[Federal Register Volume 68, Number 249 (Tuesday, December 30, 2003)]
[Proposed Rules]
[Pages 75153-75160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31928]


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DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1720

RIN 0572-AB83


Guarantees for Bonds and Notes Issued for Electrification or 
Telephone Purposes

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to establish procedures for a guarantee 
program for cooperatives and other not-for-profit lenders that make 
loans eligible for assistance under the Rural Electrification Act of 
1936 (the RE Act). Criteria for eligibility of lenders and transactions 
are set forth in the rule together with application procedures. Program 
participants are required to pay an annual fee for the guarantee. The 
fee will be credited to the Rural Development Subaccount to provide 
funds for zero-interest loans and grants pursuant to section 313 of the 
RE Act. The Farm Security and Rural Investment Act of 2002 (Pub. L. 
107-171), amended the RE Act, by adding section 313A which establishes 
this program.

DATES: Written comments must be received by RUS or carry a postmark or 
equivalent no later than March 1, 2004.

ADDRESSES: Written comments should be addressed to Blaine D. Stockton, 
Assistant Administrator, Electric Program, U.S. Department of 
Agriculture, Rural Utilities Service, Room 5156 South Building, Stop 
1560, 1400 Independence Avenue, SW., Washington, DC 20250-1560. 
Telephone (202) 720-9545. RUS requires a signed original and three 
copies of all comments (7 CFR Part 1700). All comments received will be 
made available for inspection in room 4037 South Building during 
regular business hours.

FOR FURTHER INFORMATION CONTACT: Patrick R. Sarver, Management Analyst, 
Electric Program, Rural Utilities Service, U.S. Department of 
Agriculture, 1400 Independence Avenue, SW., STOP 1560, Room 5158, 
Washington, DC 20250-1560. Telephone number (202) 690-2992, Facsimile 
(202) 690-0717.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This proposed rule has been determined to be significant for 
purposes of Executive Order 12866 and, therefore, has been reviewed by 
the

[[Page 75154]]

Office of Management and Budget (OMB).

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. RUS has determined that this proposed rule meets 
the applicable standards provided in section 3 of that Executive Order. 
In addition, all State and local laws and regulations that are in 
conflict with this proposed rule will be preempted. No retroactive 
effect will be given to the rule and, in accordance with section 212(e) 
of the Department of Agriculture Reorganization Act of 1994 (7 U.S.C. 
6912(e)), administrative appeal procedures must be exhausted before an 
action against the Department or its agencies may be initiated.

Regulatory Flexibility Act Certification

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et. 
seq.), the Administrator of RUS has determined that this proposed rule 
will not have significant impact on a substantial number of small 
entities. No small entities meet the statutory criteria for 
participation in the program that is the subject of this rulemaking.

Information Collection and Recordkeeping Requirements

    Under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.) (the 
``Act''), OMB must approve all ``collection of information'' by RUS. 
The Act defines ``collection of information'' as a requirement for 
``answers to * * * identical reporting or recordkeeping requirements 
imposed on ten or more persons * * *.'' (44 U.S.C. 3502(3)(A).) RUS has 
concluded that the reporting requirements contained in this proposed 
rule will involve less than 10 persons and do not require approval 
under the provisions of the Act.

Catalog of Federal Domestic Assistance

    The program described by this proposed rule is listed in the 
Catalog of Federal Domestic Assistance Programs under No. 10.850, Rural 
Electrification Loans and Loan Guarantees. This catalog is available on 
a subscription basis from the Superintendent of Documents, the United 
States Government Printing Office, Washington, DC 20402. Telephone: 
(202) 512-1800.

Executive Order 12372

    This proposed rule is excluded from the scope of Executive Order 
12372, Intergovernmental Consultation, which may require consultation 
with State and local officials. See the final rule related notice 
entitled ``Department Programs and Activities Excluded from Executive 
Order 12372,'' (50 FR 47034).

Unfunded Mandates

    This proposed rule contains no Federal mandates (under the 
regulatory provision of Title II of the Unfunded Mandates Reform Act of 
1995 (Pub. L. 104-4, 109-Stat. 48)) for State, local, and tribal 
governments or the private sector. Thus, this proposed rule is not 
subject to the requirements of sections 202 and 205 of the Unfunded 
Mandates Reform Act of 1995.

National Environmental Policy Act Certification

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

Background

    The Rural Electrification Act of 1936 (the ``RE Act'') (7 U.S.C. 
901 et. seq.) authorizes the Secretary of Agriculture (the 
``Secretary'') to guarantee and make loans to persons, corporations, 
states, territories, municipalities, and cooperative, non-profit, or 
limited-dividend associations for the purpose of furnishing or 
improving electric and telephone service in rural areas. Responsibility 
for administering electrification and telecommunications loan and 
guarantee programs along with other functions the Secretary deemed 
appropriate have been assigned to the Rural Utilities Service (RUS) 
under the Department of Agriculture Reorganization Act of 1994 (7 
U.S.C. 6941 et seq.). The Administrator of RUS has been delegated 
responsibility for administrating the programs and activities of RUS, 
see 7 CFR 1700.25.
    Section 6101 of the Farm Security and Rural Investment Act of 2002 
(Pub. L. 107-171, 116 Stat. 413) (``FSRIA'') amends the RE Act by 
adding a new section 313A: Guarantees for Bonds and Notes Issued for 
Electrification or Telephone Purposes (7 U.S.C. 940c-1). FSRIA became 
law on May 13, 2001, and requires the Secretary of Agriculture to 
promulgate regulations for issuing guarantees under section 313A.
    Section 313A of the RE Act provides that under certain specified 
circumstances, the Secretary shall guarantee payments on bonds or notes 
issued by cooperative or other lenders organized on a not-for-profit 
basis. Section 313A provides limits to the amount of a guarantee, the 
purposes for the guarantee, and the qualifications of eligible lenders 
seeking a guarantee of a bonds or notes. Section 313A requires that a 
guarantee be no greater than the principal amount of outstanding loans 
of the lender for electrification or telephone purposes that have been 
made concurrently with loans approved for such purposes under the RE 
Act. The section also provides for charging an annual fee of 30 basis 
points on the outstanding balance of the guaranteed bonds or notes to 
lenders that receive a guarantee under section 313A. Proceeds of the 
fee are required, except in limited circumstances specified in section 
313A, to be deposited into the Rural Economic Development Subaccount. 
From this subaccount, zero interest loans and grants are made to 
promote rural development programs as described in section 313(b)(2)(B) 
of the RE Act (7 U.S.C 940c-1(b)(2)(B)).
    The FSRIA limits eligibility under this program to not-for-profit 
third party lenders that make loans for any electrification or 
telephone purpose eligible for assistance under the Rural 
Electrification Act of 1936. Currently there are two lenders that meet 
this eligibility criterion; the National Rural Utilities Cooperative 
Finance Corporation (CFC) and CoBank.
    RUS is proposing new procedures for the guarantee program 
established by section 313A. In order to produce a comprehensive 
regulation that will carry out the objectives set forth in the FSRIA, 
and provide for a program consistent with established RUS guiding 
principles, RUS discussed program options with other federal agencies, 
and examined recently established federal guarantee programs. 
Furthermore, RUS retained the services of an outside consultant with 
experience in capital markets and establishing federal guarantee 
programs to assist it in the development of this program.
    Requests for section 313A guarantees will be considered according 
to eligibility requirements and the strength of the lender seeking such 
a guarantee. A guaranteed lender must demonstrate by sufficient 
evidence in its application and periodically while any guarantee is in 
effect, that the guaranteed lender will at all times be able to make 
timely payments on the bonds or notes being guaranteed.

Program Summary

    The rule establishes general standards for issuing a guarantee 
consistent with statutory requirements. The general standards provide 
limitations on the bonds and the use of the proceeds.

[[Page 75155]]

Eligibility criteria are established according to statute and RUS 
program requirements. To be eligible to participate in the program, a 
guaranteed lender must be a bank or other lending institution organized 
as a private, not-for-profit cooperative association or otherwise on a 
non-profit basis and be able to demonstrate to the Secretary that it 
possesses the appropriate expertise, experience and qualifications to 
make loans for electrification or telephone purposes. To be eligible to 
receive a guarantee, a guaranteed lender must furnish the Secretary 
with a certified list of the principal balances of concurrent loans 
then outstanding evidencing that such aggregate balance is at least 
equal to the sum of the proposed principal amount of guaranteed bonds 
to be issued, and any previously issued guaranteed bonds outstanding. 
Also, the guaranteed bonds to be issued by the guaranteed lender must 
receive an underlying investment grade rating from a Rating Agency, 
without regard to the guarantee and the final maturity of the 
guaranteed bonds may not exceed 15 years.
    The rules establish an application process where the applicant is 
required to submit eligibility data and certifications for on-going 
review. The application information includes background information, a 
term sheet summarizing the proposed terms and conditions of the 
guarantee agreement, a statement as to how the proceeds are to be used 
and the financial benefit it anticipates deriving from participating in 
the program, a pro-forma cash flow projection or business plan for the 
next five years, consolidated financial statements of the guaranteed 
lender for the previous three years, evidence of having been assigned 
an investment grade rating on the debt obligations for which it is 
seeking the guarantee, without regard to the guarantee; and other 
application documents deemed necessary by the Secretary for the 
evaluation of applicants.
    Each application will be reviewed by the Secretary to determine 
whether it meets the eligibility requirements. The application is then 
evaluated based upon the extent to which the proposed provisions 
indicate the applicant will be able to repay the guaranteed bonds, the 
adequacy of the proposed provisions to protect the Federal government, 
the applicant's demonstrated performance of financially sound business 
practices; the extent to which providing the guarantee to the applicant 
will help reduce the cost and/or increase the supply of credit to rural 
America, and the amount of fee income available to be deposited into 
the Rural Economic Development Subaccount.
    After the guarantee is approved, other conditions must be met prior 
to receiving final endorsement by the Secretary. Bond documents must be 
executed by the applicant and the applicant must certify to the 
Secretary that the guaranteed bonds proceeds will be applied to fund 
eligible new loans under the RE Act, to refinance concurrent loans, or 
to refinance existing debt instruments of the guaranteed lender used to 
fund eligible loans. The applicant must also provide a final certified 
list of concurrent loans and their outstanding balances as of the date 
the guarantee is issued. Counsel to the applicant must furnish an 
opinion as to the applicant being legally authorized to issue the 
guaranteed bonds and enter into the bond documents. No material adverse 
change can occur between the date of the application and date of 
execution of the guarantee. The Chairman of the Board and the Chief 
Executive Officer of the applicant (or other senior management 
acceptable to the Secretary) must certify acknowledging the applicant's 
commitment to submit to the Secretary an annual credit assessment of 
the applicant by a Rating Agency and acknowledging the guaranteed 
lender's commitment to deliver annual consolidated financial statements 
audited by an independent certified public accountant for each year 
during which the guaranteed bonds are outstanding. It should be 
emphasized that the Secretary will not issue the guarantee if, in the 
sole judgment of the Secretary, there has occurred a material adverse 
change in the condition (financial or otherwise) or prospects of the 
guaranteed lender or its subsidiaries.
    The rule establishes an annual fee for the guarantee equal to 30 
basis points (0.3 percent) of the amount of the unpaid principal of the 
guaranteed bond. The fee is deposited into the Rural Economic 
Development Subaccount maintained under section 313(b)(2)(A) of the RE 
Act. The Secretary also has the authority to structure the schedule for 
payment of the annual fee, with the consent of the lender, so that 
sufficient funds are available to pay the subsidy costs for the 
guarantee.
    As long as any guaranteed bonds remain outstanding, the guaranteed 
lender agrees to provide the Secretary on an annual basis consolidated 
financial statements and accompanying footnotes, audited by independent 
certified public accountants, pro forma projections of the guaranteed 
lender's balance sheet, income statement, and statement of cash flows 
over the ensuing five years, a credit assessment issued by a Rating 
Agency, a review and certification of the security of the government 
guarantee that is audited by an independent certified public accounting 
firm or federal banking regulator, a review and certification of the 
lender's capital adequacy utilizing the capital adequacy standards of 
FIRREA by a reputable, independent certified public accounting firm or 
federal banking regulator, and other such information requested by the 
Secretary. Additionally the bond documents will specify such bond 
monitoring and financial reporting requirements as deemed appropriate 
by the Secretary.

Economic Impact

    The Guarantees for Bonds and Notes Issued for Electrification and 
Telephone Purposes Program (the ``Program'') facilitates the continued 
improvement of electric and telephone service in rural America, by 
providing Federal loan guarantees on debt issued by non-profit, 
cooperative and other rural lending institutions (the ``Lenders''). 
However, by providing bond guarantees under the Program, financial 
default risk is transferred to the Federal government. Under the most 
likely scenario, the fees collected from the Lenders would offset all 
of the expected credit subsidy costs of the Program. As a result, the 
expected cost to taxpayers would be zero. However, there is a 
possibility that the Lender could default, which, depending on the 
timing of the default, could expose the government to a maximum 
liability of approximately $3 billion. Based on historical experience 
for unsecured corporate bonds of this quality, the government could be 
expected to recover at least one-half of the defaulted amounts, making 
it more likely that the government's maximum exposure is approximately 
$1.5 billion. The exposure may be even less depending upon the annual 
appropriation by Congress to fund guarantees through this program.
    Without this new program lenders would continue to obtain debt 
financing at prices that reflect the financial risk of uninsured bonds. 
The higher rates associated with this financing as compared to 
Federally guaranteed debt would be passed on to the cooperatives and 
other borrowers and eventually to the consumers in rural America in the 
form of higher electric or telephone rates. Under the proposed Rule 
lenders could refinance outstanding debt at a lower rate and pass the 
savings in one form or another on to its borrowers

[[Page 75156]]

consistent with 1720.4(a)(4) and the statute.
    Lenders could alternatively elect to directly pass through to the 
cooperative borrowers the lower interest rates it obtains under the 
Program by reducing the rate on a like amount of eligible loans 
consistent with 1720.4(a)(4) and the statute. Eligible loans consist of 
either new or existing loans made for electrification or telephone 
projects that are eligible for assistance under the RE Act and are made 
concurrently with RUS-funded loans. The Secretary has the authority to 
require that borrowers seek concurrent loans for up to 30 percent of 
their request as provided in Section 307 of the RE Act. Using current 
interest rates as a guideline, lenders with a mid investment grade 
credit rating are able to issue long-term debt at approximately 2 
percent over the comparable term U.S. Treasury bond yield. Similar-term 
debt guaranteed by the U.S. government is estimated to trade at a yield 
spread of approximately 0.5 percent over Treasuries. Thus, there is a 
potential interest rate savings of approximately 1.5 percent for 
lenders under this guarantee program. However, the 30 basis point 
average annual fee associated with the guarantees reduces the potential 
savings. Subtracting out the fee, average interest rate savings of 
approximately 1.2 percent could still be realized by qualified lenders 
under the guarantee program.
    The Federal government would deposit the annual guarantee fees it 
charges the Lender, less any portion necessary to pay the subsidy cost, 
into an account for grants and zero interest rate rural economic 
development loans under the Rural Economic Development Loan and Grant 
Program (``REDLG''). Assuming $3 billion of loan guarantees were made 
under this program, approximately $90 million dollars of investment 
capital could be infused into the REDLGP over the next 15 years.\1\ 
Past performance indicates that this amount could be leveraged to 
approximately $265.5 million in total investment in rural America 
through further investment by private lenders and investors.\2\ Using 
USDA's Economic Research Service multiplier for rural employment, an 
investment of this size could be expected to generate over 6,000 jobs 
in rural America.\3\
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    \1\ Assumes 20 basis points (.20 percent) of the 30 basis point 
(.30 percent) guarantee fee is deposited in the REDLG account 
annually. .20 percent x $3 billion = $6 million x 15 years = $90 
million.
    \2\ Estimated using historical investment leveraged from the 
flow of funds into the REDLG account where every $1 in investment 
into the REDLG account leveraged $2.95 in further investment in 
rural America. Data provided by RBS.
    \3\ Estimated using the USDA's Economic Research Service 
multiplier for rural employment, which estimates that for every $1 
million in investment, 23 jobs are created nationwide.
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    The RUS program has been very successful over the years in 
effectively managing the government's risk. This has been accomplished 
by ensuring that borrowers meet strict financial and engineering 
requirements. Since the late 1930's the REA and now RUS has 
administered the Electric and Telecommunications programs which 
currently hold a cumulative outstanding balance of over $45 billion. 
During that time the Electric and Telecommunications programs have 
experienced only ten defaults that required a write-off of debt in the 
amount of $4.9 billion.
    Federal government guarantee programs by their nature expose the 
taxpayer to financial risk. For the Program, the risks are estimated to 
be minimal because of the non-competitive nature of many of the 
businesses for which loans could be made (e.g., electric distribution 
cooperatives) and the requirement for guarantee recipients to pay an 
annual fee that offsets expected losses. Steps that will be taken to 
further reduce risk include stipulating minimum credit ratings without 
guarantees, establishing sound underwriting criteria, and requiring the 
participant to demonstrate industry expertise.

FIRREA Requirements

    For this program the Federal Government proposes using capital 
adequacy standards of the banking industry as defined by the Federal 
Institutions Reform, Recovery and Enforcement Act (FIRREA). FIRREA 
provides regulatory oversight of all Savings and Loan institutions 
under the Office of Thrift Supervision. FIRREA contains a number of 
provisions relating to capital standards and consequences for failure 
to meet those standards.
    The Capital Adequacy standards in FIRREA will be utilized by the 
Program. The investment grade rating required by the Program statute 
indicates that applicants must satisfy capital adequacy requirements 
necessary to meet their payment obligations. As part of the financial 
covenants in the final guarantee agreement between RUS and the 
participant, language will be included that is designed to address the 
capital adequacy standards of FIRREA. These may include financial 
indicators such as loan loss reserves, debt-to-equity ratios, and 
times-interest-earned ratios.
    FIRREA contains specific language that addresses non-compliance 
with capital adequacy requirements to limit the institution's ability 
to grow, restrict its growth to correspond with capital, or submit 
plans to reach compliance. As part of the financial covenants in the 
Program legal documents, language will be included to address non-
compliance with capital adequacy standards or credit rating downgrades 
to include specific remedies--such as requiring the obligor to post 
additional collateral until the capital adequacy standards are met or 
increases in the interest rates on the guaranteed bonds or notes.

Issues for Public Comment

    In this proposed rulemaking RUS is soliciting information from the 
public on all aspects including terms, limitations and conditions of 
this program with the goal of attaining the greatest possible public 
benefits without assuming undue risks for the U.S. Treasury and 
taxpayers. Furthermore, RUS asks that commenters give consideration to 
the following questions.
    1. A description of the impacts on rural America is presented in 
the preamble. Is this description complete or are there other concerns 
with regard to the potential benefits for, or costs to, rural 
communities, lenders making use of the program, or taxpayers?
    2. The proposed rule requires collateral for securitization of a 
bond under this program as well as the establishment of a bankruptcy 
remote trust fund capitalized at 5% of the guaranteed amount 
outstanding. This trust fund would be viewed as a risk-sharing 
mechanism in light of the government's potential 100% guarantee of an 
applicant's obligations. The trust fund would establish additional 
collateral for reimbursement of any advances the government makes on 
its guarantee. Please comment on this risk-sharing methodology and 
other methods to protect the guarantor's interests through 
collateralization.
    3. The capital adequacy standards of FIRREA will be utilized by 
this program. Please comment on the use of FIRREA standards as a model 
and the use of FIRREA-like restrictions in the event of noncompliance. 
Please also comment on whether the use of financial triggers is an 
effective mechanism for protecting the guarantor's interests.
    4. The proposed rule does not impose a limitation on the proceeds 
of the bond or note guaranteed. One consideration for this program is 
to limit the amount of refinancing to 25% of the amount guaranteed. It 
is believed that such a

[[Page 75157]]

limitation would increase new loans for rural areas. Please discuss the 
benefit and/or detriment to using this type of limitation.
    5. The regulation contemplates monitoring compliance with terms of 
the guarantee through qualified third parties acting as agents for the 
guarantor but hired by the lender obtaining the guarantee. Does this 
mechanism provide adequate protection of the guarantor's interest? Are 
other mechanisms available that present fewer potential conflicts of 
interest while relying primarily on qualified private sector monitors?
    6. Does the program envisioned by the rule adequately minimize the 
financial risk to taxpayers? If not, what changes should be made to 
best reduce the risk while still providing the kind of guarantee 
program envisioned by Congress?
    7. Issuance of a guarantee may provide an incentive for recipients 
to reduce the quality of their lending/management policies and 
practices. Does the rule adequately ensure that the recipient's 
management and lending practices are sound, effective, and minimize 
default risk?
    8. Is the accompanying economic analysis for this rule objective 
and does it provide a reasonably complete assessment of each 
significant cost and benefit of the rule?

List of Subjects in 7 CFR Part 1720

    Electric power, Electric utilities, Loan program--energy, reporting 
and recordkeeping requirements, Rural areas.

    For reasons set out in the preamble, RUS proposes to amend chapter 
XVII of title 7 of the Code of Federal Regulations by adding a new part 
1720 to read as follows:

PART 1720--GUARANTEES FOR BONDS AND NOTES ISSUED FOR 
ELECTRIFICATION OR TELEPHONE PURPOSES

Sec.
1720.1 Purpose.
1720.2 Background.
1720.3 Definitions.
1720.4 General standards.
1720.5 Eligibility criteria.
1720.6 Application process.
1720.7 Application evaluation.
1720.8 Issuance of the guarantee.
1720.9 Guarantee Agreement.
1720.10 Fees.
1720.11 Servicing.
1720.12 Reporting requirement.
1720.13 Limitations on Guarantees.
1720.14 Nature of guarantee; acceleration of guaranteed bonds.
1720.15 Equal opportunity requirements.

    Authority: 7 U.S.C. 901 et seq; 7 U.S.C. 940c.


Sec.  1720.1  Purpose.

    This part prescribes regulations implementing a guarantee program 
for bonds and notes issued for electrification or telephone purposes 
authorized by section 313A of the Rural Electrification Act of 1936 (7 
U.S.C. 940c-1).


Sec.  1720.2  Background.

    The Rural Electrification Act of 1936 (the ``RE Act'') (7 U.S.C. 
901 et. seq.) authorizes the Secretary to guarantee and make loans to 
persons, corporations, states, territories, municipalities, and 
cooperative, non-profit, or limited-dividend associations for the 
purpose of furnishing or improving electric and telephone service in 
rural areas. Responsibility for administering electrification and 
telecommunications loan and guarantee programs along with other 
functions the Secretary deemed appropriate have been assigned to RUS 
under the Department of Agriculture Reorganization Act of 1994 (7 
U.S.C. 6941 et seq.). The Administrator of RUS has been delegated 
responsibility for administering the programs and activities of RUS, 
see 7 CFR Sec.  1700.25. Section 6101 of the Farm Security and Rural 
Investment Act of 2002 (Pub.L. 107-171) (FSRIA) amended the RE Act to 
include a new program under section 313A entitled Guarantees for Bonds 
and Notes Issued for Electrification or Telephone Purposes. This 
measure became law on May 13, 2002, and directs the Secretary of 
Agriculture to promulgate regulations that carry out the Program.


Sec.  1720.3  Definitions.

    For the purpose of this part:
    Administrator means the Administrator of RUS.
    Applicant means a bank or other lending institution organized as a 
private, not-for-profit cooperative association, or otherwise on a non-
profit basis, that is applying for RUS to guarantee a bond or note 
under this part.
    Bond Documents means the trust indenture, bond resolution, 
guarantee, guarantee agreement and all other instruments and 
documentation pertaining to the issuance of the guaranteed bonds.
    Borrower means any organization that has an outstanding loan made 
or guaranteed by RUS for rural electrification or rural telephony under 
the RE Act, or that is seeking such financing.
    Concurrent Loan means a loan that a guaranteed lender extends to a 
borrower for up to 30 percent of the cost of an eligible 
electrification or telephone purpose under the RE Act, concurrently 
with an insured loan made by the Secretary pursuant to section 307 of 
the RE Act.
    Federal Financing Bank means a government corporation and 
instrumentality of the United States of America under the general 
supervision of the Secretary of the Treasury.
    Guarantee means the written agreement between the Secretary and a 
guaranteed bondholder, pursuant to which the Secretary guarantees full 
repayment of the principal, interest, and call premium, if any, on the 
guaranteed lender's guaranteed bond.
    Guarantee Agreement means the written agreement between the 
Secretary and the guaranteed lender which sets forth the terms and 
conditions of the guarantee.
    Guaranteed Bond means any bond, note, debenture, or other debt 
obligation issued by a guaranteed lender on a fixed or variable rate 
basis, and approved by the Secretary for a guarantee under this part.
    Guaranteed Bondholder means any investor in a guaranteed bond.
    Guaranteed Lender means an applicant that has been approved for a 
guarantee under this part.
    Investment Grade Rating means a bond rating of ``BBB-'' or higher 
or ``Baa3'' or higher, or its equivalent, assigned by a rating agency.
    Loan means any credit instrument that the guaranteed lender extends 
to a borrower for any electrification or telephone purpose eligible 
under the RE Act, including loans as set forth in section 4 of the RE 
Act for electricity transmission lines and distribution systems 
(excluding generating facilities) and as set forth in section 201 of 
the RE Act for telephone lines, facilities and systems.
    Loan documents means the loan agreement and all other instruments 
and documentation between the guaranteed lender and the borrower 
evidencing the making, disbursing, securing, collecting, or otherwise 
administering of a loan.
    Program means the guarantee program for bonds and notes issued for 
electrification or telephone purposes authorized by section 313A of the 
RE Act as amended.
    Rating Agency means a bond rating agency identified by the 
Securities and Exchange Commission as a nationally recognized 
statistical rating organization.

[[Page 75158]]

    RE Act means the Rural Electrification Act of 1936 (7 U.S.C. 901 et 
seq.) as amended.
    RUS means the Rural Utilities Service, an agency of the U.S. 
Department of Agriculture.
    Secretary means the Secretary of Agriculture acting through the 
Administrator of RUS.
    Subsidy Amount means the amount of budget authority sufficient to 
cover the estimated long-term cost to the Federal government of a 
guarantee, calculated on a net present value basis, excluding 
administrative costs and any incidental effects on government receipts 
or outlays, in accordance with the provisions of the Federal Credit 
Reform Act of 1990 (2 U.S.C. 661 et seq.)


Sec.  1720.4  General standards.

    (a) In accordance with section 313A of the RE Act, a guarantee will 
be issued by the Secretary only if the Secretary determines, in 
accordance with the requirements set forth in this part, that:
    (1) The proceeds of the guaranteed bonds will be used by the 
guaranteed lender to make loans to borrowers for electrification or 
telephone purposes eligible for assistance under this chapter, or to 
refinance bonds or notes previously issued by the guaranteed lender for 
such purposes;
    (2) At the time the guarantee is executed, the total principal 
amount of guaranteed bonds outstanding would not exceed the principal 
amount of outstanding concurrent loans previously made by the 
guaranteed lender;
    (3) The proceeds of the guaranteed bonds will not be used directly 
or indirectly to fund projects for the generation of electricity; and
    (4) The guaranteed lender will not use any amounts obtained from 
the reduction in funding costs provided by the program to reduce the 
interest rates borrowers are paying on new or outstanding loans, other 
than new concurrent loans as provided in 7 CFR part 1710, of this 
chapter.
    (b) The Secretary shall guarantee payments on guaranteed bonds in 
such form and on such terms and conditions and subject to such 
covenants, representations, warranties and requirements (including 
requirements for audits) as determined appropriate for satisfying the 
requirements of this part. The Secretary shall require the guaranteed 
lender to enter into a guaranty agreement to evidence its acceptance of 
the foregoing. Any guarantee issued under this part shall be made in a 
separate and distinct offering.


Sec.  1720.5  Eligibility criteria.

    (a) To be eligible to participate in the program, a guaranteed 
lender must be:
    (1) a bank or other lending institution organized as a private, 
not-for-profit cooperative association, or otherwise on a non-profit 
basis; and
    (2) able to demonstrate to the Secretary that it possesses the 
appropriate expertise, experience, and qualifications to make loans for 
electrification or telephone purposes.
    (b) To be eligible to receive a guarantee, a guaranteed lender's 
bond must meet the following criteria:
    (1) The guaranteed lender must furnish the Secretary with a 
certified list of the principal balances of concurrent loans then 
outstanding evidencing that such aggregate balance is at least equal to 
the sum of the proposed principal amount of guaranteed bonds to be 
issued, and any previously issued guaranteed bonds outstanding;
    (2) The guaranteed bonds to be issued by the guaranteed lender must 
receive an underlying investment grade rating from a Rating Agency, 
without regard to the guarantee;
    (3) The final maturity of the guaranteed bonds may not exceed 15 
years, and
    (4) The guaranteed bonds must be issued to the Federal Financing 
Bank on terms and conditions consistent with Federal Financing Bank 
lending policy and satisfactory to the Secretary.
    (c) During the term of the guarantee, the guaranteed lender must 
maintain the following:
    (1) Establish a bankruptcy remote trust fund capitalized at 5% of 
the guaranteed amount outstanding; and
    (2) As long as the guarantee is in effect, the lender shall not 
issue cash patronage refunds in excess of five percent of the total 
patronage refund eligible. Additionally, stock issued as part the 
patronage refund shall not be redeemable in cash during the term of any 
part of the guarantee. The lender shall not issue any dividends on any 
class of stock during the term of any part of the guarantee.
    (d) A lending institution's status as an eligible applicant does 
not assure that the Secretary will issue the guarantee sought in the 
amount or under the terms requested, or otherwise preclude the 
Secretary from declining to issue a guarantee.


Sec.  1720.6  Application process.

    (a) Applications shall contain the following:
    (1) Background and contact information on the applicant;
    (2) A term sheet summarizing the proposed terms and conditions of, 
and the security pledged to assure the applicant's performance under, 
the guarantee agreement;
    (3) A statement by the applicant as to how it proposes to use the 
proceeds of the guaranteed bonds, and the financial benefit it 
anticipates deriving from participating in the program;
    (4) A pro-forma cash flow projection or business plan for the next 
five years, demonstrating that there is reasonable assurance that the 
applicant will be able to repay the guaranteed bonds in accordance with 
their terms;
    (5) A description of the specific and identifiable loans comprising 
the collateral or other pledge securing the guaranteed bonds;
    (6) Consolidated financial statements of the guaranteed lender for 
the previous three years that have been audited by an independent 
certified public accountant, including any associated notes, as well as 
any interim financial statements and associated notes for the current 
fiscal year;
    (7) Evidence of having been assigned an investment grade rating on 
the debt obligations for which it is seeking the guarantee, without 
regard to the guarantee;
    (8) A review and certification of the lender's capital adequacy 
utilizing the capital adequacy standards of FIRREA by a reputable, 
independent certified public accounting firm or federal banking 
regulator, and
    (9) Such other application documents and submissions deemed 
necessary by the Secretary for the evaluation of applicants.
    (b) The application process occurs as follows:
    (1) The applicant submits an application to the Secretary;
    (2) The application is screened by RUS pursuant to 7 CFR 1720.7(a) 
of this part, to ascertain its threshold eligibility for the program;
    (3) RUS evaluates the application pursuant to the selection 
criteria set forth in 7 CFR 1720.7(b) of this part;
    (4) If RUS provisionally approves the application, the applicant 
and RUS negotiate terms and conditions of the bond documents, and
    (5) The applicant offers its guaranteed bonds to the Federal 
Financing Bank, and the Secretary upon approval of the pricing, 
redemption provisions and other terms of the offering, executes the 
guarantee.
    (c) If requested by the applicant at the time it files its 
application, the General Counsel of the Department of Agriculture shall 
provide the Secretary with an opinion regarding the validity and 
authority of a guarantee issued to

[[Page 75159]]

the lender under section 313A of the RE Act.


Sec.  1720.7  Application evaluation.

    (a) Eligibility screening. Each application will be reviewed by the 
Secretary to determine whether it is eligible under 7 CFR 1720.5 of 
this part, the information required under 7 CFR 1720.6 of this part, is 
complete, and the proposed guaranteed bond complies with applicable 
statutes and regulations. The Secretary can at any time reject an 
application that fails to meet these requirements.
    (b) Evaluation. Pursuant to paragraph (a) of this section, 
applications will be subject to a substantive review, on a competitive 
basis, by the Secretary based upon the following evaluation factors, 
listed in order of importance:
    (1) The extent to which the proposed provisions indicate the 
applicant will be able to repay the guaranteed bonds;
    (2) The adequacy of the proposed provisions to protect the Federal 
government, based upon items including, but not limited to the nature 
of the pledged security, the priority of the lien position, if any, 
pledged by the applicant, and the provision for an orderly retirement 
of principal such as an amortizing bond structure or an internal 
sinking fund;
    (3) The applicant's demonstrated performance of financially sound 
business practices;
    (4) The extent to which providing the guarantee to the applicant 
will help reduce the cost and/or increase the supply of credit to rural 
America, or generate other economic benefits; and
    (5) The amount of fee income available to be deposited into the 
Rural Economic Development Subaccount, maintained under section 
313(b)(2)(A) of the RE Act (7 U.S.C. 940c-1(b)(2)(B)), after payment of 
the subsidy amount.
    (c) Independent Assessment. Before a guarantee decision is made by 
the Secretary, the Federal Financing Bank shall review the adequacy of 
the structure of the note or bond offering and the determination by the 
Rating Agency, required under 1720.5(b)(2) as to whether the bond or 
note to be issued would be below investment grade without the 
guarantee. The Federal Financing Bank will seek Office of Management 
and Budget's review of its findings prior to submittal of its report to 
the Secretary.
    (d) Decisions by the Secretary. The Secretary shall approve or deny 
applications in a timely manner as such applications are received. The 
Secretary may limit the number of guarantees made to a maximum of five 
per year, to ensure a sufficient examination is conducted of applicant 
requests. RUS shall notify the applicant in writing of the Secretary's 
approval or denial of an application. Approvals for guarantees shall be 
conditioned upon compliance with 7 CFR 1720.6 of this part.


Sec.  1720.8  Issuance of the guarantee.

    (a) The following requirements must be met by the applicant prior 
to the endorsement of a guarantee by the Secretary.
    (1) A guarantee agreement suitable in form and substance to the 
Secretary must be delivered.
    (2) Bond documents must be executed by the applicant setting forth 
the legal provisions relating to the guaranteed bonds, including but 
not limited to payment dates, interest rates, redemption features, 
pledged security, additional borrowing terms including an explicit 
agreement to make payments even if loans made using the proceeds of 
such bond or note is not repaid to the lender, other financial 
covenants, and events of default and remedies;
    (3) Prior to the issuance of the guarantee, the applicant must 
certify to the Secretary that the proceeds from the guaranteed bonds 
will be applied to fund eligible new loans under the RE Act, to 
refinance concurrent loans, or to refinance existing debt instruments 
of the guaranteed lender used to fund eligible loans;
    (4) The applicant provides a certified list of concurrent loans and 
their outstanding balances as of the date the guarantee is to be 
issued;
    (5) Counsel to the applicant must furnish an opinion satisfactory 
to the Secretary as to the applicant being legally authorized to issue 
the guaranteed bonds and enter into the bond documents;
    (6) No material adverse change occurs between the date of the 
application and date of execution of the guarantee;
    (7) The applicant shall provide evidence of an investment grade 
rating from a Rating Agency for the proposed guaranteed bond without 
regard to the guarantee; and
    (8) Certification by the Chairman of the Board and the Chief 
Executive Officer of the applicant (or other senior management 
acceptable to the Secretary), acknowledging the applicant's commitment 
to submit to the Secretary, an annual credit assessment of the 
applicant by a Rating Agency, an annual review and certification of the 
security of the government guarantee that is audited by an independent 
certified public accounting firm or federal banking regulator, an 
annual review and certification of the lender's capital adequacy 
utilizing the capital adequacy standards of FIRREA by a reputable, 
independent certified public accounting firm or federal banking 
regulator, the lender's commitment to deliver annual consolidated 
financial statements audited by an independent certified public 
accountant each year, during which the guaranteed bonds are 
outstanding, and other such information requested by the Secretary
    (b) The Secretary shall not issue a guarantee if the applicant is 
unwilling or unable to satisfy all requirements.


Sec.  1720.9  Guarantee agreement.

    (a) The guaranteed lender will be required to sign a guarantee 
agreement with the Secretary setting forth the terms and conditions 
upon which the Secretary guarantees the payment of the guaranteed 
bonds.
    (b) The guaranteed bonds shall refer to the guarantee agreement as 
controlling the terms of the guarantee.
    (c) The guarantee agreement shall address the following matters:
    (1) Definitions and principles of construction;
    (2) The form of guarantee;
    (3) Coverage of the guarantee;
    (4) Timely demand for payment on the guarantee;
    (5) Any prohibited amendments of bond documents or limitations on 
transfer of the guarantee;
    (6) Limitations on acceleration of guaranteed bonds;
    (7) Calculation and manner of paying the guarantee fee;
    (8) Consequences of revocation of payment on the guaranteed bonds;
    (9) Representations and warranties of the guaranteed lender;
    (10) Representations and warranties for the holder of the 
guaranteed bonds;
    (11) Claim procedures;
    (12) What constitutes a failure by the guaranteed lender to pay;
    (13) Demand on RUS;
    (14) Assignment to RUS;
    (15) Conditions of guarantee which may include requiring the 
guaranteed lender to adopt measures to ensure adequate capital levels 
are retained to absorb losses relative to risk in the guaranteed 
lender's portfolio and requirements on the guaranteed lender to hold 
additional capital against the risk of default;
    (16) Payment by RUS;
    (17) RUS payment does not discharge guaranteed lender;
    (18) Undertakings for the benefit of the holders of guaranteed 
bonds, including: Notices, registration, prohibited amendments, 
prohibited transfers, indemnification, multiple bond issues;
    (19) Governing law;

[[Page 75160]]

    (20) Notices;
    (21) Benefit of agreement;
    (22) Entirety of agreement;
    (23) Amendments and waivers;
    (24) Counterparts;
    (25) Severability; and
    (26) Such other matters as the Secretary believes to be necessary 
or appropriate.


Sec.  1720.10  Fees.

    (a) Guarantee fee. An annual fee equal to 30 basis points (0.3 
percent) of the amount of the unpaid principal of the guaranteed bond 
will be deposited into the Rural Economic Development Subaccount 
maintained under section 313(b)(2)(A) of the RE Act.
    (b) Subject to part (c) of this section, up to one-third of the 30 
basis point guarantee fee may be used to fund the subsidy amount of 
providing guarantees, to the extent not otherwise funded through 
appropriation actions by Congress.
    (c) Notwithstanding subsections (c) and (e)(2) of section 313A of 
the RE Act, the Secretary shall, with the consent of the lender, 
structure the schedule for payment of the annual fee, not to exceed an 
average of 30 basis points per year for the term of the loan, to ensure 
that sufficient funds are available to pay the subsidy costs for note 
guarantees.


Sec.  1720.11  Servicing.

    The Secretary, or other agent of the Secretary on his or her 
behalf, shall have the right to service the guaranteed bond, and 
periodically inspect the books and accounts of the guaranteed lender to 
ascertain compliance with the provisions of the RE Act and the bond 
documents.


Sec.  1720.12  Reporting requirements.

    (a) As long as any guaranteed bonds remain outstanding, the 
guaranteed lender shall provide the Secretary with the following items 
each year within 90 days of the guaranteed lender's fiscal year end:
    (1) Consolidated financial statements and accompanying footnotes, 
audited by independent certified public accountants;
    (2) A review and certification of the security of the government 
guarantee, audited by reputable, independent certified public 
accountants or a federal banking regulator, who in the judgment of the 
Secretary, has the requisite skills, knowledge, reputation, and 
experience to properly conduct such a review;
    (3) Pro forma projection of the guaranteed lender's balance sheet, 
income statement, and statement of cash flows over the ensuing five 
years;
    (4) Credit assessment issued by a Rating Agency;
    (5) A review and certification of the lender's capital adequacy 
utilizing the capital adequacy standards of FIRREA by a reputable, 
independent certified public accounting firm or federal banking 
regulator, and
    (5) Other such information requested by the Secretary.
    (b) The bond documents shall specify such bond monitoring and 
financial reporting requirements as deemed appropriate by the 
Secretary.


Sec.  1720.13  Limitations on guarantees.

    In a given year the maximum amount of guaranteed bonds that the 
Secretary may approve will be subject to budget authority, together 
with receipts authority from projected fee collections from guaranteed 
lenders, the principle amount of outstanding concurrent loans made by 
the guaranteed lender, and Congressionally-mandated ceilings on the 
total amount of credit. The Secretary may also impose other limitations 
as appropriate to administer this guarantee program.


Sec.  1720.14  Nature of guarantee; acceleration of guaranteed bonds.

    (a) Any guarantee executed by the Secretary under this part shall 
be an obligation supported by the full faith and credit of the United 
States and incontestable except for fraud or misrepresentation of which 
the guaranteed bondholder had actual knowledge at the time it purchased 
the guaranteed bonds.
    (b) Amounts due under the guarantee shall be paid within 30 days of 
demand by a bondholder, certifying the amount of payment then due and 
payable.
    (c) The guarantee shall be assignable and transferable to any 
purchaser of guaranteed bonds as provided in the bond documents.
    (d) The following actions shall constitute events of default under 
the terms of the guarantee agreements:
    (1) The guaranteed lender failed to make a payment of principal or 
interest when due on the guaranteed bonds;
    (2) The guaranteed bonds were issued in violation of the terms and 
conditions of the bond documents;
    (3) The guarantee fee required by 7 CFR 1720.9 of this part has not 
been paid;
    (4) The guaranteed lender made a misrepresentation to the Secretary 
in any material respect in connection with the application, the 
guaranteed bonds, or the reporting requirements listed in 7 CFR 1720.11 
of this part; or
    (5) The guaranteed lender failed to comply with any material 
covenant or provision contained in the bond documents.
    (e) In the event the guaranteed lender fails to cure such defaults 
within the notice terms and the timeframe set forth in the bond 
documents, the Secretary may demand that the guaranteed lender redeem 
the guaranteed bonds. Such redemption amount will be in an amount equal 
to the outstanding principal balance, accrued interest to the date of 
redemption, and prepayment premium, if any. To the extent the Secretary 
makes any payments under the guarantee, the Secretary shall be deemed 
the guaranteed bondholder.
    (f) To the extent the Secretary makes any payments under the 
guarantee, the interest rate the government will charge to the 
guaranteed lender for the period of default shall accrue at an annual 
rate of the greater of 1.5 times the 91-day Treasury-Bill rate or 200 
basis points (2.00%) above the rate on the guaranteed bonds.
    (g) Upon guaranteed lender's event of default, under the bond 
documents, the Secretary shall be entitled to take such other action as 
is provided for by law or under the bond documents.


Sec.  1720.15  Equal opportunity requirements.

    ``Executive Order 12898, ``Environmental Justice.'' To comply with 
Executive Order 12898, RUS will conduct a Civil Rights Analysis for 
each guarantee prior to approval. Rural Development Form 2006-28, 
``Civil Rights Impact Analysis'', will be used to document compliance 
in regards to environmental justice.

    Dated: December 22, 2003.
Ann M. Veneman,
Secretary of Agriculture.
[FR Doc. 03-31928 Filed 12-29-03; 8:45 am]
BILLING CODE 3410-15-P