[Federal Register Volume 69, Number 209 (Friday, October 29, 2004)]
[Rules and Regulations]
[Pages 63045-63053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-24353]


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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: Final rule.

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SUMMARY: This rule establishes 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. In addition to providing funds to enhance rural 
development, this program will contribute to improving the technology 
and reliability of our rural electric transmission and distribution 
system.

DATES: This rule will become effective November 29, 2004.

FOR FURTHER INFORMATION CONTACT: Doris Nolte, Chief, Policy Analysis 
and Loan Management Staff, Electric Program, Rural Utilities Service, 
U.S. Department of Agriculture, 1400 Independence Avenue, SW., STOP 
1560, Room 5155, Washington, DC 20250-1560. Telephone: (202) 720-0424. 
Fax: (202) 690-0717. E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be significant for purposes of 
Executive Order 12866 and, therefore, has been reviewed by the Office 
of Management and Budget (OMB).

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. RUS has determined that this 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 
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 certifies that this

[[Page 63046]]

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.

Executive Order 13132

    This regulation will not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on distribution of power and responsibilities among the 
various levels of government. Under Executive Order 13132, this rule 
does not have sufficient federalism implications to require preparation 
of a Federalism Assessment.

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'' 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 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 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 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 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 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 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

    On December 30, 2003, at 68 FR 75153, the Rural Utilities Service 
(RUS) published a proposed rule, 7 CFR Part 1720, Guarantees for Bonds 
and Notes issued for Electrification and Telephone Purposes. This 
proposed rule establishes the agency's policies and procedures for 
granting guarantees to eligible cooperatives and other not-for-profit 
lenders that make loans eligible for assistance under the Rural 
Electrification Act of 1936 (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.
    A total of 231 letters were received commenting on the proposed 
rule. Two hundred and eighteen of these letters, which were received 
from electric cooperatives, electric cooperative associations, rural 
development organizations, and local governments, all requested that 
the rule be altered in a way that assures funding to the Rural Economic 
Development Loan and Grant Fund (REDLF). Many of the comments included 
the identification of successful economic development projects that 
benefited from REDLG funds. The majority of the 218 letters identified 
specific aspects of the proposed rule that should be altered to make 
the program work. Seventy percent (70%) of the letters said the 
patronage capital limitations discriminate against the cooperative 
lenders and should be removed. Seventy percent (70%) also reported that 
the Federal Institutions Reform, Recovery and Enforcement Act (FIRREA) 
requirements, as presented in the proposed rule would make cooperative 
lenders ineligible for this program. Sixty-five percent (65%) requested 
that the 15-year bond term limit be changed to the useful life of the 
asset. This change in term would serve to maximize funding available to 
REDLG. Fifteen percent (15%) of the letters suggested that the approval 
process that includes Office of Management and Budget and Treasury, is 
complicated and inefficient and 10 percent or less critized using a 
bankruptcy trust fund, collateral provisions, and the requirement that 
bonds must be issued by Federal Financing Bank (FFB) only.
    Thirteen letters were received that did not take the form of the 
others and either addressed the specific questions posed in the 
proposed rule or provided additional information for the development of 
the final rule.
    In their comment letters, the U.S. Chamber of Commerce and Edison 
Electric Institute (EEI) state that Federal guarantees made to private 
unregulated organizations is unprecedented and bad government policy. 
Their position is that because of the legislative requirement to 
establish this program, RUS must also establish appropriate safeguards 
that minimize risk to American taxpayers. Four trade organizations also 
supported strengthening the rule requirements and characterized the 
program as providing an unfair advantage to cooperatives. This unfair 
advantage would be realized, they argue, through lower rates received 
in borrowing from an eligible lender that received a guarantee or by 
receiving REDLG funds and establishing economic development projects 
that attract new loads into a cooperative territory. The comments 
received from these groups also identified specific aspects of the 
proposed rule that they thought should be strengthened in order to 
minimize taxpayer risk.
    The National Rural Electric Cooperative Association (NRECA), 
National Rural Utilities Cooperative Finance Corporation (CFC), 
National Rural Telecommunications Cooperative, an electric cooperative 
association, and an electric cooperative all identified aspects of the 
proposed rule that they said did not comport to the Farm Security and 
Rural Investment Act of 2002 (Pub. L. 107-171) (Farm Bill) legislation 
establishing this program. The comments claim that the proposed rule 
does not address the intent of the Congress, which was to create a new 
funding mechanism for the REDLG program. These comments addressed 
specific restrictions in the proposed rule and requested that they be 
removed because they were not consistent with the statute and prevent 
the lender with the largest volume of concurrent loans from 
participating in the program.
    The two general positions taken in the letters of comment received 
are (1) the program does not provide enough safeguards for the American 
taxpayer and the provisions in the proposed rule should be strengthened 
and (2) the intent of Congress is not carried out with the proposed 
rule and changes should be made to assure that the REDLG program is 
funded.

[[Page 63047]]

    CFC also provided an alternative approach to the restrictions 
included in the proposed rule. The alternative approach is to establish 
such safeguards as contemplated in the proposed rule to minimize 
taxpayer risk by establishing a trigger that would impose them only if 
the lender that qualifies and is granted a guarantee becomes ineligible 
(i.e., no longer meets the eligibility criteria established in the 
legislation). CFC proposed the trigger mechanism to be when the 
lender's non-guaranteed debt falls below investment grade. At that 
point, limitations on retiring patronage capital, establishing capital 
adequacy tests, requiring a bankruptcy remote trust and/or collateral 
requirements would go into effect.

Changes Made to the Final Rule

    A review of the limited legislative history that exists for this 
provision of the 2002 Farm Bill indicates that the intent of Congress 
was to establish an additional private funding mechanism for the Rural 
Economic Development Loan and Grant program. This flow of funds is the 
cost to qualified lenders for receiving a federal guarantee of bonds 
and notes according to the statutory criteria established in section 
6101 of the Farm Bill.
    RUS also agrees that appropriate safeguards must be implemented to 
assure risk is minimized for the American taxpayers as this program 
establishes a new relationship between eligible lenders and the Federal 
government. Furthermore, Congress has established this program by 
amending the RE Act, and fully expects RUS to continue its prudent 
guarantee and lending practices. For these reasons, RUS will provide 
additional requirements of the lender beyond the provisions established 
in section 6101 of the Farm Bill. Based upon the comments received and 
additional research into the requirements proposed, the final rule has 
been modified to maintain the safeguards envisioned in the proposed 
rule while establishing a program according to the provisions of 
section 6101 of the Farm Bill.
    The statute provides some criteria for establishing lender and 
guarantee eligibility. The statute, however, does not address 
requirements to ensure the security of a government guarantee, and 
there is no indication that RUS should not take prudent steps to 
address declining credit quality. For these reasons, RUS will establish 
requirements of the guaranteed lender to ensure the security of the 
government's guarantee throughout the term of the guarantee.
    Patronage Capital limitations. The proposed rule requires that the 
guaranteed lender not issue cash patronage refunds in excess of five 
percent of the total patronage refund eligible. Additionally, stock 
issued as part of the patronage refund shall not be redeemable in cash 
during the term of the guarantee, and the lender is not allowed to 
issue dividends on any class of stock during the term of the guarantee. 
Comments were received in favor of this restriction and some 
recommended lowering the limitation to two percent of the total 
patronage refund eligible. Comments were also received reporting that 
this limitation was not contemplated by the statute, and there is no 
rationale provided for this restriction. Furthermore, it is pointed out 
that capping patronage distributions reduces the cash flow of any RUS 
borrower that is also a borrower of the guaranteed lender and this 
reduction in cash flow may result in an increase in RUS loan security 
risk. One hundred and forty eight comments were received reporting that 
cooperatives depend upon the patronage capital distributions to keep 
electric rates low and to further invest in rural communities. One 
comment received expressed a belief that this restriction is 
unnecessary as capital markets already require financial targets for 
earnings retention.
    RUS will maintain a patronage capital limitation when a guaranteed 
lender's credit rating on its senior secured debt, without regard to 
the guarantee, falls below ``A-''. Under such a scenario, the 
guaranteed lender will be required to limit the patronage capital 
refunds in excess of five percent of the patronage capital. RUS 
believes this requirement represents a sound approach to ensuring 
capital adequacy and in minimizing the risk of default.
    FIRREA. The proposed rule requires each applicant to submit a 
review and certification of the lender's capital adequacy utilizing the 
capital adequacy standards of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA). The proposed rule also 
requires that during the term of the guarantee, a FIRREA review be 
conducted annually. Comments were received requesting that the full 
requirements of FIRREA be imposed. Other comments claim the FIRREA 
requirements as presented in the proposed rule make cooperative lenders 
ineligible based upon their financial structure. Cooperative lenders 
have forms of equity not recognized by the formulas utilized under 
FIRREA. One hundred and fifty comment letters were received expressing 
a concern that the FIRREA standards do not apply to the cooperative 
structure and that such a requirement would make cooperatives 
ineligible for the guarantee program.
    RUS agrees that the FIRREA requirement would limit participation in 
the guarantee program. Upon further review of the FIRREA requirements, 
and public comment, it has become clear that definitions of 
liabilities, capital, and risk-based assets under FIRREA do not match 
the financial structures and business model used by cooperative lenders 
and cannot directly apply. The majority of the savings institutions 
subject to the requirements of FIRREA do not have publicly traded debt 
outstanding, and have had no formal bond ratings assigned. Accordingly, 
the focus of the credit review for such entities is upon the regulatory 
accounting standards under which those lenders obtain deposit 
insurance.
    The statutory requirements of this guarantee program rely upon 
credit evaluations by the rating agencies. Their ratings reflect the 
ability of the lender to meet its long-term payment obligations based 
upon the lender's financial positions, managerial skills and other 
factors. RUS has considered alternative methods of establishing capital 
adequacy of a guaranteed lender under this program and has evaluated 
the benefits of establishing financial indicator ratio requirements to 
accomplish that goal. Based upon the comments received and further 
review, RUS will rely upon the credit rating agencies and the ongoing 
review of a lender's financial position as required in other sections 
of the rule to evaluate adequacy and monitor the financial condition of 
the program participants.
    In addition, RUS will independently monitor publicly available 
information on a program participant as it becomes available. RUS will 
use this information to monitor and evaluate the adequacy of the 
financial condition of program participants.
    Bankruptcy Remote Trust. The proposed rule requires the lender, 
during the term of the guarantee, to establish a bankruptcy remote 
trust fund capitalized at five percent of the guaranteed amount 
outstanding. Comments received in favor of additional restrictions 
favor this requirement and a few suggested increasing the capitalized 
percentage. Comments were also received with claims that a lender whose 
securities are investment grade rated is already viewed by the capital 
markets as adequately capitalized, with sufficient reserves and capital 
market liquidity. Twenty-two comment letters were received reporting 
that this requirement

[[Page 63048]]

was not contemplated in the Farm Bill and should not be implemented. 
CFC asserts that in capital markets, bankruptcy-remote trusts are used 
in non-recourse financing and that all CFC bonds are not non-recourse--
any investor in CFC has the right to make a claim against CFC as a 
corporation.
    Although a bankruptcy remote trust fund is a sound risk management 
tool in many situations, RUS believes that other requirements of this 
rule are sufficient to ensure the security of the government guarantee, 
and therefore this particular requirement has been removed.
    Collateral Requirements. The proposed rule requires the applicant 
to provide a description of the specific and identifiable loans 
comprising the collateral or other pledge securing the guaranteed 
bonds. While comments were received in support for this idea claiming 
that this would aid in minimizing taxpayer risk, other comments were 
received requesting that no such requirement be imposed as it is 
outside of the statutory criteria. CFC asserts that a collateral 
requirement is duplicative of the bankruptcy-remote trust requirement.
    RUS will maintain this requirement when the guaranteed lender's 
credit rating on its senior secured debt, without regard to the 
guarantee, falls below ``A-''. In such cases, collateral shall be in 
the form of specific and identifiable unpledged securities equal to 
100% of the value of the guarantee. This requirement is viewed as an 
important safeguard for protecting against a call on the Federal 
guarantee when the lender's creditworthiness has declined.
    15-year bond term. The proposed rule requires a final maturity of 
guaranteed bonds not to exceed 15 years. Some comment letters received 
claim this restriction will aid in minimizing taxpayer risk. Other 
comments urged RUS to continue its practice of matching terms to the 
useful life of an asset. One hundred and thirty-nine comment letters 
received urged the restriction to be lifted recognizing the normal RUS 
lending practice of 30-35 year terms and also stating that the longer 
terms would extend the funding to REDLG and maximize economic 
development benefits to rural America. CFC claims that the limitation 
on maturity of bonds is inconsistent with the intent of the statute. 
The limitation exposes the government to additional risks (bond term/
borrowers loan maturity mismatch can create both interest rate and 
liquidity risk).
    Based upon comment letters received and the desire to establish a 
bond or note guarantee term consistent with RUS lending practices, RUS 
will establish a term of 20 years which is the estimated average 
outstanding balance of concurrent loans currently eligible under this 
program.
    FFB only funding source. The proposed rule requires that the 
guaranteed bonds must be issued to the FFB on terms and conditions 
consistent with the FFB lending policy. Nineteen comment letters were 
received expressing concern with this limitation. CFC argues that this 
is inconsistent with a provision in the statute providing that the 
guarantees ``shall be fully assignable and transferable'' indicating 
that they could be issued in the capital markets. The rule also does 
not require FFB to purchase the offering and it does not discuss the 
rates, terms, or options for the transaction between the lender and 
FFB. CFC requests that flexibility be provided to issue the bonds to 
FFB or in the capital market to maximize the benefit.
    RUS understands the CFC argument that the ``best deal'' should be 
obtained in issuing a bond or not for a guarantee. Therefore, the final 
rule requires that the guaranteed bond or note be issued to FFB on 
terms and conditions consistent with comparable government-guaranteed 
bonds and satisfactory to the Secretary.
    Approval requirements to include Office of Management and Budget 
(OMB) and U.S. Department of Treasury. The proposed rule requires an 
independent assessment of the application by OMB and FFB prior to a 
decision on the guarantee being made by the Secretary. Thirty-five (35) 
comments were received claiming that this is neither needed nor 
efficient. Other comments suggest that there is no statutory 
requirement for this process.
    RUS is eliminating the requirement that FFB and OMB review the 
application. Instead, RUS is required to request that FFB review the 
credit rating of the bond or note to be issued. The expertise that FFB 
possesses will help to ensure the security of the government guarantee.

Regulatory Procedures Issues

    Comments received from the U.S. Chamber of Commerce and one 
individual suggest that the United States Department of Agriculture did 
not follow the appropriate procedures in promulgated the proposed rule. 
RUS has considered these comments and believes they are without merit. 
For example, RUS has complied with the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.) by determining that because the procedures 
contained in the proposed rule apply to only two entities, neither of 
whom are small, the rule will have no significant impact on small 
businesses or other small entities. The use of the word ``determine'' 
in context in which it was used in the published notice that was signed 
by the head of the agency is synonymous with the word ``certify'' 
within means ``to confirm formally as true.'' Since RUS certifies that 
there is no substantial impact on a significant number of small 
entities, the balance of the comments received on the Regulatory 
Flexibility Act are inapposite and in any event have more to do with 
the effects of programs which section 313A funds and which were not the 
subject of the proposed rulemaking.
    Commenters have not correctly applied National Environmental 
Protection Act (NEPA) implementation regulations of RUS. As authority 
for their proposition that the proposed rule was subject to a full 
environmental review involving the public, commenters cited 7 CFR 
1794.3. That provision provides merely that the provisions of 7 CFR 
part 1794 apply to, inter alia, the issuance of new or revised rules. 
However, Title 7 part 1794 does not require environmental reviews or 
public participation in such reviews in all cases. The provisions of 7 
CFR part 1794 identify and establish categories of actions for 
environmental review purposes. These categories range from actions that 
are categorically exempt to those normally requiring the development of 
an environmental impact statement. RUS regulations do not require the 
agency to publish a Finding of No Significant Impact (FONSI) each time 
RUS determines that an action will not have a significant environmental 
impact. RUS regulations require the publication of a FONSI only when 
its determination has been made on the basis of an Environmental 
Assessment (EA). Generally speaking, publications of regulations do not 
require an EA. It is only the issuance or modification of RUS 
regulations concerning environmental matters that are listed in 7 CFR 
part 1794 as normally requiring an EA (7 CFR 1794.23(a)). Accordingly, 
the discussion of NEPA in the proposed rule complied with NEPA and RUS 
regulations implementing NEPA.
    RUS was not, as some commenters wrote, required to prepare a 
Statement of Energy Effects to comply with Executive Order (E.O. 13211, 
``Actions Concerning Regulations That Significantly Affect Energy 
Supply, Distribution, or Use''. However, E.O. 13211 does not require 
the preparation of such statements in connection with every proposed 
rulemaking that is a

[[Page 63049]]

significant regulatory action under E.O. 12866 as the commenters seem 
to imply. while it is correct that in order for a proposed rule to be a 
``significant energy action'' under E.O. 13211, the proposal must be a 
``significant regulatory action'' under Executive Order 12866, at least 
one of two other requirements must be met before the obligation to 
prepare a statement of energy effects exists. The propose rule must 
either be ``likely to have significant adverse effect on the supply, 
distribution, or use of energy'' or it must be so ``designated by the 
Administrator of the Office of Information and Regulatory Affairs as a 
significant energy action.'' E.O. 13211 sections 2(a) and 4(b). Neither 
of these two factors are present here. Since E.O. 13211 does not apply 
to the proposed rule, there is no need to address comments about what 
such an analysis should provide.
    Some commenters wrote that the proposed rule did not meet the 
requirement under Executive Order 12866, ``Regulatory Planning and 
Review'', requiring all ``significant regulatory actions'' by Federal 
agencies to undergo cost-benefit assessment by the agency and 
centralized review by the Office of Information and Regulatory Affairs 
(OIRA), an organizational subunit of the OMB. RUS did conduct the 
appropriate regulatory analysis required for issuing the proposed rule 
to establish this Guarantee of Bonds and Notes program. RUS has 
provided the appropriate studies and justifications to OIRA for 
centralized review and the necessary OMB clearances were obtained 
before publishing the proposed rule and this final rule in the Federal 
Register.
    RUS received a few comments to the effect that RUS did not provide 
adequate opportunity for public participation during the development of 
the proposed rule and suggesting that the comment period for the 
proposed rule be extended. RUS believes that there has been ample 
opportunity for public participation and that any further delays in 
implementing the program cannot be justified. Section 313A amending the 
rural Electrification Act of 1936 (7 U.S.C. 940c-1) was signed into law 
on May 13, 2002. Pub. L. 107-171, Title VI, sec. 6101(a). There are 
directives in sec. 6101(b) of Pub. L. 107-171 requiring the 
promulgation of regulations within 180 days of enactment and to 
implement the program within 240 days. Accordingly, enactment of 
Section 313A gave notice that rules covering this subject matter would 
soon be forthcoming. Section 313A itself established many of the 
program requirements contained in the proposed rule and clearly 
signaled the principal areas that would be addressed by the program. 
RUS provided 60 days for comments on the proposed regulations. Perhaps 
the best evidence demonstrating the adequacy of the public's 
opportunity for participation in the proposed rulemaking is the fact 
that RUS received 231 written comments in response to the notice.

List of Subjects in 7 CFR Part 1720

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


0
For reasons set out in the preamble, RUS amends 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 on 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 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 telephone 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 (FFB) 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

[[Page 63050]]

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.
    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.
    RE Act means the Rural Electrification Act of 1936 (7 U.S.C. 901 et 
seq.) as amended.
    RUS means the Rural Utilities Service, a Rural Development 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) During the term of the guarantee, the guaranteed lender shall:
    (1) Limit cash patronage refunds, for guaranteed lenders having a 
credit rating below ``A-'' on its senior secured debt without regard to 
the guarantee. For such guaranteed lenders, cash patronage refunds are 
limited to five percent of the total patronage refund eligible. The 
limit on patronage refunds must be maintained until the credit rating 
is restored to ``A-'' or above. For those guaranteed lenders subject to 
patronage limitations, equity securities issued as part of the 
patronage refund shall not be redeemable in cash during the term of any 
part of the guarantee, and the guaranteed lender shall not issue any 
dividends on any class of equity securities during the term of the 
guarantee.
    (2) Maintain sufficient collateral equal to the principal amount 
outstanding, for guaranteed lenders having a credit rating below ``A-'' 
on its senior secured debt without regard to the guarantee. Collateral 
shall be in the form of specific and identifiable unpledged securities 
equal to the value of the guaranteed amount. In the case of a 
guaranteed lender's default, the U.S. government claim shall not be 
subordinated to the claims of other creditors, and the indenture must 
provide that in the event of default, the government has first rights 
on the asset. Upon application and throughout the term of the 
guarantee, guaranteed lenders not subject to collateral pledging 
requirements shall identify, with the concurrence of the Secretary, 
specific assets to be held as collateral should the credit rating of 
its senior secured debt without regard to the guarantee fall below ``A-
''. The Secretary has discretion to require collateral at any time 
should circumstances warrant.
    (c) The final maturity of the guaranteed bonds shall not exceed 20 
years.
    (d) The guaranteed bonds shall be issued to the Federal Financing 
Bank on terms and conditions consistent with comparable government-
guaranteed bonds and satisfactory to the Secretary.
    (e) The Secretary shall guarantee payment son guaranteed bonds in 
such forms 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 guarantee 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 leader 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; and
    (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;
    (c) 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

[[Page 63051]]

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) 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;
    (6) 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;
    (7) Evidence of a credit rating, from a Rating Agency, on its 
senior secured debt without regard to the government guarantee and 
satisfactory to the Secretary.
    (8) 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, 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 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, the 
information required under 7 CFR 1720.6 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, to generate other economic benefits, including 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 Secretary shall request that the Federal Financing 
Bank review the adequacy of the determination by the Rating Agency, 
required under Sec.  1720.5(b)(2) as to whether the bond or note to be 
issued would be below investment grade without the guarantee.
    (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 1720.4 and 1720.6.


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;
    (8) The applicant shall provide evidence of a credit rating on its 
senior secured debt without regard to the guarantee and satisfactory to 
the Secretary; and
    (9) 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, annual 
consolidated financial statements audited by an independent certified 
public accountant each year during which the guarantee 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

[[Page 63052]]

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) Limitation 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 benefit of 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;
    (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 guarantee bond 
will be deposited into the Rural Economic Development Subaccount 
maintained under section 313(b)(2)(A) of the RE Act.
    (b) Subject to paragraph (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 and if 
otherwise authorized by law, adjust 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) Credit rating, by a Rating Agency, on its senior secured debt 
without regard to the guarantee and satisfactory to the Secretary;
    (6) 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 1720.10 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 
1720.12; 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

[[Page 63053]]

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. The Civil Rights Impact Analysis 
will be conducted prior to application approval or a conditional 
commitment of guarantee.

    Dated: October 26, 2004.
Gilbert Gonzalez,
Acting Under Secretary, Rural Development.
[FR Doc. 04-24353 Filed 10-28-04; 8:45 am]
BILLING CODE 3410-15-P