loan Specialist, 
Water and Waste Division, Rural Utilities Service, U.S. Department of 
Agriculture, 1400 Independence Ave., SW., STOP 1570, Washington, DC 
20250-1548, telephone: (202) 720-9589.

National Performance Review

    This regulatory action is being taken as part of the National 
Performance Review program to eliminate unnecessary regulations and 
improve those that remain in force.

Unfunded Mandate Reform Act

    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the Unfunded Mandate Reform Act of 1995) for 
State, local, and tribal governments or the private sector. Thus 
today's rule is not subject to the requirements of sections 202 and 205 
of the Unfunded Mandate Reform Act of 1995.

Cross References of Regulations

    The Rural Utilities Service is an Agency resulting from a 
reorganization of programs administered by the former Farmers Home 
Administration, the former Rural Development Administration, and the 
former Rural Electrification Administration. Dual-references or cross-
references to former Farmers Home Administration regulations and forms 
are provided for by the Department of Agriculture Reorganization Act of 
1994.

Regulatory Flexibility Act Certification

    The Administrator of RUS has determined that the Regulatory 
Flexibility Act (5. U.S.C. 601 et seq.) does not apply to this rule.

Background

    The water and waste loan and grant programs are authorized by 
various sections of the Consolidated Farm and Rural Development Act, (7 
U.S.C. 1921 et seq.), as amended. The regulations for these programs, 
particularly the loan program, have not been completely reviewed for 
many years. The recent streamlining and reorganization of the 
Department of Agriculture provided an opportunity to review and rewrite 
the

[[Page 33463]]

water and waste loan and grant regulations. A task force was formed to 
review and rewrite the regulations. The aim of the task force was to 
make the regulations easier to understand, eliminate unnecessary 
requirements, and continue to protect the interest of the U.S. 
taxpayer.
    The program provides loan and grant funds for water and waste 
disposal projects serving the most financially needy rural communities. 
Financial assistance should result in reasonable user costs for rural 
residents, rural businesses, and other rural users. The program is 
limited to rural areas and small towns with a population of 10,000 or 
less.
    The final rule will divide the regulation into four subparts: A, B, 
C, and D. Subpart A contains the general policies and requirements of 
the loan and grant program. Subpart B contains the loan and grant 
application processing requirements. Subpart C contains all the 
requirements for planning, designing, bidding, contracting, 
constructing, and inspections. Subpart D has information required in 
the preparation of notes or bonds and bond transcript documents for 
public body applicants.
    Major changes are:
    1. Redirects additional grant funds to communities that truly need 
the assistance in order to construct a project. Communities with 
incomes over 100 percent of the State nonmetropolitan median household 
income will not qualify for any grant funds as in the current 
regulations.
    2. Stretches the grant dollars appropriated by Congress to help 
more communities by changing the maximum percentage of grant funds that 
a higher income community can receive from 55 percent to 45 percent of 
RUS's share of the project costs. This change could have an indirect 
effect of having an incentive for development of regional projects.
    3. The process used to select projects for funding has been revised 
to direct funds to low income, small communities that need to correct 
health problems. Also, the priority points awarded for regional systems 
have been increased.
    4. The application process has been streamlined to reduce 
unnecessary paperwork and improve service to the rural communities. 
There will be less regulations and the number of pages will be greatly 
reduced.
    5. The application process has been shortened by eliminating the 
preapplication process. However, an applicant will have the option of 
requesting an Agency eligibility review before submitting a complete 
application.
    6. A preliminary engineering report (PER) must be submitted earlier 
in the application process. The requirement of submitting a PER earlier 
in the process will assist the staff in making better decisions. Also, 
applicants have to have this type of document to help them determine 
what, where, and how they are going to build needed facilities. This 
change will force applicants to have a clear picture of what they want 
to construct prior to applying for assistance. A majority of applicants 
have a PER at the preapplication stage now, therefore the change will 
tend to put all applicants on a level field.
    7. The functions of former Farmers Home Administration (FmHA) and 
the Rural Development Administration (RDA) relating to the water and 
waste loan and grant programs authorized by various sections of the 
Consolidated Farm and Rural Development Act, (7 U.S.C. 1926(a)), as 
amended have been transferred to RUS. Therefore in order to enhance the 
delivery of customer services and better assist the public, RUS is 
amending regulations originally published by FmHA and RDA. These 
amendments will replace references to FmHA and RDA and its officials 
with references to RUS and to appropriate officials. This action will 
also separate the regulation now utilized by RUS and Rural Housing 
Service (RHS) to administering the water and waste loan and community 
facilities loan programs, respectively. All parts pertaining to the 
water and waste loan program will be moved into 7 CFR part 1780. This 
action will have no effect on RHS's community facilities loan program 
as this action makes no changes in the regulation. The following 
programs are affected by these amendments: (1) Water and Waste Loans 
and Grants, (2) Technical Assistance and Planning Grants, (3) Emergency 
Community Water Assistance Grants, (4) Section 306C WWD Loans and 
Grants, and (5) Resource Conservation and Development Loans and 
Watershed Loans and Advances.
    8. The criteria utilized to allocate water and waste program funds 
has been moved from 7 CFR part 1940, subpart L to 7 CFR part 1780.
    The major 1996 Farm Bill changes are:
    1. Funds made available for these programs may be made available 
for a water system that is making significant progress toward meeting 
the Safe Drinking Water Act standards.
    2. Funds made available for water treatment discharge or waste 
disposal system must meet applicable Federal and State water pollution 
control standards.
    3. Within 60 days of filing an application for loan or grant 
assistance, a notice of intent shall be published in a general 
circulation newspaper.
    4. When applicants hire outside engineers, the applicant shall 
publicly announce all requirements for engineering and architectural 
services, and negotiate contracts for such services on the basis of 
demonstrated competence and qualifications for the type professional 
service required and at a fair and reasonable price. When project 
design services are procured separately, the selection of the engineer 
or architect shall be done by a request for proposal.
    5. Assistance under any rural development program administered by 
the Secretary or any agency of the Department of Agriculture shall not 
be conditioned on any requirement that the recipient of the assistance 
accept or receive electric service from any particular utility, 
supplier, or cooperative. This is being implemented for the water and 
waste loan and grant programs.
    6. Section 306B of the Consolidated Farm and Rural Development Act 
(7 U.S.C. 1926b) was repealed. References to section 306B were deleted 
from the regulations and the amendments to section 306A are included.
    7. The interest rate formula for Resource Conversation and 
Development Loans, and Watershed Protection and Flood Preventation 
Loans was amended to establish the interest rate on these loans based 
on current market yield for outstanding municipal obligations with 
remaining periods to maturity comparable to the average maturity for 
the loan, adjusted to the nearest 1/8 of 1 percent.

Comments on the Proposed Rule

    RUS published a proposed rule in the Federal Register on September 
12, 1996, (61 FR 48075) and asked for written comments on or before 
October 15, 1996. The Agency received seventy-nine comments from the 
public review process. All comments were considered when preparing the 
final rule; however, all comments have not been addressed separately 
since many could be addressed collectively. Responses to comments 
received are grouped according to corresponding sections of the rule 
and are as follows:

[[Page 33464]]

Subpart A--General Policies and Requirements

Sec.

1780.1  General.

    1. Sec. 1780.1(k)--Include the Brooks Architect-Engineer Act, Title 
40 of the U.S. Code subchapter VI, Sections 541, 542, 543, and 544 as 
the federal statute applicants should be aware of and comply with 
relative to the procurement of engineering services.
    Agency response: The Agency has not implemented this suggested 
change. The Brooks Architect-Engineer Act only applies to Federal 
procurement and would not be applicable to non-profit organizations and 
units of local and State government who are the recipients of the 
financial assistance.

1780.3  Definitions and grammatical rules of construction.

    1. Add a definition of Agency Identified Target Areas referred to 
in Sec. 1780.17.
    Agency response: The Agency agrees and has added a definition.
    2. Sec. 1780.3(a)--Similar System Cost--Recommend establishment of 
similar system cost based on a comparison of rate structure for the 
same amount of water usage.
    Agency response: The Agency does not agree with this 
recommendation. While this might be possible for a water system, the 
Agency funds other types of projects where this type information would 
not be available. The proposed language would be broad enough to cover 
all types of projects funded by the Agency, including similar usage 
levels.
    3. Sec. 1780.3(a)--Equivalent Dwelling Unit--Add after ``typical 
rural residential dwelling'' add the following, ``or users whose total 
water needs could be met by a single residential sized water meter.'' A 
property with a permanent residence and a stop gap housing structure 
should only be considered as one connection.
    Agency response: The Agency made no change in the definition. 
Number of individual meters or residential dwellings are not what 
determines an equivalent dwelling unit (EDU). An EDU is based on the 
average consumption of a typical rural residential household.
    4. Sec. 1780.3(a)--Rural and rural areas--Should be written as 
broadly as possible to avoid defining a rural area as a local 
government unit.
    Agency response: The Agency made no change in the definition of 
rural and rural areas. The Agency does not define a rural area outside 
a city or town by the type of local governmental unit.

1780.7  Eligibility.

    1. Sec. 1780.7(c)(2)--Delete last sentence. The capacity for fire 
protection is repeated in Sec. 1780.57(d) and should not be in this 
section.
    Agency response: The Agency agrees and made the change.
    2. Sec. 1780.7(d)--Place a period after the word ``terms'' and 
delete ``or other funding sources.''
    Agency response: The Agency agreed and made the change.
    3. Sec. 1780.7(e)--What is meant by ``reasonable rates and terms?''
    Agency response: The words ``and terms'' should have not been 
included in that sentence. The applicant would be responsible for 
providing continued availability and use of the proposed facility at 
reasonable rates. The Agency has made the change.

1780.9  Eligible loan and grant purposes.

    1. Sec. 1780.9(e)(1)(iv)--Change to specify that only ``hired'' 
applicant labor be reimbursable and not for people already on payroll.
    Agency response: The Agency agrees and limited the use of funds to 
``additional'' applicant labor necessary to install and extend service.
    2. Sec. 1780.9(f)(1)--After the word ``obligations for'' add 
``engineering and other services used to prepare the application or.''
    Agency response: The Agency agrees and changed the word 
``construction'' to ``eligible project costs.'' This would cover all 
project costs incurred before loan or grant approval.
    3. Sec. 1780.9(e)(1)(v)--2 commenters--Should provide clearer 
guidance on what circumstances may warrant using funds for connecting 
users to the system.
    Agency response: The Agency made no change. The wording ``unusual 
cases'' means that using loan and grant funds to connect users to the 
main service line would be the exception rather than the rule. This 
should only be considered in situations where the users cannot pay the 
cost or from an engineering standpoint that it is the logical thing to 
do.
    4. Sec. 1780.9(e)(1)(i)--Revise to include training as an eligible 
cost. Would assure that equipment and processes will function as 
intended. The lack of technical expertise to properly operate and 
maintain new equipment or treatment processes can be a major problem 
with small systems.
    Agency response: The Agency made no change. The proposed language 
is broad enough to allow the use of funds to provide necessary training 
to operators to assure proper operation and maintenance of equipment.

1780.10  Limitations.

    1. Sec. 1780.10(c)(2)--13 commenters--Do not change the formula 
from 55 percent grant to 45 percent grant.
    Agency response: The Agency made no change. The Agency has a 
limited amount of grant funds available for rural communities. The 
Agency is directing these funds to the communities that have the 
greatest need for these funds. The reduction from 55 percent to 45 
percent will make additional grant funds available to low income 
communities that have the greatest need for the limited grant funds.
    2. Sec. 1780.10(c)--2 commenters--Revise the requirement that 
restricts the amount of grant to RUS's share of project costs. Change 
the wording ``RUS funded project development costs'' to ``RUS eligible 
project development costs.''
    Agency response: The Agency agrees and has made the change.
    3. Sec. 1780.10(c)(2)--Allow grants up to 75 percent to all 
existing borrowers where funding is considered servicing action.
    Agency response: The Agency does not agree with this 
recommendation. The amount of grant funds an applicant can receive 
should be based on eligibility and not if they are an existing RUS 
borrower.
    4. Sec. 1780.10(a)(6)--Recommend that the limitation on allowing 
rental of applicant owned equipment be deleted. Should allow for 
community owned equipment to be rented for the project if it is the 
most cost effective option.
    Agency response: This recommendation was not adopted. Program funds 
should not be used to rent equipment an applicant owns. Program funds 
should be used to cover services and equipment not available to the 
applicant.
    5. Sec. 1780.10(c)(1)--2 commenters--Recommend removing the 
requirement regarding health or sanitary problem. If not removed, need 
to clarify that if there is no health or sanitary problem, the amount 
of grant that could be obtained is based on income only.
    Agency response: The Agency made no change. The eligibility for the 
maximum 75 percent grant should be based on need as well as income. The 
addition of health or sanitary problems makes eligibility for the 75 
percent grant consistent with the eligibility for the poverty interest 
rate.
    6. Sec. 1780.10(c)(2)--Recommend changing 45 percent grant to 50 
percent grant.

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    Agency response: The Agency made no change. The 45 percent grant 
amount will make more grant funds available to communities with a 
median household income of less than 80 percent of the nonmetropolitian 
median household income of the State. This will allow the Agency to 
target grant funds to more low income communities.
    7. Sec. 1780.10(c)(1)--Recommend increasing maximum grant 
percentage to 85 percent.
    Agency response: Agency made no change. The maximum grant is 
limited by law to 75 percent.
    8. Sec. 1780.10(b)(3)--As written, this section is confusing. 
Should rephrase to read: ``Pay project costs when other loan funding 
for the project is available at reasonable rates and terms.''
    Agency response: The Agency made no change. This is a limitation on 
when grant funds can be used. The proposed language would prohibit a 
grant being made when the interest rate or length of repayment are not 
in line with those received by other communities with similar economic 
conditions.

1780.11  Service area requirements.

    1. Sec. 1780.11(a)(2)--Recommend that this paragraph be deleted. 
System officials should make decisions regarding areas to serve based 
on financial, environmental, and design factors.
    Agency response: The Agency made no change. The Agency agrees that 
in installing a facility the decisions regarding areas to be served 
should be based on financial, environmental, and design factors. This 
paragraph allows the decisions regarding areas to be served to be based 
on these factors.

1780.13  Rates and terms.

    1. Sec. 1780.13(d)--There are currently four weekly Bond Buyer 
indices used to measure interest rates. This section needs to 
specifically identify which index is used.
    Agency response: The Agency agrees and has made the change.
    2. Sec. 1780.13(e) Add a new paragraph (4) to read as follows: 
``Principal and interest may be deferred in whole or in part for a 
period not to exceed 36 months prior to the date of the first 
installment due. This would be only in those cases where the 
development of the water source and treatment facility or sanitary 
treatment facilities are needed prior to the water or sewer being 
available to the rural users.''
    Agency response: The Agency has not made this change. The 
regulations allow for deferment of principal and loan funds can be used 
to pay interest. By putting these together the same purpose can be 
accomplished as the suggested change.

1780.14  Security.

    1. Sec. 1780.14(c)--Recommend that the parity security requirement 
be deleted.
    Agency response: The Agency did not make this change. Eliminating 
the parity security requirement would not adequately protect the 
security interest of the Government. The Agency should be in a 
``parity'' security position with other lenders when jointly financing 
a project. If the project is financially sound, there is no problem 
with the parity requirement. The government should not guarantee other 
lenders loans by taking junior lien positions when jointly funded 
projects are developed.

1780.17  Selection priorities and process.

    1. Sec. 1780.17(a)(1)--Reduce population from 1,000 to 500 and add 
5 points.
    Agency response: The Agency agrees to make part of the suggested 
change. The Agency agrees to change the population points for 
communities with a population not in excess of 1,000 to 25 points. The 
Agency did not reduce the population to 500. Leaving the breaking point 
at 1,000 or less will give balance between financial feasibility and 
population priority.
    2. Sec. 1780.17(b)--The points for ``health'' should equal those 
for ``income.'' Recommend increasing points in Sec. 1780.17(b) (1) and 
(2) to 30 points and increasing points in Sec. 1780.17(b)(3) to 20.
    Agency response: The Agency did not make this change. The Agency 
agrees that the protection of public health is a high priority. 
However, low income communities can least afford to construct the 
infrastructure that is needed to improve their health. By giving more 
priority to income and equal priority to small populations and health, 
funds can be directed to communities with the greatest need.
    3. Sec. 1780.17(b)--Recommends that there be a gradation within the 
25 points allowed for health priorities for severity of health hazard. 
This would give more points to the greatest health hazards and less 
points to ``lesser'' health issues.
    Agency response: The Agency did not make this change. The health 
priority pertaining to a water system are required by the Federal 
statute that authorizes the program. This would make it difficult to 
develop an equitable graduation scale within the health priority points 
for each category.
    4. Sec. 1780.17(b)--Should there be health priority points for 
storm drainage?
    Agency response: The Agency did not make a change. There could be 
measurable health problems associated with a storm drainage project, 
the majority are safety related. Storm drainage would receive priority 
points under other categories, but would not rank as high as a drinking 
water or sewer project that directly corrects a health problem.
    5. Sec. 1780.17(c)--Change heading to ``Median Household Income.'' 
Also, word ``household'' should be in (c)(1).
    Agency response: Agency made the change.
    6. Sec. 1780.17(f)--Delete the phase ``exceeding 20% of the 
development cost at time of loan or grant approval or.'' Placing an 
arbitrary limit would further compound the problem at hand and would 
hinder the resolution of the funding problem.
    Agency response: The Agency made no change. Project cost overruns 
that exceed 20 percent should not be given priority for receiving 
additional funding from the Agency. The Agency is trying to reduce 
funds that go into project cost overruns and by reducing the funding 
priority is one way this can be accomplished.

1780.18  Public information.

    1. Sec. 1780.18(a)--The publishing of a notice of intent to file an 
application is nothing but extra cost to the applicant.
    Agency response: The Agency made no change. This is a requirement 
of the 1996 Farm Bill.
    2. Sec. 1780.18(a)--Should increase the notice of intent from 60 
days to 180 days.
    Agency response: The Agency made no change. This 60 day requirement 
was part of the 1996 Farm Bill.
    3. Sec. 1780.18(a)--Recommend allowing alternative means of 
notifying public such as fliers or mailers in small communities.
    Agency response: The Agency has not made the changed. The 1996 Farm 
Bill requires that the notice of intent to file a application be 
published in a general circulation newspaper.
    4. Sec. 1780.18(b)--Recommend giving applicant's the option to hold 
the public meeting prior to the application submittal. Delete ``after 
the application is filed and'' add ``The public meeting must be held 
not later than loan or grant approval.''
    Agency response: The Agency agrees to this change.
    5. Sec. 1780.18(b)--2 commenters--Eliminate the requirement for a 
public meeting.
    Agency response: The Agency made no change. It is extremely 
important that applicants keep the general public

[[Page 33466]]

informed about the development of a proposed project. Support from the 
general public for a water or waste project is one of the most 
important ingredients for success.

Subpart B--Loan and Grant Application Processing

1780.31  General.

    1. Sec. 1780.31(d)--Change ``State Environmental Coordinator'' to 
State Environmental Coordinator or designee.''
    Agency response: The Agency made no change. The State Environmental 
Coordinator should be involved in the application process to assure 
that important environmental issues are properly addressed.

1780.32  Timeframes for application processing.

    1. Sec. 1780.32(a)--2 commenters--Revise to 15 working days or 
delete the 15 day requirement for notifying applicants that application 
is incomplete.
    Agency response: The Agency agrees and has made this change.

1780.33  Application requirements.

    1. Should continue with preapplication process--14 commenters--The 
preapplication allows determination if a project is workable in RUS's 
view before spending time and money on formal application. This makes 
the overall funding process more workable and gives time needed to 
explore options before an application is formally filed.
    Agency response: The Agency has considered this recommendation and 
has given communities another option. If a community wishes to know if 
they are eligible for financial assistance they can make a written 
request to the Agency.
    2. Eliminate requiring a PER and 1940-20 at initial stage of 
application process.
    Agency response: The Agency did not make this change. The 
Preliminary Engineering Report contains information on the proposed 
project that the Agency must have at this stage of the application 
process. Form RD 1940-20 provides the information necessary for the 
Agency to start the environmental review process and is needed at this 
stage of the application process.
    3. Sec. 1780.33(c)--2 commenters--Should delete last sentence as 
the completion of a PER is covered in Sec. 1780.55 or insert ``PER 
guidelines for water, sanitary sewer, solid waste, and storm drainage 
are available from the agency.''
    Agency response: The Agency agrees and has deleted the sentence.
    4. Sec. 1780.33(c)--Recommend that RUS provide up front funds in 
form of a loan to cover cost of preliminary engineering report for 
poorest communities.
    Agency response: The Agency made no change. The Agency has a 
limited amount of loan funds available and uses these funds toward the 
total project costs rather than partial up front costs. The Agency 
believes that it is important to utilize its limited funds to build 
projects, rather than funding a preliminary engineering report for a 
project that may never be built.
    5. Sec. 1780.33(f)--Delete reference to Form RD 1940-20, insert 
``The applicant will consult with the processing office to determine 
the appropriate environmental information that should be provided.''
    Agency response: The Agency revised to allow applicant to provide 
comparable information without using Form RD 1940-20.
    6. Sec. 1780.33(h)--2 commenters--Combine all certifications into 
one form called ``General Borrower Certification.'' or include a 
statement and check off on the application indicating that these 
requirements will apply and allowing the applicant to complete such 
certificates if and when the loan actually closes.
    Agency response: The Agency made no change. However, this is a 
issue that will be reviewed in the future to determine what can be done 
in this area.

1780.35  Processing office review.

    1. Sec. 1780.35(b)(2)--Recommends that a actual monthly rate 
ceilings for the poverty and intermediate categories be established.
    Agency response: The Agency made no change. While an actual monthly 
rate ceiling might work for a small geographic area it would be 
impossible to establish one for the entire United States that would be 
fair to all areas. When the debt service portion of the annual user 
costs exceeds the appropriate percentage of median household income, 
the Agency can determine the grant amount based on similar system cost.
    2. Sec. 1780.35(b)(2)--Recommend that the relationship to total 
debt service and the project O&M cost be considered in determining 
grant eligibility.
    Agency response: The Agency made no change. The relationship 
between median household income and debt service is used because grant 
funds can only be used to reduce the debt. However, the similar system 
cost method used in (b)(3) does take into consideration other user 
costs in determining the grant amount.

1780.39  Application processing.

    1. Sec. 1780.39(a)--In first sentence remove ``and after the 
applicant selects its professional and technical representative.''
    Agency response: The Agency agrees and made the change.
    2. Sec. 1780.39(b)(1)--27 commenters--Request for proposals should 
be deleted. Could cause potential conflicts and drive cost up. 
Applicants should be allowed to choose the engineer based on knowledge 
and experience.
    Agency response: The Agency has not deleted this requirement. This 
is a requirement of the 1996 Farm Bill and must be complied with. 
However, the Agency has revised to make it clear that the selection of 
the engineer to develop the preliminary engineering report is not 
subject to this requirement. Also, clarified is that the selection of 
engineering services should be on the basis of all relevant factors.
    3. Sec. 1780.39(b)(1)--4 commenters--When applicants hire outside 
engineers, the selection of an engineer for a project design shall be 
conducted pursuant to state procurement laws or in the absence thereof, 
pursuant to the Federal Brooks Act, Public Law 92-582.
    Agency response: The Agency revised the paragraph to reflect state 
statutes or local requirements. The Brooks Act only applies to Federal 
procurement and construction. This act would not apply because the 
Federal government is not selecting the engineer. Revised rule to 
reflect that the owner may procure engineering services in accordance 
with applicable state laws providing the procurement meets the intent 
of this section.
    4. Sec. 1780.39(b)(1)--4 commenters--Request for proposals should 
be required for all engineering services not only project design. 
Delete phase ``for project design.''
    Agency response: The Agency revised to make this optional, but not 
a requirement. It should be left up to the applicant to make this 
decision and not made mandatory by the Agency.
    5. Sec. 1780.39(b)(1)--Change all references to request for 
proposal to ``Request For Qualifications and/or Request for Proposal or 
add a definition for Request For Proposal that includes qualification 
and request for engineering services.
    Agency response: The Agency has revised the selection of 
engineering services to reflect all relevant factors.
    6. Sec. 1780.39(b)(1)--Consider moving to Sec. 1780.54 and clarify 
how engineers are to be selected in (1).

[[Page 33467]]

    Agency response: The Agency did not make this change. The section 
was revised to clarify how engineers are to be selected. This section 
pertains to all professional services and contracts related to the 
facility and the Agency believes that this is the best place to address 
engineering services.
    7. Sec. 1780.39(b)(1)--Suggest that the regulation make provision 
to allow an ``ongoing'' contract or relationship with a community to 
continue without a new selection procedure.
    Agency response: The Agency made no change. The 1996 Farm Bill 
requires that when project design is procured separately, the selection 
of the engineer shall be done by a request for proposal.
    8. Sec. 1780.39(b)(1)--The rule is silent on the procurement of 
engineering services for the planning phase of a project.
    Agency response: The Agency has revised the rule to require 
applicants to publicly announce all requirements for engineering 
services.
    9. Sec. 1780.39(b)(1)--2 commenters--Should be made clear that if 
engineer has already been selected through an RFP then the process does 
not have to be repeated for design phase.
    Agency response: The Agency agrees that only one public 
announcement covering requirements for engineering services is 
necessary for a project. The revision will allow for this situation.
    10. Sec. 1780.39(b)(1)--If a project is funded in phases, would an 
RFP have to be done for each phase? When can noncompetitive 
negotiations be utilized for engineering services?
    Agency response: If a project has been divided into phases and the 
procurement of engineering services covering all phases has been done 
in accordance with Agency requirements, the process would not have to 
be repeated as each phase is constructed. Noncompetitive negotiations 
could be utilized for the planning and preliminary engineering work 
done on a project after the applicant publicly announces all 
requirements for engineering services.
    11. Sec. 1780.39(b)(1)--Honor agreements for engineering services 
entered into prior to submitting an application.
    Agency response: The Agency made no change. If engineering services 
were selected in accordance with Agency requirements, then the process 
would not have to be repeated.
    12. Sec. 1780.39(c)(2)--What is ``meaningful user cash 
contributions?''
    Agency response: To clarify the intent of this paragraph, the 
Agency has changed the word ``meaningful'' to ``new.'' This should make 
it clear that only users not presently receiving service will be 
required to make an up front cash payment to indicate interest in 
receiving service when it becomes available.
    13. Sec. 1780.39(e)(2)--Divide into two paragraphs by adding a 
(e)(3) to read as follows and deleting reference to maintenance, 
extensions, etc. in (e)(2): Facility Maintenance Reserve. Additional 
reserves will need to be established for emergency maintenance, 
improvements to facilities, replacement of short-lived assets and other 
restricted reserves as deemed necessary by the governing body and 
lender.
    Agency response: The Agency made no change. The rule would allow 
for the establishment of debt service reserve and a facility 
maintenance reserve. The amount of funds that would be placed in the 
reserve accounts would be determined by the applicant and the Agency. 
The one-tenth of an average annual loan installment is the minimum 
requirement and the requirement could be larger.
    14. Sec. 1780.39(e)(2)--2 commenters--Recommend that the reserve be 
fully funded over the first 10 years of the loan and not over the life 
of the loan.
    Agency response: Agency made no change. It is important that 
borrowers maintain adequate reserves to cover unexpected short-falls of 
revenue and to adequately maintain their systems.
    15. Sec. 1780.39(f)--Delete last sentence in (f), and all of (1) 
and (2).
    Agency response: The Agency has made a revision to clarify, but did 
not delete the sentence.
    16. Sec. 1780.39(g)(3)--Should require fidelity bond coverage be 
specifically for RUS funded project.
    Agency response: It is not necessary that a fidelity or employee 
dishonesty bond cover only the RUS funded project. However, the amount 
of fidelity or employee dishonesty bond coverage must be enough to 
cover not only RUS requirements, but other claims that could be made on 
the bond.
    17. Sec. 1780.39(i)--Should be allowed to issue a Letter of 
Conditions when funds are not available or at least some percentage.
    Agency response: The Agency made no change. Letter of Conditions 
are taken by the general public to mean a commitment has been made by 
the Agency to fund a project. By not issuing a Letter of Conditions 
until funds are available for a project, problems associated with an 
applicant thinking that funds are available when in fact they are not 
can be avoided.

1780.44  Actions prior to loan or grant closing or start of 
construction, whichever occurs first.

    1. Sec. 1780.44(e)--Allow deobligation of funds in the same 
percentage as funds were obligated.
    Agency response: The Agency did not make this change. The amount of 
deobligated funds is based on an reassessment of the need for grant 
funds to achieve a reasonable user rate. Deobligation of funds based on 
percentage of funds obligated could result in an applicant receiving 
more grant funds than needed to have reasonable user rates. With the 
limited amount of grant funds that the Agency has available, the funds 
must be stretched as far as possible in order to serve the maximum 
number of communities who need funds to construct projects.
    2. Sec. 1780.44(e)--Provide an incentive for communities to save 
money by applying savings against the loan first rather than grant.
    Agency response: The Agency made no change. The Agency believes 
that the best approach is to work with communities early in the process 
to reduce the project costs. Once the Agency has committed funds to a 
community to construct a project, both parties have agreed on an amount 
of loan that can be repaid. Any reduction in the loan amount at this 
point could result in the community receiving more grant funds than 
needed in order to have reasonable user rates.
    3. Sec. 1780.44(e)--Recommend waiting until completion of 
construction before deobligating any unused funds.
    Agency response: The Agency made no change. All construction 
projects have contingency funds set aside to cover unanticipated 
expenses during construction. Therefore, funds that are not needed for 
project costs should be deobligated and made available to another 
community.

1780.45  Loan and grant closing and delivery of funds.

    1. Sec. 1780.45(f)(1)--Revise to allow remaining funds to be used 
by a community to improve its existing system.
    Agency response: The Agency made a change. The language was 
broadened to allow use of Agency funds not needed for the project to be 
used for the facility being financed. Any improvements must not result 
in major changes to the applicant's facility. For example, if RUS funds 
were used to construct a water project, then RUS funds that remain 
after completion could be used for any RUS eligible purpose on the 
applicant's whole water system.

[[Page 33468]]

    2. Sec. 1780.45(f)(3)--Delete the requirement to notify the 
attorney and engineer when funds are deobligated.
    Agency response: The Agency did not make this change. Many of the 
engineer's or attorney's are helping the applicant with completion of a 
project. It is important that all interested parties be notified before 
funds are canceled.

1780.49  Rural or Native Alaskan villages.

    1. Sec. 1780.49(c)(4)--Revise to allow use of federal and non-
federal sources of funds.
    Agency response: The Agency made no change. The law that authorizes 
the funds for rural or native Alaskan villages requires that the 
matching funds be non-federal funds.
    2. Sec. 1780.49(f)(1)--Revise to authorize projects of Alaska Area 
Native Health Service.
    Agency response: The Agency made no change. In order to assure that 
the projects are properly constructed the Agency will continue to 
restrict the waiver of construction requirements contained in this 
subpart to projects that are jointly funded with the State of Alaska.
    3. Should contain a specific reference that solid waste disposal 
projects are eligible grant purposes.
    Agency Response: The Agency made no change. The Agency considers 
solid waste disposal to be included in waste disposal services 
authorized by this paragraph.

Subpart C--Planning, Designing, Bidding, Contracting, Constructing and 
Inspections

1780.54  Technical services.

    1. Consider including Architects in this section as they are 
sometimes involved in water and waste projects.
    Agency response: The Agency agrees and made change.
    2. Does ``in house'' mean one on the applicant's staff or one under 
previous contract with applicant or both?
    Agency response: ``in house'' means one on the applicant's staff.

1780.57  Design policies.

    1. Sec. 1780.57(c)--Recommend encouraging the procurement of 
environmentally preferable products and services.
    Agency response: The Agency revised to reflect both energy-
efficient and environmentally-sound products and services.
    2. Sec. 1780.57(b)--Delete words ``or reside.'' Do not construct 
occupied dwellings.
    Agency response: The Agency made the change.
    3. Sec. 1780.57(h)--Delete the wording ``Agency determines.''
    Agency response: The Agency made no change. This language is 
required by the 1996 Farm Bill.

1780.67  Performing construction.

    1. Recommend design build and construction management that is in 
existing regulations be added as an option.
    Agency response: Agency has made no change. The proposed language 
would not exclude design build and construction management.
    2. Strengthen language by inserting ``using their own personnel or 
designated, qualified, and supervised volunteers.''
    Agency response: The Agency did not make this change. This section 
does not prohibit use of volunteers in addition to an applicant's own 
personnel.

1780.70  Owner's procurement regulations.

    1. Sec. 1780.70(b)--Recommend deleting the word ``comprehensive'' 
or the entire last two sentences.
    Agency response: The Agency made no change. The Agency cannot make 
this change as it is required by law.

1780.72  Procurement methods.

    1. Sec. 1780.72--2 commenters--Recommend that design/build be added 
to section as an option for procurement.
    Agency response: The Agency made no change. The proposed language 
would allow design build as a construction option.
    2. Sec. 1780.72(a)--The requirements in 1780.75(b) and (d) should 
be included for any small purchase over $10,000.
    Agency response: The Agency made no change. The provision for 
termination and equal employment opportunity would apply to any 
contract exceeding $10,000. The type of procurement would not influence 
this requirement.
    3. Sec. 1780.72(a)--What does the phrase ``costing in the aggregate 
not more than $100,000'' mean?
    Agency response: The phrase ``costing in the aggregate not more 
than $100,000'' means the total dollar amount of an item or product 
that is being purchased for a project. For example, a water system 
could utilize the small purchase procedures to procure $90,000 for 
water meters and $20,000 for equipment. In this example, each item 
procured was under $100,000, but the total was over $100,000.
    4. Sec. 1780.72(a) and Sec. 1780.72(d)(6)--Recommend deleting small 
purchase and using noncompetitive negotiation in its place.
    Agency response: The Agency did not make this change. While these 
two procurement methods are similar each has its place in the 
construction of water and waste projects.
    5. Sec. 1780.72(c)--6 commenters--Delete the competitive 
negotiation for engineering services.
    Agency response: The Agency has not deleted this requirement. This 
is a requirement of the 1996 Farm Bill and must be complied with. The 
requirement has been clarified to reflect that the selection of 
engineering services should be on the basis of all relative factors. 
The Agency moved the selection of engineering services to 
Sec. 1780.39(b)(1).
    6. Sec. 1780.72(c)--2 commenters--Certain States have enacted 
legislation that specifically prohibits State and Local Agencies from 
seeking formal or informal submission of verbal or written estimates of 
costs or price proposals. The rule should be amended to delete any and 
all provisions that require or allow the use of cost or price as a 
consideration in the selection of a design professional.
    Agency response: The Agency made a change by revising 
Sec. 1780.39(b)(1) and deleting engineering procurement from this 
section.
    7. Sec. 1780.72(c)--2 commenters--Should revise to require only one 
competitive negotiation procedure which should be at the ``Step I'' 
phase and not wait until the design phase. Allow credit to those 
applicants that can properly document that their engineer selection in 
Step I of a project was in conformance with competitive negotiation and 
would not have to be repeated at the ``design phase.''
    Agency response: The Agency agrees that only one public 
announcement covering requirements for engineering services is 
necessary for a project. The revision to Sec. 1780.39(b)(1) will allow 
for this situation.
    8. Sec. 1780.72(c)--Revise by removing reference to obtaining 
proposals from other sources.
    Agency response: Agency made no change. The procurement of 
engineering services was moved to Sec. 1780.39(b)(1).
    9. Sec. 1780.72(c)--Delete reference to engineering services, 
implies competitive negotiations can only be used for engineering 
services.
    Agency response: Agency made the change. The procurement of 
engineering services was moved to Sec. 1780.39(b)(1).
    10. Sec. 1780.72(c)--Should clarify that the applicant could select 
an engineer through the noncompetitive process to perform the PER and 
assist in the production of the application.

[[Page 33469]]

    Agency response: Agency revised the procurement of engineering 
services in Sec. 1780.39(b)(1) to clarify this issue.
    11. Sec. 1780.72(c)(2)--3 commenters--Modify by deleting references 
to price or cost for obtaining engineering services. The significant 
evaluation factors to be based on a firm's professional qualifications, 
specialized experience, technical competence and so forth.
    Agency response: The Agency made a change by removing reference to 
cost or price as a consideration in Sec. 1780.39(b)(1).
    12. Sec. 1780.72(c)(5)--Delete the word ``other'' before 
``professional services.'' This will clarify that competitive 
negotiations is an acceptable method of procurement for any 
professional service.
    Agency response: Agency removed all references to procurement of 
professional service from Sec. 1780.72(c) and moved to 
Sec. 1780.39(b)(1). Sec. 1780.39(b)(1) contains all procurement 
requirements for engineering and architectural services.
    13. Sec. 1780.72(d)(5)--Delete word ``design'' so that it covers 
all engineering services.
    Agency response: Agency removed all references to procurement of 
professional service from Sec. 1780.72(c) and moved to 
Sec. 1780.39(b)(1).
    Sec. 1780.39(b)(1) contains all procurement requirements for 
engineering and architectural services.

1780.75  Contract provisions.

    1. Sec. 1780.75(a)--Should be made clear that liquidated damages 
only applies to construction contracts.
    Agency response: The Agency made the change.
    2. Sec. 1780.75(c)--Change ``be legally doing business in the State 
where the facility is located'' to ``the surety must be listed in the 
Treasury Circular 570 as amended as having a license to do business in 
the State where the facility is located.''
    Agency response: The Agency made the change.
    3. Sec. 1780.75 (b) and (f)--Recommend raising the $10,000 to 
$100,000.
    Agency response: The Agency did not make this change. It is 
important to have a termination clause in contracts. The $10,000 cut 
off point for this requirement is as high as it should be to adequately 
protect the owner. The equal employment provision is required by other 
Federal regulations.
    4. Sec. 1780.75(c)--Recommend retaining U.S. Government as co-
obligee on payment and performance bonds.
    Agency response: The Agency made no change. The Agency is not a 
party to the contract and should not be included on any payment or 
performance bond.
    5. Sec. 1780.75(j)--Recommend adding the ability to modify the 
retainage amount to match other funding source requirements on jointly 
funded projects.
    Agency response: The Agency made no change. Five percent retainage 
is the minimum amount that should be withheld to assure that 
construction is completed in a satisfactorily and timely manner. The 
regulations would allow for more than 5 percent, if required by other 
funding sources.
    6. Sec. 1780.75(j)--Five percent retainage on approved partial pay 
estimates is too low. Leave at 10 percent.
    Agency response: The Agency made no change. The 5 percent retainage 
is in line with the industry standard. Also, the funds retained will be 
held until the project is substantially completed and accepted by the 
owner.

1780.76  Contract administration.

    1. Sec. 1780.76(c)--Should be clearly stated that the Agency, not 
the project engineer, have sole authority to grant or refuse the 
owner's request for a particular independent resident inspector.
    Agency response: The Agency agrees and has revised.
    2. Sec. 1780.76(d)--Add at end of last sentence ``or similar form 
approved by the Agency.''
    Agency response: The Agency made the change.

List of Subjects

7 CFR Parts 1775, 1777, 1778, 1780 and 1781

    Business and industry, Community development, Community facilities, 
Grant programs--housing and community development, Reporting and 
recordkeeping requirements, Rural areas, Waste treatment and disposal, 
Water supply, Watersheds.

7 CFR Part 1901

    Civil rights, Fair housing, Rural areas.

7 CFR Part 1940

    Agriculture, Grant programs--housing and community development, 
Loan programs--agriculture, Rural areas.

7 CFR Parts 1942 and 4284

    Business and industry, Community development, Community facilities, 
Grant programs--housing and community development, Loan programs--
housing and community development, Reporting and recordkeeping 
requirements, Rural areas, Soil conservation, Waste treatment and 
disposal, Water supply.

7 CFR Part 1951

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

7 CFR Part 1956

    Accounting, Loan programs--agriculture, Rural areas.

    Therefore, RUS amends chapters XVII, XVIII and XLII, title 7, Code 
of Federal Regulations as follows:

Part 1942, Subpart J--[Redesignated as Part 1775 and Revised]

    1. Subpart J of 7 CFR part 1942 is redesignated as 7 CFR part 1775 
and is revised to read as follows:

PART 1775--TECHNICAL ASSISTANCE AND TRAINING GRANTS

Sec.
1775.1  General.
1775.2  [Reserved]
1775.3  Objectives.
1775.4  Definitions.
1775.5  Source of funds.
1775.6  Allocation of funds.
1775.7  Eligibility.
1775.8  Purpose.
1775.9  [Reserved]
1775.10  Limitations.
1775.11  Equal opportunity requirements.
1775.12  Environmental requirements.
1775.13  Preapplications.
1775.14  Priority.
1775.15  [Reserved]
1775.16  Application processing.
1775.17  [Reserved]
1775.18  Grant approval and obligation of funds.
1775.19  Fidelity bond.
1775.20-11775.21 [Reserved]
1775.22  Fund disbursement.
1775.23  Grant cancellation or major changes.
1775.24  Reporting.
1775.25  Audit.
1775.26  Grant Agreement.
1775.27  Grant servicing.
1775.28  Delegation of authority.
1775.29-1775.99  [Reserved]
1775.100  OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

Sec. 1775.1  General.

    This part sets forth the policies and procedures for making 
Technical Assistance grants. Grants for technical assistance and 
training for water and waste disposal facilities are authorized under 
section 306(a)(16)(A) of the Consolidated Farm and Rural Development 
Act, (CONACT), (7 U.S.C. 1926(a)), as amended. Grants for solid waste 
management are authorized under Section 310B of the CONACT, (7 U.S.C. 
1932), as amended. Any processing or servicing activity conducted 
pursuant to this part involving authorized assistance to Agency 
employees, members of their

[[Page 33470]]

families, known close relatives, or business or close personal 
associates, is subject to the provisions of subpart D of part 1900 of 
this title. Applicants for this assistance are required to identify any 
known relationship or association with an Agency employee.


Sec. 1775.2  [Reserved]


Sec. 1775.3  Objectives.

    (a) The objectives of the Technical Assistance and Training Grant 
Program are to:
    (1) Identify and evaluate solutions to water and waste disposal 
problems in rural areas.
    (2) Assist applicants in preparing applications for water and waste 
grants made in accordance with part 1780 of this chapter.
    (3) Improve operation and maintenance of existing water and waste 
disposal facilities in rural areas.
    (b) The objectives of the Solid Waste Management Grant Program are 
to:
    (1) Reduce or eliminate pollution of water resources.
    (2) Improve planning and management of solid waste sites.


Sec. 1775.4  Definitions.

    Association. An entity, including a small city or town, that is 
eligible for Rural Utilities Service (RUS) water and waste financial 
assistance in accordance with Sec. 1780.7 of this chapter.
    Grantee. An entity with whom The Agency has entered into a grant 
agreement under this program to provide technical assistance and/or 
training to associations as defined in this section.
    Low income. Median household income below the poverty line for a 
family of four as defined in Section 673(2) of the Community Services 
Block Grant Act (42 U.S.C. 9902(2)), or below 80 percent of the 
Statewide nonmetropolitan median household income.
    Regional. For purposes of the Solid Waste Management grant program, 
as implemented through this part, regional is defined as any multi-
jurisdictional area including multi-State or any multi-jurisdictional 
area within a State.
    Rural area. For water and waste disposal facilities the terms 
``rural'' or ``rural area'' will not include any area in a city or town 
with population in excess of 10,000 inhabitants according to the latest 
decennial census of the United States.
    State. Any of the fifty States, the Commonwealth of Puerto Rico, 
the Western Pacific Territories, Marshall Islands, Federated States of 
Micronesia, Republic of Palau, and the U.S. Virgin Islands.


Sec. 1775.5  Source of funds.

    Technical Assistance and Training grants awarded will be made from 
not less than one (1) percent or, at the discretion of the Agency 
Administrator, not more than three (3) percent of any appropriations 
for grants under Section 306(a)(2) of the CONACT, (7 U.S.C. 1926(a)). 
Technical Assistance and Training grant funds not obligated by 
September 1 of each fiscal year will be used for water and waste grants 
made in accordance with part 1780 of this chapter. This section does 
not apply to Solid Waste Management grants.


Sec. 1775.6  Allocation of funds.

    Control of Technical Assistance and Training grant and Solid Waste 
Management grant funds will be retained in the National office and 
allocated on a project case basis. These funds are not available for 
obligation by States.


Sec. 1775.7  Eligibility.

    (a) Entities eligible for Technical Assistance and Training (TAT) 
grants are private nonprofit organizations that have been granted tax 
exempt status by the Internal Revenue Service (IRS) of the United 
States.
    (b) Entities eligible for Solid Waste Management (SWM) grants are 
nonprofit organizations, including:
    (1) Private nonprofit organizations that have been granted tax 
exempt status by the IRS; and
    (2) Public bodies including local governmental-based multi-
jurisdictional organizations.
    (c) Applicants for either TAT or SWM grants must also have the 
proven ability, background, experience, legal authority, and actual 
capacity to provide technical assistance and/or training on a regional 
basis to associations as provided in Sec. 1775.3.


Sec. 1775.8  Purpose.

    (a) Technical Assistance and/or Training Grants may be used to:
    (1) Identify and evaluate solutions to water problems of 
associations in rural areas relating to:
    (i) Source.
    (ii) Storage.
    (iii) Treatment.
    (iv) Distribution.
    (2) Identify and evaluate solutions to waste problems of 
associations in rural areas relating to:
    (i) Collection.
    (ii) Treatment.
    (iii) Disposal.
    (3) Assist associations that have filed a preapplication with the 
Agency in the preparation of water and/or waste loan and/or grant 
applications.
    (4) Provide training to association personnel that will improve the 
management, operation and maintenance of water and waste disposal 
facilities.
    (5) To pay the expenses associated with providing the technical 
assistance and/or training authorized in paragraphs (a) (1) through (4) 
of this section.
    (b) Solid Waste Management grants may be used to:
    (1) Evaluate current landfill conditions to determine threats to 
water resources.
    (2) Provide technical assistance and/or training to enhance 
operator skills in the maintenance and operation of active landfills.
    (3) Provide technical assistance and/or training to help 
communities reduce the solid waste stream.
    (4) Provide technical assistance and/or training for operators of 
landfills which are closed or will be closed in the near future with 
the development/implementation of closure plans, future land use plans, 
safety and maintenance planning, and closure scheduling within permit 
requirements.


Sec. 1775.9  [Reserved]


Sec. 1775.10  Limitations.

    Grant funds may not be used to:
    (a) Recruit applications for the Agency's water and waste loan and/
or any loan and/or grant program.
    (b) Duplicate current services, replacement or substitution of 
support previously provided such as those performed by an association's 
consultant in developing a project.
    (c) Fund political activities.
    (d) Pay for capital assets, the purchase of real estate or 
vehicles, improve and renovate office space, or repair and maintain 
privately-owned property.
    (e) Pay for construction or operation and maintenance costs.
    (f) Pay costs incurred prior to the effective date of grants made 
under this part.
    (g) Pay for technical assistance as defined in this part which 
duplicates assistance provided to implement an action plan funded by 
Forest Service (FS) under the National Forest-Dependent Rural 
Communities Economic Diversification Act (7 U.S.C. 6601 note) for 5 
continuous years from the date of grant approval by the FS. To avoid 
duplicate assistance, the grantee shall coordinate with the FS and RUS 
to ascertain if a grant has been made in a substantially similar 
geographical or defined local area in a State for technical assistance 
under the above program. The grantee will provide

[[Page 33471]]

documentation to FS and RUS regarding the contact with each agency. 
Under its program, the FS assists rural communities dependent upon 
national forest resources by establishing rural forestry and economic 
diversification action teams which prepare action plans. Action plans 
are intended to provide opportunities to promote economic 
diversification and enhance local economies dependent upon national 
forest resources.


Sec. 1775.11  Equal opportunity requirements.

    The policies and regulations contained in subpart E of part 1901 of 
this title apply to grants made under this part.


Sec. 1775.12  Environmental requirements.

    The policies and regulations contained in subpart G of part 1940 of 
this title apply to grants made for the purposes in Sec. 1775.8.


Sec. 1775.13  Preapplications.

    (a) Applicants will file an original and one copy of SF-424.1, 
``Application for Federal Assistance (For Non-construction),'' with the 
appropriate Agency office between October 1 and December 31 each fiscal 
year. This form is available in all Agency offices. Applicants 
proposing to provide technical assistance and/or training in only one 
State will apply through the appropriate State Office. The State Office 
will review and forward preapplications, with their recommendations, 
within seven working days to the National Office, Attention: Water and 
Waste Disposal. Applicants providing technical assistance and/or 
training in more than one State will forward the preapplication to the 
Assistant Administrator, Water and Waste, Rural Utilities Service, 
Washington, DC 20250. Preapplications for Solid Waste Management grants 
that cannot be funded in the fiscal year received will not be retained 
for consideration for funding in the following fiscal year and will be 
handled as outlined in paragraph (g) of this section.
    (b) All preapplications shall be accompanied by:
    (1) Evidence of applicant's legal existence and authority in the 
form of certified copies of organizational documents and a certified 
list of directors and officers with their respective terms.
    (2) Evidence tax exempt status from the Internal Revenue Service.
    (3) Brief written narrative which includes items such as:
    (i) The proposed service(s) to be provided, including the benefits 
of the technical assistance and/or training.
    (ii) Area to be served.
    (iii) Name of association(s) or type of association(s) that will be 
served.
    (iv) Median household income of the population to be served by each 
association(s).
    (v) Grantee's experience, including experience of key staff members 
and person(s) providing the technical assistance and/or training.
    (vi) The number of months duration of the project or service and 
the estimated time it will take from grant approval to beginning of 
service.
    (vii) Method used to select the association(s) that will receive 
the service.
    (viii) Brief description of how the service will be provided, such 
as, through currently employed personnel or some other method.
    (ix) Method to be used for delivery of the service, including 
personnel to be utilized and tasks to be contracted, if any.
    (4) Latest financial information to show the organization's 
financial capacity to carry out the proposed work. As a minimum, the 
information should include a balance sheet and an income statement. A 
current audit report is preferred.
    (5) Estimated breakdown of costs including those to be funded by 
grantee as well as other sources.
    (6) Budget and accounting system in place or proposed.
    (7) Evaluation method to determine if objective(s) of the proposed 
activity is being accomplished.
    (c) Upon receipt of a preapplication, the National Office will:
    (1) Review and evaluate the preapplication and accompanying 
documents;
    (2) Request from the Office of General Counsel (OGC), a legal 
determination of applicant's legal existence and authority to provide 
technical assistance and/or training. The legal opinion will be 
obtained from the Regional Attorney servicing the area where the 
applicant's headquarters is located; and
    (3) Normally, respond to the applicant within 45 days after 
December 31 of each year using Form AD-622, ``Notice of Preapplication 
Review Action,'' indicating the action taken on the preapplication.
    (d) Applicants whose preapplications are found to be ineligible 
will be given notice by use of Form AD-622 and advised of their appeal 
rights under subpart B of part 1900 of this title.
    (e) Applicants who are eligible, but do not have the priority 
necessary for further consideration will be notified with Form AD-622, 
which includes the following statements:

    ``Your proposal cannot be funded within the available funds.''
    ``You are advised against incurring obligations which cannot be 
fulfilled without Agency funds.''

    (f) Applicants that are eligible for funding within the available 
funds will be provided forms and instructions for filing a complete 
application. Applicants should be advised against incurring obligations 
which cannot be fulfilled without Agency funds.
    (g) Applicants who have filed preapplications for solid waste 
management grant funds that cannot be funded within the available funds 
will be notified, using Form AD-622, that their preapplication will not 
be retained. They will also be notified that they may file a new 
preapplication when funds again become available using the following 
statement:

    ``If the Agency receives funding for the program in FY __, you 
may file a new preapplication on or after October 1, 19__.''


Sec. 1775.14  Priority.

    (a) The preapplication and supporting information will be used to 
determine the applicant's priority for available funds for the 
Technical Assistance and Training Grant program. The following specific 
criteria will be considered in the competitive selection of Technical 
Assistance and Training Grant recipients:
    (1) Applicant's demonstrated capability and past performance in 
providing technical assistance and/or training to rural associations.
    (2) The extent to which the population of the associations served 
have low income.
    (3) Applicant's financial and if applicable, in-kind resource that 
will maximize use of technical assistance and/or training funds for 
direct staffing of activities that are delivered to the associations.
    (4) The extent to which the project will be cost effective, 
including but not limited to the ratio of proposed personnel to the 
cost of the project, the cost per associations served by the project, 
and the expected benefits from the project.
    (5) How well the proposal coincides with the objectives of the 
Agency's Water and Waste Disposal program authorized in part 1780 of 
this chapter.
    (6) Applicants proposing to serve multi-state, regional, or 
nationwide areas.
    (7) Applicants whose timeframe for completion of the technical 
assistance and/or training grant project is 12 months or less.
    (b) Preapplications received from local governmental-based, multi-

[[Page 33472]]

 jurisdictional organizations for the SWM grant program will be given 
priority within the available funds.


Sec. 1775.15  [Reserved]


Sec. 1775.16  Application processing.

    (a) Upon notification on Form AD-622 that the applicant is eligible 
for funding, the following will be submitted to the National Office by 
the applicant:
    (1) SF-424.1.
    (2) Proposed scope of work detailing the training and/or technical 
assistance to be accomplished and timeframes for completion of each 
task.
    (3) Proposed budget.
    (4) Other requested information needed by the Agency to make a 
grant award determination.
    (b) The following forms and documents will be part of the grant 
docket:
    (1) Form RD 400-1, ``Equal Opportunity Agreement.''
    (2) Form RD 400-4, ``Assurance Agreement.''
    (3) Grant Agreement signed by the applicant.
    (4) Scope of work prepared by the applicant.
    (5) Form RD 1940-1, ``Request for Obligation of Funds.''
    (c) If the applicant fails to submit the application and related 
material by the date shown on Form AD-622 (normally 30 days from the 
date of Form AD-622), the Agency may discontinue consideration of the 
application.


Sec. 1775.17  [Reserved]


Sec. 1775.18  Grant approval and obligation of funds.

    (a) The National Office will review the application and other 
documents to determine whether the proposal complies with this part.
    (b) All grants made under this part will be approved and obligated 
by the Agency Administrator or designee.
    (c) The obligation of funds will be handled in accordance with part 
1780 of this chapter.
    (d) An executed copy of the Grant Agreement and scope of work will 
be sent to the applicant on the obligation date, along with a copy of 
Form RD 1940-1. The Agency will retain the executed original of the 
Grant Agreement. The grant will be considered closed on the obligation 
date.
    (e) If the grant is not approved, the applicant will be notified in 
writing of the reason(s) for rejection. The notification to the 
applicant will state that a review of this decision by the Agency may 
be requested by the applicant under subpart B of part 1900 of this 
title.


Sec. 1775.19  Fidelity bond.

    Prior to the advancing of funds, the grantee will provide fidelity 
bond coverage for the positions of persons entrusted with the receipt 
and disbursement of its funds and the custody of valuable property. The 
amount of the bond will be at least equal to the maximum amount of 
monies that the grantee will have on hand at any one time for technical 
assistance and/or training provided in accordance with the Grant 
Agreement. Unless prohibited by State Law, the United States, acting 
through the Agency, will be named as co-obligee in the bond. The bond 
must be obtained from a company listed in Department of Treasury 
Circular 570, as amended. Form RD 440-24, ``Position Fidelity Schedule 
Bond Declarations,'' may be used. A certified power-of-attorney with 
effective date will be attached to the bond.


Secs. 1775.20-1775.21  [Reserved]


Sec. 1775.22  Fund disbursement.

    Grantees will be reimbursed as follows:
    (a) Standard Form (SF) 270, ``Request for Advance or 
Reimbursement,'' will be completed by the applicant and submitted to 
the National Office not more frequently than monthly.
    (b) Upon receipt of a properly completed SF 270, the funds will be 
requested through the field office terminal system. Ordinarily, payment 
will be made within 30 days after receipt of a proper request for 
reimbursement.
    (c) Grantees are encouraged to use minority banks (a bank which is 
owned by at least 50 percent minority group members) for the deposit 
and disbursement of funds. A list of minority owned banks can be 
obtained from the Office of Minority Business Enterprise, Department of 
Commerce, Washington, DC 20230.


Sec. 1775.23  Grant cancellation or major changes.

    If it is determined that a project will not be funded or if major 
changes in the scope of the project are made after release of the 
approval announcement, the Administrator will notify the Director of 
Legislative Affairs and Public Information Staff (LAPIS) giving the 
reasons for such action. In the case of a grant cancellation, Form RD 
1940-10, ``Cancellation of U.S. Treasury Check and/or Obligation,'' 
will not be submitted to the Finance Office until 5 working days after 
notifying the Director of LAPIS, and grant obligation cancellations 
will not be submitted to the National Office until 5 working days after 
notifying the Director of LAPIS.


Sec. 1775.24  Reporting.

    Standard Form (SF) 269, ``Financial Status Report,'' SF 272, 
``Federal Cash Transactions Report,'' and a project performance 
activity report will be required of all grantees on a quarterly basis. 
A final project performance report will be required with the last SF 
269. The final report may serve as the last quarterly report. Grantees 
shall constantly 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. All multi-state, 
regional, and nationwide grantees are to submit an original of each 
report to the National Office. Grantees serving only one State are to 
submit an original of each report to the State Program Official. The 
State Program Official will review and forward to the National Office 
the report with comments. The project performance reports shall 
include, but not be limited to, the following:
    (a) A comparison of actual accomplishments to the objectives 
established for that period;
    (b) Reasons why established objectives were not met;
    (c) Problems, delays, or adverse conditions which will affect 
attainment of overall project objectives, prevent meeting 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
    (d) Objectives and timetable established for the next reporting 
period.


Sec. 1775.25  Audit.

    The grantee will provide an audit report prepared in accordance 
with Sec. 1780.47 of this chapter within 90 days after project 
completion.


Sec. 1775.26  Grant Agreement.

    RUS Bulletin 1775-1 is a Grant Agreement which sets forth the 
procedures for making and servicing grants made under this part. 
Bulletins, instructions and forms referenced are for use in 
administering grants made under this part and are available from any 
USDA/Rural Development office or the Rural Utilities Service, United 
States Department of Agriculture, Washington, D.C. 20250-1500.


Sec. 1775.27  Grant servicing.

    Grants will be serviced in accordance with the grant agreement and 
subpart E

[[Page 33473]]

of part 1951 of this title. Subpart B of part 1900 of this title will 
be followed when grants are terminated for cause.


Sec. 1775.28  Delegation of authority.

    The authority under this part is redelegated to the Assistant 
Administrator, Water and Waste, except for the discretionary authority 
contained in Sec. 1775.5. The Assistant Administrator, Water and Waste 
may redelegate the authority in this section.


Secs. 1775.29-1775.99  [Reserved]


Sec. 1775.100  OMB control number.

    The collection of information requirements contained in this part 
have been approved by the Office of Management and Budget and have been 
assigned OMB control number 0575-0123. Public reporting for this 
collection of information is estimated to vary from 15 minutes to 4 
hours per response, with an average of 1 hour per response including 
time for reviewing instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. Send comments regarding this burden 
estimate or any other aspect of this collection of information, 
including suggestions for reducing this burden, to Department of 
Agriculture, Clearance Officer, OIRM, Room 404-W, Washington, DC 20250; 
and to the Office of Management and Budget, Paperwork Reduction Project 
(OMB 0575-0123), Washington, DC 20503.

Part 4284, Subpart E  [Redesignated as Part 1777 and Revised]

    2. Subpart E of 7 CFR part 4284 is redesignated as 7 CFR part 1777 
and is revised to read as follows:

PART 1777--SECTION 306C WWD LOANS AND GRANTS

Sec.
1777.1  General.
1777.2  [Reserved]
1777.3  Objective.
1777.4  Definitions.
1777.5-1777.10  [Reserved]
1777.11  Making, processing, and servicing loans and grants.
1777.12  Eligibility.
1777.13  Project priority.
1777.14-1777.20  [Reserved]
1777.21  Use of funds.
1777.22-1777.30  [Reserved]
1777.31  Rates.
1777.32-1777.40  [Reserved]
1777.41  Individual loans and grants.
1777.42  Delegation of authority.
1777.43  Bulletins.
1777.44-1777.99  [Reserved]
1777.100  OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.


Sec. 1777.1  General.

    (a) This part outlines Rural Utilities Service (RUS) policies and 
procedures for making Water and Waste Disposal (WWD) loans and grants 
authorized under section 306C of the Consolidated Farm and Rural 
Development Act (7 U.S.C. 1926(c)), as amended.
    (b) Agency officials will maintain liaison with officials of other 
Federal, State, regional, and local development agencies to coordinate 
related programs to achieve rural development objectives.
    (c) Agency officials shall cooperate with appropriate State 
agencies in making loans and/or grants that support State strategies 
for rural area development.
    (d) Funds allocated in accordance with this part will be considered 
for use by Indian tribes within the State regardless of whether State 
development strategies include Indian reservations within the State's 
boundaries. Indians residing on such reservations must have an equal 
opportunity to participate in this program.
    (e) Federal statutes provide for extending the Agency's financial 
programs without regard to race, color, religion, sex, national origin, 
marital status, age, or physical/mental handicap (provided the 
participant possesses the capacity to enter into legal contracts).


Sec. 1777.2  [Reserved]


Sec. 1777.3  Objective.

    The objective of the Section 306C WWD Loans and Grants program is 
to provide water and waste disposal facilities and services to low-
income rural communities whose residents face significant health risks.


Sec. 1777.4  Definitions.

    Applicant. Entity that receives the Agency loan or grant under this 
part. The entities can be public bodies such as municipalities, 
counties, districts, authorities, or other political subdivisions of a 
State, and organizations operated on a not-for-profit basis such as 
associations, cooperatives, private corporations, or Indian tribes on 
Federal and State reservations, and other Federally recognized Indian 
tribes.
    Colonia. Any identifiable community designated in writing by the 
State or county in which it is located; determined to be a colonia on 
the basis of objective criteria including lack of potable water supply, 
lack of adequate sewage systems, and lack of decent, safe, and sanitary 
housing, inadequate roads and drainage; and existed and was generally 
recognized as a colonia before October 1, 1989.
    Cooperative. A cooperative formed specifically for the purpose of 
the installation, expansion, improvement, or operation of water supply 
or waste disposal facilities or systems.
    Individual. Recipient of a loan or grant through the applicant to 
facilitate use of the applicant's water and/or waste disposal system.
    Rural areas. Includes unincorporated areas and any city or town 
with a population not in excess of 10,000 inhabitants according to the 
most recent decennial census of the United States. They can be located 
in any of the 50 States, the Commonwealth of Puerto Rico, the Western 
Pacific Territories, Marshall Islands, Federated States of Micronesia, 
Republic of Palau, and the U.S. Virgin Islands.


Secs. 1777.5-1777.10  [Reserved]


Sec. 1777.11  Making, processing, and servicing loans and grants.

    Unless specifically modified by this part, loans and/or grants will 
be made, processed, and serviced in accordance with part 1780 of this 
chapter.


Sec. 1777.12  Eligibility.

    (a) The provisions of paragraphs (a) (1) and (2) of this section do 
not apply to a rural area recognized as a colonia. Otherwise, the 
facility financed under this part must provide water and/or waste 
disposal services to rural areas of a county where, on the date 
preapplication is received by the Agency, the:
    (1) Per capita income of the residents is not more than 70 percent 
of the most recent national average per capita income, as determined by 
the Department of Commerce; and
    (2) Unemployment rate of the residents is not less than 125 percent 
of the most recent national average unemployment rate, as determined by 
the Bureau of Labor Statistics.
    (b) Residents of the rural area to be served must face significant 
health risks due to the fact that a significant proportion of the 
community's residents do not have access to, or are not served by, 
adequate, affordable, water and/or waste disposal systems. The file 
should contain documentation to support this determination.


Sec. 1777.13  Project priority.

    Paragraphs (a) through (d) of this section indicate items and 
conditions which must be considered in selecting preapplications for 
further development. When ranking eligible preapplications for 
consideration for limited funds, Agency officials must consider the 
priority items met by each

[[Page 33474]]

preapplication and the degree to which those priorities are met.
    (a) Preapplications. The preapplication and supporting information 
submitted with it will be used to determine applicant eligibility and 
the proposed project's priority for available funds. Applicants 
determined ineligible will be advised of their appeal rights in 
accordance with 7 CFR part 11.
    (b) State Office review. All preapplications will be reviewed and 
scored for funding priority at each State Office using RUS Bulletin 
1777-2. Funds will be requested from the National Office, Attention: 
Water and Waste Processing, using RUS Bulletin 1777-3. Eligible 
applicants that cannot be funded should be advised that funds are not 
available and advised of their appeal rights as set forth in 7 CFR part 
11.
    (c) National Office. The National Office will allocate funds on a 
project-by-project basis as requests are received. If the amount of 
funds requested exceeds the amount of funds available, the total 
project score will be used to select projects for funding. The RUS 
Administrator may assign up to 35 additional points that will be 
considered in the total points for items such as geographic 
distribution of funds, severity of health risks, etc.
    (d) Selection priorities. The priorities described below will be 
used to rate preapplications and in selecting projects for funding. 
Points will be distributed as indicated in paragraphs (d)(1) through 
(d)(5) of this section and will be used in selecting projects for 
funding. A copy of RUS Bulletin 1777-2, used to rate applications, 
should be placed in the case file for future reference.
    (1) Population. The proposed project will serve an area with a 
rural population:
    (i) Not in excess of 1,500--30 points.
    (ii) More than 1,500 and not in excess of 3,000--20 points.
    (iii) More than 3,000 and not in excess of 5,500--10 points.
    (2) Income. The median household income of population to be served 
by the proposed project is:
    (i) Not in excess of 50 percent of the statewide nonmetropolitan 
median household income--40 points.
    (ii) More than 50 percent and not in excess of 60 percent of the 
statewide nonmetropolitan median household income--20 points.
    (iii) More than 60 percent and not in excess of 70 percent of the 
statewide nonmetropolitan median household income--10 points.
    (3) Joint financing. The amount of joint financing committed to the 
proposed project is:
    (i) Twenty percent or more private, local, or State funds except 
Federal funds channeled through a State agency--10 points.
    (ii) Five to 19 percent private, local, or State funds except 
Federal funds channeled through a State agency--5 points.
    (4) Colonia. (See definition in Sec. 1777.4). The proposed project 
will provide water and/or waste disposal services to the residents of a 
colonia--50 points.
    (5) Discretionary. In certain cases, the State Program Official may 
assign up to 15 points for items such as natural disaster, to improve 
compatibility/coordination between the Agency's and other agencies' 
selection systems, to assist those projects that are the most cost 
effective, high unemployment rate, severity of health risks, etc. A 
written justification must be prepared and attached to RUS Bulletin 
1777-2 each time these points are assigned.


Secs. 1777.14-1777.20  [Reserved]


Sec. 1777.21  Use of funds.

    (a) Applicant. Funds may be used to:
    (1) Construct, enlarge, extend, or otherwise improve community 
water and/or waste disposal systems. Otherwise improve would include 
extending service lines to and/or connecting residence's plumbing to 
the system.
    (2) Make loans and grants to individuals for extending service 
lines to and/or connecting residences to the applicant's system. The 
approval official must determine that this is a practical and 
economical method of connecting individuals to the community water and/
or waste disposal system. Loan funds can only be used for loans, and 
grant funds can only be used for grants.
    (3) Make improvements to individual's residence when needed to 
allow use of the water and/or waste disposal system.
    (4) Grants can be made up to 100 percent of eligible project costs.
    (b) Individuals. Funds may be used to:
    (1) Extend service lines to residence.
    (2) Connect service lines to residence's plumbing.
    (3) Pay reasonable charges or fees for connecting to a community 
water and/or waste disposal system.
    (4) Pay for necessary installation of plumbing and related fixtures 
within dwellings lacking such facilities. This is limited to one 
bathtub, sink, commode, kitchen sink, water heater, and outside spigot.
    (5) Construction and/or partitioning off a portion of dwelling for 
a bathroom, not to exceed 4.6 square meters (48 square feet) in size.
    (6) Pay reasonable costs for closing abandoned septic tanks and 
water wells when necessary to protect the health and safety of 
recipients of a grant in paragraphs (b)(1) or (b)(2) of this section 
and is required by local or State law.


Secs. 1777.22-1777.30  [Reserved]


Sec. 1777.31  Rates.

    (a) Applicant loans will bear interest at the rate of 5 percent per 
annum.
    (b) Individual loans will bear interest at the rate of:
    (1) Five percent per annum; or
    (2) The Federal Financing Bank rate for loans of a similar term at 
the time of Agency loan approval, whichever is less.


Secs. 1777.32-1777.40  [Reserved]


Sec. 1777.41  Individual loans and grants.

    (a) The amount of loan and grant funds approved by the Agency will 
be based on the need shown in the application and an implementation 
plan submitted by the applicant. The implementation plan will include 
such things as: purpose, how funds will be used, proposed application 
process, construction requirements, control and disbursement of funds, 
etc. The implementation plan will be attached to RUS Bulletin 1777-1.
    (b) RUS Bulletin 1777-1 is a Memorandum of Agreement which sets 
forth the procedures and regulations for making and servicing loans and 
grants made by applicants to individuals. The State Program Official is 
authorized to enter into a Memorandum of Agreement with any applicant 
providing loans and/or grants to individuals. The Memorandum of 
Agreement can be amended to comply with State law and recommendations 
by the Office of General Counsel. It may also be amended to eliminate 
references to loans and/or grants if no loan and/or grant is involved. 
The State Program Official is responsible for:
    (1) Ensuring that all provisions of the Agreement are understood.
    (2) Determining that the applicant has the ability to make and 
service loans and/or grants in the manner outlined in the Agreement.
    (c) Agency funds remaining after providing individual loans and/or 
grants will be returned to the Agency. The funds should be disbursed to 
individuals within 1 year from the date water and/or waste disposal 
service is available to the individuals. The State Program Official can 
make an exception to this 1 year requirement if written justification 
is provided by the applicant.

[[Page 33475]]

Sec. 1777.42  Delegation of authority.

    The State Program Official is responsible for the overall 
implementation of the authorities contained in this part and may 
redelegate any such authority to appropriate Agency employees.


Sec. 1777.43  Bulletins.

    RUS Bulletin 1780-12 referenced in part 1780 of this chapter and 
RUS Bulletin 1777-1, 1777-2 and 1777-3 are for use in administering 
loans and/or grants made under this part. Bulletins, instructions and 
forms are available from any USDA/Rural Development office or the Rural 
Utilities Service, United States Department of Agriculture, Washington, 
DC 20250-1500.


Secs. 1777.44-1777.99  [Reserved]


Sec. 1777.100  OMB control number.

    The reporting and recordkeeping requirements contained in this part 
have been approved by the Office of Management and Budget and assigned 
OMB control number 0570-0001. Public reporting burden for this 
collection of information is estimated to vary from 5 to 30 hours per 
response with an average of 17.5 hours per response, including the time 
for reviewing instructions, searching existing data sources, gathering 
and maintaining the data needed, and completing and reviewing the 
collection of information. Send comments regarding this burden estimate 
or any other aspect of this collection of information, including 
suggestions for reducing this burden, to U.S. Department of 
Agriculture, Clearance Officer, OIRM, Room 404-W, Washington, DC 20250; 
and to the Office of Information and Regulatory Affairs, Office of 
Management and Budget, Washington, DC 20503.

Part 1942, Subpart K  [Redesignated as Part 1778 and Revised]

    3. Subpart K of 7 CFR part 1942 is redesignated as 7 CFR part 1778 
and is revised to read as follows:

PART 1778--EMERGENCY COMMUNITY WATER ASSISTANCE GRANTS

Sec.
1778.1  General.
1778.2  [Reserved]
1778.3  Objective.
1778.4  Definitions.
1778.5  [Reserved]
1778.6  Eligibility.
1778.7  Project priority.
1778.8  [Reserved]
1778.9  Uses.
1778.10  Restrictions.
1778.11  Maximum grants.
1778.12  [Reserved]
1778.13  Set-aside.
1778.14  Other considerations.
1778.15-1778.20  [Reserved]
1778.21  Application processing.
1778.22  Planning development and procurement.
1778.23  Grant closing and disbursement of funds.
1778.24-1778.30  [Reserved].
1778.31  Performing development.
1778.32  Grant cancellation.
1778.33  [Reserved]
1778.34  Grant servicing.
1778.35  Subsequent grants.
1778.36  [Reserved]
1778.37  Forms, Instructions and Bulletins.
1778.38-1778.99  [Reserved]
1778.100  OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.


Sec. 1778.1  General.

    (a) This part outlines policies and procedures for making Emergency 
Community Water Assistance Grants authorized under Section 306A of the 
Consolidated Farm and Rural Development Act, (7 U.S.C. 1926(a)), as 
amended. Any processing or servicing activity conducted pursuant to 
this part involving authorized assistance to Agency employees, members 
of their families, known close relatives, or business or close personal 
associates, is subject to the provisions of subpart D of part 1900 of 
this title. Applicants for this assistance are required to identify any 
known relationship or association with an Agency employee.
    (b) Agency officials will maintain liaison with officials of other 
Federal, State, regional and local development agencies to coordinate 
related programs to achieve rural development objectives.
    (c) Agency officials shall cooperate with appropriate State 
agencies in making grants that support State strategies for rural area 
development.
    (d) Funds allocated for use in accordance with this part are also 
to be considered for use by Indian tribes within the State regardless 
of whether State development strategies include Indian reservations 
within the State's boundaries. Indians residing on such reservations 
must have an equal opportunity along with other rural residents to 
participate in the benefits of this program. This includes equal 
application of outreach activities of Field Offices.
    (e) Federal statutes provide for extending the Agency financial 
programs without regard to race, color, religion, sex, national origin, 
marital status, age, or physical/mental handicap (provided the 
participant possesses the capacity to enter into legal contracts).


Sec. 1778.2  [Reserved]


Sec. 1778.3  Objective.

    The objective of the Emergency Community Water Assistance Grant 
Program is to assist the residents of rural areas that have experienced 
a significant decline in quantity or quality of water to obtain 
adequate quantities of water that meet the standards set by the Safe 
Drinking Water Act (42 U.S.C. 300f et seq.) (SDWA).


Sec. 1778.4  Definitions.

    Emergency. Occurrence of an incident such as, but not limited to, a 
drought, earthquake, flood, hurricane, disease outbreak, or chemical 
spill.
    Rural areas. Includes any area in any city or town with a 
population not in excess of 10,000 inhabitants according to the most 
recent decennial census of the United States, located in any of the 
fifty States, the Commonwealth of Puerto Rico, the Western Pacific 
Territories, Marshall Islands, Federated States of Micronesia, Republic 
of Palau, and the U.S. Virgin Islands.
    Significant decline in quality. A significant decline in quality of 
potable water is where the present community source or delivery system 
does not meet, as a result of an emergency, the current SDWA 
requirements. For a private source or delivery system a significant 
decline in quality is where the water is no longer potable as a result 
of an emergency.
    Significant decline in quantity. A significant decline in the 
quantity is caused by a disruption of the potable water supply by an 
emergency. The disruption in quantity of water prevents the present 
source or delivery system from supplying potable water needs to rural 
residents. This would not include a decline in excess water capacity.


Sec. 1778.5  [Reserved]


Sec. 1778.6  Eligibility.

    (a) Grants may be made to public bodies and private nonprofit 
corporations serving rural areas. Public bodies include counties, 
cities, townships, incorporated towns and villages, boroughs, 
authorities, districts, and other political subdivisions of a State. 
Public bodies also includes Indian tribes on Federal and State 
reservations and other Federally recognized Indian Tribal groups in 
rural areas.
    (b) In the case of grants made to alleviate a significant decline 
in quantity or quality of water available from the water supplies of 
rural residents, the applicant must demonstrate that the decline 
occurred within two years of the date the application was filed with 
the Agency.

[[Page 33476]]

This would not apply to grants made for repairs, partial replacement, 
or significant maintenance on an established water system.


Sec. 1778.7  Project priority.

    Paragraphs (a) through (d) of this section indicate items and 
conditions which must be considered in selecting applications for 
further development. When ranking eligible applications for 
consideration for limited funds, Agency officials must consider the 
priority items met by each application and the degree to which those 
priorities are met.
    (a) Applications. The application and supporting information 
submitted with it will be used to determine the proposed project's 
priority for available funds.
    (b) State Office review. All applications will be reviewed and 
scored for funding priority using RUS Bulletin 1778-1. The State 
Program Official will request funds from the National Office, 
Attention: Assistant Administrator, Water and Waste, using RUS 
Bulletins 1778-1 and 1778-2. If an application cannot be funded, the 
State Program Official will be notified. Eligible applicants that 
cannot be funded should be advised that funds are not available.
    (c) National Office review. Each year all funding requests will be 
reviewed by the National Office starting November 1 and will continue 
as long as funds are available except for the first year in which funds 
are made available for this grant program. A review of funding requests 
the first year will start 30 days after funds are made available. 
Projects selected for funding will be considered based on the priority 
criteria and available funds. Projects must compete on a national basis 
for available funds, and the National Office will allocate funds to 
State offices on a project by project basis.
    (d) Selection priorities. The priorities described below will be 
used by the State Program Official to rate applications and by the 
Assistant Administrator of Water and Waste to select projects for 
funding. Points will be distributed as indicated in paragraphs (d)(1) 
through (d)(5) of this section and will be considered in selecting 
projects for funding. A copy of RUS Bulletins 1778-1 and 1778-2 used to 
rate applications, should be placed in the case file for future 
reference.
    (1) Population. The proposed project will serve an area with a 
rural population:
    (i) Not in excess of 1,500--30 points.
    (ii) More than 1,500 and not in excess of 3,000--20 points.
    (iii) More than 3,000 and not in excess of 5,000--15 points.
    (2) Income. The median household income of population to be served 
by the proposed project is:
    (i) Not in excess of 70% of the statewide nonmetropolitan median 
household income--30 points.
    (ii) More than 70% and not in excess of 80% of the statewide 
nonmetropolitan median household income--20 points.
    (iii) More than 80% and not in excess of 90% of the statewide 
nonmetropolitan median household income--10 points.
    (iv) Over 90% of the statewide nonmetropolitan median household 
income--0 points.
    (3) Significant decline. Points will only be assigned for one of 
the following paragraphs when the primary purpose of the proposed 
project is to correct a significant decline in the:
    (i) Quantity of water available from private individually owned 
wells or other individual sources of water--30 points; or
    (ii) Quantity of water available from an established system's 
source of water--20 points; or
    (iii) Quality of water available from private individually owned 
wells or other individual sources of water--30 points; or
    (iv) Quality of water available from an established system's source 
of water--20 points.
    (4) Acute shortage. Grants made in accordance with Sec. 1778.11(b) 
to assist an established water system remedy an acute shortage of 
quality water or correct a significant decline in the quantity or 
quality of water that is available--10 points.
    (5) Discretionary. In certain cases the Administrator may assign up 
to 30 points for items such as geographic distribution of funds, rural 
residents hauling water, severe contamination levels, etc.


Sec. 1778.8  [Reserved]


Sec. 1778.9  Uses.

    Grant funds may be used for the following purposes:
    (a) Waterline extensions from existing systems.
    (b) Construction of new waterlines.
    (c) Repairs to an existing system.
    (d) Significant maintenance to an existing system.
    (e) Construction of new wells, reservoirs, transmission lines, 
treatment plants, and other sources of water.
    (f) Equipment replacement.
    (g) Connection and/or tap fees.
    (h) Pay costs that were incurred within six months of the date an 
application was filed with the Agency to correct an emergency situation 
that would have been eligible for funding under this part.
    (i) Any other appropriate purpose such as legal fees, engineering 
fees, recording costs, environmental impact analyses, archaeological 
surveys, possible salvage or other mitigation measures, planning, 
establishing or acquiring rights associated with developing sources of, 
treating, storing, or distributing water.
    (j) Assist rural water systems to comply with the requirements of 
the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.) 
(FWPCA) or the SDWA when such failure to comply is directly related to 
a recent decline in quality of potable water. This would not apply to 
changes in the requirements of FWPCA or SDWA.


Sec. 1778.10  Restrictions.

    (a) Grant funds may not be used to:
    (1) Assist any city or town with a population in excess of 10,000 
inhabitants according to the most recent decennial census of the United 
States.
    (2) Assist a rural area that has a median household income in 
excess of the statewide nonmetropolitan median household income 
according to the most recent decennial census of the United States.
    (3) Finance facilities which are not modest in size, design, cost, 
and are not directly related to correcting the potable water quantity 
or quality problem.
    (4) Pay loan or grant finder's fees.
    (5) Pay any annual recurring costs that are considered to be 
operational expenses.
    (6) Pay rental for the use of equipment or machinery owned by the 
rural community.
    (7) Purchase existing systems.
    (8) Refinance existing indebtedness, except for short-term debt 
incurred in accordance with Sec. 1778.9(h).
    (9) Make reimbursement for projects developed with other grant 
funds.
    (10) Finance facilities that are not for public use.
    (b) Nothing in paragraph (a)(1) of this section shall preclude 
rural areas from submitting joint proposals for assistance under this 
part. Each entity applying for financial assistance under this part to 
fund their share of a joint project will be considered individually.


Sec. 1778.11  Maximum grants.

    (a) Grants made to alleviate a significant decline in quantity or 
quality of water available from the water supplies in rural areas that 
occurred within two years of filing an application with the Agency 
cannot exceed $500,000.

[[Page 33477]]

    (b) Grants made for repairs, partial replacement, or significant 
maintenance on an established system to remedy an acute shortage or 
significant decline in the quality or quantity of potable water cannot 
exceed $75,000.
    (c) Grants under this part, subject to paragraphs (a) and (b) of 
this section, shall be made for 100 percent of eligible project costs.


Sec. 1778.12  [Reserved]


Sec. 1778.13  Set-aside.

    (a) At least 70 percent of all grants made under these grant 
programs shall be for projects funded in accordance with 
Sec. 1778.11(a).
    (b) At least 50 percent of the funds appropriated for this grant 
program shall be allocated to rural areas with populations not in 
excess of 3,000 inhabitants according to the most recent decennial 
census of the United States.


Sec. 1778.14  Other considerations.

    (a) Civil rights compliance requirements. All grants made under 
this part are subject to Title VI of the Civil Rights Act of 1964 (42 
U.S.C. 2000d et seq.), as outlined in subpart E of part 1901 of this 
title.
    (b) Environmental requirements. All projects must have appropriate 
environmental reviews in accordance with RUS requirements.
    (c) Uniform Relocation and Real Property Acquisition Policies Act 
(42 U.S.C. 4601 et seq.). All projects must comply with the 
requirements set forth in 7 CFR part 21.
    (d) Flood and mudslide hazard area precautions. If the project is 
located in a flood or mudslide area, then flood or mudslide insurance 
must be provided as required in subpart A of part 1806 of this title 
(RD Instruction 426.2).
    (e) Governmentwide debarment and suspension (nonprocurement) and 
requirements for drug-free work place. All projects must comply with 
the requirements set forth in the U.S. Department of Agriculture 
regulations 7 CFR part 3017 and RD Instruction 1940-M.
    (f) Intergovernmental review. All projects funded under this part 
are subject to Executive Order 12372 (3 CFR, 1983 Comp., p. 197), which 
requires intergovernmental consultation with State and local officials. 
These requirements are set forth in U.S. Department of Agriculture 
regulations 7 CFR part 3015, subpart V, and RD Instruction 1940-J.


Secs. 1778.15-1778.20  [Reserved]


Sec. 1778.21  Application processing.

    (a) To the extent possible, an application under this part will be 
approved or disapproved within 60 days of the date that a complete 
application and all related material is submitted to the Agency.
    (b) The material submitted with the application should include the 
Preliminary Engineer Report, population and median household income of 
the area to be served, description of project, and nature of emergency 
that caused the problem(s) being addressed by the project. The 
documentation must clearly show that the applicant has had a 
significant decline in the quantity and/or quality of potable water or 
an acute shortage of potable water and the proposed project will 
eliminate the problem. For projects to be funded in accordance with 
Sec. 1778.11(a), evidence must be furnished that a significant decline 
in quantity or quality occurred within two years of filing the 
application with the Agency.
    (c) The processing office should assist the applicant in 
application assembly and processing.
    (d) Appropriate application review and approval procedures outlined 
in subpart B of part 1780 of this chapter.
    (e) Each application for assistance will be carefully reviewed in 
accordance with the priorities established in Sec. 1778.7. A priority 
rating will be assigned to each application by the State Program 
Official.
    (f) When the National Office has allocated funds to the State for a 
project, applicable provisions outlined in subpart B of part 1780 of 
this chapter will be followed in preparation of the grant docket. This 
would include development of an operating budget showing that the 
applicant can meet all its obligations and provide the intended 
services.
    (g) When favorable action will not be taken on an application, the 
applicant will be notified in writing by the State Program Official of 
the reasons why the request was not favorably considered. Notification 
to the applicant will state that a review of this decision by the 
Agency may be requested by the applicant in accordance with 7 CFR part 
11.
    (h) State Program Officials are authorized to approve grants made 
in accordance with this part and RUS Staff Instruction 1780-1.
    (i) Funds will be obligated and approval announcement made in 
accordance with the provisions of subpart B of part 1780 of this 
chapter.


Sec. 1778.22  Planning development and procurement.

    Planning development and procurement for grants made under this 
part will be in accordance with subpart C of part 1780 of this chapter. 
A certification should be obtained from the State agency or the 
Environmental Protection Agency if the State does not have primacy, 
stating that the proposed improvements will be in compliance with 
requirements of the SDWA.


Sec. 1778.23  Grant closing and disbursement of funds.

    (a) Grants will be closed in accordance with Sec. 1780.45 of this 
chapter.
    (b) RUS Bulletin 1780-12, ``Water or Waste Grant Agreement,'' will 
be executed by all applicants. State Program Officials are authorized 
to execute the agreement on behalf of the Agency.
    (c) The grant will be considered closed on the date RUS Bulletin 
1780-12 is signed by the Agency. The Finance Office will be notified of 
the grant closing date. The Agency will retain the original of the 
Grant Agreement.
    (d) The Agency's policy is not to disburse grant funds from the 
Treasury until they are actually needed by the applicant. Grant funds 
will be disbursed by using multiple advances.


Secs. 1778.24-1778.30  [Reserved]


Sec. 1778.31  Performing development.

    (a) Applicable provisions of subpart C of part 1780 of this chapter 
will be followed in performing development for grants made under this 
part.
    (b) After filing an application in accordance with Sec. 1778.21 and 
when immediate action is necessary, the State Program Official may 
concur in an applicant's request to proceed with construction before 
funds are obligated provided the RUS environmental requirements are 
complied with. The applicant must be advised in writing that:
    (1) Any authorization to proceed or any concurrence in bid awards, 
contract concurrence, or other project development activity, is not a 
commitment by the Agency to provide grant funds under this part.
    (2) The Agency is not liable for any debt incurred by the applicant 
in the event that funds are not provided under this part.


Sec. 1778.32  Grant cancellation.

    The State Program Official may prepare and execute Form RD 1940-10, 
``Cancellation of U.S. Treasury Check and/or Obligation,'' in 
accordance with the Forms Manual Insert. If the docket has been 
forwarded to OGC, that office should receive a copy of Form RD 1940-10. 
The applicant's attorney and engineer may be provided a copy of

[[Page 33478]]

Form RD 1940-10. A copy should also be sent to the National Office, 
Attention: Water and Waste Processing.


Sec. 1778.33  [Reserved]


Sec. 1778.34  Grant servicing.

    (a) Grants will be serviced in accordance with Sec. 1951.215 of 
subpart E of part 1951 of this title and subpart O of part 1951 of this 
title.
    (b) The grantee will provide an audit report in accordance with 
Sec. 1780.47 of this chapter.


Sec. 1778.35  Subsequent grants.

    Subsequent grants will be processed in accordance with the 
requirements set forth in this part. The initial and subsequent grants 
made to complete a previously approved project must comply with the 
maximum grant requirements set forth in Sec. 1778.11.


Sec. 1778.36  [Reserved]


Sec. 1778.37  Forms, Instructions and Bulletins.

    Bulletins, instructions and forms referenced are for use in 
administering grants made under this part and are available from any 
USDA/Rural Development office or the Rural Utilities Service, United 
States Department of Agriculture, Washington, DC 20250-1500.


Secs. 1778.38-1778.99  [Reserved]


Sec. 1778.100  OMB control number.

    The reporting and recordkeeping requirements contained in this part 
have been approved by the Office of Management and Budget and assigned 
OMB control number 0575-0074. Public reporting burden for this 
collection of information is estimated to average two hours per 
response, including the time for reviewing instructions, searching 
existing data sources, gathering and maintaining the data needed, and 
completing and reviewing the collection of information. Send comments 
regarding this burden estimate or any other aspect of this collection 
of information, including suggestions for reducing this burden, to 
Department of Agriculture, Clearance Officer, OIRM, Room 404-W, 
Washington, DC 20250; and to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Washington, DC 20503.
    4. Part 1780, is added to read as follows:

PART 1780--WATER AND WASTE LOANS AND GRANTS

Subpart A--General Policies and Requirements

Sec.
1780.1  General.
1780.2  Purpose.
1780.3  Definitions and grammatical rules of construction.
1780.4  Availability of forms and regulations.
1780.5  [Reserved]
1780.6  Application information.
1780.7  Eligibility.
1780.8  [Reserved]
1780.9  Eligible loan and grant purposes.
1780.10  Limitations.
1780.11  Service area requirements.
1780.12  [Reserved]
1780.13  Rates and terms.
1780.14  Security.
1780.15  Other Federal, State, and local requirements.
1780.16  [Reserved]
1780.17  Selection priorities and process.
1780.18  Allocation of program funds.
1780.19  Public information.
1780.20-1780.23  [Reserved]
1780.24  Approval authorities.
1780.25  Exception authority.
1780.26-1780.30  [Reserved]

Subpart B--Loan and Grant Application Processing

1780.31  General.
1780.32  Timeframes for application processing.
1780.33  Application requirements.
1780.34  [Reserved]
1780.35  Processing office review.
1780.36  Approving official review.
1780.37  Applications determined ineligible.
1780.38  [Reserved]
1780.39  Application processing.
1780.40  [Reserved]
1780.41  Loan or grant approval.
1780.42  Transfer of obligations.
1780.43  [Reserved]
1780.44  Actions prior to loan or grant closing or start of 
construction, whichever occurs first.
1780.45  Loan and grant closing and delivery of funds.
1780.46  [Reserved]
1780.47  Borrower accounting methods, management reporting and 
audits.
1780.48  Regional commission grants.
1780.49  Rural or Native Alaskan villages.
1780.50-1780.52  [Reserved]
Subpart C--Planning, Designing, Bidding, Contracting, Constructing and 
Inspections
1780.53  General.
1780.54  Technical services.
1780.55  Preliminary engineering reports.
1780.56  [Reserved]
1780.57  Design policies.
1780.58-1780.60  [Reserved]
1780.61  Construction contracts.
1780.62  Utility purchase contracts.
1780.63  Sewage treatment and bulk water sales contracts.
1780.64-1780.66  [Reserved]
1780.67  Performing construction.
1780.68  Owner's contractual responsibility.
1780.69  [Reserved]
1780.70  Owner's procurement regulations.
1780.71  [Reserved]
1780.72  Procurement methods.
1780.73  [Reserved]
1780.74  Contracts awarded prior to applications.
1780.75  Contract provisions.
1780.76  Contract administration.
1780.77-1780.79  [Reserved]
Subpart D--Information Pertaining to Preparation of Notes or Bonds and 
Bond Transcript Documents for Public Body Applicants
1780.80  General.
1780.81  Policies related to use of bond counsel.
1780.82  [Reserved]
1780.83  Bond transcript documents.
1780.84-1780.86  [Reserved]
1780.87  Permanent instruments for Agency loans.
1780.88  [Reserved]
1780.89  Multiple advances of Agency funds using permanent 
instruments.
1780.90  Multiple advances of Agency funds using temporary debt 
instruments.
1780.91-1780.93  [Reserved]
1780.94  Minimum bond specifications.
1780.95  Public bidding on bonds.
1780.96-1780.100  [Reserved]

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

Subpart A--General Policies and Requirements


Sec. 1780.1  General.

    (a) This part outlines the policies and procedures for making and 
processing direct loans and grants for water and waste projects. The 
Rural Utilities Service (RUS) shall cooperate fully with State and 
local agencies in making loans and grants to assure maximum support to 
the State strategy for rural development. Agency officials and their 
staffs shall maintain coordination and liaison with State agency and 
substate planning districts.
    (b) The income data used in this part to determine median household 
income must be that which most accurately reflects the income of the 
service area. The median household income of the service area and the 
nonmetropolitan median household income of the State will be determined 
from income data from the most recent decennial census of the United 
States. If there is reason to believe that the census data is not an 
accurate representation of the median household income within the area 
to be served, the reasons will be documented and the applicant may 
furnish, or the Agency may obtain, additional information regarding 
such median household income. Information will consist of reliable data 
from local, regional, State or Federal sources or from a survey 
conducted by a reliable

[[Page 33479]]

impartial source. The nonmetropolitan median household income of the 
State may only be updated on a national basis by the RUS National 
Office. This will be done only when median household income data for 
the same year for all Bureau of the Census areas is available from the 
Bureau of the Census or other reliable sources. Bureau of the Census 
areas would include areas such as: Counties, County Subdivisions, 
Cities, Towns, Townships, Boroughs, and other places.
    (c) RUS debt instruments will require an agreement that if at any 
time it shall appear to the Government that the borrower is able to 
refinance the amount of the indebtedness to the Government then 
outstanding, in whole or in part, by obtaining a loan for such purposes 
from responsible cooperative or private credit sources, at reasonable 
rates and terms for loans for similar purposes and periods of time, the 
borrower will, upon request of the Government, apply for and accept 
such loan in sufficient amount to repay the Government and will take 
all such actions as may be required in connection with such loan.
    (d) Funds allocated for use under this part are also for the use of 
Indian tribes within the State, regardless of whether State development 
strategies include Indian reservations within the State's boundaries. 
Native Americans residing on such reservations must have equal 
opportunity to participate in the benefits of these programs as 
compared with other residents of the State. Such tribes might not be 
subject to State and local laws or jurisdiction. However, any 
requirements of this part that affect applicant eligibility, the 
adequacy of RUS's security, or the adequacy of service to users of the 
facility and all other requirements of this part must be met.
    (e) RUS financial programs must be extended without regard to race, 
color, religion, sex, national origin, marital status, age, or physical 
or mental handicap.
    (f) Any processing or servicing activity conducted pursuant to this 
part involving authorized assistance to Agency employees, members of 
their families, known close relatives, or business or close personal 
associates, is subject to the provisions of subpart D of part 1900 of 
this title. Applicants for assistance are required to identify any 
known relationship or association with a RUS employee.
    (g) Water and waste facilities will be designed, installed, and 
operated in accordance with applicable laws which include but are not 
limited to the Safe Drinking Water Act, Clean Water Act and the 
Resource Conservation and Recovery Act.
    (h) RUS financed facilities will be consistent with any current 
development plans of State, multijurisdictional areas, counties, or 
municipalities in which the proposed project is located.
    (i) Each RUS financed facility will be in compliance with 
appropriate State or Federal agency regulations which have control of 
the appropriation, diversion, storage and use of water and disposal of 
excess water.
    (j) Water and waste applicants must demonstrate that they possess 
the financial, technical, and managerial capability necessary to 
consistently comply with pertinent Federal and State laws and 
requirements. In developing water and waste systems, applicants must 
consider alternatives of ownership, system design, and the sharing of 
services.
    (k) Applicants should be aware of and comply with other Federal 
statute requirements including but not limited to:
    (1) Section 504 of the Rehabilitation Act of 1973. Under section 
504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. 794 et 
seq.), no handicapped individual in the United States shall, solely by 
reason of their handicap, be excluded from participation in, be denied 
the benefits of, or be subjected to discrimination under any program or 
activity receiving RUS financial assistance;
    (2) Civil Rights Act of 1964. All borrowers are subject to, and 
facilities must be operated in accordance with, title VI of the Civil 
Rights Act of 1964 (42 U.S.C. 2000d et seq.) and subpart E of part 1901 
of this title, particularly as it relates to conducting and reporting 
of compliance reviews. Instruments of conveyance for loans and/or 
grants subject to the Act must contain the covenant required by 
Sec. 1901.202(e) of this title;
    (3) The Americans with Disabilities Act (ADA) of 1990. This Act (42 
U.S.C. 12101 et seq.) prohibits discrimination on the basis of 
disability in employment, State and local government services, public 
transportation, public accommodations, facilities, and 
telecommunications. Title II of the Act applies to facilities operated 
by State and local public entities which provides services, programs 
and activities. Title III of the Act applies to facilities owned, 
leased, or operated by private entities which accommodate the public; 
and
    (4) Age Discrimination Act of 1975. This Act (42 U.S.C. 6101 et 
seq.) provides that no person in the United States shall on the basis 
of age, be excluded from participation in, be denied the benefits of, 
or be subjected to discrimination under any program or activity 
receiving Federal financial assistance.


Sec. 1780.2  Purpose.

    Provide loan and grant funds for water and waste projects serving 
the most financially needy communities. Financial assistance should 
result in reasonable user costs for rural residents, rural businesses, 
and other rural users.


Sec. 1780.3  Definitions and grammatical rules of construction.

    (a) Definitions. For the purposes of this part:
    Agency means the Rural Utilities Service and any United States 
Department of Agriculture (USDA) employee acting on behalf of the Rural 
Utilities Service in accordance with appropriate delegations of 
authority.
    Agency identified target areas means an identified area in the 
State strategic plan or other plans developed by the Rural Development 
State Director.
    Approval official means the USDA official at the State level who 
has been delegated the authority to approve loans or grants.
    Equivalent Dwelling Unit (EDU) means the level of service provided 
to a typical rural residential dwelling.
    Parity bonds means bonds which have equal standing with other bonds 
of the same Issuer.
    Poverty line means the level of income for a family of four, as 
defined in section 673(2) of the Community Services Block Grant Act (42 
U.S.C. 9902(2)).
    Processing office means the office designated by the State program 
official to accept and process applications for water and waste 
disposal assistance.
    Project means all activity that an applicant is currently 
undertaking to be financed in whole or part with RUS assistance.
    Protective advances are payments made by a lender for items such as 
insurance or taxes in order to preserve and protect the security or the 
lien or priority of the lien securing the loan.
    Rural and rural areas means any area not in a city or town with a 
population in excess of 10,000 inhabitants, according to the latest 
decennial census of the United States.
    Rural Development means the mission area of the Under Secretary for 
Rural Development. Rural Development State and local offices will 
administer this water and waste program on behalf of the Rural 
Utilities Service.
    RUS means the Rural Utilities Service, an agency of the United 
States

[[Page 33480]]

Department of Agriculture established pursuant to section 232 of the 
Department of Agriculture Reorganization Act of 1994 (Pub. L. 103-354, 
108 Stat. 3178), successor to the Farmer's Home Administration and the 
Rural Development Administration with respect to certain water and 
waste disposal loan and grant programs.
    Service area means the area reasonably expected to be served by the 
project.
    Servicing office means the office designated by the State program 
official to service water and waste disposal loans and grants.
    Similar system cost means the average annual EDU user cost of a 
system within a community having similar economic conditions and being 
served by the same type of established system. Similar system cost 
shall include all charges, taxes, and assessments attributable to the 
system including debt service, reserves and operation and maintenance 
costs.
    State program official means the USDA official at the State level 
who has been delegated the responsibility of administering the water 
and waste disposal programs under this regulation for a particular 
State or States.
    Statewide nonmetropolitan median household income means the median 
household income of all rural areas of a state.
    (b) Rules of grammatical construction. Unless the context otherwise 
indicates, ``includes'' and ``including'' are not limiting, and ``or'' 
is not exclusive. 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. 1780.4  Availability of forms and regulations.

    Information about the availability of forms, instructions, 
regulations, bulletins, OMB Circulars, Treasury Circulars, standards, 
documents and publications cited in this part is available from any 
USDA/Rural Development office or the Rural Utilities Service, United 
States Department of Agriculture, Washington, DC 20250-1500.


Sec. 1780.5  [Reserved]


Sec. 1780.6  Application information.

    (a) The Rural Development State Director in each State will 
determine the office and staff that will be responsible for delivery of 
the program (processing office) and designate an approving office. 
Applications will be accepted by the processing office.
    (b) The applicant's governing body should designate one person to 
act as contact person with the Agency during loan and grant processing. 
Agency personnel should make every effort to involve the applicant's 
contact person when meeting with the applicant's professional 
consultants or agents.


Sec. 1780.7  Eligibility.

    Facilities financed by water and waste disposal loans or grants 
must serve rural areas.
    (a) Eligible applicant. An applicant must be:
    (1) A public body, such as a municipality, county, district, 
authority, or other political subdivision of a state, territory or 
commonwealth;
    (2) An organization operated on a not-for-profit basis, such as an 
association, cooperative, or private corporation. The organization must 
be an association controlled by a local public body or bodies, or have 
a broadly based ownership by or membership of people of the local 
community; or
    (3) Indian tribes on Federal and State reservations and other 
Federally recognized Indian tribes.
    (b) Eligible facilities. Facilities financed by RUS may be located 
in non-rural areas. However, loan and grant funds may be used to 
finance only that portion of the facility serving rural areas, 
regardless of facility location.
    (c) Eligible projects. (1) Projects must serve a rural area which, 
if such project is completed, is not likely to decline in population 
below that for which the project was designed.
    (2) Projects must be designed and constructed so that adequate 
capacity will or can be made available to serve the present population 
of the area to the extent feasible and to serve the reasonably 
foreseeable growth needs of the area to the extent practicable.
    (3) Projects must be necessary for orderly community development 
and consistent with a current comprehensive community water, waste 
disposal, or other current development plan for the rural area.
    (d) Credit elsewhere. Applicants must certify in writing and the 
Agency shall determine and document that the applicant is unable to 
finance the proposed project from their own resources or through 
commercial credit at reasonable rates and terms.
    (e) Legal authority and responsibility. Each applicant must have or 
will obtain the legal authority necessary for owning, constructing, 
operating, and maintaining the proposed facility or service and for 
obtaining, giving security for, and repaying the proposed loan. The 
applicant shall be responsible for operating, maintaining, and managing 
the facility, and providing for its continued availability and use at 
reasonable user rates and charges. This responsibility shall be 
exercised by the applicant even though the facility may be operated, 
maintained, or managed by a third party under contract or management 
agreement. Guidance for preparing a management agreement is available 
from the Agency. Such contracts, management agreements, or leases must 
not contain options or other provisions for transfer of ownership.
    (f) Economic feasibility. All projects financed under the 
provisions of this section must be based on taxes, assessments, income, 
fees, or other satisfactory sources of revenues in an amount sufficient 
to provide for facility operation and maintenance, reasonable reserves, 
and debt payment. If the primary use of the facility is by business and 
the success or failure of the facility is dependent on the business, 
then the economic viability of that business must be assessed.
    (g) Federal Debt Collection Act of 1990 (28 U.S.C. 3001 et seq.). 
An outstanding judgment obtained by the United States in a Federal 
Court (other than in the United States Tax Court), which has been 
recorded, shall cause the applicant to be ineligible to receive a loan 
or grant until the judgment is paid in full or otherwise satisfied.
    (h) Expanded eligibility for timber-dependent communities in 
Pacific Northwest. In the Pacific Northwest, defined as an area 
containing national forest covered by the Federal document entitled, 
``Forest Plan for a Sustainable Economy and a Sustainable 
Environment,'' dated July 1, 1993, the population limits contained in 
Sec. 1780.3(a) are expanded to include communities with not more than 
25,000 inhabitants until September 30, 1998, if:
    (1) Part or all of the community lies within 100 miles of the 
boundary of a national forest covered by the Federal document entitled, 
``Forest Plan for a Sustainable Economy and a Sustainable 
Environment,'' dated July 1, 1993; and
    (2) The community is located in a county in which at least 15 
percent of the total primary and secondary labor and proprietor income 
is derived from forestry, wood products, or forest-related industries 
such as recreation and tourism.


Sec. 1780.8  [Reserved]


Sec. 1780.9  Eligible loan and grant purposes.

    Loan and grant funds may be used only for the following purposes:
    (a) To construct, enlarge, extend, or otherwise improve rural 
water, sanitary sewage, solid waste disposal, and storm wastewater 
disposal facilities.

[[Page 33481]]

    (b) To construct or relocate public buildings, roads, bridges, 
fences, or utilities, and to make other public improvements necessary 
for the successful operation or protection of facilities authorized in 
paragraph (a) of this section.
    (c) To relocate private buildings, roads, bridges, fences, or 
utilities, and other private improvements necessary for the successful 
operation or protection of facilities authorized in paragraph (a) of 
this section.
    (d) For payment of other utility connection charges as provided in 
service contracts between utility systems.
    (e) When a necessary part of the project relates to those 
facilities authorized in paragraphs (a), (b),(c) or (d) of this section 
the following may be considered:
    (1) Loan or grant funds may be used for:
    (i) Reasonable fees and costs such as: legal, engineering, 
administrative services, fiscal advisory, recording, environmental 
analyses and surveys, possible salvage or other mitigation measures, 
planning, establishing or acquiring rights;
    (ii) Costs of acquiring interest in land; rights, such as water 
rights, leases, permits, rights-of-way; and other evidence of land or 
water control or protection necessary for development of the facility;
    (iii) Purchasing or renting equipment necessary to install, 
operate, maintain, extend, or protect facilities;
    (iv) Cost of additional applicant labor and other expenses 
necessary to install and extend service; and
    (v) In unusual cases, the cost for connecting the user to the main 
service line.
    (2) Only loan funds may be used for:
    (i) Interest incurred during construction in conjunction with 
multiple advances or interest on interim financing;
    (ii) Initial operating expenses, including interest, for a period 
ordinarily not exceeding one year when the applicant is unable to pay 
such expenses;
    (iii) The purchase of existing facilities when it is necessary 
either to improve service or prevent the loss of service;
    (iv) Refinancing debts incurred by, or on behalf of, an applicant 
when all of the following conditions exist:
    (A) The debts being refinanced are a secondary part of the total 
loan;
    (B) The debts were incurred for the facility or service being 
financed or any part thereof; and
    (C) Arrangements cannot be made with the creditors to extend or 
modify the terms of the debts so that a sound basis will exist for 
making a loan; and
    (v) Prepayment of costs for which RUS grant funds were obligated.
    (3) Grant funds may be used to restore loan funds used to prepay 
grant obligated costs.
    (f) Construction incurred before loan or grant approval.
    (1) Funds may be used to pay obligations for eligible project costs 
incurred before loan or grant approval if such requests are made in 
writing by the applicant and the Agency determines that:
    (i) Compelling reasons exist for incurring obligations before loan 
or grant approval;
    (ii) The obligations will be incurred for authorized loan or grant 
purposes; and
    (iii) The Agency's authorization to pay such obligations is on the 
condition that it is not committed to make the loan or grant; it 
assumes no responsibility for any obligations incurred by the 
applicant; and the applicant must subsequently meet all loan or grant 
approval requirements, including environmental and contracting 
requirements.
    (2) If construction is started without Agency approval, post-
approval in accordance with this section may be considered, provided 
the construction meets applicable requirements including those 
regarding approval and environmental matters.
    (g) Water or sewer service may be provided through individual 
installations or small clusters of users within an applicant's service 
area. The approval official should consider items such as: quantity and 
quality of the individual installations that may be developed; cost 
effectiveness of the individual facility compared with the initial and 
long term user cost on a central system; health and pollution problems 
attributable to individual facilities; operational or management 
problems peculiar to individual installations; and permit and 
regulatory agency requirements.
    (1) Applicants providing service through individual facilities must 
meet the eligibility requirements in Sec. 1780.7.
    (2) The Agency must approve the form of agreement between the 
applicant and individual users for the installation, operation, 
maintenance and payment for individual facilities.
    (3) If taxes or assessments are not pledged as security, applicants 
providing service through individual facilities must obtain security 
necessary to assure collection of any sum the individual user is 
obligated to pay the applicant.
    (4) Notes representing indebtedness owed the applicant by a user 
for an individual facility will be scheduled for payment over a period 
not to exceed the useful life of the individual facility or the RUS 
loan, whichever is shorter. The interest rate will not exceed the 
interest rate charged the applicant on the RUS indebtedness.
    (5) Applicants providing service through individual or cluster 
facilities must obtain:
    (i) Easements for the installation and ingress to and egress from 
the facility if determined necessary by RUS; and
    (ii) An adequate method for denying service in the event of 
nonpayment of user fees.


Sec. 1780.10  Limitations.

    (a) Loan and grant funds may not be used to finance:
    (1) Facilities which are not modest in size, design, and cost;
    (2) Loan or grant finder's fees;
    (3) The construction of any new combined storm and sanitary sewer 
facilities;
    (4) Any portion of the cost of a facility which does not serve a 
rural area;
    (5) That portion of project costs normally provided by a business 
or industrial user, such as wastewater pretreatment, etc.;
    (6) Rental for the use of equipment or machinery owned by the 
applicant;
    (7) For other purposes not directly related to operating and 
maintenance of the facility being installed or improved; and
    (8) A judgment which would disqualify an applicant for a loan or 
grant as provided for in Sec. 1780.7(g).
    (b) Grant funds may not be used to:
    (1) Reduce EDU costs to a level less than similar system cost;
    (2) Pay any costs of a project when the median household income of 
the service area is and more than 100 percent of the nonmetropolitan 
median household income of the State;
    (3) Pay project costs when other loan funding for the project is 
not at reasonable rates and terms; and
    (4) Pay project costs when other funding is a guaranteed loan 
obtained in accordance with subpart I of part 1980 of this title.
    (c) Grants may not be made in excess of the following percentages 
of the RUS eligible project development costs. Facilities previously 
installed will not be considered in determining the development costs.
    (1) 75 percent when the median household income of the service area 
is below the higher of the poverty line or 80% of the state 
nonmetropolitan median income and the project is

[[Page 33482]]

necessary to alleviate a health or sanitary problem.
    (2) 45 percent when the median household income of the service area 
exceeds the 80 percent requirements described in paragraph (c)(1) of 
this section but is not more than 100 percent of the statewide 
nonmetropolitan median household income.
    (3) Applicants are advised that the percentages contained in 
paragraphs (c)(1) and (c)(2) of this section are maximum amounts and 
may be further limited due to availability of funds or the grant 
determination procedures contained in Sec. 1780.35 (b).


Sec. 1780.11  Service area requirements.

    (a) All facilities financed under the provisions of this part shall 
be for public use. The facilities will be installed so as to serve any 
potential user within the service area who desires service and can be 
feasibly and legally served. This does not preclude:
    (1) Financing or constructing projects in phases when it is not 
practical to finance or construct the entire project at one time; and
    (2) Financing or constructing facilities where it is not 
economically feasible to serve the entire area, provided economic 
feasibility is determined on the basis of the entire system and not by 
considering the cost of separate extensions to or parts thereof; the 
applicant publicly announces a plan for extending service to areas not 
initially receiving service from the system; and potential users 
located in the areas not to be initially served receive written notice 
from the applicant that service will not be provided until such time as 
it is economically feasible to do so.
    (b) Should the Agency determine that inequities exist within the 
applicants service area for the same type service proposed (i.e., water 
or waste disposal) such inequities will be remedied by the applicant 
prior to loan or grant approval or included as part of the project. 
Inequities are defined as unjustified variations in availability, 
adequacy or quality of service. User rate schedules for portions of 
existing systems that were developed under different financing, rates, 
terms or conditions do not necessarily constitute inequities.
    (c) Developers are normally expected to provide utility-type 
facilities in new or developing areas in compliance with appropriate 
State statutes. RUS financing will be considered to an eligible 
applicant only in such cases when failure to complete development would 
result in an adverse economic condition for the rural area (not the 
community being developed); the proposal is necessary to the success of 
a current area development plan; and loan repayment can be assured by:
    (1) The applicant already having sufficient assured revenues to 
repay the loan; or
    (2) Developers providing a bond or escrowed security deposit as a 
guarantee sufficient to meet expenses attributable to the area in 
question until a sufficient number of the building sites are occupied 
and connected to the facility to provide enough revenues to meet 
operating, maintenance, debt service, and reserve requirements. Such 
guarantees from developers will meet the requirements in 
Sec. 1780.39(c)(4)(ii); or
    (3) Developers paying cash for the increased capital cost and any 
increased operating expenses until the developing area will support the 
increased costs; or
    (4) The full faith and credit of a public body where the debt is 
evidenced by general obligation bonds; or
    (5) The loan is to a public body evidenced by a pledge of tax 
revenue or assessments; or
    (6) The user charges can become a lien upon the property being 
served and income from such lien can be collected in sufficient time to 
be used for its intended purposes.


Sec. 1780.12  [Reserved]


Sec. 1780.13  Rates and terms.

    (a) General. (1) Each loan will bear interest at the rate 
prescribed in RD Instruction 440.1, exhibit B. The interest rates will 
be set by the Agency for each quarter of the fiscal year. All rates 
will be adjusted to the nearest one-eighth of one per centum. The rate 
will be the lower of the rate in effect at the time of loan approval or 
the rate in effect at the time of loan closing unless the applicant 
otherwise chooses.
    (2) If the interest rate is to be that in effect at loan closing on 
a loan involving multiple advances of RUS funds using temporary debt 
instruments, the interest rate charged shall be that in effect on the 
date when the first temporary debt instrument is issued.
    (b) Poverty rate. The poverty interest rate will not exceed 5 per 
centum per annum. All poverty rate loans must comply with the following 
conditions:
    (1) The primary purpose of the loan is to upgrade existing 
facilities or construct new facilities required to meet applicable 
health or sanitary standards; and
    (2) The median household income of the service area is below the 
higher of the poverty line, or 80 percent of the Statewide 
nonmetropolitan median household income.
    (c) Intermediate rate. The intermediate interest rate will be set 
at the poverty rate plus one-half of the difference between the poverty 
rate and the market rate, not to exceed 7 percent per annum. It will 
apply to loans that do not meet the requirements for the poverty rate 
and for which the median household income of the service area is not 
more than 100 percent of the nonmetropolitan median household income of 
the State.
    (d) Market rate. The market interest rate will be set using as 
guidance the average of the Bond Buyer (11-GO Bond) Index for the four 
weeks prior to the first Friday of the last month before the beginning 
of the quarter. The market rate will apply to all loans that do not 
qualify for a different rate under paragraph (b) or (c) of this 
section.
    (e) Repayment terms. The loan repayment period shall not exceed the 
useful life of the facility, State statute or 40 years from the date of 
the note or bond, whichever is less. Where RUS grant funds are used in 
connection with an RUS loan, the loan will be for the maximum term 
permitted by this part, State statute, or the useful life of the 
facility, whichever is less, unless there is an exceptional case where 
circumstances justify making an RUS loan for less than the maximum term 
permitted. In such cases, the reasons must be fully documented.
    (1) Principal payments may be deferred in whole or in part for a 
period not to exceed 36 months following the date the first interest 
installment is due. If for any reason it appears necessary to permit a 
longer period of deferment, the Agency may authorize such deferment. 
Deferments of principal will not be used to:
    (i) Postpone the levying of taxes or assessments;
    (ii) Delay collection of the full rates which the borrower has 
agreed to charge users for its services as soon as those services 
become available;
    (iii) Create reserves for normal operation and maintenance;
    (iv) Make any capital improvements except those approved by the 
Agency which are determined to be essential to the repayment of the 
loan or to maintain adequate security; and
    (v) Make payment on other debt.
    (2) Payment date. Loan payments will be scheduled to coincide with 
income availability and be in accordance with State law. If State law 
only permits principal plus interest (P&I) type bonds, annual or 
semiannual payments will be used. Insofar as practical monthly payments 
will be scheduled one full month following the date of loan closing; or 
semiannual or annual payments will be scheduled six or twelve full 
months, respectively,

[[Page 33483]]

following the date of loan closing or any deferment period. Due dates 
falling on the 29th, 30th or 31st day of the month will be avoided.
    (3) In all cases, including those in which RUS is jointly financing 
with another lender, the RUS payments of principal and interest should 
approximate amortized installments.


Sec. 1780.14  Security.

    Loans will be secured by the best security position practicable in 
a manner which will adequately protect the interest of RUS during the 
repayment period of the loan. Specific security requirements for each 
loan will be included in a letter of conditions.
    (a) Public bodies. Loans to such borrowers, including Federally 
recognized Indian tribes as appropriate, will be evidenced by notes, 
bonds, warrants, or other contractual obligations as may be authorized 
by relevant laws and by borrower's documents, resolutions, and 
ordinances. Security, in the following order of preference, will 
consist of:
    (1) The full faith and credit of the borrower when the debt is 
evidenced by general obligation bonds; and/or
    (2) Pledges of taxes or assessments; and/or
    (3) Pledges of facility revenue and, when it is the customary 
financial practice in the State, liens will be taken on the interest of 
the applicant in all land, easements, rights-of-way, water rights, 
water purchase contracts, water sales contracts, sewage treatment 
contracts, and similar property rights, including leasehold interests, 
used or to be used in connection with the facility whether owned at the 
time the loan is approved or acquired with loan funds.
    (b) Other-than-public bodies. Loans to other-than-public body 
applicants and Federally recognized Indian tribes, as appropriate, will 
be secured in the following order of preference:
    (1) Assignments of borrower income will be taken and perfected by 
filing, if legally permissible; and
    (2) A lien will be taken on the interest of the applicant in all 
land, easements, rights-of-way, water rights, water purchase contracts, 
water sales contracts, sewage treatment contracts and similar property 
rights, including leasehold interest, used, or to be used in connection 
with the facility whether owned at the time the loan is approved or 
acquired with loan funds. In unusual circumstances where it is not 
legally permissible or feasible to obtain a lien on such land (such as 
land rights obtained from Federal or local government agencies, and 
from railroads) and the approval official determines that the interest 
of RUS is otherwise adequately secured, the lien requirement may be 
omitted as to such land rights. For existing borrowers where the Agency 
already has a security position on real property, the approval official 
may determine that the interest of the Government is adequately secured 
and not require additional liens on such land rights. When the 
subsequent loan is approved or the acquisition of real property is 
subject to an outstanding lien indebtedness, the next highest priority 
lien obtainable will be taken if the approval official determines that 
the loan is adequately secured.
    (c) Joint financing security. For projects utilizing joint 
financing, when adequate security of more than one type is available, 
the other lender may take one type of security with RUS taking another 
type. For projects utilizing joint financing with the same security to 
be shared by RUS and another lender, RUS will obtain at least a parity 
position with the other lender. A parity position is to ensure that 
with joint security, in the event of default, each lender will be 
affected on a proportionate basis. A parity position will conform with 
the following unless an exception is granted by the approval official:
    (1) It is not necessary for loans to have the same repayment terms. 
Loans made by other lenders involved in joint financing with RUS should 
be scheduled for repayment on terms similar to those customarily used 
in the State for financing such facilities.
    (2) The use of a trustee or other similar paying agent by the other 
lender in a joint financing arrangement is acceptable to RUS. A trustee 
or other similar paying agent will not normally be used for the RUS 
portion of the funding unless required to comply with State law. The 
responsibilities and authorities of any trustee or other similar paying 
agent on projects that include RUS funds must be clearly specified by 
written agreement and approved by the State program official and the 
Office of the General Counsel (OGC). RUS must be able to deal directly 
with the borrower to enforce the provisions of loan and grant 
agreements and perform necessary servicing actions.
    (3) In the event adequate funds are not available to meet regular 
installments on parity loans, the funds available will be apportioned 
to the lenders based on the respective current installments of 
principal and interest due.
    (4) Funds obtained from the sale or liquidation of secured property 
or fixed assets will be apportioned to the lenders on the basis of the 
pro rata amount outstanding; provided, however, funds obtained from 
such sale or liquidation for a project that included RUS grant funds 
will be apportioned as required by the grant agreement.
    (5) Protective advances must be charged to the borrower's account 
and be secured by a lien on the security property. To the extent 
consistent with State law and customary lending practices in the area, 
repayment of protective advances made by either lender, for the mutual 
protection of both lenders, should receive first priority in 
apportionment of funds between the lenders. To ensure agreement between 
lenders, efforts should be made to obtain the concurrence of both 
lenders before one lender makes a protective advance.


Sec. 1780.15  Other Federal, State, and local requirements.

    Proposals for facilities financed in whole or in part with RUS 
funds will be coordinated with appropriate Federal, State and local 
agencies. If there are conflicts between this part and State or local 
laws or regulatory commission regulations, the provisions of this part 
will control. Applicants will be required to comply with Federal, 
State, and local laws and any regulatory commission rules and 
regulations pertaining to:
    (a) Organization of the applicant and its authority to own, 
construct, operate, and maintain the proposed facilities;
    (b) Borrowing money, giving security therefore, and raising 
revenues for the repayment thereof;
    (c) Land use zoning; and
    (d) Health and sanitation standards and design and installation 
standards unless an exception is granted by RUS.


Sec. 1780.16  [Reserved]


Sec. 1780.17  Selection priorities and process.

    When ranking eligible applications for consideration for limited 
funds, Agency officials must consider the priority items met by each 
application and the degree to which those priorities are met. Points 
will be awarded as follows:
    (a) Population priorities. (1) The proposed project will primarily 
serve a rural area having a population not in excess of 1,000--25 
points;
    (2) The proposed project primarily serves a rural area having a 
population between 1,001 and 2,500--15 points;
    (3) The proposed project primarily serves a rural area having a 
population between 2,501 and 5,500--5 points.
    (b) Health priorities. The proposed project is:
    (1) Needed to alleviate an emergency situation, correct 
unanticipated diminution or deterioration of a water supply, or to meet 
Safe Drinking Water

[[Page 33484]]

Act requirements which pertain to a water system--25 points;
    (2) Required to correct inadequacies of a wastewater disposal 
system, or to meet health standards which pertain to a wastewater 
disposal system--25 points;
    (3) Required to meet administrative orders issued to correct local, 
State, or Federal solid waste violations--15 points.
    (c) Median household income priorities. The median household income 
of the population to be served by the proposed project is:
    (1) Less than the poverty line if the poverty line is less than 80% 
of the statewide nonmetropolitan median household income--30 points;
    (2) Less than 80 percent of the statewide nonmetropolitan median 
household income--20 points;
    (3) Equal to or more than the poverty line and between 80% and 
100%, inclusive, of the State's nonmetropolitan median household 
income--15 points.
    (d) Other priorities. (1) The proposed project will: merge 
ownership, management, and operation of smaller facilities providing 
for more efficient management and economical service--15 points;
    (2) The proposed project will enlarge, extend, or otherwise modify 
existing facilities to provide service to additional rural areas--10 
points;
    (3) Applicant is a public body or Indian tribe--5 points;
    (4) Amount of other than RUS funds committed to the project is:
    (i) 50% or more--15 points;
    (ii) 20% to 49%--10 points;
    (iii) 5%--19%--5 points;
    (5) Projects that will serve Agency identified target areas--10 
points;
    (6) Projects that primarily recycle solid waste products thereby 
limiting the need for solid waste disposal--5 points;
    (7) The proposed project will serve an area that has an unreliable 
quality or supply of drinking water--10 points.
    (e) In certain cases the State program official may assign up to 15 
points to a project. The points may be awarded to projects in order to 
improve compatibility and coordination between RUS's and other 
agencies' selection systems, to ensure effective RUS fund utilization, 
and to assist those projects that are the most cost effective. A 
written justification must be prepared and placed in the project file 
each time these points are assigned.
    (f) Cost overruns. An application may receive consideration for 
funding before others at the State or National Office level when it is 
a subsequent request for a previously approved project which has 
encountered construction cost overruns. The cost overruns must be due 
to high bids or unexpected construction problems that cannot be reduced 
by negotiations, redesign, use of bid alternatives, rebidding or other 
means. Cost overruns exceeding 20% of the development cost at time of 
loan or grant approval or where the scope of the original purpose has 
changed will not be considered under this paragraph.
    (g) National office priorities. In selecting projects for funding 
at the National Office level State program official points may or may 
not be considered. The Administrator may assign up to 15 additional 
points to account for items such as geographic distribution of funds, 
the highest priority projects within a state, and emergency conditions 
caused by economic problems or natural disasters. The Administrator may 
delegate the authority to assign the 15 points to appropriate National 
Office staff.


Sec. 1780.18  Allocation of program funds.

    (a) General. (1) The purpose of this part is to set forth the 
methodology and formulas by which the Administrator of the RUS 
allocates program funds to the States. (The term ``State'' means any of 
the States of the United States, the Commonwealth of Puerto Rico, any 
territory or possession of the United States, or the Western Pacific 
Areas.)
    (2) The formulas in this part are used to allocate program loan and 
grant funds to Rural Development State offices so that the overall 
mission of the Agency can be carried out. Considerations used when 
developing the formulas include enabling legislation, congressional 
direction, and administration policies. Allocation formulas ensure that 
program resources are available on an equal basis to all eligible 
individuals and organizations.
    (3) The actual amounts of funds, as computed by the methodology and 
formulas contained herein, allocated to a State for a funding period, 
are distributed to each State office. The allocated amounts are 
available for review in any Rural Development State office.
    (b) Definitions.--(1) Amount available for allocations. Funds 
appropriated or otherwise made available to the Agency for use in 
authorized programs. On occasion, the allocation of funds to States may 
not be practical for a particular program due to funding or 
administrative constraints. In these cases, funds will be controlled by 
the National Office.
    (2) Basic formula criteria, data source and weight. Basic formulas 
are used to calculate a basic State factor as a part of the methodology 
for allocating funds to the States. The formulas take a number of 
criteria that reflect the funding needs for a particular program and 
through a normalization and weighting process for each of the criteria 
calculate the basic State factor (SF). The data sources used for each 
criteria are believed to be the most current and reliable information 
that adequately quantifies the criterion. The weight, expressed as a 
percentage, gives a relative value to the importance of each of the 
criteria.
    (3) Basic formula allocation. The result of multiplying the amount 
available for allocation less the total of any amounts held in reserve 
or distributed by base or administrative allocation times the basic 
State factor for each State. The basic formula allocation (BFA) for an 
individual State is equal to:

BFA=(Amount available for allocation-NO reserve-total base and 
administrative allocations)  x  SF.

    (4) Transition formula. (i) A formula based on a proportional 
amount of previous year allocation used to maintain program continuity 
by preventing large fluctuations in individual State allocations. The 
transition formula limits allocation shifts to any particular State in 
the event of changes from year to year of the basic formula, the basic 
criteria, or the weights given the criteria. The transition formula 
first checks whether the current year's basic formula allocation is 
within the transition range (plus or minus 20 percentage points of the 
proportional amount of the previous year's BFA). The formula follows:
[GRAPHIC] [TIFF OMITTED] TR19JN97.000

    (ii) If the current year's State BFA is not within the transition 
range in paragraph (b)(4)(i) of this section, the State formula 
allocation is changed to the amount of the transition range limit 
closest to the BFA amount. After having

[[Page 33485]]

performed this transition adjustment for each State, the sum of the 
funds allocated to all States will differ from the amount of funds 
available for BFA. This difference, whether a positive or negative 
amount, is distributed to all States receiving a formula allocation by 
multiplying the difference by the SF. The end result is the transition 
formula allocation. The transition range will not exceed 40% (plus or 
minus 20%), but when a smaller range is used it will be stated in the 
individual program section.
    (5) Base allocation. An amount that may be allocated to each State 
dependent upon the particular program to provide the opportunity for 
funding at least one typical loan or grant in each Rural Development 
State office. The amount of the base allocation may be determined by 
criteria other than that used in the basic formula allocation such as 
Agency historic data.
    (6) Administrative allocations. Allocations made by the 
Administrator in cases where basic formula criteria information is not 
available. This form of allocation may be used when the Administrator 
determines the program objectives cannot be adequately met with a 
formula allocation.
    (7) Reserve. An amount retained under the National Office control 
for each loan and grant program to provide flexibility in meeting 
situations of unexpected or justifiable need occurring during the 
fiscal year. The Administrator may make distributions from this reserve 
to any State when it is determined necessary to meet a program need or 
Agency objective. The Administrator may retain additional amounts to 
fund authorized demonstration programs.
    (8) Pooling of funds. A technique used to ensure that available 
funds are used in an effective, timely and efficient manner. At the 
time of pooling those funds within a State's allocation for the fiscal 
year or portion of the fiscal year, depending on the type of pooling, 
that have not been obligated by the State are placed in the National 
Office reserve. The Administrator will establish the pooling dates for 
each affected program.
    (i) Mid-year: Mid-year pooling occurs near the midpoint of the 
fiscal year.
    (ii) Year-end: Year-end pooling usually occurs near the first of 
August.
    (iii) Emergency: The Administrator may pool funds at any time that 
it is determined the conditions upon the initial allocation was based 
have changed to such a degree that it is necessary to pool funds in 
order to efficiently carry out the Agency mission.
    (9) Availability of the allocation. Program funds are made 
available to the Agency on a quarterly basis.
    (10) Suballocation by the Rural Development State Director. The 
State Director may be directed or given the option of suballocating the 
State allocation to processing offices. When suballocating the State 
Director may retain a portion of the funds in a State office reserve to 
provide flexibility in situations of unexpected or justified need. When 
performing a suballocation the State Director will use the same 
formula, criteria and weights as used by the National Office.
    (c) Water and Waste Disposal loans and grants.--(1) Amount 
available for allocations. See paragraph (b)(1) of this section.
    (2) Basic formula criteria, data source and weight. See paragraph 
(b)(2) of this section.
    (i) The criteria used in the basic formula are:
    (A) State's percentage of national rural population will be 50 
percent.
    (B) State's percentage of national rural population with incomes 
below the poverty level will be 25 percent.
    (C) State's percentage of national nonmetropolitan unemployment 
will be 25 percent.
    (ii) Data source for each of these criterion is based on the latest 
census data available. Each criterion is assigned a specific weight 
according to its relevance in determining need. The percentage 
representing each criterion is multiplied by the weight factor and 
summed to arrive at a State factor (SF). The SF cannot exceed .05, as 
follows:

SF = (criterion in paragraph (b)(1)(i) of this section  x  50 
percent) + (criterion in paragraph(b)(1)(ii) of this section  x  25 
percent) + (criterion in paragraph(b)(1)(iii) of this section  x  25 
percent)

    (3) Basic formula allocation. See paragraph (b)(3) of this section. 
States receiving administrative allocations do not receive formula 
allocations.
    (4) Transition formula. See paragraph (b)(4) of this section. The 
percentage range for the transition formula equals 30 percent (plus or 
minus 15%).
    (5) Base allocation. See paragraph (b)(5) of this section. States 
receiving administrative allocations do not receive base allocations.
    (6) Administrative allocation. See paragraph (b)(6) of this 
section. States participating in the formula and base allocation 
procedures do not receive administrative allocations.
    (7) Reserve. See paragraph (b)(7) of this section. Any State may 
request reserve funds by forwarding a request to the National Office. 
Generally, a request for additional funds will not be honored unless 
the State has insufficient funds to obligate the loan requested.
    (8) Pooling of funds. See paragraph (b)(8) of this section. Funds 
are generally pooled at mid-year and year-end. Pooled funds will be 
placed in the National Office reserve and will be made available 
administratively.
    (9) Availability of the allocation. See paragraph (b)(9) of this 
section. The allocation of funds is made available for States to 
obligate on an annual basis although the Office of Management and 
Budget apportions it to the Agency on a quarterly basis.
    (10) Suballocation by the State Director. See paragraph (b)(10) of 
this section. The State Director has the option to suballocate funds to 
processing offices.


Sec. 1780.19  Public information.

    (a) Public notice of intent to file an application with the Agency. 
Within 60 days of filing an application with the Agency the applicant 
must publish a notice of intent to apply for a RUS loan or grant. The 
notice of intent must be published in a newspaper of general 
circulation in the proposed area to be served.
    (b) General public meeting. Applicants should inform the general 
public regarding the development of any proposed project. Any applicant 
not required to obtain authorization by vote of its membership or by 
public referendum, to incur the obligations of the proposed loan or 
grant, must hold at least one public information meeting. The public 
meeting must be held not later than loan or grant approval. The meeting 
must give the citizenry an opportunity to become acquainted with the 
proposed project and to comment on such items as economic and 
environmental impacts, service area, alternatives to the project, or 
any other issue identified by Agency. To the extent possible, this 
meeting should cover items necessary to satisfy all public information 
meeting requirements for the proposed project. To minimize duplication 
of public notices and public involvement, the applicant shall, where 
possible, coordinate and integrate the public involvement activities of 
the environmental review process into this requirement. The applicant 
will be required, at least 10 days prior to the meeting, to publish a 
notice of the meeting in a newspaper of general circulation in the 
service area, to post a public notice at the applicant's principal 
office, and to notify the Agency. The applicant will provide the

[[Page 33486]]

Agency a copy of the published notice and minutes of the public 
meeting. A public meeting is not normally required for subsequent loans 
or grants which are needed to complete the financing of a project.


Secs. 1780.20-1780.23  [Reserved]


Sec. 1780.24  Approval authorities.

    Appropriate reviews, concurrence, and authorization must be 
obtained for all loans or grants in excess of the amounts indicated in 
RUS Staff Instruction 1780-1.
    (a) Redelegation of authority by State Directors. Unless restricted 
by memorandum from the RUS Administrator, State Directors can 
redelegate their approval authorities to State employees by memorandum.
    (b) Restriction of approval authority by the RUS Administrator. The 
RUS Administrator can make written restrictions or revocations of the 
authority given to any approval official.


Sec. 1780.25  Exception authority.

    The Administrator may, in individual cases, make an exception to 
any requirement or provision of this part which is not inconsistent 
with the authorizing statute or other applicable law and is determined 
to be in the Government's interest.


Secs. 1780.26-1780.30  [Reserved]

Subpart B--Loan and Grant Application Processing


Sec. 1780.31  General.

    (a) Applicants are encouraged to contact the Agency processing 
office early in the planning stages of their project. Agency personnel 
are available to provide general advice and assistance regarding RUS 
programs, other funding sources, and types of systems or improvements 
appropriate for the applicants needs. The Agency can also provide 
access to technical assistance and other information resources for 
other project development issues such as public information, income 
surveys, developing rate schedules, system operation and maintenance, 
and environmental compliance requirements. Throughout the planning, 
application processing and construction of the project, Agency 
personnel will work closely and cooperatively with the applicant and 
their representatives, other State and Federal agencies and technical 
assistance providers.
    (b) The processing office will handle initial inquiries and provide 
basic information about the program. They are to provide the 
application, SF 424.2, ``Application for Federal Assistance (For 
Construction),'' assist applicants as needed in completing SF 424.2, 
and in filing a request for intergovernmental review. Federally 
recognized Indian tribes are exempt from intergovernmental review. The 
processing office will explain eligibility requirements and meet with 
the applicant whenever necessary to discuss application processing.
    (c) Applicants can make a written request for an eligibility 
determination in lieu of filing an SF 424.2 along with the information 
required by Sec. 1780.33. Applicants seeking only an eligibility 
determination, should contact the processing office to obtain a list of 
the items needed to make this determination. An eligibility 
determination for loan or grant assistance will not give an applicant 
priority for funding as set forth in Sec. 1780.17.
    (d) Applications that are not developed in a reasonable period of 
time taking into account the size and complexity of the proposed 
project may be removed from the State's active file. Applicants will be 
consulted prior to taking such action.
    (e) Starting with the earliest discussions with prospective 
applicants or review of applications and continuing throughout 
application processing, environmental issues must be considered. 
Throughout the application process the State Environmental Coordinator 
will discuss with the applicant and their engineer, environmental 
review requirements for evaluating a project's potential for 
environment impacts. This should provide flexibility to consider 
alternatives to the project and develop methods to mitigate identified 
adverse environmental impacts. The environmental review requirements 
shall be performed simultaneously and concurrently with the project's 
engineering design and mitigation measures integrated into the design 
to minimize any adverse environmental impacts.


Sec. 1780.32  Timeframes for application processing.

    (a) The processing office will determine if the application is 
properly assembled. If not, the applicant will be notified within 
fifteen federal working days as to what additional submittal items are 
needed.
    (b) The processing and approval offices will coordinate their 
reviews to ensure that the applicant is advised about eligibility and 
anticipated fund availability within 45 days of the receipt of a 
completed application.


Sec. 1780.33  Application requirements.

    An initial application consists of the following:
    (a) One copy of a completed SF 424.2;
    (b) A copy of the State intergovernmental comments or one copy of 
the filed application for State intergovernmental review; and
    (c) Two copies of the preliminary engineering report (PER) for the 
project.
    (1) The PER may be submitted to the processing office prior to the 
rest of the application material if the applicant desires a preliminary 
review.
    (2) The processing office will forward one copy of the PER with 
comments and recommendations to the State staff engineer for review 
upon receipt from the applicant.
    (3) The State staff will consult with the applicant's engineer as 
appropriate to resolve any questions concerning the PER and any 
environmental concerns. Written comments will be provided by the State 
staff engineer and State Environmental Coordinator to the processing 
office to meet eligibility determination time lines.
    (d) Written certification that other credit is not available.
    (e) Supporting documentation necessary to make an eligibility 
determination such as financial statements, audits, organizational 
documents, or existing debt instruments. The processing office will 
advise applicants regarding the required documents. Applicants that are 
indebted to RUS will not need to submit documents already on file with 
the processing office.
    (f) Form RD 1940-20, ``Request for Environmental Information'' or 
comparable information. The applicant should consult with the 
processing office to determine what information should be included with 
this form.
    (g) The applicants Internal Revenue Service Taxpayer Identification 
Number (TIN). The TIN will be used by the Agency to assign a case 
number which will be the applicant's or transferee's TIN preceded by 
State and County Code numbers. Only one case number will be assigned to 
each applicant regardless of the number of loans or grants or number of 
separate facilities, unless an exception is authorized by the National 
Office.
    (h) Other Forms and certifications. Applicants will be required to 
submit the following items to the processing office, upon notification 
from the processing office to proceed with further development of the 
full application:
    (1) Form RD 442-7, ``Operating Budget'';

[[Page 33487]]

    (2) Form RD 1910-11, ``Application Certification, Federal 
Collection Policies for Consumer or Commercial Debts'';
    (3) Form RD 400-1, ``Equal Opportunity Agreement'';
    (4) Form RD 400-4, ``Assurance Agreement'';
    (5) Form AD-1047, ``Certification Regarding Debarment, Suspension 
and other Responsibility Matters'';
    (6) Form AD-1049, Certification regarding Drug-Free Workplace 
Requirements (Grants) Alternative I For Grantees Other Than 
Individuals;
    (7) Certifications for Contracts, Grants, and Loans (Regarding 
Lobbying); and
    (8) Certification regarding prohibited tying arrangements. 
Applicants that provide electric service must provide the Agency a 
certification that they will not require users of a water or waste 
facility financed under this part to accept electric service as a 
condition of receiving assistance.


Sec. 1780.34  [Reserved]


Sec. 1780.35  Processing office review.

    Review of the application will usually include the following:
    (a) Nondiscrimination. Boundaries for the proposed service area 
must not be chosen in such a way that any user or area will be excluded 
because of race, color, religion, sex, marital status, age, handicap, 
or national origin. This does not preclude construction of the project 
in phases as noted in Sec. 1780.11 as long as it is not done in a 
discriminatory manner.
    (b) Grant determination. Grants will be determined by the 
processing office in accordance with the following provisions and will 
not result in EDU costs below similar system user cost.
    (1) Maximum grant. Grants may not exceed the percentages in 
Sec. 1780.10(c) of the eligible RUS project development costs listed in 
Sec. 1780.9.
    (2) Debt service. Applicants will be considered for grant 
assistance when the debt service portion of the average annual EDU 
cost, for users in the applicant's service area, exceeds the following 
percentages of median household income:
    (i) 0.5 percent when the median household income of the service 
area is equal to or below 80% of the statewide nonmetropolitan median 
income.
    (ii) 1.0 percent when the median household income of the service 
area exceeds the 0.5 percent requirement but is not more than 100 
percent the statewide nonmetropolitan household income.
    (3) Similar system cost. If the grant determined in paragraph 
(b)(2) of this section results in an annual EDU cost that is not 
comparable with similar systems, the Agency will determine a grant 
amount based on achieving EDU costs that are not below similar system 
user costs.
    (4) Wholesale service. When an applicant provides wholesale sales 
or services on a contract basis to another system or entity, similar 
wholesale system cost will be used in determining the amount of grant 
needed to achieve a reasonable wholesale user cost.
    (5) Subsidized cost. When annual cost to the applicant for delivery 
of service is subsidized by either the state, commonwealth, or 
territory, and uniform flat user charges regardless of usage are 
imposed for similar classes of service throughout the service area, the 
Agency may proceed with a grant in an amount necessary to reduce such 
delivery cost to a reasonable level.
    (c) User charges. The user charges should be reasonable and produce 
enough revenue to provide for all costs of the facility after the 
project is complete. The planned revenue should be sufficient to 
provide for all debt service, debt reserve, operation and maintenance 
and, if appropriate, additional revenue for facility replacement of 
short lived assets without building a substantial surplus. Ordinarily, 
the total debt reserve will be equal to one average annual loan 
installment which will accumulate at the rate of one-tenth of the total 
each year.


Sec. 1780.36  Approving official review.

    Projects may be obligated as their applications are completed and 
approved.
    (a) Selection of applications for further processing. The 
application and supporting information submitted will be used to 
determine the applications selected for further development and 
funding. After completing the review, the approval official will 
normally select those eligible applications with the highest priority 
scores for further processing. When authorizing the development of an 
application for funding, the following will be considered:
    (1) Funds available in State allocation;
    (2) Anticipated allocation of funds for the next fiscal year; and
    (3) Time necessary for applicant to complete the application.
    (b) Lower scoring projects. (1) In cases where preliminary cost 
estimates indicate that an eligible, high scoring application is 
unfeasible or would require an amount of funding from RUS that exceeds 
either 25 percent of a State's current annual allocation or an amount 
greater than that remaining in the State's allocation, the approval 
official may instead select the next lower scoring application for 
further processing provided the high scoring applicant is notified of 
this action and given an opportunity to revise the proposal and 
resubmit it.
    (2) If it is found that there is no effective way to reduce costs 
or no other funding sources, the approval official, after consultation 
with applicant, may submit a request for an additional allocation of 
funds for the proposed project to the National Office. The request 
should be submitted during the fiscal year in which obligation is 
anticipated. Such request will be considered along with all others on 
hand. A written justification must be prepared and placed in the 
project file.


Sec. 1780.37  Applications determined ineligible.

    If at any time an application is determined ineligible, the 
processing office will notify the applicant in writing of the reasons. 
The notification to the applicant will state that an appeal of this 
decision may be made by the applicant under 7 CFR part 11.


Sec. 1780.38  [Reserved]


Sec. 1780.39  Application processing.

    (a) Processing conference. Before starting to assemble the full 
application, the applicant should arrange through the processing office 
an application conference to provide a basis for orderly application 
assembly. The processing office will explain program requirements, 
public information requirements and provide guidance on preparation of 
items necessary for approval.
    (b) Professional services and contracts related to the facility. 
Fees provided for in contracts or agreements shall be reasonable. The 
Agency shall consider fees to be reasonable if they are not in excess 
of those ordinarily charged by the profession as a whole for similar 
work when RUS financing is not involved. Applicants will be responsible 
for providing the services necessary to plan projects including design 
of facilities, preparation of cost and income estimates, development of 
proposals for organization and financing, and overall operation and 
maintenance of the facility. Applicants should negotiate for 
procurement of professional services, whereby competitors' 
qualifications are evaluated and the most qualified competitor is 
selected, subject to negotiations of fair and reasonable compensation. 
Contracts or other forms of agreement between the applicant and its 
professional and

[[Page 33488]]

technical representatives are required and are subject to RUS 
concurrence.
    (1) Engineering and architectural services. (i) Applicants shall 
publicly announce all requirements for engineering and architectural 
services, and negotiate contracts for engineering and architectural 
services on the basis of demonstrated competence and qualifications for 
the type of professional services required and at a fair and reasonable 
price.
    (ii) When project design services are procured separately, the 
selection of the engineer or architect shall be done by requesting 
qualification-based proposals and in accordance with this section.
    (iii) Applicants may procure engineering and architectural services 
in accordance with applicable State statutes or local requirements 
provided the State Director determines that such procurement meets the 
intent of this section.
    (2) Other professional services. Professional services of the 
following may be necessary: Attorney, bond counsel, accountant, 
auditor, appraiser, environmental professionals, and financial advisory 
or fiscal agent (if desired by applicant). Guidance on entering into an 
agreement for legal services is available from the Agency.
    (3) Bond counsel. Unless otherwise provided by subpart D of this 
part, public bodies are required to obtain the service of recognized 
bond counsel in the preparation of evidence of indebtedness.
    (4) Contracts for other services. Contracts or other forms of 
agreements for other services including management, operation, and 
maintenance will be developed by the applicant and presented to the 
Agency for review and concurrence. Guidance on entering into a 
management agreement is available from the Agency.
    (c) User estimates. Applicants dependent on users fees for debt 
payment or operation and maintenance expenses shall base their income 
and expense forecast on realistic user estimates. For users presently 
not receiving service, consideration must be given to the following:
    (1) An estimated number of maximum users should not be used when 
setting user fees and rates since it may be several years before all 
residents will need service by the system. In establishing rates a 
realistic number of users should be employed.
    (2) New user cash contributions. The amount of cash contributions 
required will be set by the applicant and concurred in by the approval 
official. Contributions should be an amount high enough to indicate 
sincere interest on the part of the potential user, but not so high as 
to preclude service to low income families. Contributions ordinarily 
should be an amount approximating one year's minimum user fee, and 
shall be paid in full before loan closing or commencement of 
construction, whichever occurs first. Once economic feasibility is 
ascertained based on a demonstration of potential user cash 
contributions, the contribution, membership fee or other fees that may 
be imposed are not a loan requirement under this section. A new user 
cash contribution is not required when:
    (i) The Agency determines that the potential users as a whole in 
the applicant's service area cannot make cash contributions; or
    (ii) State statutes or local ordinances require mandatory use of 
the system and the applicant or legal entity having such authority 
agrees in writing to enforce such statutes, or ordinances.
    (3) An enforceable user agreement with a penalty clause is required 
(RUS Bulletin 1780-9 can be used) except:
    (i) For users presently receiving service; or
    (ii) Where mandatory use of the system is required.
    (4) Individual vacant property owners will not be considered when 
determining project feasibility unless:
    (i) The owner has plans to develop the property in a reasonable 
period of time and become a user of the facility; and
    (ii) The owner agrees in writing to make a monthly payment at least 
equal to the proportionate share of debt service attributable to the 
vacant property until the property is developed and the facility is 
utilized on a regular basis. A bond or escrowed security deposit must 
be provided to guarantee this monthly payment and to guarantee an 
amount at least equal to the owner's proportionate share of 
construction costs. If a bond is provided, it must be executed by a 
surety company that appears on the Treasury Department's most current 
list (Circular 570, as amended) and be authorized to transact business 
in the State where the project is located. The guarantee shall be 
payable jointly to the borrower and the United States of America.
    (5) Applicants must provide a positive program to encourage 
connection by all users as soon as service is available. The program 
will be available for review and concurrence by the processing office 
before loan closing or commencement of construction, whichever occurs 
first. Such a program shall include:
    (i) An aggressive information program to be carried out during the 
construction period. The applicant should send written notification to 
all signed users in advance of the date service will be available, 
stating the date users will be expected to have their connections 
completed, and the date user charges will begin;
    (ii) Positive steps to assure that installation services will be 
available. These may be provided by the contractor installing the 
system, local plumbing companies, or local contractors;
    (iii) Aggressive action to see that all signed users can finance 
their connections.
    (d) Interim financing. For all loans exceeding $500,000, where 
funds can be borrowed at reasonable interest rates on an interim basis 
from commercial sources for the construction period, such interim 
financing may be obtained so as to preclude the necessity for multiple 
advances of RUS loan funds. However, the approval official may make an 
exception when interim financing is cost prohibitive or unavailable. 
Guidance on informing the private lender of RUS's commitment is 
available from the Agency. When interim commercial financing is used, 
the application will be processed, including obtaining construction 
bids, to the stage where the RUS loan would normally be closed, that is 
immediately prior to the start of construction. The RUS loan should be 
closed as soon as possible after the disbursal of all interim funds.
    (e) Reserve requirements. Provision for the accumulation of 
necessary reserves over a reasonable period of time will be included in 
the loan documents.
    (1) General obligation or special assessment bonds. Ordinarily, the 
requirements for reserves will be considered to have been met if 
general obligation or other bonds which pledge the full faith and 
credit of the political subdivision are used, or special assessment 
bonds are used, and if such bonds provide for the annual collection of 
sufficient taxes or assessments to cover debt service.
    (2) Other than general obligation or special assessment bonds. Each 
borrower will be required to establish and maintain reserves sufficient 
to assure that loan installments will be paid on time, for emergency 
maintenance, for extensions to facilities, and for replacement of 
short-lived assets which have a useful life significantly less than the 
repayment period of the loan. Borrowers issuing bonds or other 
evidences of debt pledging facility revenues as security will plan 
their reserve to provide for at least an annual reserve equal to one-
tenth of an average

[[Page 33489]]

annual loan installment each year for the life of the loan unless 
prohibited by state law.
    (f) Membership authorization. For organizations other than public 
bodies, the membership will authorize the project and its financing. 
Form RD 1942-8, ``Resolution of Members or Stockholders'' may be used 
for this authorization. The approval official may, with the concurrence 
of OGC, accept Form RD 1942-9, ``Loan Resolution (Security Agreement)'' 
without such membership authorization when State statutes and the 
organization's charter and bylaws do not require such authorization; 
and:
    (1) The organization is well established and is operating with a 
sound financial base; or
    (2) The members of the organization have all signed an enforceable 
user agreement with a penalty clause and have made the required 
meaningful user cash contribution.
    (g) Insurance. The purpose of RUS's insurance requirements is to 
protect the government's financial interest based on the facility 
financed with loan funds. It is the responsibility of the applicant and 
not that of RUS to assure that adequate insurance and fidelity or 
employee dishonesty bond coverage is maintained. The requirements below 
apply to all types of coverage determined necessary. The approval 
official may grant exceptions to normal requirements when appropriate 
justification is provided establishing that it is in the best interest 
of the applicant and will not adversely affect the government's 
interest.
    (1) Insurance requirements proposed by the applicant will be 
accepted if the processing office determines that proposed coverage is 
adequate to protect the government's financial interest. Applicants are 
encouraged to have their attorney, consulting engineer, and/or 
insurance provider(s) review proposed types and amounts of coverage, 
including any deductible provisions.
    (2) The use of deductibles may be allowed by RUS providing the 
applicant has financial resources which would likely be adequate to 
cover potential claims requiring payment of the deductible.
    (3) Fidelity or employee dishonesty bonds. Applicants will provide 
coverage for all persons who have access to funds, including persons 
working under a contract or management agreement. Coverage may be 
provided either for all individual positions or persons, or through 
``blanket'' coverage providing protection for all appropriate 
employees. An exception may be granted by the approval official when 
funds relating to the facility financed are handled by another entity 
and it is determined that the entity has adequate coverage or the 
government's interest would otherwise be adequately protected. The 
amount of coverage required by RUS will normally approximate the total 
annual debt service requirements for the RUS loans.
    (4) Property insurance. Fire and extended coverage will normally be 
maintained on all structures except as noted below. Ordinarily, RUS 
should be listed as mortgagee on the policy when RUS has a lien on the 
property. Normally, major items of equipment or machinery located in 
the insured structures must also be covered. Exceptions:
    (i) Reservoirs, pipelines and other structures if such structures 
are not normally insured;
    (ii) Subsurface lift stations except for the value of electrical 
and pumping equipment therein.
    (5) General liability insurance, including vehicular coverage.
    (6) Flood insurance required for facilities located in special 
flood-and mudslide-prone areas.
    (7) Worker's compensation. The borrower will carry worker's 
compensation insurance for employees in accordance with State laws.
    (h) The processing office will conduct appropriate environmental 
reviews in accordance with RUS requirements.
    (i) The processing office will assure that appropriate forms and 
documents listed in RUS Bulletin 1780-6 are complete. Letters of 
conditions will not be issued unless funds are available.


Sec. 1780.40  [Reserved]


Sec. 1780.41  Loan or grant approval.

    (a) The processing office will submit the following to the approval 
official:
    (1) Form RD 1942-45, ``Project Summary'';
    (2) Form RD 442-7, ``Operating Budget'';
    (3) Form RD 442-3, ``Balance Sheet'' or a financial statement or 
audit that includes a balance sheet;
    (4) Form RD 442-14, ``Association Project Fund Analysis'';
    (5) ``Letter of Conditions'';
    (6) Form RD 1942-46, ``Letter of Intent to Meet Conditions'';
    (7) Form RD 1940-1, ``Request for Obligation of Funds'';
    (8) Completed environmental review documents including copies of 
required publication evidence; and
    (9) Grant determination, if applicable.
    (b) Approval and applicant notification will be accomplished by 
mailing to the applicant on the obligation date a copy of Form RD 1940-
1. The date the applicant is notified is also the date the interest 
rate at loan approval is established.


Sec. 1780.42  Transfer of obligations.

    An obligation of funds established for an applicant may be 
transferred to a different (substituted) applicant provided:
    (a) The substituted applicant is eligible and has the authority to 
receive the assistance approved for the original applicant; and
    (b) The need, purpose(s) and scope of the project for which RUS 
funds will be used remain substantially unchanged.


Sec. 1780.43  [Reserved]


Sec. 1780.44  Actions prior to loan or grant closing or start of 
construction, whichever occurs first.

    (a) Applicants must provide evidence of adequate insurance and 
fidelity or employee dishonesty bond coverage.
    (b) Verification of users and other funds. In connection with a 
project that involves new users and will be secured by a pledge of user 
fees or revenues, the processing office will authenticate the number of 
users. Ordinarily each signed user agreement will be reviewed and 
checked for evidence of cash contributions. If during the review any 
indication is received that all signed users may not connect to the 
system, there will be such additional investigation made as deemed 
necessary to determine the number of users who will connect to the 
system.
    (c) Initial compliance review. An initial compliance review should 
be completed under subpart E of part 1901 of this title.
    (d) Applicant contribution. An applicant contributing funds toward 
the project cost shall deposit these funds in its project account 
before start of construction. Project costs paid with applicant funds 
prior to the required deposit time shall be appropriately accounted 
for.
    (e) Excess RUS loan and grant funds. If there is a significant 
reduction in project cost, the applicant's funding needs will be 
reassessed. Decreases in RUS funds will be based on revised project 
costs and current number of users, however, other factors including RUS 
regulations used at the time of loan or grant approval will remain the 
same. Obligated loan or grant funds not needed to complete the proposed 
project will be deobligated. Any reduction will be applied to grant 
funds first. In such cases, applicable forms, the letter of conditions, 
and other items will be revised.

[[Page 33490]]

    (f) Evidence of and disbursement of other funds. Applicants 
expecting funds from other sources for use in completing projects being 
partially financed with RUS funds will present evidence of the 
commitment of these funds from such other sources. An agreement should 
be reached with all funding sources on how funds are to be disbursed 
before the start of construction. RUS funds will not be used to pre-
finance funds committed to the project from other sources.
    (g) Acquisition of land, easements, water rights, and existing 
facilities. Applicants are responsible for acquisition of all property 
rights necessary for the project and will determine that prices paid 
are reasonable and fair. RUS may require an appraisal by an independent 
appraiser or Agency employee.
    (1) Rights-of-way and easements. Applicants will obtain valid, 
continuous and adequate rights-of-way and easements needed for the 
construction, operation, and maintenance of the facility.
    (i) The applicant must provide a legal opinion relative to the 
title to rights-of-way and easements. Form RD 442-22, ``Opinion of 
Counsel Relative to Rights-of-Way,'' may be used. When a site is for 
major structures such as a reservoir or pumping station and the 
applicant is able to obtain only a right-of-way or easement on such a 
site rather than a fee simple title, the applicant will furnish a title 
report thereon by the applicant's attorney showing ownership of the 
land and all mortgages or other lien defects, restrictions, or 
encumbrances, if any.
    (ii) For user connections funded by RUS, applicants will obtain 
adequate rights to construct and maintain the connection line or other 
facilities located on the user's property. This right may be obtained 
through formal easement or user agreements.
    (2) Title for land or existing facilities. Title to land essential 
to the successful operation of facilities or title to facilities being 
purchased, must not contain any restrictions that will adversely affect 
the suitability, successful operation, security value, or 
transferability of the facility. Preliminary and final title opinions 
must be provided by the applicant's attorney. The opinions must be in 
sufficient detail to assess marketability of the property. Form RD 
1927-9, ``Preliminary Title Opinion,'' and Form RD 1927-10, ``Final 
Title Opinion,'' may be used to provide the required title opinions.
    (i) In lieu of receiving title opinions from the applicant's 
attorney, the applicant may use a title insurance company. If a title 
insurance company is used, the applicant must provide the Agency a 
title insurance binder, disclosing all title defects or restrictions, 
and include a commitment to issue a title insurance policy. The policy 
should be in an amount at least equal to the market value of the 
property as improved. The title insurance binder and commitment should 
be provided to the Agency prior to requesting closing instructions. The 
Agency will be provided a title insurance policy which will insure 
RUS's interest in the property without any title defects or 
restrictions which have not been waived by the Agency.
    (ii) The approval official may waive title defects or restrictions, 
such as utility easements, that do not adversely affect the 
suitability, successful operation, security value, or transferability 
of the facility.
    (3) Water rights. The following will be furnished as applicable:
    (i) A statement by the applicant's attorney regarding the nature of 
the water rights owned or to be acquired by the applicant (such as 
conveyance of title, appropriation and decree, application and permit, 
public notice and appropriation and use).
    (ii) A copy of a contract with another company or municipality to 
supply water; or stock certificates in another company which represents 
the right to receive water.
    (4) Lease agreements. Where the right of use or control of real 
property not owned by the applicant is essential to the successful 
operation of the facility during the life of the loan, such right will 
be evidenced by written agreements or contracts between the owner of 
the property and the applicant. Lease agreements shall not contain 
provisions for restricted use of the site of facility, forfeiture or 
summary cancellation clauses. Lease agreements shall provide for the 
right to transfer, encumber, assign and sub-lease without restriction. 
Lease agreements will ordinarily be written for a term at least equal 
to the term of the loan. Such lease contracts or agreements will be 
approved by the approval official with the advice and counsel of OGC, 
as necessary.
    (h) Obtaining loan closing instructions. The information required 
by OGC will be transmitted to OGC with request for closing 
instructions. Upon receipt of closing instructions, the processing 
office will discuss with the applicant and its engineer, attorney, and 
other appropriate representatives, the requirements contained therein 
and any actions necessary to proceed with closing. State program 
officials have the option to work with OGC to obtain waivers for 
closing instructions in certain cases. Closing instructions are not 
required for grants.


Sec. 1780.45  Loan and grant closing and delivery of funds.

    (a) Loan closing. Notes and bonds will be completed on the date of 
loan closing except for the entry of subsequent RUS multiple advances 
where applicable. The amount of each note will be in multiples of not 
less than $100. The amount of each bond will ordinarily be in multiples 
of not less than $1,000.
    (1) Form RD 440-22, ``Promissory Note (Association or 
Organization),'' will ordinarily be used for loans to nonpublic bodies.
    (2) Forms RD 1942-47, ``Loan Resolution (Public Bodies),'' or RD 
1942-9, ``Loan Resolution (Security Agreement)'' will be adopted by 
public and other-than-public bodies. These resolutions supplement other 
provisions in this part.
    (3) Subpart D of this part contains instructions for preparation of 
notes and bonds evidencing indebtedness of public bodies.
    (b) Loan disbursement. (1) Multiple advances. Multiple advances 
will be used only for loans in excess of $100,000. Advances will be 
made only as needed to cover disbursements required by the borrower 
over a 30-day period.
    (i) Subpart D of this part contains instructions for making 
multiple advances to public bodies.
    (ii) Advances will be requested by the borrower in writing. The 
request should be in sufficient amounts to pay cost of construction, 
rights-of-way and land, legal, engineering, interest, and other 
expenses as needed. The borrower may use Form RD 440-11, ``Estimate of 
Funds Needed for 30 Day Period Commencing XXX,'' to show the amount of 
funds needed during the 30-day period.
    (2) RUS loan funds obligated for a specific purpose, such as the 
paying of interest, but not needed at the time of loan closing will 
remain in the Finance Office until needed unless State statutes require 
all funds to be delivered to the borrower at the time of closing. Loan 
funds may be advanced to prepay costs under Sec. 1780.9 (e)(2)(iv). If 
all funds must be delivered to the borrower at the time of closing to 
comply with State statutes, funds not needed at loan closing will be 
handled as follows:
    (i) Deposited in an appropriate borrower account, such as debt 
service or construction accounts; or
    (ii) Deposited in a joint bank account under paragraph (e)(3) of 
this section.
    (c) Grant closing. RUS Bulletin 1780-12 ``Water or Waste System 
Grant

[[Page 33491]]

Agreement'' of this part will be completed and executed in accordance 
with the requirements of grant approval. The grant will be considered 
closed when RUS Bulletin 1780-12 has been properly executed. Processing 
or approval officials are authorized to sign the grant agreement on 
behalf of RUS. For grants that supplement RUS loan funds, the grant 
should be closed simultaneously with the closing of the loan. However, 
when grant funds will be disbursed before loan closing, as provided in 
paragraph (d)(1) of this section, the grant will be closed not later 
than the delivery date of the first advance of grant funds.
    (d) Grant disbursements. RUS policy is not to disburse grant funds 
from the Treasury until they are actually needed by the applicant. 
Applicant funds will be disbursed before the disbursal of any RUS grant 
funds. RUS loan funds will be disbursed before the disbursal of any RUS 
grant funds except when:
    (1) Interim financing of the total estimated amount of loan funds 
needed during construction is arranged; and
    (2) All interim funds have been disbursed; and
    (3) RUS grant funds are needed before the RUS loan can be closed.
    (e) Use and accountability of funds. (1) Arrangements will be 
agreed upon for the prior concurrence by the Agency of the bills or 
vouchers upon which warrants will be drawn. Form RD 402-2, ``Statement 
of Deposits and Withdrawals,'' or similar form will be used by the 
Agency to monitor funds. Periodic reviews of these accounts shall be 
made by the Agency.
    (2) Pledge of collateral for grants to nonprofit organizations. 
Grant funds must be deposited in a bank with Federal Deposit Insurance 
Corporation (FDIC) insurance coverage. Also, if the balance in the 
account containing grant funds exceeds the FDIC insurance coverage, the 
excess amount must be collaterally secured. The pledge of collateral 
for the excess will be in accordance with Treasury Circular 176.
    (3) Joint RUS/borrower bank account. RUS funds and any funds 
furnished by the borrower including contributions to purchase major 
items of equipment, machinery, and furnishings will be deposited in a 
joint RUS/borrower bank account if determined necessary by the approval 
official. When RUS has a Memorandum of Understanding with another 
agency that provides for the use of joint RUS/borrower accounts, or 
when RUS is the primary source of funds for a project and has 
determined that the use of a joint RUS/borrower bank account is 
necessary, project funds from other sources may also be deposited in 
the joint bank account. RUS shall not be accountable to the source of 
the other funds nor shall RUS undertake responsibility to administer 
the funding program of the other entity. Joint RUS/borrower bank 
accounts should not be used for funds advanced by an interim lender. 
When funds exceeds the FDIC insurance coverage, the excess must have a 
pledge of collateral in accordance with Treasury Circular 176.
    (4) Payment for project costs. Project costs will be monitored by 
the RUS processing office. Invoices will be approved by the borrower 
and their engineer, as appropriate, and submitted to the processing 
office for concurrence. The review and acceptance of project costs, 
including construction pay estimates, by RUS does not attest to the 
correctness of the amounts, the quantities shown or that the work has 
been performed under the terms of the agreements or contracts.
    (f) Use of remaining funds. Funds remaining after all costs 
incident to the basic project have been paid or provided for will not 
include applicant contributions. Funds remaining, may be considered in 
direct proportion to the amounts obtained from each source. Remaining 
funds will be handled as follows:
    (1) Remaining funds may be used for eligible loan or grant 
purposes, provided the use will not result in major changes to the 
facility(s) and the purpose of the loan and grant remains the same;
    (2) RUS loan funds that are not needed will be applied as an extra 
payment on the RUS indebtedness unless other disposition is required by 
the bond ordinance, resolution, or State statute; and
    (3) Grant funds not expended under paragraph (f)(1) of this section 
will be canceled. Prior to the actual cancellation, the borrower, its 
attorney and its engineer will be notified of RUS's intent to cancel 
the remaining funds. The applicant will be given appropriate appeal 
rights.
    (g) Post review of loan closing. In order to determine that the 
loan has been properly closed the loan docket will be reviewed by OGC. 
The State program official has the option to consult with OGC to obtain 
waivers of this review.


Sec. 1780.46  [Reserved]


Sec. 1780.47  Borrower accounting methods, management reporting and 
audits.

    (a) Borrowers are required to provide RUS an annual audit or 
financial statements.
    (b) Method of accounting and preparation of financial statements. 
Annual organization-wide financial statements must be prepared on the 
accrual basis of accounting, in accordance with generally accepted 
accounting principles (GAAP), unless State statutes or regulatory 
agencies provide otherwise, or an exception is granted by the Agency. 
An organization may maintain its accounting records on a basis other 
than accrual accounting, and make the necessary adjustments so that 
annual financial statements are presented on the accrual basis.
    (c) Record retention. Each borrower shall retain all records, 
books, and supporting material for 3 years after the issuance of the 
audit or management reports. Upon request, this material will be made 
available to RUS, Office of the Inspector General (OIG), United States 
Department of Agriculture (USDA), the Comptroller General, or to their 
assignees.
    (d) Audits. All audits are to be performed in accordance with the 
latest revision of the generally accepted government auditing standards 
(GAGAS), developed by the Comptroller General of the United States. In 
addition, the audits are also to be performed in accordance with 
various Office of Management and Budget (OMB) Circulars. The type of 
audit each borrower is required to submit will be designated by RUS. 
Further guidance on preparing an acceptable audit can be obtained from 
RUS. It is not intended that audits required by this part be separate 
and apart from audits performed in accordance with State and local 
laws. To the extent feasible, the audit work should be done in 
conjunction with those audits. Audits shall be annual unless otherwise 
prohibited and supplied to the processing office as soon as possible 
but in no event later than 150 days following the period covered by the 
audit. OMB Circulars are available in any USDA/RUS office.
    (e) Borrowers exempt from audits. All borrowers who are exempt from 
audits, will, within 60 days following the end of each fiscal year, 
furnish the RUS with annual financial statements, consisting of a 
verification of the organization's balance sheet and statement of 
income and expense by an appropriate official of the organization. 
Forms RD 442-2, ``Statement of Budget, Income and Equity,'' and 442-3 
may be used.
    (f) Management reports. These reports will furnish management with 
a means of evaluating prior decisions and serve as a basis for planning 
future operations and financial strategies. In those cases where 
revenues from multiple sources are pledged as security for an RUS loan, 
two reports will be required; one for the

[[Page 33492]]

project being financed by RUS and one combining the entire operation of 
the borrower. In those cases where RUS loans are secured by general 
obligation bonds or assessments and the borrower combines revenues from 
all sources, one management report combining all such revenues is 
acceptable. The following management data will be submitted by the 
borrower to the processing office. These reports at a minimum will 
include a balance sheet and income and expense statement.
    (1) Quarterly reports. A quarterly management report will be 
required for the first year for new borrowers and for all borrowers 
experiencing financial or management problems for one year from the 
date problems were noted. If the borrower's account is current at the 
end of the year, the processing office may waive the required reports.
    (2) Annual management reports. Prior to the beginning of each 
fiscal year the following will be submitted to the processing office. 
(If Form RD 442-2 is used as the annual management report, enter data 
in column three only of Schedule 1, and complete all of Schedule 2.)
    (i) Two copies of the management reports and proposed ``Annual 
Budget''.
    (ii) Financial information may be reported on Form RD 442-2 which 
includes Schedule 1, ``Statement of Budget, Income and Equity'' and 
Schedule 2, ``Projected Cash Flow'' or information in similar format.
    (iii) A copy of the rate schedule in effect at the time of 
submission.
    (g) Substitute for management reports. When RUS loans are secured 
by the general obligation of the public body or tax assessments which 
total 100 percent of the debt service requirements, the State program 
official may authorize an annual audit to substitute for other 
management reports if the audit is received within 150 days following 
the period covered by the audit.


Sec. 1780.48  Regional commission grants.

    Grants are sometimes made by regional commissions for projects 
eligible for RUS assistance. RUS has agreed to administer such funds in 
a manner similar to administering RUS assistance.
    (a) When RUS has funds in the project, no charge will be made for 
administering regional commission funds.
    (b) When RUS has no loan or grant funds in the project, an 
administrative charge will be made pursuant to the Economy Act of 1932, 
as amended (31 U.S.C. 1535). A fee of 5 percent of the first $50,000 of 
a regional commission grant and 1 percent of any amount over $50,000 
will be paid RUS by the commission.
    (1) Appalachian Regional Commission (ARC). RUS Bulletin 1780-23 
will be followed in determining the responsibilities of RUS. The ARC 
Federal Co-chairman and the State program official will provide each 
other with the necessary notification and certification.
    (2) Other regional commissions. Title V of the Public Works and 
Economic Development Act of 1965 (42 U.S.C. 3121 et seq.) authorizes 
other commissions similar to ARC. RUS Bulletin 1780-23 will be used to 
develop a separate project management agreement between RUS and the 
commission for each project. The agreement should be prepared by the 
State program official as soon as notification is received that a 
commission grant will be made and the amount is confirmed.
    (c) Regional commission grants should be obligated as soon as 
possible in accordance with Sec. 1780.41, except that the announcement 
procedure referred to in RUS Staff Instruction 1780-2 is not 
applicable. Regional commission grants will be disbursed from the 
Finance Office in the same manner as RUS funds.


Sec. 1780.49  Rural or Native Alaskan villages.

    (a) General. (1) This section contains regulations for providing 
grants to remedy the dire sanitation conditions in rural Alaskan 
villages using funds specifically made available for this purpose.
    (2) Unless specifically modified by this section, grants will be 
made, processed, and serviced in accordance with this subpart.
    (b) Definitions--(1) Dire sanitation condition. For the purpose of 
this section a dire sanitation condition exists where:
    (i) Recurring instances of a waterborne communicable disease have 
been documented; or
    (ii) No community-wide water and sewer system exists and individual 
residents must haul water to or human waste from their homes and/or use 
pit privies.
    (2) Rural or Native Alaskan village. A rural or Native Alaskan 
community which meets the definition of a village under State statutes 
and does not have a population in excess of 10,000 inhabitants, 
according to the latest decennial Census of the United States.
    (c) Eligibility. (1) The applicant must be a rural or Native 
Alaskan village.
    (2) The median household income of the village cannot exceed 110 
percent of the statewide nonmetropolitan household income.
    (3) A dire sanitation condition must exist in the village.
    (4) The applicant must obtain 50 percent of project development 
costs from State or local contributions. The local contribution can be 
from loan funds authorized under this part.
    (d) Grant amount. Grants will be made for up to 50 percent of the 
project development costs.
    (e) Use of funds. Grant funds can be used to pay reasonable costs 
associated with providing potable water or waste disposal services to 
residents of rural or Native Alaskan villages.
    (f) Construction. (1) If the State of Alaska is contributing to the 
project costs, the project does not have to meet the construction 
requirements of this subpart.
    (2) If a loan is made in accordance with this part for part of the 
local contribution, all of the requirements of this part apply.


Secs. 1780.50-1780.52  [Reserved]

Subpart C--Planning, Designing, Bidding, Contracting, Constructing 
and Inspections


Sec. 1780.53  General.

    This subpart is specifically designed for use by owners including 
the professional or technical consultants or agents who provide 
assistance and services such as engineering, environmental, inspection, 
financial, legal or other services related to planning, designing, 
bidding, contracting, and constructing water and waste disposal 
facilities. These procedures do not relieve the owner of the 
contractual obligations that arise from the procurement of these 
services. For this subpart, an owner is defined as an applicant, 
borrower, or grantee.


Sec. 1780.54  Technical services.

    Owners are responsible for providing the engineering, architect and 
environmental services necessary for planning, designing, bidding, 
contracting, inspecting, and constructing their facilities. Services 
may be provided by the owner's ``in house'' engineer or architect or 
through contract, subject to Agency concurrence. Engineers and 
architects must be licensed in the State where the facility is to be 
constructed.


Sec. 1780.55  Preliminary engineering reports.

    Preliminary engineering reports (PER)s must conform with customary 
professional standards. PER guidelines for water, sanitary sewer, solid 
waste,

[[Page 33493]]

and storm sewer are available from the Agency.


Sec. 1780.56  [Reserved]


Sec. 1780.57  Design policies.

    Facilities financed by the Agency will be designed and constructed 
in accordance with sound engineering practices, and must meet the 
requirements of Federal, State and local agencies.
    (a) Environmental review. Facilities financed by the Agency must 
undergo an environmental impact analysis in accordance with RUS 
requirements. Facility planning and design must not only be responsive 
to the owner's needs but must consider the environmental impacts of the 
proposed project. Facility designs shall incorporate and integrate, 
where practicable, mitigation measures that avoid or minimize adverse 
environmental impacts. Environmental reviews serve as a means of 
assessing environmental impacts of project proposals, rather than 
justifying decisions already made. Applicants may not take any action 
on a project proposal that will have an adverse environmental impact or 
limit the choice of reasonable project alternatives being reviewed 
prior to the completion of the Agency's environmental review.
    (b) Architectural barriers. All facilities intended for or 
accessible to the public or in which physically handicapped persons may 
be employed must be developed in compliance with the Architectural 
Barriers Act of 1968 (42 U.S.C. 4151 et seq.) as implemented by 41 CFR 
101-19.6, section 504 of the Rehabilitation Act of 1973 (42 U.S.C 1474 
et seq.) as implemented by 7 CFR parts 15 and 15b, and Titles II and 
III of the Americans with Disabilities Act of 1990 (42 U.S.C. 12101 et 
seq.).
    (c) Energy/environment. Facility design should consider cost 
effective energy-efficient and environmentally-sound products and 
services.
    (d) Fire protection. Water facilities should have sufficient 
capacity to provide reasonable fire protection to the extent 
practicable.
    (e) Growth capacity. Facilities should have sufficient capacity to 
provide for reasonable growth to the extent practicable.
    (f) Water conservation. Owners are encouraged, when economically 
feasible, to incorporate water conservation practices into a facility's 
design. For existing water systems, evidence must be provided showing 
that the distribution system water losses do not exceed reasonable 
levels.
    (g) Conformity with state drinking water standards. No funds shall 
be made available under this part for a water system unless the Agency 
determines that the water system will make significant progress toward 
meeting the standards established under title XIV of the Public Health 
Service Act (commonly known as the `Safe Drinking Water Act') (42 
U.S.C. 300f et seq.).
    (h) Conformity with federal and state water pollution control 
standards. No funds shall be made available under this part for a water 
treatment discharge or waste disposal system unless the Agency 
determines that the effluent from the system conforms with applicable 
Federal and State water pollution control standards.
    (i) Combined sewers. New combined sanitary and storm water sewer 
facilities will not be financed by the Agency. Extensions to existing 
combined systems can only be financed when separate systems are 
impractical.
    (j) Dam safety. Projects involving any artificial barrier which 
impounds or diverts water, or the rehabilitation or improvement of such 
a barrier, must comply with the provisions for dam safety as set forth 
in the Federal Guidelines for Dam Safety (Government Printing Office 
stock No. 041-001-00187-5, Superintendent of Documents, Attn: New 
Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954) as prepared by the 
Federal Coordinating Council for Science, Engineering and Technology.
    (k) Pipe. All pipe used shall meet current American Society for 
Testing Materials (ASTM) or American Water Works Association (AWWA) 
standards.
    (l) Water system testing. For new water systems or extensions to 
existing water systems, leakage shall not exceed limits set by either 
ASTM or AWWA whichever is the more stringent.
    (m) Metering devices. Water facilities financed by the Agency will 
have metering devices for each connection. An exception to this 
requirement may be granted by the State program official when the owner 
demonstrates that installation of metering devices would be a 
significant economic detriment and that environmental considerations 
would not be adversely affected by not installing such devices. 
Sanitary sewer projects should incorporate water system metering 
devices whenever practicable.
    (n) Economical service. The facility's design must provide the most 
economical service practicable.


Secs. 1780.58-1780.60  [Reserved]


Sec. 1780.61  Construction contracts.

    Contract documents must be sufficiently descriptive and legally 
binding in order to accomplish the work as economically and 
expeditiously as possible.
    (a) Standard construction contract documents. If the construction 
contract documents utilized are not in the format previously approved 
by the Agency, OGC's review of the construction contract documents will 
be obtained prior to their use.
    (b) Contract review and concurrence. The owner's attorney will 
review the executed contract documents, including performance and 
payment bonds, and will certify that they are adequate, and that the 
persons executing these documents have been properly authorized to do 
so. The contract documents, engineer's recommendation for award, and 
bid tabulation sheets will be forwarded to the Agency for concurrence 
prior to awarding the contract. All contracts will contain a provision 
that they are not effective until they have been concurred in by the 
Agency. The State program official or designee is responsible for 
concurring in construction contracts with the legal advice and guidance 
of the OGC when necessary.


Sec. 1780.62  Utility purchase contracts.

    Applicants proposing to purchase water or other utility service 
from private or public sources shall have written contracts for supply 
or service which are reviewed and concurred in by the Agency. To the 
extent practical, the Agency review and concurrence of such contracts 
should take place prior to their execution by the owner. OGC advice and 
guidance may be requested. Form RD 442-30, ``Water Purchase Contract,'' 
may be used when appropriate. If the Agency loan will be repaid from 
system revenues, the contract will be pledged to the Agency as part of 
the security for the loan. Such contracts will:
    (a) Include a commitment by the supplier to furnish, at a specified 
point, an adequate quantity of water or other service and provide that, 
in case of shortages, all of the supplier's users will proportionately 
share shortages.
    (b) Set out the ownership and maintenance responsibilities of the 
respective parties including the master meter if a meter is installed 
at the point of delivery.
    (c) Specify the initial rates and provide a type of escalator 
clause which will permit rates for the association to be raised or 
lowered proportionately as certain specified rates for the supplier's 
regular customers are raised or lowered. Provisions may be made for 
altering rates in accordance with the decisions of the appropriate 
State agency which may have regulatory authority.

[[Page 33494]]

    (d) Cover period of time which is at least equal to the repayment 
period of the loan. State program officials may approve contracts for 
shorter periods of time if the supplier cannot legally contract for 
such period, or if the owner and supplier find it impossible or 
impractical to negotiate a contract for the maximum period permissible 
under State law, provided:
    (1) The supplier is subject to regulations of the Federal Energy 
Regulatory Commission or other Federal or State agency whose 
jurisdiction can be expected to prevent unwarranted curtailment of 
supply; or
    (2) The contract contains adequate provisions for renewal; or
    (3) A determination is made that in the event the contract is 
terminated, there are or will be other adequate sources available to 
the owner that can feasibly be developed or purchased.
    (e) Set out in detail the amount of connection or demand charges, 
if any, to be made by the supplier as a condition to making the service 
available to the owner. However, the payment of such charges from loan 
funds shall not be approved unless the Agency determines that it is 
more feasible and economical for the owner to pay such a connection 
charge than it is for the owner to provide the necessary supply by 
other means.
    (f) Provide for a pledge of the contract to the Agency as part of 
the security for the loan.
    (g) Not contain provisions for:
    (1) Construction of facilities which will be owned by the supplier. 
This does not preclude the use of money paid as a connection charge for 
construction to be done by the supplier.
    (2) Options for the future sale or transfer. This does not preclude 
an agreement recognizing that the supplier and owner may at some future 
date agree to a sale of all or a portion of the facility.
    (h) If it is impossible to obtain a firm commitment for either an 
adequate quantity or sharing shortages proportionately, a contract may 
be executed and concurred in provided adequate evidence is furnished to 
enable the Agency to make a determination that the supplier has 
adequate supply and/or treatment facilities to furnish its other users 
and the applicant for the foreseeable future; and:
    (1) The supplier is subject to regulations of the Federal Energy 
Regulatory Commission or other Federal or State agency whose 
jurisdiction can be expected to prevent unwarranted curtailment of 
supply; or
    (2) A suitable alternative supply could be arranged within the 
repayment ability of the borrower if it should become necessary; or
    (3) Concurrence in the proposed contract is obtained from the 
National Office.


Sec. 1780.63  Sewage treatment and bulk water sales contracts.

    Owners entering into agreements with private or public parties to 
treat sewage or supply bulk water shall have written contracts for such 
service and all such contracts shall be subject to the Agency 
concurrence. Section 1780.62 should be used as a guide to prepare such 
contracts.


Secs. 1780.64-1780.66  [Reserved]


Sec. 1780.67  Performing construction.

    Owners are encouraged to accomplish construction through contracts 
with qualified contractors. Owners may accomplish construction by using 
their own personnel and equipment provided the owners possess the 
necessary skills, abilities and resources to perform the work and 
provided a licensed engineer prepares design drawings and 
specifications and inspects construction and furnishes inspection 
reports as required by Sec. 1780.76. Inspection services may be 
provided by individuals as approved by the State staff engineer. 
Payments for construction will be handled under Sec. 1780.76(e).


Sec. 1780.68  Owner's contractual responsibility.

    This part does not relieve the owner of any responsibilities under 
its contract. The owner is responsible for the settlement of all 
contractual and administrative issues arising out of procurement 
entered into in support of a loan or grant. These include, but are not 
limited to: source evaluation, protests, disputes, and claims. Matters 
concerning violation of laws are to be referred to the applicable 
local, State, or Federal authority.


Sec. 1780.69  [Reserved]


Sec. 1780.70  Owner's procurement regulations.

    Owner's procurement requirements must comply with the following 
standards:
    (a) Code of conduct. Owners shall maintain a written code or 
standards of conduct which shall govern the performance of their 
officers, employees or agents engaged in the award and administration 
of contracts supported by Agency funds. No employee, officer or agent 
of the owner shall participate in the selection, award, or 
administration of a contract supported by Agency funds if a conflict of 
interest, real or apparent, would be involved. Examples of such 
conflicts would arise when: the employee, officer or agent; any member 
of their immediate family; their partner; or an organization which 
employs, or is about to employ, any of the above; has a financial or 
other interest in the firm selected for the award.
    (1) The owner's officers, employees or agents shall neither solicit 
nor accept gratuities, favors or anything of monetary value from 
contractors, potential contractors, or parties to subagreements.
    (2) To the extent permitted by State or local law or regulations, 
the owner's standards of conduct shall provide for penalties, 
sanctions, or other disciplinary actions for violations of such 
standards by the owner's officers, employees, agents, or by contractors 
or their agents.
    (b) Maximum open and free competition. All procurement 
transactions, regardless of whether by sealed bids or by negotiation 
and without regard to dollar value, shall be conducted in a manner that 
provides maximum open and free competition. Procurement procedures 
shall not restrict or eliminate competition. Examples of what are 
considered to be restrictive of competition include, but are not 
limited to: placing unreasonable requirements on firms in order for 
them to qualify to do business; noncompetitive practices between firms; 
organizational conflicts of interest; and unnecessary experience and 
bonding requirements. In specifying materials, the owner and its 
consultant will consider all materials normally suitable for the 
project commensurate with sound engineering practices and project 
requirements. The Agency shall consider fully any recommendation made 
by the owner concerning the technical design and choice of materials to 
be used for a facility. If the Agency determines that a design or 
material, other than those that were recommended should be considered 
by including them in the procurement process as an acceptable design or 
material in the water or waste disposal facility, the Agency shall 
provide such owner with a comprehensive justification for such a 
determination. The justification will be documented in writing.
    (c) Owner's review. Proposed procurement actions shall be reviewed 
by the owner's officials to avoid the purchase of unnecessary or 
duplicate items. Consideration should be given to consolidation or 
separation of procurement items to obtain a more

[[Page 33495]]

economical purchase. Where appropriate, an analysis shall be made of 
lease versus purchase alternatives, and any other appropriate analysis 
to determine which approach would be the most economical. To foster 
greater economy and efficiency, owners are encouraged to enter into 
State and local intergovernmental agreements for procurement or use of 
common goods and services.
    (d) Solicitation of offers, whether by competitive sealed bid or 
competitive negotiation, shall:
    (1) Incorporate a clear and accurate description of the technical 
requirements for the material, product or service to be procured. When 
it is impractical or uneconomical to make a clear and accurate 
description of the technical requirements, a ``brand name or equal'' 
description may be used to define the performance or other salient 
requirements of a procurement. The specific feature of the name brands 
which must be met by the offeror shall be clearly stated; and
    (2) Clearly specify all requirements which offerors must fulfill 
and all other factors to be used in evaluating bids or proposals.
    (e) Affirmative steps should be taken to assure that small, 
minority, and women businesses are utilized when possible as sources of 
supplies, equipment, construction and services.
    (f) Contract pricing. Cost plus a percentage of cost method of 
contracting shall not be used.
    (g) Unacceptable bidders. The following will not be allowed to bid 
on, or negotiate for, a contract or subcontract related to the 
construction of the project:
    (1) An engineer as an individual or firm who has prepared plans and 
specifications or who will be responsible for monitoring the 
construction;
    (2) Any firm or corporation in which the owner's engineer is an 
officer, employee, or holds or controls a substantial interest;
    (3) The governing body's officers, employees, or agents;
    (4) Any member of the immediate family or partners in the entities 
referred to in paragraphs (g)(1), (g)(2) or (g)(3) of this section; or
    (5) An organization which employs, or is about to employ, any 
person in the entities referred to in paragraphs (g)(1), (g)(2), (g)(3) 
or (g)(4) of this section.
    (h) Contract award. Contracts shall be made only with responsible 
parties possessing the potential ability to perform successfully under 
the terms and conditions of a proposed procurement. Consideration shall 
include but not be limited to matters such as integrity, record of past 
performance, financial and technical resources, and accessibility to 
other necessary resources. Contracts shall not be made with parties who 
are suspended or debarred by any Agency of the United States 
Government.


Sec. 1780.71  [Reserved]


Sec. 1780.72  Procurement methods.

    Procurement shall be made by one of the following methods: Small 
purchase procedures; competitive sealed bids (formal advertising); 
competitive negotiation; or noncompetitive negotiation. Competitive 
sealed bids (formal advertising) is the preferred procurement method 
for construction contracts.
    (a) Small purchase procedures. Small purchase procedures are those 
relatively simple and informal procurement methods that are sound and 
appropriate for a procurement of services, supplies or other property, 
costing in the aggregate not more than $100,000. If small purchase 
procedures are used for a procurement, written price or rate quotations 
shall be requested from at least three qualified sources.
    (b) Competitive sealed bids. In competitive sealed bids (formal 
advertising), an invitation for sealed bids is publicly advertised and 
a firm-fixed-price contract (lump sum or unit price) is awarded to the 
responsible bidder whose bid, conforming with all the material terms 
and conditions of the invitation for bids, is lowest, price and other 
factors considered. When using this method the following shall apply:
    (1) The invitation for bids shall be publicly advertised at a 
sufficient time prior to the date set for opening of bids. The 
invitation shall comply with the requirements in Sec. 1780.70(d). Bids 
shall be solicited from an adequate number of qualified sources;
    (2) All bids shall be opened publicly at the time and place stated 
in the invitation for bids;
    (3) A firm-fixed-price contract award shall be made by written 
notice to that responsible bidder whose bid, conforming to the 
invitation for bids, is lowest. When specified in the bidding 
documents, factors such as discounts and transportation costs shall be 
considered in determining which bid is lowest; and
    (4) Any or all bids may be rejected by the owner when it is in its 
best interest.
    (c) Competitive negotiation. In competitive negotiations, proposals 
are requested from a number of sources and the Request for Proposal is 
publicized. Negotiations are normally conducted with more than one of 
the sources submitting offers. Competitive negotiation may be used if 
conditions are not appropriate for the use of formal advertising and 
where discussions and bargaining with a view to reaching agreement on 
the technical quality, price, other terms of the proposed contract and 
specifications may be necessary. If competitive negotiation is used for 
a procurement, the following requirements shall apply:
    (1) Proposals shall be solicited from an adequate number of 
qualified sources to permit reasonable competition consistent with the 
nature and requirements of the Procurement. The Request for Proposal 
shall be publicized and reasonable requests by other sources to compete 
shall be honored to the maximum extent practicable;
    (2) The Request for Proposal shall identify all significant 
evaluation factors and their relative importance;
    (3) The owner shall provide mechanisms for technical evaluation of 
the proposals received, determination of responsible offerors for the 
purpose of written or oral discussions, and selection for contract 
award; and
    (4) Award may be made to the responsible offeror whose proposal 
will be most advantageous to the owner. Unsuccessful offerors should be 
promptly notified.
    (d) Noncompetitive negotiation. Noncompetitive negotiation is 
procurement through solicitation of a proposal from only one source, or 
after solicitation of a number of sources, competition is determined 
inadequate. Noncompetitive negotiation may be used when the award of a 
contract is not feasible under small purchase or competitive sealed 
bids. Circumstances under which a contract may be awarded by 
noncompetitive negotiations are limited to the following:
    (1) The item is available only from a single source; or
    (2) There exists a public exigency or emergency and the urgency for 
the requirement will not permit a delay incident to competitive 
solicitation; or
    (3) After solicitation of a number of sources, competition is 
determined inadequate; or
    (4) No acceptable bids have been received after formal advertising; 
or
    (5) The procurement is for professional services; or
    (6) The aggregate amount does not exceed $100,000.


Sec. 1780.73  [Reserved]


Sec. 1780.74  Contracts awarded prior to applications.

    Owners awarding construction or other procurement contracts prior 
to

[[Page 33496]]

filing an application, must provide evidence that is satisfactory to 
the Agency that the contract was entered into without intent to 
circumvent the requirements of Agency regulations.
    (a) Modifications. The contract shall be modified to conform with 
the provisions of this part. Where this is not possible, modifications 
will be made to the extent practicable and, as a minimum, the contract 
must comply with all State and local laws and regulations as well as 
statutory requirements and executive orders related to the Agency 
financing. When all construction is complete and it is impracticable to 
modify the contracts, the owner must provide the certification required 
by paragraph (c) of this section.
    (b) Consultant's certification. Provide a certification by an 
engineer, licensed in the State where the facility is constructed, that 
any construction performed complies fully with the plans and 
specifications.
    (c) Owner's certification. Provide a certification by the owner 
that the contractor has complied with applicable statutory and 
executive requirements related to Agency financing for construction 
already performed.


Sec. 1780.75  Contract provisions.

    In addition to provisions required for a valid and legally binding 
contract, any recipient of Agency funds shall include the following 
contract provisions in all contracts.
    (a) Remedies. Contracts other than small purchases shall contain 
provisions or conditions which will allow for administrative, 
contractual, or legal remedies in instances where contractors violate 
or breach contract terms, and provide for such sanctions and penalties 
as may be appropriate. A realistic liquidated damage provision should 
be included in all contracts for construction.
    (b) Termination. All contracts exceeding $10,000, shall contain 
suitable provisions for termination by the owner including the manner 
by which it will be effected and the basis for settlement. In addition, 
such contracts shall describe conditions under which the contract may 
be terminated for default as well as conditions where the contract may 
be terminated because of circumstances beyond the control of the 
contractor.
    (c) Surety. In all contracts for construction or facility 
improvements exceeding $100,000, the owner shall require bonds or cash 
deposit in escrow assuring performance and payment each in the amount 
of 100 percent of the contract cost. The surety will be in the form of 
performance bonds and payment bonds. For contracts of lesser amounts, 
the owner may require surety. When a surety is not provided, 
contractors will furnish evidence of payment in full for all materials, 
labor, and any other items procured under the contract. Form RD 1924-
10, ``Release by Claimants,'' and Form RD 1924-9, ``Certificate of 
Contractor's Release,'' may be used for this purpose. Companies 
providing performance bonds and payment bonds must hold a certificate 
of authority as an acceptable surety on Federal bonds as listed in 
Treasury Circular 570 as amended and the surety must be listed as 
having a license to do business in the State where the facility is 
located.
    (d) Equal employment opportunity. All contracts awarded in excess 
of $10,000 by owners shall contain a provision requiring compliance 
with Executive Order 11246 (3 CFR, 1966 Comp., p.339), entitled, 
``Equal Employment Opportunity,'' as amended by Executive Order 11375 
(3 CFR, 1968 Comp., p. 321), and as supplemented by Department of Labor 
regulations 41 CFR chapter 60.
    (e) Anti-kickback. All contracts for construction shall include a 
provision for compliance with the Copeland ``Anti-Kickback'' Act (18 
U.S.C. 874). This Act provides that each contractor shall be prohibited 
from inducing, by any means, any person employed in the construction, 
completion, or repair of public work, to give up any part of the 
compensation to which they are otherwise entitled. The owner shall 
report suspected or reported violations to the Agency.
    (f) Records. All negotiated contracts (except those of $10,000 or 
less) awarded by owners shall include a provision to the effect that 
the owner, the Agency, the Comptroller General of the United States, or 
any of their duly authorized representatives, shall have access to any 
books, documents, papers, and records of the contractor which are 
directly pertinent to a specific Federal loan or grant program for the 
purpose of making audits, examinations, excerpts, and transcriptions. 
Owners shall require contractors to maintain all required records for 3 
years after making final payment and all other pending matters are 
closed.
    (g) State energy conservation plan. Contracts shall incorporate 
mandatory standards and policies relating to energy efficiency which 
are contained in the State energy conservation plan issued in 
compliance with the Energy Policy and Conservation Act (42 U.S.C. 
6201).
    (h) Change orders. The construction contract shall require that all 
contract change orders be concurred in by the Agency.
    (i) Agency concurrence. All contracts must contain a provision that 
they shall not be effective unless and until the State program official 
or designee concurs in writing.
    (j) Retainage. All construction contracts shall contain adequate 
provisions for retainage. No payments will be made that would deplete 
the retainage nor place in escrow any funds that are required for 
retainage nor invest the retainage for the benefit of the contractor. 
The retainage shall not be less than an amount equal to 5 percent of an 
approved partial payment estimate until the project is substantially 
complete and accepted by the owner, consulting engineer and Agency. The 
contract must provide that additional amounts may be retained if the 
job is not proceeding satisfactorily.
    (k) Other compliance requirements. Contracts in excess of $100,000 
shall contain a provision which requires compliance with all applicable 
standards, orders, or requirements issued under section 306 of the 
Clean Air Act (42 U.S.C. 1857(h)), section 508 of the Clean Water Act 
(33 U.S.C. 1368), Executive Order 11738 (3 CFR, 1974 Comp., p.209), and 
Environmental Protection Agency (EPA) regulations 40 CFR part 15, which 
prohibit the use under non-exempt Federal contracts, grants or loans of 
facilities included on the EPA List of Violating Facilities. The 
provision shall require reporting of violations to the Agency and to 
the U.S. Environmental Protection Agency, Assistant Administrator for 
Enforcement. Solicitations and contract provisions shall include the 
requirements of 4 CFR 15.4(c) as set forth in RUS Bulletin 1780-14.


Sec. 1780.76  Contract administration.

    Owners shall be responsible for maintaining a contract 
administration system to monitor the contractors' performance and 
compliance with the terms, conditions, and specifications of the 
contracts.
    (a) Preconstruction conference. Prior to beginning construction, 
the owner will schedule a preconstruction conference where the 
consulting engineer will review the planned development with the 
Agency, owner, resident inspector, attorney, contractor, and other 
interested parties. The conference will thoroughly cover applicable 
items included in Form RD 1924-16, ``Record of Pre-construction 
Conference,'' and the discussions and agreements will be documented.
    (b) Monitoring reports. The owner is required to monitor 
construction and

[[Page 33497]]

provide a report to the Agency giving a full explanation under the 
following circumstances:
    (1) Reasons why approved construction schedules were not met;
    (2) Analysis and explanation of cost overruns and how payment is to 
be made for the same; and
    (3) If events occur which have a significant impact upon the 
project.
    (c) Inspection. Full-time resident inspection is required for all 
construction unless a written exception is made by the Agency upon 
written request of the owner. Unless otherwise agreed, the resident 
inspector will be provided by the consulting engineer. Prior to the 
preconstruction conference, the consulting engineer will submit a 
resume of qualifications of the resident inspector to the owner and to 
the Agency for acceptance in writing. If the owner provides the 
resident inspector, it must submit a resume of the inspector's 
qualifications to the project engineer for comments and the Agency for 
acceptance in writing prior to the preconstruction conference. The 
resident inspector will work under the technical supervision of the 
project engineer and the role and responsibilities will be defined in 
writing.
    (d) Inspector's daily diary. The resident inspector will maintain a 
record of the daily construction progress in the form of a daily diary 
and daily inspection reports. The daily entries shall be made available 
to the Agency personnel and will be reviewed during project 
inspections. The original complete set will be furnished to the owner 
upon completion of construction. RUS Bulletin 1780-18 is available from 
the Agency for preparing daily inspection reports or the reports can be 
provided in other formats approved by the State staff engineer.
    (e) Payment for Construction. Form RD 1924-18, ``Partial Payment 
Estimate,'' or other similar form may be used for construction 
payments. If Form 1924-18 is not used, prior concurrence by the State 
staff engineer must be obtained.
    (1) Payment of contract retainage will not be made until such 
retainage is due and payable under the terms of the contact.
    (2) Invoices for the payment of construction costs must be approved 
by the owner, project engineer and concurred in by the Agency.
    (3) The review and acceptance of project costs, including 
construction payment estimates by the Agency shall not attest to the 
correctness of the amounts, the quantities shown, or that the work has 
been performed under the terms of agreements or contracts.
    (f) Prefinal inspections. A prefinal inspection will be made by the 
owner, resident inspector, project engineer, contractor, 
representatives of other agencies involved, and Agency representative 
(preferably the State staff engineer or designee). The inspection 
results will be recorded by the project engineer and a copy provided to 
all interested parties.
    (g) Final inspection. A final inspection will be made by the Agency 
before final payment is made.
    (h) Changes in development plans. (1) Changes in development plans 
shall be reviewed and approved by the Agency provided:
    (i) Funds are available to cover any additional costs; and
    (ii) The change is for an authorized loan or grant purpose; and
    (iii) It will not adversely affect the soundness of the facility 
operation or the Agency's security; and
    (iv) The change is within the scope of the contract,
    (2) Changes will be recorded on Form RD 1924-7, ``Contract Change 
Order,'' or other similar form if approved by the State program 
official or designee. Regardless of the form, change orders must be 
approved by the State program official or designee.
    (3) Changes should be accomplished only after Agency approval and 
shall be authorized only by means of contract change order. The change 
order will include items such as:
    (i) Any changes in labor and material;
    (ii) Changes in facility design;
    (iii) Any decrease or increase in quantities based on final 
measurements that are different from those shown in the bidding 
schedule; and
    (iv) Any increase or decrease in the time to complete the project.
    (4) All changes shall be recorded on chronologically numbered 
contract change orders as they occur. Change orders will not be 
included in payment estimates until approved by all parties.


Secs. 1780.77-1780.79  [Reserved]

Subpart D--Information Pertaining to Preparation of Notes or Bonds 
and Bond Transcript Documents for Public Body Applicants


Sec. 1780.80  General.

    This subpart includes information for use by public body applicants 
in the preparation and issuance of evidence of debt (bonds, notes, or 
debt instruments, referred to as bonds in this subpart) and other 
necessary loan documents.


Sec. 1780.81  Policies related to use of bond counsel.

    The applicant is responsible for preparation of bonds and bond 
transcript documents. The applicant will obtain the services and 
opinion of recognized bond counsel experienced in municipal financing 
with respect to the validity of a bond issue, except for issues of 
$100,000 or less. With prior approval of the approval official, the 
applicant may elect not to use bond counsel. Such issues will be closed 
in accordance with the following:
    (a) The applicant must recognize and accept the fact that 
application processing may require additional legal and administrative 
time;
    (b) It must be established that not using bond counsel will produce 
significant savings in total legal costs;
    (c) The local attorney must be able and experienced in handling 
this type of legal work;
    (d) The applicant must understand that it will likely have to 
obtain an opinion from bond counsel at its expense should the Agency 
require refinancing of the debt;
    (e) Bonds will be prepared in accordance with this regulation and 
conform as closely as possible to the preferred methods of preparation 
stated in Sec. 1780.94; and
    (f) Closing instructions must be issued by OGC.


Sec. 1780.82  [Reserved]


Sec. 1780.83  Bond transcript documents.

    Any questions relating to Agency requirements should be discussed 
with Agency representatives. Bond counsel or local counsel, as 
appropriate, must furnish at least two complete sets of the following 
to the applicant, who will furnish one complete set to the Agency:
    (a) Copies of all organizational documents;
    (b) Copies of general incumbency certificate;
    (c) Certified copies of minutes or excerpts from all meetings of 
the governing body at which action was taken in connection with the 
authorizing and issuing of the bonds;
    (d) Certified copies of documents evidencing that the applicant has 
complied fully with all statutory requirements incident to calling and 
holding a favorable bond election, if one is necessary;
    (e) Certified copies of the resolutions, ordinances, or other 
documents such as the bond authorizing resolutions or ordinances and 
any resolution establishing rates and regulating use of facility, if 
such documents are not included in the minutes furnished;

[[Page 33498]]

    (f) Copies of the official Notice of Sale and the affidavit of 
publication of the Notice of Sale when State statute requires a public 
sale;
    (g) Specimen bond, with any attached coupons;
    (h) Attorney's no-litigation certificate;
    (i) Certified copies of resolutions or other documents pertaining 
to the bond award;
    (j) Any additional or supporting documents required by bond 
counsel;
    (k) For loans involving multiple advances of Agency loan funds, a 
preliminary approving opinion of bond counsel (or local counsel if no 
bond counsel is involved) if a final unqualified opinion cannot be 
obtained until all funds are advanced. The preliminary opinion for the 
entire issue shall be delivered at or before the time of the first 
advance of funds. It will state that the applicant has the legal 
authority to issue the bonds, construct, operate and maintain the 
facility, and repay the loan, subject only to changes occurring during 
the advance of funds, such as litigation resulting from the failure to 
advance loan funds, and receipt of closing certificates;
    (l) Final unqualified approving opinion of bond counsel, (and 
preliminary approving opinion, if required) or local counsel if no bond 
counsel is involved, including an opinion as to whether interest on 
bonds will be exempt from Federal and State income taxes. With approval 
of the State program official, a final opinion may be qualified to the 
extent that litigation is pending relating to Indian claims that may 
affect title to land or validity of the obligation. It is permissible 
for such opinion to contain language referring to the last sentence of 
section 306 (a)(1) or to section 309A (h) of the Consolidated Farm and 
Rural Development Act (7 U.S.C. 1926 (a)(1) or 1929a (h)).


Secs. 1780.84 and 1780.86  [Reserved]


Sec. 1780.87  Permanent instruments for Agency loans.

    Agency loans will be evidenced by an instrument determined legally 
sufficient and in accordance with the following order of preference:
    (a) First preference--Form RD 440-22, ``Promissory Note''. Refer to 
paragraph (b) of this section for methods of various frequency payment 
calculations.
    (b) Second preference--single instruments with amortized 
installments. A single instrument providing for amortized installments 
which follows Form RD 440-22 as closely as possible. The full amount of 
the loan must show on the face of the instrument, and there must be 
provisions for entering the date and amount of each advance on the 
reverse or an attachment. When principal payments are deferred, the 
instrument will show that ``interest only'' is due on interest-only 
installment dates, rather than specific dollar amounts. The payment 
period including the ``interest only'' installment cannot exceed 40 
years, the useful life of the facility, or State statute limitations, 
whichever occurs first. The amortized installment, computed as follows, 
will be shown as due on installment dates thereafter.
    (1) Monthly payments. Multiply by twelve the number of years 
between the due date of the last interest-only installment and the 
final installment to determine the number of monthly payments. When 
there are no interest-only installments, multiply by twelve the number 
of years over which the loan is amortized. Then multiply the loan 
amount by the amortization factor and round to the next higher dollar.
    (2) Semiannual payments. Multiply by two the number of years 
between the due date of the last interest-only installment and the due 
date of the final installment to determine the correct number of 
semiannual periods. When there are no interest-only installments, 
multiply by two the number of years over which the loan is amortized. 
Then multiply the loan amount by the applicable amortization factor.
    (3) Annual payments. Subtract the due date of the last interest-
only installment from the due date of the final installment to 
determine the number of annual payments. When there are no interest-
only installments, the number of annual payments will equal the number 
of years over which the loan is amortized. Then multiply the loan 
amount by the applicable amortization factor and round to the next 
higher dollar.
    (c) Third preference--single instruments with installments of 
principal plus interest. If a single instrument with amortized 
installments is not legally permissible, use a single instrument 
providing for installments of principal plus interest accrued on the 
principal balance. For bonds with semiannual interest and annual 
principal, the interest is calculated by multiplying the principal 
balance times the interest rate and dividing this figure by two. 
Principal installments are to be scheduled so that total combined 
interest and principal payments closely approximate amortized payments.
    (1) The repayment terms concerning interest only installments 
described in paragraph (b) of this section apply.
    (2) The instrument shall contain in substance provisions 
indicating:
    (i) Principal maturities and due dates;
    (ii) Regular payments shall be applied first to interest due 
through the next principal and interest installment due date and then 
to principal due in chronological order stipulated in the bond; and
    (iii) Payments on delinquent accounts will be applied in the 
following sequence:
    (A) billed delinquent interest;
    (B) past due interest installments;
    (C) past due principal installments;
    (D) interest installment due; and
    (E) principal installment due.
    (d) Fourth preference--serial bonds with installments of principal 
plus interest. If instruments described under the first, second, and 
third preferences are not legally permissible, use serial bonds with a 
bond or bonds delivered in the amount of each advance. Bonds will be 
numbered consecutively and delivered in chronological order. Such bonds 
will conform to the minimum requirements of Sec. 1780.94. Provisions 
for application of payments will be the same as those set forth in 
paragraph (c)(2)(ii) of this section.
    (e) Coupon bonds. Coupon bonds will not be used unless required by 
State statute. Such bonds will conform to the minimum requirements of 
Sec. 1780.94.


Sec. 1780.88  [Reserved]


Sec. 1780.89  Multiple advances of Agency funds using permanent 
instruments.

    Where interim financing from commercial sources is not used, Agency 
loan proceeds will be disbursed on an ``as needed by borrower'' basis 
in amounts not to exceed the amount needed during 30-day periods.


Sec. 1780.90  Multiple advances of Agency funds using temporary debt 
instruments.

    When none of the instruments described in Sec. 1780.87 are legally 
permissible or practical, a bond anticipation note or similar temporary 
debt instrument may be used. The debt instrument will provide for 
multiple advances of Agency funds and will be for the full amount of 
the Agency loan. The instrument will be prepared by bond counsel, or 
local counsel if bond counsel is not involved, and approved by the 
State program official and OGC. At the same time the Agency delivers 
the last advance, the borrower will deliver the permanent bond 
instrument and the canceled temporary instrument will be returned to 
the borrower. The approved debt instrument will show at least the 
following:
    (a) The date from which each advance will bear interest;
    (b) The interest rate as determined by Sec. 1780.13;

[[Page 33499]]

    (c) A payment schedule providing for interest on outstanding 
principal at least annually; and
    (d) A maturity date which shall be no earlier than the anticipated 
issuance date of the permanent instruments and no longer than the 40-
year statutory limit.


Secs. 1780.91-1780.93  [Reserved]


Sec. 1780.94  Minimum bond specifications.

    The provisions of this section are minimum specifications only and 
must be followed to the extent legally permissible.
    (a) Type and denominations. Bond resolutions or ordinances will 
provide that the instruments be either a bond representing the total 
amount of the indebtedness or serial bonds in denominations customarily 
accepted in municipal financing (ordinarily in multiples of not less 
than $1,000). Single bonds may provide for repayment of principal plus 
interest or amortized installments. Amortized installments are 
preferred by the Agency.
    (b) Bond registration. Bonds will contain provisions permitting 
registration for both principal and interest. Bonds purchased by the 
Agency will be registered in the name of ``United States of America'' 
and will remain so registered at all times while the bonds are held or 
insured by the Government. The Agency address for registration purposes 
will be that of the Finance Office.
    (c) Size and quality. Size of bonds and coupons should conform to 
standard practice. Paper must be of sufficient quality to prevent 
deterioration through ordinary handling over the life of the loan.
    (d) Date of bond. Bonds will normally be dated as of the day of 
delivery. However, the borrower may use another date if approved by the 
Agency. Loan closing is the date of delivery of the bonds or the date 
of delivery of the first bond when utilizing serial bonds, regardless 
of the date of delivery of the funds. The date of delivery will be 
stated in the bond if different from the date of the bond. In all 
cases, interest will accrue from the date of delivery of the funds.
    (e) Payment date. Loan payments will be scheduled to coincide with 
income availability and be in accordance with State law.
    (1) If income is available monthly, monthly payments are 
recommended unless precluded by State law. If income is available 
quarterly or otherwise more frequently than annually, payments must be 
scheduled on such basis. However, if State law only permits principal 
plus interest (P&I) type bonds, annual or semiannual payments will be 
used.
    (2) The payment schedule will be enumerated in the evidence of 
debt, or if that is not feasible, in a supplemental agreement.
    (3) If feasible, the first payment will be scheduled one full 
month, or other period, as appropriate, from the date of loan closing 
or any deferment period. Due dates falling on the 29th, 30th, and 31st 
day of the month will be avoided. When principal payments are deferred, 
interest-only payments will be scheduled at least annually.
    (f) Extra payments. Extra payments are derived from the sale of 
basic chattel or real estate security, refund of unused loan funds, 
cash proceeds of property insurance and similar actions which reduce 
the value of basic security. At the option of the borrower, regular 
facility revenue may also be used as extra payments when regular 
payments are current. Unless otherwise established in the note or bond, 
extra payments will be applied as follows:
    (1) For loans with amortized debt instruments, extra payments will 
be applied first to interest accrued to the date of receipt of the 
payment and second to principal.
    (2) For loans with debt instruments with P&I installments, the 
extra payment will be applied to the final unpaid principal 
installment.
    (3) For borrowers with more than one loan, the extra payment will 
be applied to the account secured by the lowest priority of lien on the 
property from which the extra payments was obtained. Any balance will 
be applied to other Agency loans secured by the property from which the 
extra payment was obtained.
    (4) For assessment bonds, see paragraph (k) of this section.
    (g) The place of payments on bonds purchased by the Agency will be 
determined by the Agency.
    (h) Redemptions. Bonds will normally contain customary redemption 
provisions. However, no premium will be charged for early redemption on 
any bonds held by the Government.
    (i) Additional revenue bonds. Parity bonds may be issued to 
complete the project. Otherwise, parity bonds may not be issued unless 
acceptable documentation is provided establishing that net revenues for 
the fiscal year following the year in which such bonds are to be issued 
will be at least 120 percent of the average annual debt serviced 
requirements on all bonds outstanding, including the newly-issued 
bonds. For purposes of this section, net revenues are, unless otherwise 
defined by State statute, gross revenues less essential operation and 
maintenance expenses. This limitation may be waived or modified by the 
written consent of bondholders representing 75 percent of the then-
outstanding principal indebtedness. Junior and subordinate bonds may be 
issued in accordance with the loan resolution.
    (j) Precautions. The following types of provisions in debt 
instruments should be avoided:
    (1) Provisions for the holder to manually post each payment to the 
instrument.
    (2) Provisions for returning the permanent or temporary debt 
instrument to the borrower in order that it, rather than the Agency, 
may post the date and amount of each advance or repayment on the 
instrument.
    (3) Provisions that amend covenants contained in Forms RD 1942-47 
or RD 1942-9.
    (4) Defeasance provisions in loan or bond resolutions. When a bond 
issue is defeased, a new issue is sold which supersedes the contractual 
provisions of the prior issue, including the refinancing requirement 
and any lien on revenues. Since defeasance in effect precludes the 
Agency from requiring refinancing before the final maturity date, it 
represents a violation of the statutory refinancing requirement; 
therefore, it is disallowed. No loan documents shall include a 
provision of defeasance.
    (k) Assessment bonds. When security includes special assessment to 
be collected over the life of the loan, the instrument should address 
the method of applying any payments made before they are due. It may be 
desirable for such payments to be distributed over remaining payments 
due, rather than to be applied in accordance with normal procedures 
governing extra payments, so that the account does not become 
delinquent.
    (l) Multiple debt instruments. The following will be adhered to 
when preparing debt instruments:
    (1) When more than one loan type is used in financing a project, 
each type of loan will be evidenced by a separate debt instrument or 
series of debt instruments;
    (2) Loans obligated in different fiscal years and those obligated 
with different terms in the same fiscal year will be evidenced by 
separate debt instruments;
    (3) Loans obligated for the same loan type in the same fiscal year 
with the same term may be combined in the same debt instrument;
    (4) Loans obligated in the same fiscal year with different interest 
rates that

[[Page 33500]]

will be closed at the same interest rate may be combined in the same 
debt instrument.


Sec. 1780.95  Public bidding on bonds.

    Bonds offered for public sale shall be offered in accordance with 
State law and in such a manner to encourage public bidding. The Agency 
will not submit a bid at the advertised sale unless required by State 
law, nor will reference to Agency's rates and terms be included. If no 
acceptable bid is received, the Agency will negotiate the purchase of 
the bonds.


Secs. 1780.96-1780.100  [Reserved]

Part 1942, Subpart I [Redesignated as Part 1781 and Revised]

    5. Subpart I of 7 CFR part 1942 is redesignated as 7 CFR part 1781 
and is revised to read as follows:

PART 1781--RESOURCE CONSERVATION AND DEVELOPMENT (RCD) LOANS AND 
WATERSHED (WS) LOANS AND ADVANCES

Sec.
1781.1  Purpose.
1781.2  Policy.
1781.3  Authorities, responsibilities, and delegation of authority.
1781.4  Definitions.
1781.5  Eligibility.
1781.6  Loan purposes.
1781.7  Loan and advance limitations and obligations incurred before 
loan closing.
1781.8  Rates and terms--WS loans and WS advances and RCD loans.
1781.9  Security, feasibility, evidence of debt, title insurance, 
and other requirements.
1781.10  [Reserved]
1781.11  Other considerations.
1781.12  Preapplication and application processing.
1781.13  [Reserved]
1781.14  Planning, options, and appraisals.
1781.15  Planning and performing development.
1781.16  [Reserved]
1781.17  Docket preparation and processing.
1781.18  Feasibility.
1781.19  Approval, closing, and cancellation.
1781.20  Disbursement of WS and RCD loan funds and WS advance funds.
1781.21  Borrower accounting methods, management, reporting, and 
audits.
1781.22  Subsequent loans.
1781.23  Servicing.
1781.24  State supplements and availability of bulletins, 
instructions, forms, and memorandums.
1781.25-1781.100  [Reserved]

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.


Sec. 1781.1  Purpose.

    This part prescribes the policies and procedures for making:
    (a) Watershed (WS) loans and Watershed (WS) advances for works of 
improvement in a watershed project; and
    (b) Resource Conservation and Development (RCD) loans for measures 
or projects needed to implement the RCD area plan to achieve objectives 
in an RCD area.


Sec. 1781.2  Policy.

    (a) Rural Utilities Service (RUS), is an agency of the United 
States Department of Agriculture established pursuant to section 232 of 
the Department of Agriculture Reorganization Act of 1994 (Pub. L. 103-
354, 108 Stat. 3178), successor to the Farmers's Home Administration. 
Natural Resources Conservation Service (NRCS), is an agency of the 
United States Department of Agriculture established pursuant to section 
232 of the Department of Agriculture Reorganization Act of 1994 (Pub. 
L. 103-354, 108 Stat. 3178), successor to the Soil Conservation 
Service. RUS will make WS and RCD loans available to sponsoring local 
public bodies, agencies, and nonprofit organizations to assist them in 
obtaining the local cost of WS works of improvement and RCD measures. 
Any processing or servicing activity conducted pursuant to this part 
involving authorized assistance to RUS employees, members of their 
families, known close relatives, or business or close personal 
associates, is subject to the provisions of subpart D of Part 1900 of 
this title. Applicants for this assistance are required to identify any 
known relationship or association with an RUS employee. RUS will assist 
the local sponsors and the NRCS in making loans from NRCS construction 
funds as WS advances when needed for the development of future water 
supplies or for site preservation.
    (b) Rural Development State and local offices will administer these 
programs on behalf of RUS and will coordinate application processing 
with the NRCS and other appropriate State and Federal agencies.


Sec. 1781.3  Authorities, responsibilities and delegation of authority.

    (a) NRCS provides technical and financial assistance to sponsoring 
local organizations for developing WS and RCD area plans and for 
individual RCD measures or projects and watershed works of improvement. 
The watershed work plan for developing, operating, and maintaining 
watershed works of improvement must be agreed upon by sponsoring local 
organizations and NRCS. When approved, it is the basis for extending 
technical and cost sharing assistance from watershed funds. The RCD 
area plan is prepared for the development of the RCD area by sponsoring 
local organizations with assistance from NRCS and other agencies, 
endorsed by the Governor or by the agency designated by the Governor, 
and accepted by the Secretary of Agriculture or his delegate. It 
includes objectives, planned courses of action, and RCD measures or 
projects to be developed. It is amended as necessary to include 
continuing activities and needs in the RCD area.
    (b) RUS receives and processes applications for WS loans and NRCS 
WS advances and RCD loans and makes and services such loan and 
advances. WS loans are made by RUS from either Public Law 534 (78th 
Cong.) funds authorized in the Flood Control Act of 1944 (33 U.S.C. 701 
et seq.) or Public Law 566 (83rd Cong.) funds authorized in the 
Watershed Protection and Flood Prevention Act of 1954 (68 Stat. 666) to 
cover a part or all of the local cost for a watershed work of 
improvement.
    (c) WS loans and WS advances may be made to project sponsors in 
watershed project areas for which:
    (1) A watershed work plan has been approved administratively or by 
resolutions adopted by the Committee on Agriculture and Forestry of the 
Senate and by the Committee on Agriculture of the House of 
Representatives; and
    (2) Federal assistance has been authorized for the installation of 
works of improvement by the Administrator of NRCS.
    (d) RCD loans may be made in areas authorized for RCD program 
assistance by the Secretary of Agriculture and for which an RCD plan 
design or area plan has been accepted by the State NRCS 
Conservationist.
    (e) Delegation of authority. The Rural Development State Director 
is authorized to approve WS and RCD loans subject to limitations in RUS 
Staff Instruction 1780-1 and conditions of this part. The Rural 
Development State Director is authorized to relegate authority in 
accordance with this part to the Chief, Community Programs; or other 
members of the State Office staff.
    (f) NRCS is responsible for providing technical and financial 
assistance to sponsoring local organizations for planning and 
developing WS and RCD areas. This includes development of WS and RCD 
plans and WS works of improvement and RCD measures or projects.
    (g) RUS is responsible for making and servicing WS loans and 
advances and RCD loans.

[[Page 33501]]

    (h) The NRCS-RUS Agreements in RUS Bulletin's 1781 and 1781-2 
include further responsibilities and functions of NRCS and RUS in WS 
and RCD areas.


Sec. 1781.4  Definitions.

    (a) Watershed (WS) project. An authorized area in which watershed 
assistance from NRCS and other U.S. Department of Agriculture (USDA) 
agencies including WS loans and advances may be provided. Watershed 
assistance is provided in two types of watershed projects identified by 
the Public Law under which they are authorized.
    (1) Public Law-534 Watershed. One of the 11 watersheds authorized 
by Congress in the Flood Control Act of 1944 (33 U.S.C. 701 et seq.), 
Public Law 78-534 as amended.
    (2) Public Law-566 Watershed. A small watershed of not more than 
250,000 acres authorized in accordance with the Watershed Protection 
and Flood Prevention Act, August 4, 1954, Public Law 83-566 as amended.
    (b) Resource Conservation and Development (RCD) area. An area in 
which RCD program assistance from NRCS and other USDA agencies has been 
authorized. It usually includes all or part of more than one county and 
may be coterminous with substate planning and development areas. RCD 
loans are authorized under Section 32 of Title III of the Bankhead-
Jones Farm Tenant Act (7 U.S.C. 1011).
    (c) Watershed plan. A plan agreed upon by sponsoring local 
organizations and the NRCS for developing, operating, and maintaining 
watershed works of improvement.
    (d) RC&D measure plan. A plan document for a land area, directly 
controlled or under the jurisdiction of the sponsoring public bodies or 
public nonprofit organization. It involves one of the measure purposes 
eligible for RC&D cost sharing assistance. The document sets forth what 
will be done, how, when and by whom, and involves RC&D technical and/or 
financial assistance.
    (e) RCD area plan. A plan prepared by sponsoring local 
organizations with assistance from NRCS and other agencies for the 
development of the RCD area which has been endorsed by the Governor or 
his designated agency and accepted by the Secretary of Agriculture or 
his delegate. It includes objectives, planned courses of action, and 
RCD measures to be developed. It is amended as necessary to include 
continuing activities and needs in the RCD area.
    (f) Watershed works of improvement. Structural, nonstructural, and 
land treatment measures included in a watershed plan which are to be 
installed in a watershed project.
    (g) RCD measure or project. An activity or development indicated in 
the RCD area plan as being needed to achieve RCD area goals and 
objectives.
    (h) Cost sharing. The WS and RCD legislative authorities provide 
for sharing certain costs of installing WS works of improvement or RCD 
measures by the Federal Government and by sponsoring local 
organizations. Federal cost sharing from WS and RCD funds is provided 
by NRCS for certain WS works of improvement and RCD measures. 
Information on amounts, purposes, and procedures for cost sharing is 
available from the NRCS.
    (i) Local cost. The part of the cost of a WS work of improvement or 
a RCD measure or project that is to be paid by a sponsoring local 
organization.
    (j) Public agency or public body. A State agency or department or 
instrumentality, county, municipality or other political subdivision or 
instrumentality of a State or agencies or districts created by or 
pursuant to State law for making improvements of a public nature or 
providing public services such as soil and water conservation 
districts, irrigation districts, drainage districts, flood prevention 
and control districts, school districts, other special purpose 
districts, municipal corporations or similar governmental units.
    (k) Non-profit corporation. Mutual and other irrigation, water 
users, water supply, drainage, or waste disposal companies or 
associations, ditch companies, grazing, recreation and forestry 
associations and similar associations and organizations generally 
designated as private corporations operating on a non-profit basis. 
They may be organized and chartered under special law, general 
nonprofit corporation law, or general profit corporation law, if 
operated on a nonprofit basis under adequate charter, bylaw, mortgage 
or supplementary agreement provisions which will assure continued 
operation in that manner.
    (l) Sponsoring local organization. A local public agency or body or 
a local nonprofit corporation having authority under State law to plan, 
develop, maintain and operate WS works of improvement or RCD measures 
or projects included in a WS or RCD area plan. The name of the 
sponsoring local organization must be included in the plan and 
sponsorship must be evidenced by execution of the plan.
    (m) Watershed loan. A loan made by RUS from watershed funds to a 
sponsoring local organization to develop a WS work of improvement.
    (n) RCD loan. A loan made by RUS from RCD funds to a local 
sponsoring organization to develop a RCD measure or project. RCD loans 
are made from RCD funds to enable sponsoring local organizations to 
provide a part or all of the local share of cost for an RCD measure.
    (o) Watershed advance. A loan made from NRCS watershed construction 
funds to develop a future water supply or for the preservation of a 
site for a work of improvement authorized in a watershed plan.
    (p) Future water supply. Water storage capacity in a reservoir with 
related facilities for release or withdrawal of water to meet future 
needs for municipal or industrial use.
    (q) Preservation of sites. Acquisition to assure their availability 
for planned developments. Land, easements, or rights-of-way essential 
to preserve sites for watershed works of improvement or RCD measures.
    (r) Processing office. Means the office designated by the Rural 
Development State Director to accept and process applications for WS 
and RCD loans and advances.


Sec. 1781.5  Eligibility.

    To be eligible for a WS loan, WS advance, or an RCD loan, the 
sponsoring local organization must meet the following requirements as 
applicable. Questions on eligibility will be referred to the Regional 
Attorney, OGC for legal advise prior to development of a loan docket.
    (a) Be named in the WS or RCD plan as a sponsor of the development 
to be financed.
    (b) Be legally organized and established in the WS or RCD area with 
legal authority, responsibility and capability to develop and operate 
the facility for which assistance is requested.
    (c) Have authority under and comply with Federal, State and local 
laws on such matters as:
    (1) Organizing, installing, operating, and maintaining proposed WS 
works of improvement or RCD measures or projects.
    (2) Borrowing money, giving security, levying taxes, making 
assessments or raising revenues for operation and maintenance of the 
facility and repayment of loans.
    (3) Land use zoning.
    (4) Acquiring necessary property, lands, and rights.
    (5) Obtaining approval of construction plans and specifications by 
appropriate Federal, State, and local agencies and construction 
facilities.

[[Page 33502]]

    (6) Health and sanitation standards, water pollution control, and 
environmental regulations.
    (7) Design and installation standards.
    (8) Public service commission or similar State public body rules 
and regulations.
    (d) Be financially sound and capable of providing service essential 
to the rural development needs of the area.
    (e) If it is a nonprofit corporation.
    (1) Membership should be broadly based and representative of the 
area benefiting from the facility. Membership on the governing board of 
the corporation will be limited to those living in the area to be 
benefited unless for justifiable reasons the Rural Development State 
Director gives prior approval for other than local residents to serve 
on the board of directors.
    (2) The corporation must propose a facility which will primarily 
serve or generate other substantial, tangible benefits for farmers and 
other residents of the area. In the case of a recreational development 
at least two-thirds of the membership must be farmers and other 
residing in the area.
    (3) Nonprofit corporations will not be formed to serve an area 
which could be served by a public agency which has adequate authority 
to provide the needed service unless prior approval of the National 
Office is obtained.


Sec. 1781.6  Loan purposes.

    (a) WS and RCD loans. WS and RCD loans may be used for:
    (1) Water development, storage, treatment and conveyance to farms 
for irrigation and other farm use, including farmstead, livestock, 
orchard, and crop spraying.
    (2) Drainage systems and facilities in farm areas to sustain 
agricultural production or protect farmers and rural residents from 
water damage.
    (3) Agricultural water management practices for annual streamflow 
stabilization, recharging ground water reservoirs, and conserving water 
supplies by management and control of vegetation along waterways and in 
drainage basins.
    (4) Soil conservation and water control facilities such as dikes, 
terraces, detention reservoirs, stream channels, ditches, and other 
special land treatment and stabilization measures needed to protect 
farms and rural residents from water damage, provided such facilities 
cannot be installed or improved under, or will not conflict with, other 
public programs such as those administered by the Corps of Engineers.
    (5) Special treatment measures or equipment primarily, though not 
exclusively, for flood prevention such as:
    (i) Facilities and equipment for fire prevention and control.
    (ii) Tree planting and establishment of other vegetative cover for 
stabilizing critical runoff and sediment-producing areas.
    (iii) Structural and vegetative measures to stabilize stream 
channels and gullies.
    (iv) Basic farm conservation practices to control runoff, erosion, 
and sedimentation.
    (6) Installing, repairing, and improving water storage facilities, 
including outlets for immediate and future domestic, municipal and 
industrial water supply and water quality management, and conveying 
water to treatment facilities or distribution systems. When payment of 
loans for such facilities are primarily dependent upon revenues from 
use of water stored the loan approval official must determine the 
adequacy of facility for use of the water before a loan is closed.
    (7) Public water based recreation and fish and wildlife developer 
loans will only be made to public bodies for the local share of cost 
for such developments for which NRCS is providing technical or 
financial assistance from WS or RCD funds. Loans will not be made for 
developments larger or more elaborate than that which is included in 
the WS or RCD plan. Loans may include funds for:
    (i) Construction of necessary water resource improvements such as 
storage capacity in multipurpose and single purpose reservoirs, water 
level control structures in reservoirs and streams, and stream channel 
improvements necessary for the development of the facilities. This may 
include practices for improvement of fish and wildlife habitat and 
environment and related areas and facilities for proper protection and 
management of the development.
    (ii) Essential developments, improvements, equipment and facilities 
for access, public health and safety, and efficient operation 
management and maintenance; such as energy utilities, water supply and 
waste disposal systems, maintenance buildings, fences, cattle guards, 
roads and trails, parking, picnicking, camping, beaches, playgrounds, 
and related shelters and equipment.
    (iii) Special areas and structures such as forest and other 
vegetative cover, marshes, pits, shelters and fish ladders to provide 
protected natural spawning, breeding, nesting, and feeding for fish and 
wildlife.
    (8) Soil and Water Management for Agriculture-Related Pollutant 
Control. Measures to reduce agriculture-related pollutants that 
adversely affect the community and the general public. Measures may 
include, but are not limited to, holding ponds, debris basins, 
diversions, terraces, and community distribution systems.
    (9) Acquiring fee simple title to lands or perpetual easements, or 
rights-of-way for sites for works of improvement or project measures 
and related costs for removal, relocation, or replacement of existing 
improvements including relocation payments for displaced persons, 
business enterprises and facilities, and other related purposes. Funds 
for land acquisition will be limited to costs necessary for WS works of 
improvement or RCD measures. Final construction plans will indicate 
minimum essential lands and rights-of-way to be acquired. In some 
cases, sponsoring local organizations may need to acquire lands in 
excess of actual needs when it is expedient for planned development. If 
the Rural Development State Director determines that the acquisition of 
excess land is necessary or expedient for the orderly development of a 
WS works of improvement, or RCD measure, he may authorize the action 
subject to the following conditions:
    (i) The applicant must agree to sell excess land as soon as 
practicable and apply the proceeds, together with any income from 
excess land, on the debt to RUS.
    (ii) The applicant must furnish legal evidence of authority to 
acquire additional land and dispose of it as agreed.
    (iii) Evidence must be provided to justify acquisition of 
additional land.
    (iv) Easements for land or water resource protection structures 
must be perpetual and must not include clauses that terminate the 
easement with the dissolution or abandonment of the applicant 
organization. Loan funds will not be used for an easement that deviates 
in any way from that provided in the standard NRCS form unless 
modifications of it are approved by both NRCS and RUS.
    (10) Acquisition of water supply or water right by purchase or by 
appropriation under local, State, and Federal laws. The loan may 
include funds for the purchase of land on which the water supply or 
water right is presently being used when:
    (i) The water supply or water right cannot be purchased without the 
land; and
    (ii) The value of the land is not the major portion of the cost; 
and

[[Page 33503]]

    (iii) Any excess land thus acquired will be sold as soon as 
possible and the proceeds applied on the loan.
    (11) Purchase of equipment and machinery necessary for development 
and operation of planned WS works of improvement or RCD measures or 
projects including:
    (i) Special-purpose equipment. Purchase or rent special-purpose 
equipment to install or maintain any community facility in categories 
in paragraph (a)(11) of this section or to establish on farms soil and 
water conservation measures such as terraces, ponds, land leveling for 
irrigation or drainage, subsoiling, seeding, tree planting, and removal 
of brush, scattered trees, and stumps, provided:
    (A) Such equipment is not otherwise available when needed.
    (B) There is sufficient need and local demand to justify ownership 
or rental.
    (C) Rates to be charged include, among other things, an allowance 
for depreciation, obsolescence, and replacement based upon the 
recommendations of the equipment manufacturer or the experience of 
contractors engaged in providing services for similar types of work.
    (ii) Forestry equipment and services. Purchase or rent basic 
special-purpose equipment, facilities, certain land or land rights, and 
supplies needed for furnishing services for the establishment, 
improvement, protection, and harvesting of timber (not processing) 
suitable for lumber, pulp, poles or posts; providing that the forest 
program and forest practices benefiting from such services are in 
accordance with approved conservation practices for the development, 
use, and control of water resources on farms and in forests. Special-
purpose equipment may include such items as tractors, bull dozers, 
plows, planters, trucks, loaders, fire-fighting equipment, and 
sprayers. Facilities may include such items as ponds and reservoirs, 
pipelines, buildings for storage of equipment and supplies, nurseries, 
access roads, fire lanes, and lookout towers. Supplies may include such 
things as seed, seedlings, fertilizers, fencing, and pesticides. Land 
or land-rights acquisition will be limited to that necessary for sites 
for facilities listed above which are directly related to the forestry 
program. Loans for these purposes may be made only when the equipment, 
supplies, and facilities to be provided:
    (A) Are not readily available when needed.
    (B) Will be justified by local need and demand.
    (C) Will be available to users at rates sufficient to cover loan 
amortization, obsolescence, replacement, operation, and cost of 
supplies.
    (D) Will more efficiently serve the group through cooperative 
effort.
    (12) Refinancing debt obligations of the sponsoring local 
organization that were incurred before application for a WS or RCD loan 
when that is not the primary purpose of the loan and:
    (i) The debt being refinanced was for works of improvement or 
measures for which loan funds could be used; and
    (ii) The debt is a valid obligation of the sponsor; and
    (iii) Creditors will not modify payment terms on existing debts, 
and the organization cannot pay existing debts and a loan from RUS over 
the same period of time; and
    (iv) Long-term debts will not be refinanced unless necessary to 
provide a sound basis for the loan or WS advance and concurrence is 
obtained from the National Office.
    (13) If repayment is based on revenues, loan funds (not WS 
advances) can be used for payment of interest installments until the 
facility is generating enough revenue to make accrued interest 
payments. Loan funds for interest payments will not exceed the 
estimated amount that will accrue to the end of the third full calendar 
year after loan closing without prior approval from the National 
Office.
    (14) Relocation payment to displaced persons, businesses, and farm 
operations and for relocation assistance advisory services in 
accordance with the Uniform Relocation Assistance and Real Property 
Acquisition Policies Act of 1970 (Public Law 91-646, 84 Stat. 1894), 
the Regulations issued by the Secretary of Agriculture under the Act (7 
CFR part 21), and the Memorandum of Understanding Between NRCS and RUS.
    (15) Services of engineers, architects, attorneys, auditors, 
construction foremen, managers, clerks, and others for organizing, 
planning, surveying, supervising, analyzing, developing, operating, 
managing, and accounting for activities related to loan processing and 
closing and development for which the loan is made.
    (16) Buildings, fences, roads, utilities, facilities, and 
relocation:
    (i) To construct buildings of modest design essential for the 
operation and maintenance of the works of improvement or measure.
    (ii) To provide support facilities and utilities such as gas, 
electricity, water, sewer, and waste disposal.
    (iii) To build or relocate roads, bridges, utilities, fences, and 
other improvements when necessary to acquire rights-of-ways or to 
construct or operate the facility.
    (17) Services and fees. To pay costs for services for any purposes 
listed under this section such as:
    (i) Fees or other legal expenses for establishing a water right 
through appropriation, agreement, permit, or court decree.
    (ii) Purchase of water stock or membership in an incorporated water 
users' association to acquire a water supply.
    (iii) Costs of labor, technical or professional services, and fees 
to be incurred in obtaining the loan and in planning and completing the 
facilities or services to be financed with loan funds.
    (iv) Services such as those listed in paragraph (a) (16) of this 
section.
    (b) RCD loans. Purposes for which RCD loans may be made in addition 
to those included in paragraph (a) of this section are:
    (1) Solid waste management. Lands, equipment and facilities to 
collect, transport, and dispose of solid waste in sanitary landfills 
for which NRCS is providing technical assistance.
    (2) Shifts-in-land use. Lands for uses such as grazing, forestry, 
wildlife, natural areas and parks, greenbelts, and other open spaces.
    (3) Purchase existing facilities. Purchase existing facilities for 
shift-in-land use, soil and water development, conservation, control 
and use when it is determined that purchase is necessary to provide 
efficient service through a facility owned and operated by a public 
agency (or a nonprofit corporation in a rural area), or the owner is 
either unwilling or unable to make improvements, enlargement, or 
extensions needed to provide significant additional or improved service 
for present users or for a new group of users at reasonable rates.
    (c) NRCS watershed advances. NRCS watershed advances are loans that 
may be made from NRCS construction funds for the following purposes 
included in a watershed work plan agreement:
    (1) To pay construction costs including cost of engineering and 
related services for increasing reservoir capacity (including intake 
and outlet structures) for a future water supply for municipal, 
domestic, industrial, or agricultural uses.
    (2) To preserve sites for authorized watershed works of improvement 
by acquiring land, easements, and rights-of-ways or other property 
rights.


Sec. 1781.7  Loan and advance limitations and obligations incurred 
before loan closing.

    (a) WS and RCD loan limitations. (1) Loans will not be used for:

[[Page 33504]]

    (i) Land treatment measures on individual farms except as provided 
in Sec. 1781.6(a)(5)(iv).
    (ii) Buildings and facilities to be used for lodging, dining or 
entertainment purposes.
    (iii) Building industrial parks or constructing facilities in them, 
or establishing private industrial or commercial enterprises, or 
purchasing land to be used primarily for industrial purposes.
    (iv) Paying costs allocated to structural measures for flood 
prevention.
    (v) Facilities for the production and harvesting of fish and 
wildlife such as hatcheries, rearing ponds, and related facilities 
other than those under natural conditions.
    (vi) Facilities primary for treatment and distribution of water or 
for sewerage, collection and treatment for domestic or industrial use 
or for municipal or community systems.
    (vii) Electric generating, transmission, and distribution 
facilities, except when provided as part of the minimum basic 
facilities for recreation and fish and wildlife developments authorized 
in Sec. 1781.6(a)(7).
    (viii) Storm and sanitary sewers and solid waste disposal 
facilities other than authorized in Sec. 1781.6(b)(1).
    (ix) Payment for a tract of land, easements, or rights-of-ways on 
which NRCS will share the cost if the amount to be paid with loan funds 
exceeds the difference between the NRCS share and the value on which 
the NRCS share is based.
    (x) Purchasing tracts of land primarily for later resale to private 
developers or individuals for agricultural or nonagricultural use.
    (xii) Buildings for residential, commercial, or industrial, use.
    (xiii) Developments on private property primarily for the benefit 
of the individual property owner.
    (xiv) Payment of that part of the cost of facilities, improvements, 
and practices that could be earned by participation in agricultural 
conservation programs unless such cost cannot be covered by purchase 
orders or assignments to material suppliers or contractors. If a loan 
is made for such purposes for which practice or cost share payments 
exceed $500, RUS will obtain an assignment on such payments to be paid 
on the loan.
    (xv) Primarily for water and sewage treatment plants and 
distribution systems.
    (xvi) Drainage facilities primarily for the benefit of other than 
rural areas.
    (xvii) Any single RCD measure that requires a loan of more than 
$500,000.
    (xviii) The total amount of principal outstanding for all WS loans 
made for one or more watershed works of improvement in a single 
watershed project, whether made to one or more sponsoring 
organizations, will not exceed $10,000,000.
    (b) Watershed advance limitations. (1) A WS advance for future 
water supply will not be used for acquiring property rights including 
lands, easements, and rights-of-way; water rights; administration of 
contracts; storage capacity for immediate municipal use; pipelines from 
the reservoir to place of use; or for other uses such as irrigation, 
fish and wildlife, and recreation.
    (2) A WS advance for increasing reservoir capacity for future water 
supply will not exceed 30 percent of the total installation cost of one 
structure.
    (3) A WS advance for site preservation will not exceed that 
determined necessary by NRCS except to purchase land in excess of 
actual needs in accordance with the provisions of Sec. 1781.6(a)(7).
    (4) Before a project agreement is entered into, there must be 
satisfactory evidence that the borrower will develop the site to be 
acquired or will use the future water supply and that revenue will be 
sufficient to meet all scheduled installments.
    (c) Obligations incurred before loan closing. (1) WS loans, WS 
advances, and RCD loans may be used for payment of obligations incurred 
before loan closing when the Rural Development State Director 
determines that:
    (i) The obligations incurred are necessary for planned 
developments; and
    (ii) The obligations are incurred for authorized loan purposes; and
    (iii) Contracts and construction plans meet RUS and NRCS standards; 
and
    (iv) The applicant has legal authority to incur the obligations at 
the time proposed; and
    (v) The Rural Development State Director authorizes such action in 
a letter to the applicant.
    (2) The Rural Development State Director's letter will specifically 
state that the permission is granted on the condition that RUS is not 
committed to make a loan and assumes no responsibility for any 
obligation incurred by the applicant because of the permission granted 
and that the loan will be closed subject to compliance with agency 
regulations including closing instructions of the Regional Attorney 
Office of the General Counsel.


Sec. 1781.8  Rates and terms--WS loans and WS advances and RCD loans.

    (a) Interest rates. The interest rate for WS loans, WS advances and 
RCD loans will be at a rate not to exceed the current market yield for 
outstanding municipal obligations with remaining periods to maturity 
comparable to the average maturity for the loan, adjusted to the 
nearest 1/8 of 1 percent.
    (1) For loans, unless otherwise required by State law, interest 
will accrue from date of check delivery where Form RD 440-22, 
``Promissory Note (Association Organization),'' is used. Where bonds 
are used interest will accrue from the applicable dates recorded on the 
bonds. Where multiple loan disbursements are used interest will accrue 
from date of check.
    (2) Interest on an advance for future water supply will begin as 
required by State law, when water is first used from the future water 
storage capacity installed with advance, or ten years from the 
scheduled date of the completion of the facility, whichever date is the 
earlier.
    (3) Interest on an advance for preservation of sites will begin on 
the date the advance is closed.
    (b) Length of repayment period. The repayment period on loans may 
not exceed the shortest of the following periods:
    (1) The statutory limitation on the sponsoring local organization's 
borrowing authority.
    (2) Fifty (50) years for WS loans and WS advances and 30 years for 
RCD loans from the date when the principal benefits from the WS works 
of improvement or RCD measure being financed first become available.
    (3) The useful life of the WS works of improvement or RCD measure 
being financed with loan or advance funds.
    (c) Deferred or partial payments. Deferred or partial payments may 
be authorized in the following circumstances:
    (1) Payments need to be delayed until the receipt of income from 
taxes or other revenues is enough to meet a regular installment but not 
exceed:
    (i) The completion date of the facility; or
    (ii) The date when benefits from the facility begins; but
    (iii) In no case for more than 5 years for other than future water 
supply.
    (2) Payments will depend on the increased returns expected from 
planned improvements, or from the installation on individual farms of 
land development or other soil and water improvements essential for 
obtaining benefits from the improvement to be installed with loan 
funds.
    (3) They will not be used to permit the accelerated payment of 
other debts, to make capital improvements, or to create operating 
reserves.

[[Page 33505]]

    (4) Where prohibited by State statutes; interest payments will not 
be deferred even though payments on principal may be deferred.
    (5) Loans or advances for future water supply will be repaid within 
the life of the reservoir structure but in no event later than 50 years 
for WS and 30 years for RCD after the reservoir structure is built. 
Payments on the principal amount may be deferred one year after the 
water is first used from the storage capacity installed with the 
advance or for 10 years from the scheduled completion date of the 
structures, whichever occurs first.
    (i) Interest will begin for a future water supply as required by 
State law, or when water is first used from the future storage capacity 
or 10 years from the scheduled date of completion of the facility, 
whichever occurs first.
    (ii) If State law requires that interest be charged and repaid 
before water is first used or earlier than 10 years from completion 
date of the structure, interest payments will be scheduled to comply 
with State law even though payments of principal may be deferred.
    (iii) The borrower should be encouraged to begin repayments as soon 
as practicable after the reservoir is built even though this liberal 
deferment policy exists.
    (iv) WS advances for preservation of sites must be fully repaid 
before beginning construction of the works of improvement for which 
such sites were acquired.
    (A) Unless a WS advance is to be repaid with a WS loan, 
installments will be scheduled at the earliest possible date following 
the date of closing the advance. The date and amount of each such 
installment will be fixed to coincide with the receipt of income from 
taxes or other revenues.
    (B) Payments for both principal and interest on a WS advance for 
preservation of sites may be scheduled for payment in one installment 
to be paid on the date of the closing of a WS loan which includes funds 
for the repayment of the WS advance.
    (C) Interest on a WS advance for preservation of sites will begin 
on the date the WS advance is closed.
    (d) Payment amortization and application. (1) A borrower may make 
prepayments on WS loans, WS advances or RCD loans in any amount at any 
time.
    (2) Payments will be applied first to interest accrued to the date 
of the receipt of payment, and second to the principal balance. If the 
regular payments plus any prepayments exceed the cumulative amount due, 
the excess payments will be applied on the next installment first to 
interest, then principal. Loan refunds and proceeds from the sale of 
security property, however, will be applied on the final unpaid 
installment.
    (3) Payments will be scheduled annually beginning one year 
following the date of loan closing or one year following the end of any 
approved deferment period, unless another annual due date is required 
by State statute or upon prior written authorization from the National 
Office. In those cases where loans are being made under statutes 
requiring a repayment date other than this, the Rural Development State 
Director will send a copy of the Regional Attorney's opinion that such 
is required, to the Finance Office.
    (4) When a single obligation instrument is used, amortized 
installments will be required. When this cannot be done because of 
state law, serial bonds or a single bond having installments of 
principal plus interest, stated separately, will be used. In cases 
where the payment of interest has been deferred, all collections will 
be applied to interest until such interest has been paid. Also, when a 
full installment is not paid when due, the payment made will be applied 
first to accrued interest.
    (5) In cases where the indebtedness will be represented by serial 
bonds or a single bond having installments of principal plus interest, 
stated separately, annual payments of principal and interest will be 
scheduled to permit them to be paid in amounts approximately equal to 
the amounts that would be required for annual amortized installments.
    (6) If the borrower will be retiring other debts represented by 
bonds or notes, the payment on such bonds may be considered in 
developing the payment schedule for the RUS loan. In some cases, it may 
be desirable to reduce the amount of payments to RUS in the early years 
of the loan in order to preclude the necessity for refinancing the 
outstanding debt. When such payment schedules are proposed, National 
Office authorization will be obtained prior to loan approval.
    (7) Payment date. Insofar as loan payments are consistent with 
income availability, applicable State statutes, and commercial customs 
in the preparation of bonds or other evidence of indebtedness, they 
should be scheduled on a monthly basis either in the bond or other 
evidence of indebtedness or through the use of a supplemental 
agreement. Such requirements will be accomplished not later than the 
time of loan closing. When monthly payments are required, such payments 
will be scheduled beginning one full month following the date of loan 
closing or the end of any approved deferment period. Subsequent monthly 
payments will be scheduled each full month thereafter. In those cases 
where evidence of indebtedness calls for annual or semiannual payments, 
they will be scheduled beginning six or twelve full months, 
respectively following the date of loan closing or the end of any 
approved deferment period. Subsequent payments will be scheduled each 
sixth or twelfth full month respectively, thereafter. When the evidence 
of indebtedness is dated the 29th, 30th, or 31st day of a month, the 
payment date will be scheduled the 28th day of the month.


Sec. 1781.9  Security, feasibility, evidence of debt, title, insurance 
and other requirements.

    (a) Security. WS loans, WS advances, and RCD loans will be secured 
in accordance with applicable provisions of Sec. 1780.14 of this 
chapter.
    (b) Feasibility. All projects financed under the provisions of this 
part must be based on taxes, assessments, revenues, fees, or other 
satisfactory sources in an amount that will provide for facility 
operation and maintenance, a reasonable reserve, and payment of the 
debt. The Rural Development State Director may obtain needed assistance 
in determining economic feasibility from officials of NRCS and other 
appropriate USDA agencies. See Sec. 1780.7(f) of this chapter for 
applicable economic feasibility requirements and feasibility reports.
    (c) Notes, bonds, and bond transcript documents. See subpart D of 
Part 1780 of this chapter for applicable requirements and provisions.
    (d) Insurance. See Sec. 1780.39(g) of this chapter for 
requirements.
    (e) National flood insurance. The requirements of the National 
Flood Insurance Act of 1968 (42 U.S.C. 4001 et seq.) as amended by the 
Flood Disaster Protection Act of 1973 (42 U.S.C. 4003 et seq.) will be 
complied with in accordance with applicable provisions of RD 
Instruction 1901-L. Also see Sec. 1780.39(g) of this chapter.
    (f) Borrower contracts and bonds. See subpart C of Part 1780 of 
this chapter for applicable provisions.
    (g) Title requirements. (1) Title evidence for land, easements, and 
rights-of-way to be acquired with proceeds of loans or advances will be 
furnished by the sponsoring local organization in accordance with NRCS 
policies and procedures.
    (2) RUS will specify and approve the form and content of 
instruments for conveying title to or interest in real estate on which 
a lien will be taken to

[[Page 33506]]

secure a WS loan, WS advance, or RCD loan. These should be consistent 
with the applicable provisions of Sec. 1780.14 of this chapter. The 
Rural Development State Director will make his decision after 
consultation with the Regional Attorney and the State Conservationist. 
He will notify NRCS in writing of his decision. Thereafter, title 
clearance will be completed under NRCS regulations except that a 
marketable title must be obtained on any tract of land, a part of which 
will be sold as excess land in accordance with Sec. 1781.6(a)(9). In 
addition to the title evidence required by NRCS, applicants will 
furnish an opinion of legal counsel on all land and interest in land 
acquired with loan or advance funds.
    (h) Purchasing lands, rights and facilities. The amounts paid for 
lands, rights, and facilities with loan funds will be not more than 
that determined to be reasonable and fair by the loan approval official 
based upon an appraisal of the current market value made by an Rural 
Development employee or an independent appraiser.
    (i) Water rights. Applicants will be required to comply with 
applicable State and local laws and regulations governing 
appropriating, diverting, storing and using water, changing the place 
and manner of use of water, and in disposing of water. All of the 
rights of any landowner, appropriator, or user of water from any source 
will be fully honored in all respects as they may be affected by 
facilities installed with WS loans and advances and RCD loans. If, 
under the provisions of State law, notice of the proposed diversion or 
storage of water by the applicant may be filed, the applicant will be 
required to file such a notice. An applicant must furnish evidence to 
provide reasonable assurance that its water rights will be or have been 
properly established, will not interfere with prior vested rights, will 
likely not be contested or enjoined by other water users or riparian 
owners, and will be within the provisions of any applicable interstate 
compact.


Sec. 1781.10  [Reserved]


Sec. 1781.11  Other considerations.

    (a) Technical assistance. When pipelines from reservoirs to 
treatment plants are included in watershed work plans, NRCS will not 
furnish engineering services for their design or installation. When 
such pipelines are to be financed by WS or RCD loans, RUS will 
supervise the activities of the private engineers retained for the 
purpose. Such RUS supervision will include, among other things, 
approval of private engineer's contracts, approval of plans and 
specifications, authorization of contract awards, spot checks of 
engineering inspection, and final inspection and acceptance.
    (b) Professional services. Applicants will be responsible for 
providing the services necessary to plan projects including design of 
facilities, preparation of cost and income estimates, development of 
proposals for organization and financing, and overall operation and 
maintenance of the facility. Necessary professional services may 
include such as that of an engineer, architect, attorney, bond counsel, 
accountant, auditor, and financial advisor or fiscal agent. Form RD 
442-19, ``Agreement for Engineering Services,'' may be used when 
appropriate. RUS Bulletin 1780-7, ``Legal Service Agreement'' may be 
used to prepare the agreement for legal services.
    (c) Other services. Contracts for other services such as 
management, operation, and maintenance will be developed by the 
applicant and presented to the RUS official developing the docket for 
review and approval.
    (d) Fees for services. Fees provided for in contracts, agreements 
or services will not be more than those ordinarily charged by the 
profession for similar work when RUS financing is not involved.
    (e) State pollution control or Environmental Protection Agency 
standards. Facilities will be designed, installed and operated to 
prevent pollution of water in excess of established standards. Effluent 
disposal will conform with appropriate State and Federal Water 
Pollution Control Standards.
    (f) Water pollution. When repayment of a WS loan, WS advance, or 
RCD loan will be dependent upon income from the use or sale of water, 
RUS approval will be contingent upon a determination that the proposed 
use of stored water for recreation or municipal supply might not be 
permitted by a State health department because the water is being 
polluted from an upstream or other source.
    (g) Environmental requirements. Actions will be taken to comply 
with the National Environmental Policy Act (42 U.S.C. 4321 et seq.) in 
accordance with subpart G of part 1940 of this title. When 
environmental assessments and environmental impact statements have been 
prepared on WS plans or RCD area plans by NRCS, a separate 
environmental impact statement or assessment on WS works of improvement 
or RCD measures for which a WS loan, WS advance, or RCD loan is 
requested will not be necessary unless the NRCS environmental review 
fails to meet the requirements of subpart G of part 1940 of this title. 
The Rural Development State Director should document the action taken 
by NRCS in compliance with the requirements of the National 
Environmental Policy Act and formally adopt the impact statement or 
assessment if satisfactory. If a determination is made that a further 
analysis of the environmental impact is needed, the Rural Development 
State Director will make necessary arrangements with the State NRCS 
conservationist for such action to be taken before a loan is made.
    (h) National Historic Preservation Act. All projects will comply 
with the provisions of the National Historic Preservation Act of 1966 
(16 U.S.C. 470 et seq.) in accordance with RD Instruction 1901-F.
    (i) Civil Rights Act of 1964. Recipients of WS loans, WS advances, 
or RCD loans are subject to Title VI of the Civil Rights Act of 1964 
(42 U.S.C. 2000d et seq.), which prohibits discrimination because of 
race, color, or national origin. Borrowers must agree not to 
discriminate in their operations by signing Form RD 400-4, 
``Nondiscrimination Agreement,'' before loan closing. This requirement 
should be discussed with the applicant as early in the negotiations as 
possible. Necessary actions will be taken in accordance with RD 
Instruction 1901-E.
    (j) Appraisals. When required by the Rural Development State 
Director, appraisals will be made by an Rural Development official 
designated or an independent appraiser. Form RD 442-10, ``Appraisal 
Report--Water and Waste Disposal Systems,'' with appropriate 
supplements, may be modified as needed for use with the type of 
facilities being appraised.
    (k) Architectural Barriers Act of 1968. All facilities financed 
with RUS loans and grants which are accessible to the public or in 
which physically handicapped persons may be employed or reside must be 
developed in compliance with this act (42 U.S.C. 4151 et seq.).


Sec. 1781.12  Preapplication and application processing.

    (a) WS and RCD Loans.--(1) Preapplications. (i) The processing 
office or other person designated by the Rural Development State 
Director may assist the applicant in completing SF 424.1, ``Application 
for Federal Assistance (For Non-construction),'' and will forward one 
of SF 424.1 to the Rural Development State Director.
    (ii) The Rural Development State Director will review SF 424.1 
along with other necessary information and will

[[Page 33507]]

coordinate selection of preapplications to be processed with NRCS. He 
will consult with NRCS State Conservationist concerning the status of 
the WS plan or RCD measure plan, the estimated time schedule for 
construction and cost of the proposed works to be installed with the 
loan, cost sharing funds to be made available to the applicant, and 
other pertinent information.
    (iii) Form AD-622, ``Notice of Preapplication Review Action,'' will 
be prepared and signed by the Rural Development State Director within 
forty-five (45) days from receipt of the preapplication in the 
processing office stating the results of the review action. An original 
and one copy of Form AD-622 will be sent to the processing office who 
will deliver the original to the applicant.
    (2) Applications. (i) The application includes applicable forms and 
information indicated in RUS Instruction 1780. When the Rural 
Development State Director determines that an application will be 
further processed and Form AD-622 is delivered, he will designate a 
community program specialist (field), or a member of the community 
program staff to assist the processing office and the applicant with 
assembling and processing the application.
    (ii) The processing office should arrange needed conferences with 
the applicant and its legal and engineering consultants, and when 
necessary, arrange for review of other Rural Development officials, and 
provide bulletins, forms, instructions and other assistance with 
assembling and processing the application. A processing checklist and 
time schedule will be established by using Form RD 1942-40, 
``Processing Check List (Public Bodies),'' or Form RD 1942-39, 
``Processing Check List (Other than Public Bodies).'' The processing 
office will send a letter and a copy of the processing checklist to the 
applicant to confirm decisions reached at the conference. The original 
and a copy of the processing checklist will be kept in the processing 
office and will be posted current as application processing actions are 
taken. The copy will be circulated from the processing office to the 
State Office for use in updating copies of the forms retained, after 
which it will be returned from the State Office to the processing 
office.
    (3) Dockets. WS loan, WS advance, and RCD loan dockets will be 
developed and assembled in accordance with applicable RUS Instruction 
1780.
    (b) Watershed advances. Applications for WS advances will be 
developed and processed with NRCS assistance as necessary.
    (1) The Rural Development State Director will arrange with the NRCS 
State Conservationist to be advised when a local sponsoring 
organization applies to NRCS for a WS advance.
    (2) The Rural Development State Director will request the NRCS 
State Conservationist to provide information justifying the WS advance 
along with a written recommendation that it be made. This will include:
    (i) Economic feasibility of the proposed WS advance.
    (ii) Evidence of the legal authority of the sponsoring local 
organization to incur the obligation and make required payments.
    (iii) Any limitations on the issuance of additional bonds or notes 
which may be imposed by the provisions of bond ordinances or on 
resolutions which authorize the issuance of any outstanding obligation 
of the sponsoring local organization.
    (iv) The amount of WS advance funds to be provided, purpose for 
which funds will be used, and date funds will be needed.
    (3) When the above information has been made available to the Rural 
Development State Director, he will send written recommendations 
concerning further action on the WS advance request to the NRCS State 
Conservationist including actions to be taken in the preparation of the 
WS advance docket.
    (c) Combination WS loans and WS advances. If an applicant requests 
both a WS loan and WS advance, the application for the WS loan should 
indicate the amount of the WS advance needed and whether a request for 
it has been made to NRCS. The Rural Development State Director and the 
NRCS State Conservationist will coordinate applicable processing 
actions of such applications. When the Rural Development State Director 
determines that favorable consideration will be given to an application 
for a loan or advance, he will provide instructions to the processing 
office for completing and processing the appropriate docket. Any 
questions concerning eligibility or other legal matters should be 
cleared with the Regional Attorney.
    (d) Review of Decision. When it is determined that the 
preapplication or application cannot be given favorable consideration, 
the Rural Development State Director will return it to the processing 
office along with written reasons. When the processing office receives 
this information, it will notify the applicant in writing of the 
reasons why the request was not favorably considered. The notification 
to the applicant will state that the RUS Administrator may be requested 
to review the decision. This action will be taken in accordance with 
Sec. 1780.37 of this chapter.
    (1) Upon receipt of the State Office copy of a review request from 
the applicant, the Rural Development State Director will furnish a 
report on the matter to the Administrator.
    (2) The Administrator will notify the applicant and the Rural 
Development State Director in writing of his decision and the reasons 
therefore.


Sec. 1781.13  [Reserved]


Sec. 1781.14  Planning, options, and appraisals.

    (a) WS and RCD area plans are developed by sponsoring local 
agencies and organizations with technical assistance from NRCS and 
other Federal and State agencies. These plans include WS works of 
improvement and RCD measures to be developed or constructed for which 
NRCS construction funds may be made available on a cost share basis 
along with funds provided by the sponsoring local organization, a 
portion or all of which may be obtained by a WS loan and/or WS advance 
or a RCD loan.
    (b) Current information on the availability of cost share funds and 
purposes for which they may be used is provided by NRCS. The amount of 
NRCS cost share funds and the amount of funds to be provided by the 
sponsoring local organizations will be indicated in each plan. The 
estimated amount of WS loan, WS advance or RCD loan anticipated by the 
sponsoring local organization should also be included.
    (c) Plans for the development or construction of individual WS 
works of improvement and RCD measures will normally be developed with 
NRCS technical assistance. In every case they will be approved by both 
the NRCS State conservationist and the Rural Development State Director 
or their designated agent when a WS loan, WS advance or RCD loan is 
made.
    (d) Options and appraisals related to the purchase of real estate 
for which a WS loan, WS advance, or RCD loan is made must be developed 
in accordance with NRCS and RUS requirements and approved by RUS. The 
determination of present market value will be made in accordance with 
Sec. 1780.44(g) of this chapter.


Sec. 1781.15  Planning and performing development.

    Planning and performing development will be handled in accordance 
with subpart C of part 1780

[[Page 33508]]

of this chapter and guidance from NRCS.


Sec. 1781.16  [Reserved]


Sec. 1781.17  Docket preparation and processing.

    (a) Loan dockets. Dockets for WS loans, WS advances and RCD loans 
will be prepared in accordance with the applicable provisions of part 
1780 of this chapter.
    (1) Time for preparation of docket. Docket preparation may begin as 
soon as a preliminary draft of the watershed plan or RCD area plan, 
together with an estimate of costs and benefits, have been prepared 
with the assistance of NRCS and approved by the sponsoring local 
organization applicant. However, the applicant must understand that 
approval of the WS loan, WS advance, or RCD loan will not be determined 
until the work plan has been authorized for assistance by NRCS. To the 
extent practicable, docket preparation may be completed by that time to 
facilitate the availability of funds when needed.
    (2) Instructions for preparation of docket. When the Rural 
Development State Director has determined that plans and other 
requirements are completed to the extent that preparation of the loan 
docket may begin, he will send the processing office a memorandum 
giving complete instructions for docket preparation, with a list of 
documents to be included in the docket.
    (3) Objectives of the docket. The docket should include information 
for use in determining that:
    (i) The sponsoring local organization:
    (A) Has legal authority to construct and operate the proposed 
facility, borrow money, give security, incur debt, and generate revenue 
needed for operation, maintenance, reserves, debt payment, and other 
cash requirements.
    (B) Is a sponsor or cosponsor of the WS plan or RCD work plan and 
is otherwise eligible for assistance.
    (ii) Funds will be used for authorized purposes.
    (iii) The source of income to be pledged for debt payment and the 
security proposed is adequate.
    (iv) Actions required for loan closing are administratively 
satisfactory, legally sufficient and properly documented in accordance 
with Agency regulations.
    (4) Assembly of the docket. The docket will be assembled in 
accordance with paragraph (a)(2) of this section and will include the 
following:
    (i) A copy of the WS works of improvement agreement or RCD measure 
agreement.
    (ii) A copy of the Operation and Maintenance Agreement between NRCS 
and the WS or RCD sponsoring local organization for the WS works of 
improvement or the RCD measure.
    (iii) A statement from the NRCS State Conservationist concurring in 
the feasibility of the WS work of improvement or RCD measure and that 
NRCS is providing financial and/or technical assistance in accordance 
with applicable WS or RCD authorities.
    (5) Narrative by processing office. This should be included in or 
attached to the Project Summary. It should relate project costs to 
benefits of the WS or RCD loan or WS advance. Minimum and average 
individual charges, tax levies or assessments should be given where 
applicable. Where taxes or assessments on land will be levied, acres 
should be indicated and average cost per acre should be given. Analyses 
of income from recreational facilities should be based on the best 
information available from local, State, and Federal agencies concerned 
with such recreation facilities. Determination of water rates, 
schedules, and estimated consumption of water should be made by the 
same methods as for loans for domestic water and irrigation.
    (6) Estimates of right-of-way Costs. The docket should include, as 
part of the Project Summary, current estimated costs of easements, 
rights-of-way, and other land rights which must be acquired. The amount 
estimated for such purposes in the WS or RCD plan should reflect 
current conditions.
    (b) Loan processing by State Office.--(1) Review of the docket. The 
processing office will check the docket for accuracy and completeness 
and forward it to the State Office with their recommendations. The 
Rural Development State Director will review the docket to determine 
that:
    (i) All documents are accurate and complete.
    (ii) The proposed loan complies with WS and RCD program policies 
and procedures of both RUS and NRCS.
    (iii) Security is adequate and the repayment plan is sound.
    (iv) Funds requested are for authorized purposes.
    (v) Actions are in compliance with requirements of applicable 
Federal and State laws.
    (2) Letter of conditions. When the Rural Development State Director 
determines that the docket is complete and the proposed activity is 
feasible, he will prepare a proposed letter of conditions under which 
the application may be further processed. The letter will be delivered 
to and discussed with the applicant. Upon acceptance of the conditions 
the applicant will indicate intentions to meet the conditions by a 
letter of interest and the application will be further processed.
    (3) Legal review. The complete docket and proposed letter of 
conditions will be forwarded to the Regional Attorney, OGC for review 
and preparation of closing instructions. If it is not possible to issue 
closing instructions at that time, the Regional Attorney, will issue a 
preliminary legal opinion commenting upon the applicants legal 
existence, authority to incur debt and give security for the WS loan, 
WS advance, or RCD loan requested and actions to be taken before 
closing instructions may be issued.
    (4) Authorization for approval. When the Rural Development State 
Director receives closing instructions or a preliminary legal opinion 
for a WS loan, WS advance, or RCD loan that is not within his approval 
authority he will send this information along with the docket, the 
proposed letter of conditions, and a memorandum recommending approval 
to the National Office. A copy of his memorandum will be sent to the 
processing office. If the proposed action is within the Rural 
Development State Director's approval authority he need not submit the 
material listed in this paragraph (b)(4) to the National Office unless 
he wants review and comments before approval.
    (c) WS advance processing. (1) When the Rural Development State 
Director has concurred with the NRCS State Conservationist in the 
inclusion of a WS advance in a watershed plan, preparation of the 
advance docket can be initiated and will be processed in the same 
manner as for a WS loan. Where both a WS loan and WS advance are 
planned only one docket will be prepared to include both the WS loan 
and WS advance.
    (2) If the advance appears to be sound and proper, the Rural 
Development State Director will send a proposed memorandum of 
concurrence to the NRCS State Conservationist. The memorandum will 
state that RUS concurs in the execution of a work of improvement 
agreement for which NRCS will obligate advance funds and that RUS will 
accept the proposed obligations of the applicant to repay the advance 
subject to conditions specified in or attached to the memorandum. These 
conditions will include all appropriate requirements in accordance with 
paragraph (b)(2) of this section and will specify compliance with 
closing instructions issued by the Regional Attorney. It will also 
indicate that preparation of the WS advance docket will be in 
accordance with paragraph (a) of this section.

[[Page 33509]]

    (3) The Rural Development State Director and the NRCS State 
Conservationist will sign the memorandum of concurrence to NRCS when:
    (i) It has been determined that funds for the advance will be 
obligated by NRCS; and
    (ii) The WS advance docket, has been approved; and
    (iii) Closing instructions have been issued by the Regional 
Attorney; and
    (iv) The Rural Development State Director and NRCS State 
Conservationist have determined that the applicant can comply with all 
requirements of the letter of conditions and closing instructions.


Sec. 1781.18  Feasibility.

    (a) Before WS loan, WS advance, or RCD loan is approved, a 
determination of feasibility will be made by the Rural Development 
State Director based upon a review of plans developed in cooperation 
with NRCS personnel. The feasibility determination must have the 
concurrence of the NRCS State Conservationist before a WS loan, WS 
advance, or RCD loan is approved.
    (b) A written assessment of the project's feasibility will be made 
by the processing office, Architect/Engineer, and Program Chief in 
their recommendations or comments on the Project Summary. These should 
reflect concurrence of the respective NRCS personnel in counterpart 
positions with whom they cooperate in administering these programs.


Sec. 1781.19  Approval, closing, and cancellation.

    (a) Approval and closing actions will be taken in accordance with 
the applicable provisions of part 1780 of this chapter and the 
following requirements have been met:
    (1) The WS or RCD plan has been approved for operations by NRCS and 
the applicant is an official sponsoring or cosponsoring local 
organization for the plan as evidenced by being included in the list of 
sponsoring or co-sponsoring local organizations in the plan.
    (2) Closing instructions or a preliminary legal opinion has been 
prepared by the Regional Attorney.
    (3) The governing body of the applicant's sponsoring local 
organization has formally passed and approved the loan resolution.
    (4) The Rural Development State Director and NRCS State 
Conservationist have determined that all planned actions can be carried 
out as proposed in the project plan and the docket.
    (5) The NRCS State Conservationist and Rural Development State 
Director have mutually agreed on the priority to be given the WS loan 
or WS advance, or RCD loan. In making this determination, consideration 
will be given to the relative priority of the WS works of improvement 
or RCD measures to all other such work in the State and the anticipated 
availability of Federal and local funds to assure continuity of action 
and work until the project is completed. When funds are to be provided 
by NRCS for a WS or RCD loan or a WS advance such funds must be 
obligated by NRCS before closing.
    (6) Public bodies will be required to use bond counsel in 
accordance with subpart D of part 1780 of this chapter.
    (b) When favorable action is not taken on a WS loan, WS advance, or 
RCD loan, the Rural Development State Director will notify the NRCS 
State Conservationist and the applicant in writing and, if possible, 
arrange for a meeting of RUS and NRCS representatives with the 
applicant to explain the action. WS loans, WS advances, or RCD loans 
may be canceled before closing.


Sec. 1781.20  Disbursement of WS and RCD loan funds and WS advance 
funds.

    (a) WS and RCD loan funds will be disbursed by the processing 
office in accordance with the applicable provisions of Sec. 1780.45 of 
this chapter and RUS Bulletin 1781-1, paragraph (5). Funds will be made 
available to the borrower as needed for payment of development or other 
costs for which the loan is made. The processing office must determine 
that the payment is for an authorized purpose and is for benefits 
accrued to the borrower. This will require evidence from NRCS in 
accordance with the applicable provisions of RUS Bulletin 1781-1, 
``Memorandum of Understanding Between RUS and NRCS.''
    (b) WS advance funds may be disbursed in the same manner as WS loan 
funds if such funds are transferred to RUS by NRCS for disbursement or 
they may be disbursed by NRCS. When WS advance funds are disbursed by 
NRCS, payments from advance of funds will be reported to the Rural 
Development State Director each month to be reported to the Finance 
Office and charged to the borrower's account. This action will be taken 
in accordance with the applicable provisions of RUS Bulletin 1781-1 or 
RUS Bulletin 1781-2 and agreement between the NRCS State 
Conservationist and Rural Development State Director as follows:
    (1) When a future water supply is being developed with NRCS, WS 
advance funds, the NRCS State Conservationist will send the Rural 
Development State Director a monthly report of funds disbursed. This 
will include three (3) copies of Form NRCS-AS-49a and 49b, ``Contract 
Payment Estimate and Construction Progress Report,'' along with a 
transmittal Memorandum showing the sequential number (first, second, 
third, etc.) of the payment, the amount and date of payment, the check 
number by which the payment was made and the cumulative amount of 
advance funds disbursed to date. When the works of improvement, for 
which WS advance funds are used is completed the final report will, in 
addition to the above, show the date that construction was completed 
and the total amount of WS advance funds used.
    (2) WS advances for construction costs will be set out each month 
on Form NRCS-49a. The Rural Development State Director should make 
arrangements with the NRCS State Conservationist to be supplied each 
month with a copy of Form NRCS 49a when advance funds are included 
together with an official statement from the NRCS State Administrative 
Officer giving the date of the check and the exact amount of each 
advance of funds made under the advance provisions of the project 
agreement or of any engineering services agreement or other 
supplementary agreement which further implements the proposal for the 
advance in the project agreement. The original will be sent immediately 
to the Finance Office and a copy provided for the processing office 
file.
    (3) When WS advance funds are used to acquire property for site 
preservation the same reporting procedure as for a future water supply 
will be used except that Form NRCS-AS-49a and 49b if used, should be 
adopted to indicate fund use. As payments are made on land on which a 
mortgage or other security instrument is required, such instruments 
will be executed in accordance with instructions from the Regional 
Attorney, OGC.
    (4) The Rural Development State Director must send the bond or note 
evidencing WS advance indebtedness of the borrower to the Finance 
Office along with reports of payments from advance funds disbursed by 
NRCS. A copy of the bond or note and copy of each report of payment 
will be sent to the processing office.
    (c) Actions subsequent to closing of loans or advances. Actions 
will be taken in accordance with Sec. 1780.44 of this chapter.

[[Page 33510]]

Sec. 1781.21  Borrower accounting methods, management, reporting, and 
audits.

    These activities will be handled in accordance with the provisions 
of Sec. 1780.47 of this chapter.


Sec. 1781.22  Subsequent loans.

    Subsequent loans will be processed in accordance with this part.


Sec. 1781.23  Servicing.

    Servicing will be handled in accordance with the provisions of 
subpart E of part 1951 of this title.


Sec. 1781.24  State supplements and availability of bulletins, 
instructions, forms, and memorandums.

    (a) State supplements will be issued as needed in accordance with 
applicable provisions of part 1780 of this chapter.
    (b) Bulletins, instructions, forms and memorandums are available 
from any USDA/Rural Development office or the Rural Utilities Service, 
United States Department of Agriculture, Washington, DC. 20250-1500.


Secs. 1781.25--1781.100  [Reserved]

PART 1901--PROGRAM-RELATED INSTRUCTIONS

Subpart E--Civil Rights Compliance Requirements*C*

    6. The authority citation for subpart E of part 1901 continues to 
read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 40 U.S.C. 442; 42 U.S.C. 
1480, 2942.

    7. Section 1901.204 is amended by revising paragraph (a)(25) to 
read as follows:


Sec. 1901.204  Compliance reviews.

    (a) * * *
    (25) Section 306C WWD loans and grants.
* * * * *

PART 1940--GENERAL

    8. The authority citation for part 1940 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart L--Methodology and Formulas for Allocation of Loan and 
Grant Program Funds


Secs. 1940.586 and 1940.587  [Removed and Reserved]

    9. Sections 1940.586 and 1940.587 are removed and reserved.

PART 1942--ASSOCIATIONS

    10. The authority citation for part 1942 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

Subpart A--Community Facility Loans

    11. Section 1942.1 is amended by revising paragraph (a) to read as 
follows:


Sec. 1942.1  General.

    (a) This subpart outlines the policies and procedures for making 
and processing insured loans for community facilities except for fire 
and rescue and water and waste disposal facilities. This subpart 
applies to community facility loans for fire and rescue facilities only 
as specifically provided for in subpart C of this part. Water and waste 
loans are provided for in part 1780 of this title. The Agency shall 
cooperate fully with State and local agencies in making loans to assure 
maximum support to the State strategy for rural development. State 
Directors and their staffs shall maintain coordination and liaison with 
State agency and substate planning districts. Funds allocated for use 
under this subpart are also for the use of Indian tribes within the 
State, regardless of whether State development strategies include 
Indian reservations within the State's boundaries. Indians residing on 
such reservations must have equal opportunity to participate in the 
benefits of these programs as compared with other residents of the 
State. Federal statues provide for extending Agency financial programs 
without regard to race, color, religion, sex, national origin, marital 
status, age, or physical/mental handicap. The participants must possess 
the capacity to enter into legal contracts under State and local 
statutes. Any processing or servicing activity conducted pursuant to 
this subpart involving authorized assistance to Agency employees, 
members of their families, known close relatives, or business or close 
personal associates, is subject to the provisions of subpart D of part 
1900 of this chapter. Applicants for this assistance are required to 
identify any known relationship or association with an Agency employee.
* * * * *
    12. Section 1942.17 is amended by revising the heading and 
introductory text of paragraph (p)(6)(i) to read as follows:


Sec. 1942.17  Community facilities.

* * * * *
    (p) * * *
    (6) * * *
    (i) Agency loan and/or grant funds. Remaining funds may be used for 
purposes authorized by paragraph (d) of this section, provided the use 
will not result in major changes to the facility design or project and 
that the purposes of the loan and/or grant remains the same.
* * * * *

Subpart G--Rural Business Enterprise Grants and Television 
Demonstration Grants

    13. Section 1942.308 is amended by revising paragraph (c) to read 
as follows:


Sec. 1942.308  Regional Commission grants.

* * * * *
    (c) ARC is authorized under the Appalachian Regional Development 
Act of 1965 (40 U.S.C. 1-405), as amended, to serve the Appalachian 
region. ARC grants are handled in accordance with the ARC Agreement 
which applies to all ARC grants administered by the Agency. Therefore, 
a separate Project Management Agreement between the Agency and ARC is 
not needed for each ARC grant.
* * * * *
    14. Section 1942.349 is revised to read as follows:


Sec. 1942.349  Forms, guides, and attachments.

    Guides 1 and 2 of this subpart, Attachment 1 and Forms referenced 
(all available in any Rural Development office) are for use in 
administering RBE/television demonstration grants.

Subpart H--[Removed and Reserved]

    15. Subpart H of part 1942 is removed and reserved.

PART 1951--SERVICING AND COLLECTIONS

    16. The authority citation for part 1951 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart E--Servicing of Community and Insured Business Programs 
Loans and Grants

    17. Section 1951.201 is revised to read as follows:


Sec. 1951.201  Purposes.

    This subpart prescribes the Rural Development mission area 
policies, authorizations, and procedures for servicing Water and Waste 
Disposal System loans and grants; Community Facility loans and grants; 
Rural Business Enterprise/Television Demonstration grants; loans for 
Grazing and other shift-in-land-use projects; Association Recreation 
loans; Association Irrigation and Drainage loans; Watershed loans and 
advances; Resource Conservation and Development loans; Insured Business 
loans; Economic Opportunity

[[Page 33511]]

Cooperative loans; loans to Indian Tribes and Tribal Corporations; 
Rural Renewal loans; Energy Impacted Area Development Assistance 
Program grants; National Nonprofit Corporation grants; Water and Waste 
Disposal Technical Assistance and Training grants; Emergency Community 
Water Assistance grants; System for Delivery of Certain Rural 
Development Programs panel grants; section 306C WWD loans and grants; 
and Rural Technology and Cooperative Development Grants in subpart F of 
part 4284 of this title. Rural Development State Offices act on behalf 
of the Rural Utilities Service, the Rural Business-Cooperative Service, 
and the Farm Service Agency as to loan and grant programs formerly 
administered by the Farmers Home Administration and the Rural 
Development Administration. Loans sold without insurance to the private 
sector will be serviced in the private sector and will not be serviced 
under this subpart. The provisions of this subpart are not applicable 
to such loans. Future changes to this subpart will not be made 
applicable to such loans.

PART 1956--DEBT SETTLEMENT

    18. The authority citation for part 1951 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 U.S.C. 3711; 42 
U.S.C. 1480.

Subpart C--Debt Settlement-Community and Business Programs

    19. Section 1956.101 is revised to read as follows:


Sec. 1956.101  Purposes.

    This subpart delegates authority and prescribes policies and 
procedures for debt settlement of Water and Waste Disposal System 
loans; Community Facility loans; Association Recreation loans; 
Watershed loans and advances; Resource, Conservation and Development 
loans; Rural Renewal loans; direct Business and Industry loans; 
Irrigation and Drainage loans; Shift-in-land-use loans; and Indian 
Tribal Land Acquisition loans; and Section 306C WWD loans. Settlement 
of Economic Opportunity Cooperative loans, Claims Against Third Party 
Converters, Nonprogram loans, Rural Business Enterprise/Television 
Demonstration Grants, Rural Development Loan Fund loans, Intermediary 
Relending Program loans, Nonprofit National Corporations Loans and 
Grants, and 601 Energy Impact Assistance Grants, is not authorized 
under independent statutory authority and settlement under these 
programs is handled pursuant to the Federal Claims Collection Joint 
Standards, 4 CFR parts 101-105 as described in Sec. 1956.147 of this 
subpart.

    Dated: May 15, 1997.
Jill Long Thompson,
Under Secretary for Rural Development.
[FR Doc. 97-13445 Filed 6-18-97; 8:45 am]
BILLING CODE 3410-15-P