[Federal Register Volume 72, Number 91 (Friday, May 11, 2007)]
[Proposed Rules]
[Pages 26742-26759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-9021]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Proposed 
Rules  

[[Page 26742]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1738

RIN 0572-AC06


Rural Broadband Access Loans and Loan Guarantees

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: The Rural Utilities Service, an agency delivering the United 
States Department of Agriculture's (USDA) Rural Development Utilities 
Programs, hereinafter referred to as Rural Development, proposes to 
amend its regulation for the Rural Broadband Access Loan and Loan 
Guarantee Program (Broadband Loan Program). Since the Broadband Loan 
Program's inception, the Agency has faced and continues to face 
significant challenges in administering the program, including the 
fierce competitive nature of the broadband market, the fact that many 
companies proposing to offer broadband service are start-up 
organizations with limited resources, continually evolving technology, 
and economic factors such as the higher cost of serving rural 
communities. Because of these challenges, the Agency has been reviewing 
the characteristics of the Broadband Loan Program and has determined 
that modifications are required to accelerate the deployment of 
broadband service to the rural areas of the country. Therefore, this 
rulemaking proposes to implement changes on the following subject 
matter: funding in competitive markets and new eligibility 
requirements; new equity and market survey requirements; and new legal 
notice requirements to increase transparency.

DATES: Comments must be submitted on or before July 10, 2007.

ADDRESSES: Submit comments by either of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov and, in the lower ``Search Regulations and Federal 
Actions'' box, select ``Rural Utilities Service'' from the agency drop-
down menu, then click on ``Submit.'' In the Docket ID column, select 
RUS-06-Agency-0052 to submit or view public comments and to view 
supporting and related materials available electronically. Information 
on using Regulations.gov, including instructions for accessing 
documents, submitting comments, and viewing the docket after the close 
of the comment period, is available through the site's ``User Tips'' 
link.
     Postal Mail/Commercial Delivery: Please send your comment 
addressed to Michele Brooks, Acting Director, Program Development and 
Regulatory Analysis, USDA Rural Development, 1400 Independence Avenue, 
STOP 1522, Room 5159, Washington, DC 20250-1522. Please state that your 
comment refers to Docket No. RUS-06-Agency-0052.
    Other Information: Additional information about Rural Development 
and its programs is available on the Internet at http://www.rurdev.usda.gov/index.html.

FOR FURTHER INFORMATION CONTACT: Jonathan Claffey, Deputy Assistant 
Administrator, Telecommunications Program, Rural Development, U.S. 
Department of Agriculture, 1400 Independence Avenue, SW., STOP 1590, 
Room 4056, Washington, DC 20250-1590. Telephone number (202) 720-9554, 
Facsimile (202) 720-0810.

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 Office of Management and Budget (OMB). In accordance with Executive 
Order 12866, an Economic Impact Analysis was completed, outlining the 
costs and benefits of implementing this program in rural America. The 
complete analysis is available from Rural Development upon request.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. Rural Development 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

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) is not 
applicable to this proposed rule because the Agency is not required by 
5 U.S.C. 553 or any other law to publish a notice of proposed 
rulemaking for the subject matter of this rule.

Paperwork Reduction Act and E-Government Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35, as amended), Rural Development invites comments on this 
information collection for which approval from the Office of Management 
and Budget (OMB) will be requested.
    Comments on this notice must be received by July 10, 2007.
    Comments are invited on: (a) Whether the collection of information 
is necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility; (b) the 
accuracy of the agency's estimate of burden including the validity of 
the methodology and assumption used; (c) ways to enhance the quality, 
utility and clarity of the information to be collected; and (d) ways to 
minimize the burden of the collection of information on those who are 
to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques on 
other forms of information technology.
    Comments may be sent to Michele Brooks, Acting Director, Program 
Development and Regulatory Analysis, Rural Development, U.S. Department 
of Agriculture, 1400 Independence Ave., SW., Stop 1522, Room 5159 South 
Building, Washington, DC 20250-1522.
    Title: 7 CFR Part 1738, Rural Broadband Access Loans and Loan 
Guarantees.
    OMB Control Number: 0572-0130.

[[Page 26743]]

    Type of Request: Revision of a currently approved information 
collection package.
    Abstract: Rural Development is authorized by Title VI, Rural 
Broadband Access, of the Rural Electrification Act of 1936, as amended 
(RE Act), to provide loans and loan guarantees to fund the cost of 
construction, improvement, or acquisition of facilities and equipment 
for the provision of broadband service in eligible rural communities in 
States and Territories of the United States. Title VI of the RE Act 
requires that Rural Development make or guarantee a loan only if there 
is reasonable assurance that the loan, together with all outstanding 
loans and obligations of the borrower will be repaid in full within the 
time agreed. The items covered by this collection include forms and 
related documentation to support a loan application, including Form 532 
and supporting documentation.
    Revisions to the information collection include: (1) Funding in 
competitive markets and new eligibility requirements (revisions will 
affect the details of an application, but not the difficulty of 
preparation or quantity of information provided; accordingly, the 
paperwork burden associated with these changes is not expected to be 
appreciably more or less than under the existing rule); (2) new equity 
requirements (revisions will affect the details of an application, but 
not the difficulty of preparation or quantity of information provided; 
accordingly, the paperwork burden associated with these changes is not 
expected to be appreciably more or less than under the existing rule); 
(3) new market survey requirements (the associated paperwork burden 
will be reduced by a small amount for some applicants as the 
requirement will be eliminated in certain instances); and (4) new legal 
notice requirements to increase transparency (the additional 
information required by the proposed modification of legal notice 
requirement will increase the paperwork burden of each application by a 
small amount).
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 225 hours per response.
    Respondents: Businesses and not-for-profit institutions.
    Estimated Number of Respondents: 40.
    Estimated Number of Responses per Respondent: 2.
    Estimated Total Annual Burden on Respondents: 13,480 hours.
    Copies of this information collection can be obtained from Michele 
Brooks, Program Development and Regulatory Analysis, at (202) 690-1078.
    All responses to this information collection and recordkeeping 
notice will be summarized and included in the request for OMB approval. 
All comments will also become a matter of public record. Rural 
Development is committed to the E-Government Act, which requires 
Government agencies in general to provide the public the option of 
submitting information or transacting business electronically to the 
maximum extent possible.

Catalog of Federal Domestic Assistance

    The program described by this proposed rule is listed in the 
Catalog of Federal Domestic Assistance Programs under No. 10.886, Rural 
Broadband Access 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 or at http://www.cfda.gov.

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 Mandate Reform Act of 
1995) 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 Mandate Reform Act of 1995.

National Environmental Policy Act Certification

    Rural Development 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

Contents

A. Introduction
B. Regulatory History
C. Program Results
D. Program Improvements
E. Review of Rules and Processes
F. Proposed Rule Changes

    A. Introduction: The Utilities Programs (the Agency) of USDA Rural 
Development improve the quality of life in rural America by providing 
investment capital for deployment of rural telecommunications 
infrastructure. Financial assistance is provided to rural utilities; 
municipalities; commercial corporations; limited liability companies; 
public utility districts; Indian tribes; and cooperative, nonprofit, 
limited-dividend, or mutual associations. In order to achieve the goal 
of increasing economic opportunity in rural America, USDA Rural 
Development finances infrastructure that enables access to a seamless, 
nation-wide telecommunications network. With access to the same 
advanced telecommunications networks as its urban counterparts, 
especially broadband networks designed to accommodate distance 
learning, telework and telemedicine, rural America will eventually see 
improving educational opportunities, health care, economies, safety and 
security, and ultimately higher employment. The Agency shares the 
assessment of Congress, State and local officials, industry 
representatives, and rural residents that broadband service is a 
critical component to the future of rural America. The Agency is 
committed to ensuring that rural America will have access to 
affordable, reliable, broadband services, and to provide a healthy, 
safe and prosperous place to live and work.
    B. Regulatory History: On May 13, 2002, the Farm Security and Rural 
Investment Act of 2002, Public Law 107-171 ``Farm Bill'' was signed 
into law. The Farm Bill amended the Rural Electrification Act of 1936 
to include Title VI, the Rural Broadband Access Loan and Loan Guarantee 
Program (Broadband Loan Program), to be administered by the Agency. 
Title VI authorized the Agency to approve loans and loan guarantees for 
the costs of construction, improvement, and acquisition of facilities 
and equipment for broadband service in eligible rural communities. 
Under the Farm Bill, the Agency was directed to promulgate regulations 
without public comment within 120 days from passage. Implementing the 
program required a different lending approach for the Agency than it 
employed in its earlier telephone program because of the unregulated, 
highly competitive, and technologically diverse nature of the broadband 
market. The current regulations were published on January 30, 2003.

[[Page 26744]]

    C. Program Results: Despite the challenges in implementing this new 
program, significant progress has been made in facilitating rural 
broadband deployment. As of March 15, 2007, the Agency approved 68 
loans totaling $1.2 billion for broadband deployment projects 
headquartered in 36 states. Eight of those projects are completed in 
Kansas, Louisiana, Michigan, North Dakota, Nebraska, South Dakota, 
Texas and Washington. The remainder of the projects are in various 
stages of construction or planning. Through these loans, more than half 
a million households in more than 1,000 rural communities will receive 
broadband service. Approximately 40 percent of these communities had no 
broadband service at the time the loan was approved, and an additional 
20 percent had limited access to broadband services.
    As mandated by Congress, the program is to be administered in a 
technology neutral manner. As the results show below, the Agency has 
achieved that mandate by financing the deployment of a wide array of 
technologies capable of meeting the needs of rural communities:

------------------------------------------------------------------------
                                                              Number of
                        Technology                              loans
                                                             approved *
------------------------------------------------------------------------
Broadband over Powerline..................................            1
Digital Subscriber Line...................................           15
Wireless..................................................           18
Hybrid Fiber Coax.........................................           12
Optical Fiber.............................................          27
------------------------------------------------------------------------
* Applications deploying multiple technolo- gies counted in each
  category.

    In addition to the various types of technology deployments, loans 
have been made to a very diverse set of organizations using various 
business models. Nearly 90 percent of loans approved were made to 
private companies, 7 percent were made to cooperatives, 3 percent were 
made to municipalities and 1 loan was awarded to a tribal authority.
    D. Program Improvements: Since the Broadband Program's inception, 
many modifications have been made to improve the administration of the 
program. Specifically, the Agency has created a standardized loan 
application; a Broadband Credit Committee to evaluate risks in the 
program; a financial assessment model to measure loan feasibility; and 
new standardized loan documents to cover the unique attributes of the 
industry, as well as accommodate private lending from financial markets 
which were not traditional Agency lending partners.
    Moreover, the Agency now encourages applicants to work with Agency 
local field representatives prior to submitting applications to 
increase loan processing efficiency. Program outreach efforts have been 
well received and are in high demand today. To date, the Agency has 
conducted nearly two dozen awareness sessions with 1,488 attendees 
nation-wide.
    As a result of its efforts, the Agency has seen dramatic 
improvements in its application processing. The average processing time 
in 2006 was almost half of what it was in 2003. In addition, to 
increase program awareness and transparency, modifications have been 
made to the Agency's Web site to ensure that information is available 
to potential applicants, potential competitors, and the public.
    E. Review of Rules and Processes: While the Agency is proud of the 
results achieved thus far, it is also aware that improvements to the 
Broadband Program are necessary. Over the course of the last four 
years, the Broadband Program has encountered challenges in 
administering the program and learned from them. The challenges include 
the competitive nature of the broadband communications industry, the 
fact that many applicants are start-up organizations with limited 
resources to meet equity requirements, the rapid pace of technology 
advancement and increases in demand for bandwidth, and the need for 
increased transparency in providing communities and incumbent providers 
with information on new market entrants. Program participants and 
industry members have since raised concerns with the implementation of 
the program. The Agency's experience, coupled with input from industry 
representatives, state and regional associations, and other interested 
parties, has prompted the Agency to propose amendments to its 
regulations to address these challenges and other critical issues 
affecting the deployment of broadband service in rural America. The 
Agency is, however, still committed to Title VI's direction to give 
priority to eligible rural communities where broadband service is not 
available. Further, the Agency is seeking comment on the proposals, 
which as noted above, will be the first formal opportunity for public 
comment on the rules associated with the Broadband Program. 
Specifically, this proposed rule will address: (1) Funding in 
competitive markets and new eligibility requirements; (2) New equity 
and market survey requirements; and (3) New legal notice requirements 
to increase transparency. Further, the program proposes reordering the 
present rules to make them more user-friendly, and rewording certain 
rules, without substantively changing them, to clarify their meaning. 
In addition, the proposed changes codify processes and procedures 
currently published in Agency guides (i.e., application submission 
procedures, competitive analysis, reporting requirements, etc.). In 
order to easily identify which sections have been modified, added, 
removed, or re-ordered, the following table summarizes the proposed 
changes:

                  Broadband Loan and Loan Guarantee Program Rules--Summary of Proposed Changes
----------------------------------------------------------------------------------------------------------------
          Existing section            Proposed new location       Action taken         Proposed content change
----------------------------------------------------------------------------------------------------------------
Subpart A--........................  1738.1................  Modified..............  Revised 1738.1(c) to state
                                                                                      that ``RUS will not assess
                                                                                      fees for any loan made
                                                                                      under this part''.
General:
    Sec.   1738.1 General statement  ......................  ......................   Added reference to
                                                                                      agency's web site in
                                                                                      paragraph (b).
    Sec.   1738.2 Definitions......  1738.2................  New and modified        Current text designated (a)
                                                              definition and          and new (b) added.
                                                              additional language    Modified Definitions--In
                                                              at 1738.2(b).           most cases, definitions
                                                                                      were modified for
                                                                                      clarification purposes.
                                                                                       Acquisition.
                                                                                       Eligible Rural Community.
                                                                                       Financial Feasibility.
                                                                                       Forecast Period.
                                                                                       Interim Construction.
                                                                                       Interim Financing.
                                                                                       Release of Funds.

[[Page 26745]]

 
                                                                                     Deleted Definitions.
                                                                                       Broadband pilot.
                                                                                       Mortgage.
                                                                                       Private Loan Guarantee.
                                                                                       RUS Telecommunications
                                                                                        borrower.
                                                                                     New Definitions--The Agency
                                                                                      has added definitions to
                                                                                      clarify existing
                                                                                      regulation and support
                                                                                      proposed rule
                                                                                      modifications.
                                                                                       Advance of Funds.
                                                                                       Agency.
                                                                                       Arm's Length Transaction.
                                                                                       Broadband Loan.
                                                                                       Census block.
                                                                                       Census block group.
                                                                                       Derivative.
                                                                                       Eligible Entity.
                                                                                       Equity or Net Worth.
                                                                                       Existing Broadband
                                                                                        Service Provider.
                                                                                       Guaranteed Amount Debt
                                                                                        Derivative.
                                                                                       Guaranteed Amount Equity
                                                                                        Derivative.
                                                                                       Guaranteed Amount
                                                                                        Equivalent.
                                                                                       Guaranteed Loan Amount.
                                                                                       Guaranteed Loan Note.
                                                                                       Guaranteed Loan Portion.
                                                                                       Guaranteed Loan Portion
                                                                                        Amount.
                                                                                       Guaranteed Loan Portion
                                                                                        Note.
                                                                                       Incumbent Service
                                                                                        Provider.
                                                                                       Indefeasible Right to Use
                                                                                        Agreement (IRU).
                                                                                       Loan Guarantee.
                                                                                       Loan Guarantee Documents.
                                                                                       Pre-Loan Expenses.
                                                                                       Security Documents.
                                                                                       Telecommunications Loan.
                                                                                       Urban Area.
                                                                                       Un-guaranteed Amount
                                                                                        Equivalent.
                                                                                       Un-guaranteed Loan Amount
                                                                                        and Un-guaranteed Loan
                                                                                        Portion Amount.
Subpart B--Loan Purposes and Basic
 Policies:
    Sec.   1738.10 General.........  1738.1(a).............  Modified/relocated....  Refinancing language in (b)
                                     1738.2(a).............  ......................   was moved to 1738.22(e).
                                                                                     Moved and modified text
                                                                                      related to economic
                                                                                      composite life to
                                                                                      1738.2(a).
    Sec.   1738.11 Availability of   1738.33...............  Modified/relocated....  Legal notice language moved
     broadband service.              1738.61...............  ......................   to 1738.33.
                                                                                     (a) and (b) (1) through (3)
                                                                                      included in new
                                                                                      prioritization scheme in
                                                                                      1738.61.
    Sec.   1738.12 Location of       1738.22(a)............  Modified..............  Clarify eligible items for
     facilities.                                                                      financing.
    Sec.   1738.13 Allocation of     1738.62...............  Modified..............  Condensed original language
     funds.                                                                           by citing the RE Act as
                                                                                      the guidance for
                                                                                      allocating funds.
    Sec.   1738.14 One-time          Deleted...............  Deleted...............  No longer relevant.
     priority for unfunded
     applications from the
     broadband pilot program.
    Sec.   1738.15 Priorities......  1738.61...............  Modified..............  Added new language
                                                                                      regarding prioritization
                                                                                      of applications in the
                                                                                      following order:
                                                                                     (1) Applications that
                                                                                      include only households
                                                                                      that have no broadband
                                                                                      access or only one
                                                                                      Existing Broadband Service
                                                                                      Provider.
                                                                                     (2) Applications that
                                                                                      include only areas where
                                                                                      at least 40 percent of
                                                                                      households have no access
                                                                                      to Broadband service or
                                                                                      access to only one
                                                                                      Existing Service provider;
                                                                                     (3) All other applications.
                                     1738.62...............  ......................  Relocated language
                                                                                      regarding State and
                                                                                      National reserves to
                                                                                      1738.62. Text is reworded
                                                                                      to reference the Act.
    Sec.   1738.16 Eligible          1738.2................  Relocated/modified....  Moved language regarding
     entities.                                                                        the types of entities
                                                                                      eligible for loans to
                                                                                      1738.2(a).
                                     1738.20...............  ......................  Moved language regarding
                                     1738.21...............                           eligible entities
                                                                                      (existing 1738.16(a) and
                                                                                      (b)) to 1738.2(a).

[[Page 26746]]

 
                                                                                     Added new section, 1738.21,
                                                                                      to detail requirements to
                                                                                      serve areas with little or
                                                                                      no service:
                                                                                     --Start-up operations and
                                                                                      new entrants--40% of
                                                                                      proposed households in a
                                                                                      proposed service area must
                                                                                      have access to no or only
                                                                                      one existing broadband
                                                                                      provider.
                                                                                     --Incumbent Service
                                                                                      Providers proposing to
                                                                                      extend service beyond
                                                                                      their existing footprint--
                                                                                      40% of proposed households
                                                                                      in extended service areas
                                                                                      must have access to no or
                                                                                      only one existing
                                                                                      broadband provider.
                                                                                     --Incumbent Service
                                                                                      Providers submitting
                                                                                      applications solely for
                                                                                      the purpose of upgrading
                                                                                      existing facilities within
                                                                                      Eligible Rural Communities
                                                                                      must offer Broadband
                                                                                      Service with enhanced
                                                                                      features.
    Sec.   1738.17 Civil rights....  1738.64...............  Relocated/unmodified..  Redesignated as 1738.64 but
                                                                                      text is unchanged.
    Sec.   1738.18 Minimum and       1738.12...............  Relocated/modified....  Removed reference to plant
     maximum loan amount.                                                             costs.
                                                                                     Moved language from
                                                                                      1738.30(b)(2) regarding
                                                                                      annual publication of max/
                                                                                      min to this section.
                                                                                     Removed language ``maximum
                                                                                      loan amounts apply only to
                                                                                      an applicant for a direct
                                                                                      4-percent broadband loan''
                                                                                      and made a general
                                                                                      statement that the maximum
                                                                                      will be set in the NOFA
                                                                                      published annually in the
                                                                                      Federal Register. This
                                                                                      allows the Agency the
                                                                                      flexibility to set the
                                                                                      maximum level based on
                                                                                      current funding levels and
                                                                                      portfolio concentration.
    Sec.   1738.19 Facilities        1738.19...............  Modified/clarified....  General reorganization to
     financed.                                                                        more clearly define for
                                                                                      applicants what is and is
                                                                                      not eligible for funding
                                                                                      by dividing the two topics
                                                                                      into separate sections.
                                                                                     Old 1738.19(h) is now in
                                                                                      1738.19(b) and renamed
                                                                                      ineligible areas.
                                     1738.22...............  ......................  1738.22 Items Eligible to
                                                                                      be financed.
                                                                                     1738.22(a)--new language
                                                                                      regarding start-up and
                                                                                      overhead costs is a
                                                                                      further clarification that
                                                                                      these costs are eligible
                                                                                      for financing. Although
                                                                                      not specified in the
                                                                                      earlier rules, these costs
                                                                                      were considered part of
                                                                                      the construction costs and
                                                                                      therefore have been
                                                                                      routinely funding in the
                                                                                      loan program.
                                                                                     1738.22(b)--new language
                                                                                      regarding pre-loan
                                                                                      expenses.
                                                                                     1738.22(c)--new language
                                                                                      (replacing old 1738-19(b))
                                                                                      limiting the cost of the
                                                                                      capital lease for the
                                                                                      first 5 years of the loan
                                                                                      amortization period. This
                                                                                      language was added because
                                                                                      the standard period for
                                                                                      advancing all funds set in
                                                                                      all RUS loan documents is
                                                                                      5 years. Any lease
                                                                                      extending beyond that
                                                                                      period should not have
                                                                                      funds available at that
                                                                                      time.
                                                                                     1738.22(d)--new language
                                                                                      clarifies the definition
                                                                                      of ``necessary and
                                                                                      incidental'' that
                                                                                      currently exists in
                                                                                      1738.21(c). The common
                                                                                      practice of the agency is
                                                                                      to interpret this clause
                                                                                      as 50%. We have made this
                                                                                      standard known in public
                                                                                      workshops for several
                                                                                      years.
                                     1738.23...............  Modified/clarified....  1738.23(d)--clarification
                                                                                      that funds cannot be used
                                                                                      to purchase or acquire the
                                                                                      equipment of an affiliate.
                                                                                     1738.23(e)--modified
                                                                                      language regarding
                                                                                      financing of CPE
                                                                                      equipment; applicants
                                                                                      often sell the CPE rather
                                                                                      than lease it to the end-
                                                                                      user. The original intent
                                                                                      was that this equipment
                                                                                      would be used as
                                                                                      collateral; however,
                                                                                      because CPE is often
                                                                                      physically out of the
                                                                                      control of the applicant
                                                                                      and because the value of
                                                                                      end-user equipment
                                                                                      depreciates quickly, we
                                                                                      have determined that other
                                                                                      arrangements offer the
                                                                                      Agency a similar level of
                                                                                      security, while offering
                                                                                      the applicant more
                                                                                      flexibility under our
                                                                                      rules.
                                                                                     Eliminated old 1738.19(g)--
                                                                                      This rule specifically
                                                                                      addressed actions the
                                                                                      Agency would take prior to
                                                                                      October 2004. This rule is
                                                                                      outdated and no longer
                                                                                      valid.

[[Page 26747]]

 
    Sec.   1738.20 Credit support    1738.31...............  Modified..............  Now called Equity
     requirement.                                                                     Requirement and Additional
                                                                                      cash requirement.
                                     1738.32...............  ......................  Added incentive to serve
                                                                                      areas with little or no
                                                                                      broadband service: reduced
                                                                                      initial equity requirement
                                                                                      to 10% for applications
                                                                                      filing pursuant to
                                                                                      1738.31(a) or (b); 20%
                                                                                      equity requirement remains
                                                                                      for all other
                                                                                      applications.
                                                                                     Added clarification on the
                                                                                      use of letters of credit
                                                                                      and bonds to meet equity
                                                                                      requirements.
                                                                                     Added language to reserve
                                                                                      the Administrator's right
                                                                                      to modify or waive the
                                                                                      requirements of this
                                                                                      section as long as those
                                                                                      modifications do not
                                                                                      result in a projected
                                                                                      negative cash position in
                                                                                      any quarter throughout the
                                                                                      forecast period and the
                                                                                      modifications are required
                                                                                      to provide Broadband
                                                                                      Service in areas that are
                                                                                      not capable of receiving
                                                                                      Broadband Service or can
                                                                                      receive Broadband Service
                                                                                      from only one Existing
                                                                                      Broadband Service
                                                                                      Provider.
                                                                                     Modified cash requirement
                                                                                      language so that cash
                                                                                      requirements are
                                                                                      considered at time of
                                                                                      feasibility determination
                                                                                      rather than for
                                                                                      eligibility.
    Sec.   1738.21 Interim           1738.60...............  Relocated/modified....  Revised for clarification.
     financing.                                                                       No substantive change.
    Sec.   1738.22 Loan security...  1738.41(b) (c) & (d)..  Modified..............  1738.41(b), (c) and (d)--
                                                                                      requirement unchanged,
                                                                                      reworded to provide
                                                                                      further clarity.
                                     1738.37(e)............  ......................  Old 1738.22(e) language
                                                                                      regarding TIER was moved
                                                                                      to financial analysis
                                                                                      section--1738.37(e).
Subpart C--Types of Loans:
    Sec.   1738.30 Rural broadband   1738.11...............  Relocated/modified....  Modified original language
     access loans and loan                                                            in 1738(b)(1)(i)(A) to
     guarantees.                                                                      increase the populations
                                                                                      test for a 4% loan from
                                                                                      2,500 to 5,000.
                                     1738.43...............  ......................  Modified original language
                                                                                      in 1738.30(b)(1)(i)(B) to
                                                                                      be consistent with
                                                                                      proposed rules. Language
                                                                                      located in 1738.11b(1)(ii)
                                                                                      now reads ``is not capable
                                                                                      of receiving broadband
                                                                                      service or can receive
                                                                                      service from only one
                                                                                      existing broadband service
                                                                                      provider.
                                                                                     Deleting original language
                                                                                      in 1738.30(b)(1)(ii)--This
                                                                                      language was intended to
                                                                                      promote service to
                                                                                      outlying rural areas
                                                                                      because these areas had
                                                                                      less access to broadband
                                                                                      service. The new proposed
                                                                                      regulations will achieve
                                                                                      this same goal by
                                                                                      requiring most applicants
                                                                                      to include a significant
                                                                                      portion of service areas
                                                                                      with little or no
                                                                                      broadband service.
                                                                                     Deleting original language
                                                                                      in 1738.30(b)(1)(i)(C)--
                                                                                      Our experience has
                                                                                      demonstrated that this
                                                                                      rule was too restrictive
                                                                                      and prevented most
                                                                                      applicants from qualifying
                                                                                      for the 4% funding. The
                                                                                      proposed regulations will
                                                                                      require most applicants to
                                                                                      include service to areas
                                                                                      with little or no
                                                                                      broadband service. These
                                                                                      areas are likely to have
                                                                                      lower population density
                                                                                      and higher deployment
                                                                                      costs. Removing the
                                                                                      original restriction in
                                                                                      1738.30(b)(1)(i)(C) will
                                                                                      better support deployment
                                                                                      to these areas by allowing
                                                                                      applicants access to lower
                                                                                      cost financing.
                                     1738.11...............  Relocated/modified....  Current 1738.30(b)(2) has
                                     1738.43...............  ......................   been relocated to 1738.12.
                                                                                     Current rules specific to
                                                                                      loan guarantees have been
                                                                                      moved to 1738.43
    Sec.   1738.31 Full faith and    1738.43(f)............  Relocated/unmodified..  Moved to 1738.43(f) without
     credit.                                                                          substantial changes.
Subpart D--Terms of Loans:
    Sec.   1738.40 General.........  1738.40(a)............  Relocated/modified....  Current text designated as
                                                                                      paragraph (a) and revised
                                                                                      to clarify for applicants.
    Sec.   1738.41 Payments on       1738.42...............  Relocated/modified....  Added language regarding
     Loans.                                                                           the Administrator's
                                                                                      ability to modify
                                                                                      requirements on a case-by-
                                                                                      case basis for areas that
                                                                                      are not capable of
                                                                                      receiving or can only
                                                                                      receive from one existing
                                                                                      broadband provider.
----------------------------------------------------------------------------------------------------------------


[[Page 26748]]


                  Broadband Loan and Loan Guarantee Program Rules--Summary of Proposed Changes
----------------------------------------------------------------------------------------------------------------
        Proposed new sections               Subject matter                      Proposed content
----------------------------------------------------------------------------------------------------------------
Subpart D--Loan Application
 Requirements:
    1738.34..........................  Market Survey..........  The rules proposed in this section codify
                                                                 existing requirements published in Bulletin
                                                                 1738-1.
                                                                Modification of Market Survey Requirement:
                                                                 1738.34(b) now eliminates the requirement for a
                                                                 market survey if an applicant is projecting
                                                                 less than a 15 percent penetration of the
                                                                 households passed, by the end of the Forecast
                                                                 Period. A detailed competitive analysis is
                                                                 still required for all applications. We are
                                                                 proposing this modification in response to
                                                                 applicants' concerns that the cost of
                                                                 conducting a market survey is a barrier to
                                                                 filing. The Agency has relied more heavily on
                                                                 the competitive analysis and financial and risk
                                                                 analysis to determine project feasibility, and
                                                                 will continue to do so under the new proposal.
                                                                Added language reserving the Administrator's
                                                                 right to waive the requirements on a case-by-
                                                                 case basis.
    1738.35..........................  Competitive analysis...  The rules proposed in this section codify
                                                                 existing requirements published in Bulletin
                                                                 1738-1. Applicants are aware of the
                                                                 requirements and currently comply with them.
    1738.36..........................  Business plan..........  The rules proposed in this section codify
                                                                 existing requirements published in Bulletin
                                                                 1738-1. Applicants are aware of the
                                                                 requirements and currently comply with them.
    1738.37..........................  Financial information..  The rules proposed in this section codify
                                                                 existing requirements published in Bulletin
                                                                 1738-1. Applicants are aware of the
                                                                 requirements and currently comply with them.
                                                                The proposed rule also allows cash-flow from
                                                                 operations to be used in determination of the
                                                                 cash requirement.
    1738.38..........................  System design..........  The rules proposed in this section codify
                                                                 existing requirements published in Bulletin
                                                                 1738-1. Applicants are aware of the
                                                                 requirements and currently comply with them.
                                                                New language reserving the Administrator's right
                                                                 to waive the requirements on a case-by-case
                                                                 basis.
    1738.39..........................  Submission of            New section that clarifies that applicants are
                                        application.             encouraged to submit applications through the
                                                                 General Field Representative in their state for
                                                                 review prior to final submission. Applications
                                                                 will still be accepted at the National Office.
Subpart F--Post Application
 Procedures:
    1738.50..........................  Notification of          This new section codifies currently existing
                                        completeness.            internal processes and is designed to help
                                                                 applicants understand the post-application
                                                                 process. We believe this demonstrates the
                                                                 Agency's commitment to a standardized and more
                                                                 transparent process.
    1738.51..........................  Determination of         This new section codifies currently existing
                                        feasibility.             internal processes and is designed to help
                                                                 applicants understand the post-application
                                                                 process. We believe this demonstrates the
                                                                 Agency's commitment to a standardized and more
                                                                 transparent process.
    1738.52..........................  Notice to applicant of   This new section codifies currently existing
                                        decision.                internal processes and is designed to help
                                                                 applicants understand the post-application
                                                                 process. We believe this demonstrates the
                                                                 Agency's commitment to a standardized and more
                                                                 transparent process.
Subpart G--Miscellaneous Requirements
 and Information:
    1738.63..........................  Annual audit and         Codifies standard requirements currently
                                        reporting requirements.  existing in broadband loan closing documents.
                                                                Added language to 1738.63(a) to allow the
                                                                 Administrator to waive the requirement that an
                                                                 audit be performed in the year in which the
                                                                 loan is approved if operations of the applicant
                                                                 have not yet started.
    1738.65..........................  Applicable laws........  Codifies standard requirements existing in all
                                                                 broadband loan documents.
----------------------------------------------------------------------------------------------------------------

    F. Proposed Rule Changes: The following proposals seek to implement 
changes to the Broadband Program's regulations regarding: (1) Funding 
in competitive markets and new eligibility requirements; (2) New equity 
and market survey requirements; and (3) New legal notice requirements 
to increase transparency. Through this Notice, the Agency seeks 
comments on all of these proposed changes from any and all interested 
parties.
    (1) Funding in competitive markets and new eligibility 
requirements: The most intractable problem the Broadband Program has 
encountered is finding feasible loan applications which propose to 
serve only rural areas which do not have broadband service. The cost of 
building out a broadband system coupled with low rural population 
density in unserved areas has consistently yielded loan proposals which 
cannot be supported by project revenues. Consequently, in the history 
of the program, the Agency has certified as complete only one 
application to serve a rural area completely without broadband service. 
Uniquely, that application was for an Indian reservation with a very 
different competitive environment.
    In order for broadband loans to be feasible, it is necessary for 
applicants to serve low cost, more densely populated areas, as well as 
low density high cost areas. Although it is necessary to serve high 
density areas which are likely to have broadband service, the Agency 
proposes to place limitations on service to such areas. The Agency 
proposes changes in eligibility that would prohibit funding within 
urban areas, regardless of population, and areas where a significant 
share of the market is already served by incumbent providers. To 
accomplish this, the Agency is adding or modifying three definitions, 
Existing Broadband Service Provider, Eligible Rural Community, and 
Urban Area, which will identify communities that will be ineligible for 
funding by establishing that sufficient service is already being 
provided.
    (a) Existing Broadband Service Provider. The Agency initially 
proposes the definition of an existing broadband service provider to 
identify existing competition. As a basis, the Agency will use the 
current definition of

[[Page 26749]]

``broadband'' established by the Federal Communications Commission 
(FCC) to determine Incumbent Service Providers that are providing 
broadband service to the households in the applicant's proposed 
communities. To be recognized as an Existing Broadband Service 
Provider, the Incumbent Service Provider must provide evidence and 
certify to the Agency that 10 percent of the households passed by their 
facilities are purchasing their broadband service. Using this new 
definition, funding for any community where there are four or more 
Existing Broadband Service Provider will be prohibited.
    In establishing the benchmark of ``10 percent of households,'' the 
Agency sought to establish a threshold penetration of the broadband 
market in any particular community in order to separate broadband 
service providers who are actively and successfully selling their 
services from those who are only marginally engaged with a community. 
The Agency believes that the threshold should differentiate providers 
who only market to a limited segment of the community (e.g. to 
businesses, densely populated areas, apartment buildings, etc.) so that 
a community is not treated as having service available from a provider 
who does not, in fact, serve all types of customers, throughout its 
service territory.
    Nationwide, slightly more than 40 percent of households are 
subscribing to broadband service. This number was determined by using 
the FCC's report entitled ``High-Speed Services for Internet Access: 
Status as of June 30, 2006'' and comparing the number of residential 
Advanced Services Lines (45.9 million) with the number of households in 
the country. The FCC report indicates that the two major technologies 
providing broadband service are cable modem (59.9%) and DSL (36.0%). In 
most rural communities, these two types of service are offered by two 
providers, the incumbent local cable company and the incumbent local 
exchange carrier (ILEC). For example, assuming that a particular 
community meets the national average penetration percentage of 40.9 
percent and further assuming that there are only two providers 
supplying these services in the same proportions as the national data 
reflect, the percentage of households served by these two providers 
would be 24.5 percent and 14.7 percent for the cable company and the 
ILEC, respectively. This example reflects an idealized estimate. 
Nonetheless, looking to the idealized case for guidance indicates that 
setting a threshold at 20 percent of the households in a market 
(roughly half of the average penetration) might well eliminate all but 
one provider in a market. Even a 15 percent threshold seems high, since 
nationwide, DSL does not yet reach that penetration. Therefore, we 
propose a threshold of 10 percent of the households in a market. A 
company offering broadband service will need to have a customer base of 
at least 10 percent of the households in a community in order to be 
considered an Existing Broadband Service Provider for the purposes of 
this proposed rule
    (b) Urban Area. In addition to identifying competition, the Agency 
proposes limiting eligibility of those communities that qualify under 
the regulations as rural in population, but are located within the 
boundaries of an Urban Area. The Agency believes that using the pre-
established definition of Urban Area will clarify exactly which 
communities are eligible and reduce the number of ``urban-like'' 
communities that technically qualify in population size but are not 
representative of rural in most other characteristics.
    (c) Eligible Rural Community. Tying together the preceding two 
concepts, then, the Agency proposes that an Eligible Rural Community 
mean a community which contains less than four Existing Broadband 
Service Providers and is not located in an Urban Area. This 
modification recognizes that, where there are four or more existing 
providers, the market is sufficiently served and does not warrant an 
additional market entrant subsidized through Federal funding.
    In addition, the Agency continues to prioritize deployment of 
Broadband Service to households with no or limited broadband access 
while ensuring the financial feasibility of loans. To accomplish this, 
the Agency will require applications from new market entrants, start-
ups or incumbent providers that are expanding their service area, to 
enter areas where 40 percent of households either have no or limited 
access to Broadband Service. This requirement addresses the need to 
reach unserved or underserved areas while also permitting service to 
more lucrative areas, which may be served by up to three Existing 
Service Providers, in order to attract feasible loan proposals which 
are supportable from project revenues. Permitting service in areas with 
up to three Existing Service Providers addresses the need for 
applicants to leverage revenues from lower-cost users (typically those 
in more densely populated areas within a city or town) in order to 
provide service to rural households in higher cost areas, while 
excluding areas with higher levels of competition where loan 
feasibility is unlikely.
    Lastly, the Agency's proposed rule includes loans to incumbent 
providers to upgrade existing facilities without requiring service to 
additional customers as long as the upgrades enhance existing Broadband 
Service. For purposes of determining whether the proposed service area 
has ``four or more'' Existing Service Providers, thereby disqualifying 
the area from lending consideration, the applicant will not be 
considered as an Existing Broadband Service Provider. Therefore, a 
facility upgrade loan may be made to an applicant operating in an area 
which has three other Existing Broadband Service Providers.
    The Agency believes that this approach will benefit rural residents 
by allowing incumbents to keep pace with the changing needs of their 
customers through continued advancement in technologies and services
    (2) New equity and market survey requirements: Two requirements of 
the Broadband Program have significantly precluded applicants from 
being eligible for a Broadband loan, the equity requirement and the 
market survey requirement. In response, the Agency is modifying both 
requirements so as to provide incentives for serving markets with 
limited or no broadband service and to reduce the costs to applicants 
under certain circumstances.
    (a) Sec.  1738.31 Equity requirement: Under the current rules, to 
be eligible for a loan, applicants must have a 20 percent (of the 
requested loan amount) credit support contribution and in some 
instances, cash equal to the first full year's operations. The concept 
of credit support was unique to the Agency and has been a source of 
confusion for many applicants. In an effort to better clarify its 
requirements, the Agency is proposing to replace the credit support 
methodology with a straight forward equity requirement, mirroring 
private industry.
    With this proposed rule modification, the Agency is also addressing 
our applicants' challenges in obtaining private investment capital to 
provide service in less lucrative, rural markets, particularly those 
with no broadband service or service from only one provider. A 
significant number of applicants, many of whom are start-ups, have 
noted that private financing for these areas is limited and difficult 
to obtain. Further, applicants assert that the current equity 
requirement proves too burdensome and serves as a barrier to entities 
seeking to serve these markets. The Agency's records generally support 
this assertion. Of the 106

[[Page 26750]]

applications returned since the Program's inception, more than half 
were returned for lack of credit support. Therefore, the Agency is 
proposing to reduce its equity requirement from 20 percent to 10 
percent of the requested loan amount for applicants proposing to serve 
an area wherein at least 40 percent of the households have no broadband 
access or service from only one provider. The Agency proposes that all 
other applicants be required to demonstrate a minimum equity position 
equal to 20 percent of the requested loan amount at the time the 
application is submitted.
    (b) Sec.  1738.33 Market survey: Currently, the Agency uses market 
surveys, competitive assessments and financial analyses as tools to 
validate subscriber projections and determine loan feasibility. 
Applicants have asserted that completing a market survey can prove to 
be onerous, unnecessary, and cost prohibitive, especially for those 
seeking to serve areas where no service exists. Based on our experience 
with the program, the Agency finds that most market surveys submitted 
support a 15 percent penetration rate. As a result, the Agency relies 
more heavily on other means, such as the detailed competitive and 
financial analyses, to determine feasibility for areas where 15 percent 
or less penetration is projected. Therefore, in communities where an 
applicant is proposing to serve less than 15 percent of the market, the 
Agency is proposing to eliminate the requirement for a market survey, 
but continue to require submission of competitive and financial 
analyses.
    (3) New legal notice requirements to increase transparency: The 
Agency is also proposing to modify the Legal Notice requirement of 
Sec.  1738.32 to improve information to customers, existing service 
providers, and applicants. This requirement of the existing rule was 
designed to: (i) Identify areas with no existing Broadband Service for 
priority consideration, (ii) notify communities of the potential 
entrant of a new service provider, and (iii) provide incumbent service 
providers with an opportunity to describe their current service 
territory and service offerings, market share, etc. The concept of the 
legal notice is well intended and, the Agency believes, still necessary 
and useful to the Agency in making lending decisions. However, based on 
past experience, the current process needs to be modified. The Agency 
proposes further modifications to increase transparency, reach a 
broader range of interested parties, and provide more detailed 
information on the extent of broadband deployment by incumbent 
providers. To address concerns with timely access to legal notices, the 
Agency is proposing to establish a clearly defined window for posting 
of the notices. Specifically, the legal notice will be published on the 
Agency's webpage after the application has been received in the 
Agency's national office and will remain on the webpage for a period of 
30 working days. The notice must set forth the applicant's total 
proposed service area, including a service area map. An applicant will 
also need to indicate if it is proposing voice and video services, in 
addition to the present requirement of its intention to provide data 
services. This will increase the transparency of the new application to 
the incumbent provider, as well as alert customers to potential new 
service offerings.
    In response to the Legal Notice, incumbent providers will have new 
responsibilities as well. The Legal Notice will now request any 
Incumbent Service Provider to submit to the Agency the following 
information (within 30 days of notice posting) on the number of 
customers: (i) Capable of receiving Broadband Service in the 
applicant's proposed service area; (ii) purchasing Broadband Service in 
the applicant's proposed service area (including the rates of data 
transmission being offered, and the cost of each level of Broadband 
Service); and (iii) receiving other services that will be offered in 
the applicant's proposed service area and the associated rates for 
these other services. An incumbent will also be requested to submit a 
map of its service territory.
    It is important that the Agency receive this information, as it 
will be used by the Agency to determine if the incumbent will be 
classified as an Existing Broadband Service Provider, and ultimately 
whether an Eligible Rural Community is eligible for funding. If, 
however, an incumbent does not submit a response to the legal notice 
within the applicable time period, it will not be considered an 
Existing Broadband Service Provider for the purpose of determining 
applicant eligibility. Nonetheless, the incumbent will still be 
considered in the lending decision as a competitor. All proprietary and 
confidential information submitted by the incumbent will not be 
released under the Freedom of Information Act.

List of Subjects in 7 CFR Part 1738

    Broadband, Loan programs-communications, Rural areas, Telephone, 
Telecommunications.

    For reasons set out in the preamble, the Agency proposes to amend 
chapter XVII of title 7 of the Code of Federal Regulations by revising 
part 1738 to read as follows:

PART 1738--RURAL BROADBAND ACCESS LOANS AND LOAN GUARANTEES

Subpart --General
Sec.
1738.1 General.
1738.2 Definitions.
1738.3--1738.9 [Reserved]
Subpart B--Types of Loans
1738.10 General.
1738.11 Broadband Loans and Loan Guarantees.
1738.12 Minimum and maximum loan amounts.
1738.13-1738.18 [Reserved]
Subpart C-- Ineligible Areas, Eligible Entities and Eligible/Not 
Eligible Items
1738.19 Ineligible areas.
1738.20 Eligible entities.
1738.21 Service requirement for proposed projects.
1738.22 Items eligible to be financed.
1738.23 Items not eligible to be financed.
1738.24-1738.29 [Reserved]
Subpart D--Loan Application Requirements
1738.30 General.
1738.31 Equity requirement.
1738.32 Additional cash requirements.
1738.33 Legal notice.
1738.34 Market survey.
1738.35 Competitive analysis.
1738.36 Business plan.
1738.37 Financial information.
1738.38 System design.
1738.39 Submission of the application.
Subpart E--Terms for Loans and Loan Guarantees
1738.40 Direct 4 Percent and Cost of Money Loans.
1738.41 Loan security.
1738.42 Payments on loans.
1738.43 Loan guarantees.
1738.44-1738.49 [Reserved]
Subpart F--Post-Application Procedures
1738.50 Notification of completeness.
1738.51 Determination of feasibility.
1738.52 Notice to applicant on decision.
1738.53-1738.59 [Reserved]
Subpart G--Miscellaneous Requirements and Information
1738.60 Interim financing and construction.
1738.61 Priority for processing loan applications.
1738.62 Allocation of funds.
1738.63 Annual audit and reporting requirements.
1738.64 Applicable laws.
1738.65-1738.99 [Reserved]
1738.100 OMB control number.

    Authority: Pub. L. 107-171, 7 U.S.C. 901 et seq.

[[Page 26751]]

Subpart A--General


Sec.  1738.1  General statement.

    (a) This part sets forth the general policies, types of loans and 
loan guarantees, and program requirements under the Rural Broadband 
Access Loan and Loan Guarantee Program to provide funds on a technology 
neutral basis for the costs of construction, improvement, and 
acquisition of facilities and equipment for broadband service in 
eligible rural communities.
    (b) Additional information regarding the Rural Broadband Access 
Loan and Loan Guarantee Program can be found in Bulletin 1738-1, 
``Rural Broadband Access Loan and Loan Guarantee Application Guide'' 
and Bulletin 1738-2, ``Rural Broadband Access Loan and Loan Guarantee 
Advance and Construction Procedures Guide.'' These bulletins are 
located on the Agency's Web page: http://www.usda.gov/rus/telecom/broadband.htm. or you can contact Kenneth Kuchno, Director, Broadband 
Division at the following address for copies: Stop 1599, South 
Agriculture Building, Room 2868, Washington , DC 20250.(c) No fees or 
charges will be assessed for any loan made under this part.


Sec.  1738.2  Definitions.

    (a) As used in this part:
    Acquisition means the purchase of assets that will be used to 
provide Broadband Service, such as by acquiring facilities, equipment, 
operations, licenses, or majority stock interest of one or more 
organizations. Stock acquisitions must be arms-length transactions.
    Administrator means the Administrator of the Rural Utilities 
Service (RUS), or his or her designee.
    Advance of Funds means the transfer of loan funds from the Agency 
to the borrower.
    Affiliate or Affiliated Company of any specified entity means any 
other entity directly or indirectly controlling of, controlled by, 
under direct or indirect common control with, or related to, such 
specified entity. For the purpose of this definition, ``control'' of 
any specified entity means the power to direct the management and 
policies of such specified entity, directly or indirectly, whether 
through the ownership of stock, by contract, or otherwise.
    Agency shall mean the Rural Utilities Service, which administers 
the United States Department of Agriculture's (USDA) Rural Development 
Utilities Programs.
    Applicant means an eligible entity requesting approval of a loan or 
loan guarantee under this part.
    Arms-Length Transaction means a transaction between two related or 
affiliated parties that is conducted as if they were unrelated, so that 
there is no question of conflict of interest, or a transaction between 
two otherwise unrelated or unaffiliated parties.
    Borrower means any organization that has an outstanding Broadband 
or Telecommunications loan made or guaranteed by the Agency.
    Broadband Loan means any loan approved under Title VI of the Rural 
Electrification Act of 1936 (RE Act).
    Broadband Service means any technology identified by the 
administrator as having the capacity to transmit data to enable a 
subscriber to the service to originate and receive high quality voice, 
data, graphics and video. To qualify as broadband service, the project 
must offer data transmission services and may provide voice, graphics, 
video and other services. The Agency will publish a notice in the 
Federal Register defining the minimum rate-of-data transmission 
criteria to qualify as broadband service during that fiscal year's 
funding period.
    Census block means an area normally bounded by visible features, 
such as streets, streams, and railroads, and by nonvisible features, 
such as the boundary of an incorporated place, minor civil division, 
county, or other tabulation entity as described in the latest decennial 
census.
    Census block group means a group of census blocks within a census 
tract whose numbers begin with the same digit; for example, BG 3 within 
a census tract includes all census blocks numbered from 3000 to 3999.
    Composite economic life means the weighted (by dollar amount of 
each class of facility in the loan) average economic life of all 
classes of facilities in the loan.
    Derivative means any right, interest, instrument or security issued 
or traded on the credit of the Guaranteed Loan or any Guaranteed Loan 
Portion, including but not limited to any participation share of, or 
undivided ownership or other equity interest in, the Guaranteed Loan or 
any Guaranteed Loan Portion; any note, bond or other debt instrument or 
obligation which is collateralized or otherwise secured by a pledge of, 
or security interest in, the Guaranteed Loan or any Guaranteed Loan 
Portion; or any such interest in such an interest or any such 
instrument secured by such an instrument.
    Economic life means the estimated useful service life of an asset 
as determined by the Agency.
    Eligible entity means a cooperative, nonprofit or for-profit 
corporation, limited dividend or mutual association, limited liability 
company, Indian tribe, tribal organization as defined in 25 U.S.C. 450b 
(b) and (c), state or local government, including any agency, 
subdivision, or instrumentality thereof (including consortia thereof). 
In addition, the entity must have sufficient authority to enter into a 
contract with the Agency and to carry out the purposes of the proposed 
loan. Individuals, partnerships of individuals, and entities that serve 
more than 2 percent of the telephone subscriber lines installed in the 
United States are not eligible entities.
    Eligible Rural Community means any area, as confirmed by the latest 
decennial census of the Bureau of the Census, which is not located 
within:
    (1) The boundaries of an Urban Area;
    (2) An incorporated city or town with a population of more than 
20,000; or
    (3) An area that has four or more Existing Broadband Service 
Providers (excluding the applicant).
    Equity or Net Worth means Total Assets minus Total Liabilities. For 
example, the sum of the balances of the following accounts of the 
applicant: Capital Stock or Membership Units, Additional Paid-In-
Capital, Treasury Stock, Other Capital, and Retained Earnings.
    Existing Broadband Service Provider means an Incumbent Service 
Provider that is providing Broadband Service, and is able to provide 
evidence and certify to the Agency that 10 percent of the households 
passed by their facilities are purchasing their Broadband Service. 
Resellers of Broadband Service who utilize the physical facilities of 
other service providers to deliver their products to the subscriber 
will not be considered as an Existing Broadband Service Provider.
    Feasibility study means the pro forma financial analysis prepared 
by the Agency, based on the financial projections supplied by the 
applicant and found acceptable by the Agency, to determine the 
financial feasibility of a loan.
    Financial feasibility means the ability of an applicant to generate 
sufficient revenues to cover its expenses and service its debt and meet 
the minimum TIER requirement of 1.25 by the end of the Forecast Period.
    Fiscal year means the fiscal year of the Federal Government 
(October 1 to September 30).

[[Page 26752]]

    Forecast period means the time period used in the feasibility study 
to determine if an application is financially feasible. Financial 
feasibility of a loan application is usually based on 5-year 
projections.
    Guaranteed-Amount Debt Derivative means any note, bond or other 
debt instrument or obligation which is collateralized or otherwise 
secured by a pledge of, or security interest in, the Guaranteed Loan 
Note or any Guaranteed Loan Portion Note or any Derivative, as the case 
may be, which has an exclusive or preferred claim to the Guaranteed 
Loan Amount or the respective Guaranteed Loan Portion Amount or the 
respective Guaranteed-Amount Equivalent, as the case may be.
    Guaranteed-Amount Equity Derivative means any participation share 
of, or undivided ownership or other equity interest in, the Guaranteed 
Loan or any Guaranteed Loan Portion or any Derivative, as the case may 
be, which has an exclusive or preferred claim to the Guaranteed Loan 
Amount or the respective Guaranteed Loan Portion Amount or the 
respective Guaranteed-Amount Equivalent, as the case may be.
    Guaranteed-Amount Equivalent means, with respect to any Derivative 
which is equal in principal amount to the Guaranteed Loan or any 
Guaranteed Loan Portion, that amount of payment on account of such 
Derivative which is equal to the Guaranteed Loan Amount or the 
respective Guaranteed Loan Portion Amount, as the case may be; or with 
respect to any Derivative which in the aggregate are equal in principal 
amount to the Guaranteed Loan or any Guaranteed Loan Portion, that 
amount of payment on account of such derivatives which is equal to the 
Guaranteed Loan Amount or the respective Guaranteed Loan Portion 
Amount, as the case may be.
    Guaranteed Loan Amount means that amount of payment on account of 
the Guaranteed Loan which is guaranteed under the terms of the 
Guarantee.
    Guaranteed Loan Note means, collectively, the note or notes 
executed and delivered by the Borrower to evidence the Guaranteed Loan.
    Guaranteed Loan Portion means any portion of the Guaranteed Loan.
    Guaranteed Loan Portion Amount means that amount of payment on 
account of any Guaranteed Loan Portion which is guaranteed under the 
terms of the Guarantee.
    Guaranteed Loan Portion Note means any note executed and delivered 
by the Borrower to evidence a Guaranteed Loan Portion.
    Incumbent service provider means an existing entity that is 
currently providing data, voice, video and/or graphic services in the 
applicant's proposed service area.
    Indefeasible Right to Use Agreement (IRU) means the effective long-
term lease of a portion of the capacity of a cable, specified in terms 
of a certain number of channels of a given bandwidth.
    Initial loan means the first loan made under the RE Act to a 
Borrower.
    Interim construction means the construction, improvement, or 
acquisition of facilities and equipment proposed to be funded by loan 
funds, which occurs after the application is deemed complete by the 
Agency.
    Interim financing means funding for the Interim construction.
    Loan means any loan made or guaranteed under this part by the 
Agency, unless otherwise noted.
    Loan contract means the loan agreement between the Agency and the 
borrower, including all amendments thereto.
    Loan documents mean the loan contract, note, and security 
instrument between the borrower and the Agency and any associated 
documents pertaining to a loan once the loan is approved for financing.
    Loan funds mean funds provided pursuant to a loan made or 
guaranteed under this part by the Agency.
    Loan guarantee means a loan made by another lender and guaranteed 
by the Agency.
    Loan guarantee documents mean the guarantee agreement, the loan 
contract between the guaranteed lender and the Borrower, the loan note 
guarantee, the Guaranteed Loan Note, and the Security Documents.
    Pre-loan expenses means the expenses associated with the 
preparation of a loan application. These expenses include costs 
associated with the legal notice, market survey, competitive analysis, 
financial analysis, environmental report, engineering design, and 
required legal opinions. Pre-loan expenses must be fully supported and 
acceptable to the Agency if they are to be considered for funding.
    RE Act means the Rural Electrification Act of 1936, as amended (7 
U.S.C. 901 et seq.).
    Release of funds means the availability of loan funds to be 
advanced for approved purposes.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture, and successor to the Rural 
Electrification Administration.
    Security Documents mean any mortgage, security agreement, and/or 
financing statement, or other documents which grants to the Agency a 
security interest, including any amendments and supplements thereto.
    Service area means the geographical area within which the applicant 
proposes to make Broadband Service available with a loan provided under 
this part.
    Telecommunications means the transmission and reception of voice, 
data, sounds, signals, pictures, writings, or signs of all kinds, by 
wire, fiber, radio, light, or other visual or electromagnetic means.
    Telecommunications loan means any telecommunication loan made under 
Title II, III, IV or VI of the RE Act.
    TIER means Times Interest Earned Ratio. TIER is the ratio of an 
applicant's net income (after taxes) plus (adding back) interest 
expense, all divided by interest expense.
    Total Assets means the sum of the balances of the following 
accounts of the applicant: Current Assets, Non Current-Assets, and 
Total Plant, minus the following accounts of the applicant: Accumulated 
Depreciation and Accumulated Amortization.
    Unguaranteed-amount equivalent means all amounts of payment on 
account of any Derivative other than the respective Guaranteed-Amount 
Equivalent.
    Unguaranteed loan amount means all amounts of payment on account of 
the Guaranteed Loan other than the Guaranteed Amount.
    Unguaranteed loan portion amount means all amounts of payment on 
account of any Guaranteed Loan Portion other than the respective 
Guaranteed Loan Portion Amount.
    Urban Area means, as defined by the Bureau of the Census, all 
territory, population, and housing units located within an urbanized 
area (UA) or an urban cluster (UC).
    (b) Accounting terms not otherwise defined in this part shall have 
the definition ascribed to them under generally accepted accounting 
principles (GAAP).


Sec. Sec.  1738.3-1738.9  [Reserved]

 Subpart B--Types of Loans


Sec.  1738.10  General.

    Financial assistance under the Rural Broadband Access Loan and Loan 
Guarantee Program shall be in the form of a Direct Cost-of-Money loan, 
a Direct 4 Percent Loan, and/or a Loan Guarantee to provide Broadband 
Service in Eligible Rural Communities.

[[Page 26753]]

Sec.  1738.11  Broadband Loans and Loan Guarantees.

    Broadband Loans and Loan Guarantees shall consist of one or more of 
the following three types of financial assistance:
    (a) Direct Cost-of-Money, which shall bear interest at a rate (the 
``Cost-of-Money Interest Rate'') equal to the cost of borrowing to the 
Department of Treasury for obligations of comparable maturity. The 
Cost-of-Money Interest Rate will be supplied by the Agency each time 
funds are actually advanced to the Borrower.
    (b) Direct 4 Percent, which shall bear an interest rate of 4 
percent on any advance to the Borrower.
    (1) To be eligible for a direct loan bearing an interest rate of 4 
percent, the applicant must propose serving an Eligible Rural Community 
that:
    (i) Has a population of less than 5,000 inhabitants; and
    (ii) Is not currently capable of receiving Broadband Service or can 
receive Broadband Service from only one Existing Broadband Service 
Provider.
    (iii) Is located in a county with per capita personal income that 
is less than or equal to that percent of the national per capita 
personal income which the Agency will publish in the Federal Register 
at the beginning of each fiscal year. County per capita income is 
published by the Bureau of Economic Analysis, U.S. Department of 
Commerce, at http://www.bea.doc.gov/bea/regional/reis/. The Agency will 
use the most recent statistics published on October 1 of the fiscal 
year in which the application is deemed complete by the Agency.
    (2) When an approved application exceeds the maximum amount of 4 
percent financing that may be available to the Borrower, a direct loan 
made at 4 percent may be made simultaneously with a Cost-of-Money 
Interest Rate loan.
    (3) A 4 percent loan may be made simultaneously with a Cost-of-
Money Interest Rate loan or a private loan guarantee.
    (c) Loan Guarantee, which shall bear interest at a rate, set by the 
guaranteed lender that must be consistent with the then applicable 
market rate for loans of comparable amounts and maturities.


Sec.  1738.12  Minimum and maximum loan amounts.

    Applications for loans or loan guarantees of less than $100,000 
will not be considered. The maximum of any single type of loan or loan 
combination will be published in the Federal Register at the beginning 
of each fiscal year.


Sec. Sec.  1738.13-1738.18  [Reserved]

Subpart C--Ineligible Areas, Eligible Entities and Eligible/
Ineligible Items


Sec.  1738.19  Ineligible areas.

    The Agency will not approve the use of a broadband loan:
    (a) To more than one applicant to provide Broadband Service within 
the same Eligible Rural Community; or
    (b) To an applicant proposing to provide Broadband Service in an 
Eligible Rural Community where an existing Borrower is already 
providing Broadband Service.


Sec.  1738.20  Eligible entities.

    Only Eligible Entities which propose providing Broadband Services 
in Eligible Rural Communities shall be eligible for a Broadband Loan.


Sec.  1738.21  Service requirements for proposed projects.

    (a) A project in an area not currently served by the applicant 
must:
    (1) Be in an Eligible Rural Community.
    (2) Contain at least 40 percent of households with no access to 
Broadband Service or access to only one Existing Broadband Service 
Provider. (For example, if a start-up company or new entrant submits a 
loan application to provide Broadband Service to 1000 households, 400 
(1000 x 40%) of the households must have no broadband access or have 
access to only one Existing Broadband Service Provider. Likewise, if an 
Incumbent Service Provider submits a loan application to provide 
Broadband Service to 2000 households in its existing service territory 
and 1000 households outside of its existing territory, 400 (1000 x 40%) 
of the households outside its existing service territory must have no 
broadband access or have access to only one Existing Broadband Service 
Provider.)
    (b) Applications submitted by Incumbent Service Providers solely 
for the purpose of upgrading existing facilities in Eligible Rural 
Communities must enhance existing service by providing or improving 
Broadband Service and other services related thereto.
    (c) Areas that are being acquired from an Incumbent Service 
Provider will be considered existing service areas of the applicant.


Sec.  1738.22  Items eligible to be financed.

    The proceeds of any loan made under this part may be used:
    (a) To fund the construction, improvement, and acquisition of all 
facilities, wherever located, required to provide Broadband Service to 
Eligible Rural Communities, including facilities required for providing 
other services over the same facilities that Broadband Services are 
being provided. Start-up and overhead costs that can be capitalized and 
included as part of the cost of facilities required to provide 
Broadband Service are eligible for financing.
    (b) To fund Pre-Loan Expenses not to exceed 5 percent of the 
requested total Broadband Loan amount, excluding any amounts requested 
to refinance outstanding telecommunication loans.
    (c) To finance facilities to provide Broadband Service leased under 
the terms of a capital lease as defined in generally accepted 
accounting principles. Loan funds will be limited to the cost of the 
capital lease for the first 5 years of the loan amortization period.
    (d)(1) To finance an Acquisition, provided that:
    (i) The Acquisition is necessary for furnishing or improving rural 
Broadband Service;
    (ii) The acquired Service Area, if any, is in an Eligible Rural 
Community; and
    (iii) Funds provided for the Acquisition do not exceed 50 percent 
of the approved loan amount.
    (2) For the purposes of the Acquisition, the applicant will be 
considered the Incumbent Service Provider with regard to the acquired 
Service Area, if any.
    (e) To refinance an outstanding obligation of an applicant on 
another Telecommunications Loan made under the RE Act if the use of the 
proceeds realized will further the construction, improvement, or 
acquisition of facilities for the provision of Broadband Service in 
Eligible Rural Communities, provided that:
    (1) Funds used for refinancing may not constitute more than 40 
percent of the loan;
    (2) The amortization period for the funds associated with the 
refinancing of outstanding obligations cannot exceed the remaining 
amortization period of the notes being refinanced. If multiple notes 
are being refinanced, an average remaining amortization period will be 
calculated based on the weighted dollar average of the notes being 
refinanced; and
    (3) The Applicant must be current with payments on the notes to be 
refinanced.


Sec.  1738.23  Items not eligible to be financed.

    The proceeds of any loan made under this part cannot be used:
    (a) To fund the costs associated with facilities covered by an 
Indefeasible Right of Use Agreement (IRU);

[[Page 26754]]

    (b) To acquire less than the majority interest of the stock of a 
company offering, or capable of offering Broadband Services, unless 
otherwise approved by the Agency;
    (c) To acquire the stock of an affiliate;
    (d) To purchase or acquire any facilities or equipment of an 
affiliate of the applicant. However, the Agency may consider, on a case 
by case basis, such funding if the Applicant can demonstrate that the 
purchase or acquisition will be an arms-length transaction, and that 
the cost is the most economically available for the facilities or 
equipment in question;
    (e) To finance Customer Premise Equipment (CPE) not owned by the 
Applicant during its economic life and any associated inside wiring, 
unless:
    (1) Additional collateral, acceptable to the Agency, at least equal 
to the purchase price of the CPE is pledged, which collateral has not 
been purchased with loan funds, or
    (2) A revolving fund for the initial purchase of CPE to be sold is 
established, and as CPE is sold to the customer, at least the 
Borrower's cost of such equipment is deposited back from the proceeds 
of the sale into the revolving fund to purchase additional CPE units. 
For additional information on this option, refer to Bulletin 1738-1.
    (f) To purchase or lease vehicles not used primarily in 
construction of the Broadband Service project to be financed; or
    (g) To finance systems or facilities that have not been designed 
and constructed in accordance with the loan contract, which 
incorporates Bulletin1738-2.


Sec. Sec.  1738.24-1738.29  [Reserved]

Subpart D--Loan Application Requirements


Sec.  1738.30  General.

    A loan application will be considered complete upon the submission 
of acceptable information regarding:
    (a) The equity requirement;
    (b) The legal notice;
    (c) The market survey;
    (d) The competitive analysis;
    (e) The business plan;
    (f) The financial information; and
    (g) The system design.


Sec.  1738.31  Equity requirement.

    (a) To be eligible for a loan, an applicant must have a minimum 
equity position in the operation proposed to be funded. For start-up 
companies, new entrants into an area and Incumbent Service Providers 
that are proposing to extend their service territory, the applicant 
must demonstrate a minimum equity position equal to 10 percent of the 
requested loan amount at the time the application is submitted. For all 
other applications, the applicant must demonstrate a minimum equity 
position equal to 20 percent of the requested loan amount at the time 
the application is submitted. If the applicant does not have the 
required equity in the operation to be funded at the time the 
application is submitted, the shortfall for this requirement can be 
satisfied as follows:
    (1) With an investor's proposal to cover the shortfall of the 
equity requirement by infusing additional capital into the operation. 
The additional capital must be deposited into the applicant's operating 
accounts prior to loan closing. If this option is elected, evidence 
must be included in the application that clearly identifies the 
investor's commitment to the project along with its bank or financial 
statements that demonstrates its ability to satisfy this requirement. 
This evidence must be acceptable to the Agency before the application 
will be considered complete and ready for further processing. If an 
investor's proposal to satisfy this requirement is not included in the 
loan application, the application will be returned. The Agency reserves 
the right to reject investments that are on a preferred basis for any 
reason.
    (2) With an unconditional, irrevocable letter of credit (LOC) 
satisfactory to the Agency. If an LOC will be used to satisfy the 
equity requirement, the LOC must be secured and serviced by an entity 
other than the applicant applying for the loan and must remain in 
effect until the applicant's financial position has reached a Net Worth 
equal to 20 percent of Total Assets after 80 percent of loan funds have 
been expended. The Agency must be an unconditional payee under the LOC 
and the LOC must be in place prior to loan closing.
    (b) For State and local governments, the equity requirement can be 
satisfied with general obligation bonds. If the equity requirement is 
satisfied with general obligation bonds, the Broadband Loan or loan 
guarantee cannot be subordinate to the bonds.
    (c) Revenue bonds supported by the operations being funded cannot 
be used to satisfy the equity requirement.
    (d) Based on the results of the Agency's financial analysis of the 
application, additional equity requirements may be included as 
covenants to a loan offer.
    (e) The Administrator reserves the right to modify or waive the 
requirements of this section as long as those modifications do not 
result in a projected negative cash position in any quarter throughout 
the forecast period and the modifications are required to provide 
Broadband Service in areas that are not capable of receiving Broadband 
Service or can receive Broadband Service from only one Existing 
Broadband Service Provider.


Sec.  1738.32  Additional cash requirements.

    (a) Once the Agency has completed its review of the loan 
application, the applicant will be notified if additional cash 
requirements are needed to support the feasibility of the loan. 
Additional cash infusions will be necessary when the Agency's financial 
analysis indicates that cash from operations and previous cash 
infusions cannot sustain a positive cash position throughout the 
forecast period.
    (1) The amount of the additional cash infusions required must bring 
the cash balance at the end of each year of the Forecast Period to 
zero.
    (2) For purposes of satisfying the additional cash requirement for 
a start-up operation or an operation that has not demonstrated positive 
cash flow for the two previous years prior to the date the application 
was submitted, only 50 percent of projected revenues for each year of 
the forecast period will be used in the feasibility study to determine 
if an operation can sustain a positive cash position.
    (3) The applicant will be required to infuse additional cash into 
the operation to cover projected deficits for the first two years of 
operations at loan closing and to enter into legal arrangements with 
the Agency committing to additional cash infusions to ensure that the 
operation will sustain a positive cash position on a quarterly basis 
throughout the forecast period.
    (4) If debt is incurred to satisfy the additional cash requirement, 
this debt must take a subordinate lien position to the Agency debt. The 
Agency will provide the applicant with options for satisfying any 
additional requirements.
    (5) Once the applicant has agreed to a method for satisfying the 
additional cash requirements, this method will be incorporated into the 
loan documents.
    (6) If a loan is offered to the applicant, the applicant will have 
120 days from the date of the loan contract to have the additional cash 
infusions deposited into the company applying for the loan and enter 
into any other legal arrangements to cover proposed deficits. If these 
requirements are not completed within this timeframe, the loan offer 
will be terminated, absent a written request from the applicant, and 
consent thereto from the Agency.

[[Page 26755]]

    (b) If additional requirements and covenants are required to obtain 
loan approval, they will be detailed in the loan documents.


Sec.  1738.33  Legal notice.

    (a) All applicants, as part of submitting a completed application, 
must prepare a legal notice to be published on the Agency Web page 
stating the applicant's intent to offer Broadband Service in a 
particular community. In addition, if the applicant is proposing other 
(i.e. video, voice, etc.) services, these services must also be 
identified in the legal notice. The legal notice will be published on 
the Agency's Web page after the application has been received in the 
Agency's national office and will remain on the Web page for a period 
of 30 work days. The notice must set forth the applicant's total 
proposed service area, including a service area map, and request any 
Incumbent Service Provider to submit to the Agency, within this 30 day 
period, the following information:
    (1) The number of residential and business customers capable of 
receiving Broadband Service in the applicant's proposed service area;
    (2) The number of residential and business customers purchasing 
Broadband Service in the applicant's proposed service area, the rates 
of data transmission being offered, and the cost of each level of 
Broadband Service;
    (3) The number of residential and business customers receiving 
other services that will be offered in the applicant's proposed service 
area and the associated rates for these other services;
    (4) A map of its service territory.
    (b) The information that is submitted by the Incumbent Service 
Provider will be used by the Agency to determine if the Incumbent 
Service Provider will be classified as an Existing Broadband Service 
Provider. If an Incumbent Service Provider does not submit a response 
to the legal notice, it will not be considered an Existing Broadband 
Service Provider. However, all Incumbent Service Providers will be 
considered in the Agency lending decision.
    (c) All proprietary and confidential information submitted by the 
incumbent in response to the legal notice will not be released under 
the Freedom of Information Act.


Sec.  1738.34  Market survey.

    (a) Except as provided in paragraph (b) of this section, the 
applicant must complete a market survey for each area where Broadband 
Service is proposed to be provided and include it as part of the 
application. The survey must not only include questions about the 
deployment of Broadband Services but must also address all other 
services that are being proposed. The survey must be conducted on each 
Eligible Rural Community where service is proposed. Additional 
information on the requirements of the market survey can be found in 
Bulletin 1738-1.
    (b) For any service that the applicant is projecting less than a 15 
percent penetration of households passed in the total proposed service 
territory, by the end of the Forecast Period, a market survey does not 
need to be completed. The proposed rates for these services must be 
affordable as determined by the Agency. If the rates are not 
affordable, the Agency will require that a market survey be completed.
    (c) Generally, for a market survey to be acceptable to the Agency, 
it must have been completed within six months from the date the 
application was submitted to the Agency for processing. The Agency 
reserves the right to reject any market survey so long as it can 
demonstrate that the market survey does not support the financial 
projections or the business plan or that the demographics of the 
proposed service territory have significantly changed since the survey 
was completed.
    (d) With respect to loans for areas that do not have the capability 
of receiving Broadband Service or can receive Broadband Service from 
only one Existing Broadband Service Provider, the Administrator 
reserves the right to waive or modify the requirements of this section 
on a case by case basis.


Sec.  1738.35  Competitive analysis.

    The applicant must identify all competitors, including resellers, 
in their proposed service territory irregardless of the competitor's 
market share and prepare a competitive analysis, for all types of 
services proposed and include it as part of the application. This 
analysis must include each competitor's proposed rate packages for all 
services offered and to the extent possible, the level of service being 
provided and the area that is being covered. Although a market survey 
is not required for areas where an applicant is projecting less than 15 
percent penetration of the households passed for a specific service, a 
competitive analysis is required for all proposed service territories.


Sec.  1738.36  Business plan.

    A business plan must be included as part of the application and 
must address, at a minimum, the following items:
    (a) The proposed use of loan funds and if any non-loan funds will 
be required to complete the proposed project;
    (b) A detailed description of working capital requirements and the 
source of these funds;
    (c) A description of how the equity requirements will be satisfied;
    (d) A description of the services that will be offered, the rates 
for the proposed services and the marketing plan to sell these 
services;
    (e) A description of any current operations including services 
being provided, areas being served, rate structure and penetration 
rates;
    (f) A description of any licenses and regulatory approvals that are 
required for the proposed operation including the status of obtaining 
these items;
    (g) A detailed description of the qualifications of the proposed 
management team for the operation including a resume of each team 
member detailing prior positions held for the previous 10 years from 
the date the application is submitted;
    (h) A description of the staffing requirements to operate the 
proposed system; and
    (i) A description of the workforce that is required to construct 
the system. This description must agree with the build-out schedule 
included in Sec.  1738.37.


Sec.  1738.37  Financial information.

    The financial information that must be included in the application 
to support the business plan is as follows:
    (a) Copies of audited financial statements (balance sheet, income 
statement, cash flow statement) for the three years preceding the date 
of the application for an existing company. If audited statements are 
not available, un-audited statements and tax returns for the three 
previous years must be submitted;
    (b) Copies of audited financial statements for the parent operation 
for the year preceding the year the application was submitted if the 
applicant for the Broadband Loan is a subsidiary operation. If audited 
statements are not available, un-audited statements and tax returns for 
the previous year must be submitted;
    (c) Copies of audited financial statements for any affiliated 
operation that is providing services to the applicant for the year 
preceding the year the application was submitted. If audited statements 
are not available, un-audited statements and tax returns for the 
previous year must be submitted;
    (d) Customer projections for the forecast period that substantiate 
the projected revenues for each service that

[[Page 26756]]

is to be provided. The projections must at a minimum be on an annual 
basis and must be provided for each Eligible Rural Community that will 
be receiving service. These projections must be clearly supported by 
the information contained in the market survey;
    (e) Financial projections in the form of balance sheets, income 
statements and cash flow statements for the 5-year forecast period. 
These projections must be supported by detailed narrative assumptions 
that fully explain the methodology used to develop the projections. The 
financial projections submitted by the applicant and the feasibility 
study prepared by the Agency must demonstrate that the proposed 
operation will be able to meet a minimum TIER requirement equal to 1.25 
by the end of the forecast period. (A projected TIER of 1.25 does not 
guarantee that a loan will be approved.) Based on the findings of the 
feasibility study, the Agency will establish a TIER maintenance 
requirement in the loan documents that will remain in effect throughout 
the amortization period; and
    (f) A list of all outstanding obligations of the applicant. Copies 
of existing notes and loan and security agreements must be included in 
the application.


Sec.  1738.38  System design.

    (a) The system design must fully support the delivery of Broadband 
Service and any other services being provided, must demonstrate that 
the project will be completed within 3 years from the date of the loan 
contract, and must include the following items:
    (1) A detailed description of the proposed technology that will be 
used to provide the services. This description must include sufficient 
information for the Agency to make the determination that all 
households in the proposed service territory will have the capability 
of receiving Broadband Services. For further clarification, reference 
Bulletin 1738-2;
    (2) Existing and proposed network diagrams that clearly demonstrate 
the traffic flows through the network from the interconnection points 
with the backbone providers to the end users;
    (3) Estimated project costs detailing all facilities that are 
required to complete the project. These estimated costs must be broken 
down to indicate costs associated with each community to be served; and
    (4) A construction build-out schedule of the proposed facilities by 
community on a quarterly basis. The build-out schedule must:
    (i) Include a description of the work force that will be required 
to complete the proposed construction;
    (ii) Include a timeline demonstrating project completion within 3 
years from the date of the Loan Contract;
    (iii) Include detailed information showing that all households that 
are proposed to be passed with facilities funded by the Agency must 
have the capability of receiving Broadband Service with the completion 
of construction of the system. For additional information on how to 
satisfy this requirement, please refer to Bulletin 1738-1.
    (iv) Include detailed information showing that construction of the 
proposed facilities will start within 6 months from the date the 
Administrator signs the Loan Documents.
    (5) A depreciation schedule for the proposed facilities;
    (6) Information required by 7 CFR part 1794, an environmental 
report prepared in accordance therewith;
    (7) Any other system requirements which shall be published annually 
in the Federal Register, which the Administrator shall determine to be 
necessary in addressing the rapidly changing technological needs of the 
Broadband Program.
    (b) With respect to loans for areas that are not capable of 
receiving Broadband Service or can receive Broadband Service from only 
one Existing Broadband Service Provider, the Administrator reserves the 
right to waive or modify the requirements of this section on a case by 
case basis.


Sec.  1738.39  Submission of the application.

    Loan applications can be submitted directly to the Agency's 
National Office or can be submitted to the Agency's general field 
representative (GFR) that is assigned to the area where the applicant's 
headquarters are located. Although the applications can be submitted 
directly to the National Office, it is recommended that the applicant 
identify and contact the appropriate GFR as early as possible when 
preparing a loan application. The GFR will assist the applicant with 
the preparation of the application and explain the regulations and 
requirements that govern the Broadband Program. The applicant should 
contact the National Office in Washington to identify the GFR that is 
assigned to the area where their headquarters are located or refer to 
the list of GFR's assigned to different parts of the country on the 
Agency webpage. Please refer to the following Web address to identify 
the GFR assigned to your proposed service territory: http://www.usda.gov/rus/telecom/staff/gfr-state-list.htm. All applications 
must contain two hard copies and an electronic copy of the entire 
application.

Subpart E--Terms for Loans and Loan Guarantees


Sec.  1738.40  Direct 4 Percent and Cost of Money Loans.

    (a) Terms and conditions of loans are set forth in a mortgage, 
note, and loan contract. Provisions of the mortgage and loan contract 
are implemented by provisions in the Agency bulletins and regulations. 
Samples of the mortgage, note, and loan contract can be found on the 
Agency Web page: http://www.usda.gov/rus/telecom/broadband.htm.
    (b) The Agency reserves the right to establish terms and 
conditions, including security requirements, on a case-by-case basis.


Sec.  1738.41  Loan security.

    (a) The Agency makes loans only if, in the judgment of the 
Administrator, the security is reasonably adequate and the loan will be 
repaid within the time agreed.
    (b) The Agency generally requires that an applicant provide it with 
an exclusive first lien, in form and substance satisfactory to the 
Agency, on all of the applicant's property and such additional security 
as the Agency may require. The Agency will share its first lien 
position with another lender provided the Broadband Loan is adequately 
secured and the security arrangements are acceptable to the Agency. The 
Agency will consider entering into joint security arrangements with 
other lenders on a pari pasu, prorated basis.
    (c) All collateral that is securing the loan must be free from 
liens or security interests other than those permitted by the Agency or 
the Security Documents. The applicant must own collateral that will be 
purchased with loan funds unless otherwise designated by the Agency.
    (d) In the case of loans that include the financing of broadband 
facilities that do not constitute self-contained operating systems or 
units, the applicant shall, in addition to the mortgage and/or security 
lien on all of the applicant's facilities financed by the Agency, 
furnish adequate assurance, in the form of contractual or other 
arrangements, satisfactory to the Agency, that continuous and efficient 
broadband service will be rendered.
    (e) Additional financial, investment, operational, reporting, and 
managerial controls will appear in the loan documents required by the 
Agency.

[[Page 26757]]

Sec.  1738.42  Payments on loans.

    Broadband loans must be repaid with interest within a period that, 
rounded to the nearest whole year, equals the expected composite 
economic life of the facilities to be financed, as calculated by the 
Agency. The expected composite economic life shall be based upon the 
depreciation rates for the facilities financed by the loan.
    (a) The depreciation rates used shall be the rates currently in 
place, as long as the Agency finds them to be reasonable for the 
telecommunications industry.
    (b) Applicants may request a repayment period that is shorter than 
the expected composite economic life of the facilities financed. A 
shorter period may be approved as long as the Administrator determines 
that the loan remains feasible.
    (c) Interest is payable on funds advanced each month as it accrues 
beginning with the first billing after the advance, as defined in the 
note. Principal payments on each note are scheduled to begin one year 
after the date of the first advance. After this deferral period, 
interest and principal payments on all funds advanced during this one-
year period shall be made in equal monthly installments. Principal 
payments on funds advanced one year or more after the date of the first 
advance will begin with the first billing after the advance. The 
interest and principal payments on each of these advances shall be made 
in equal monthly installments. On a case by case basis for areas that 
are not capable of receiving Broadband Service or can receive Broadband 
Service from only one Existing Service Provider, the Administrator 
reserves the right to modify the terms and conditions for the interest 
and principal payments.


Sec.  1738.43  Loan guarantees.

    (a) Eligible guaranteed lenders. To be eligible for a Loan 
Guarantee, guaranteed lenders must be legally organized lending 
institutions, such as commercial banks, trust companies, mortgage 
banking firms, insurance companies, and any other institutional 
investor authorized by law to loan money, which must be subject to 
credit examination and supervision by a Federal or state agency, unless 
the Agency determines that alternative examination and supervisory 
mechanisms are adequate.
    (b) Requirements for the Loan Guarantee. At the time of 
application, Applicants must provide, in form and substance acceptable 
to the Agency:
    (1) Evidence of the guaranteed lender's eligibility under paragraph 
(a) of this section;
    (2) Evidence that the guaranteed lender is capable of adequately 
servicing the guaranteed loan;
    (3) Evidence that the guaranteed lender is in good standing with 
its licensing authority and meets the loan making, loan servicing, and 
other requirements of the jurisdiction in which the lender makes loans;
    (4) Evidence satisfactory to the Agency of its qualification under 
this part, along with the name of the authority that supervises it;
    (5) A commitment letter from the guaranteed lender that will be 
providing the funding, and the terms of such funding, all of which may 
be conditioned on final approval of the Broadband Loan by the Agency; 
and
    (6) A description of any and all charges and fees for the loan 
provided they are not greater than those normally charged other 
applicants for the same type of loan in the ordinary course of 
business. Notwithstanding, such charges and fees shall not be included 
within the loan guarantee.
    (c) Terms for Guarantee. Loan Guarantees will only be given on the 
conditions that:
    (1) The Loan Guarantee is no more than 80 percent of the principal 
amount, which shall exclude any and all charges and fees;
    (2) The guarantee is limited to the loan repayment obligation of 
the Borrower and does not extend to guaranteeing that the guaranteed 
lender will remit to a holder, loan payments made by the Borrower;
    (3) The interest rate must be fixed and must be the same or lesser 
for the Guaranteed Loan Amount or the respective Guaranteed Loan 
Portion Amount or the respective Guaranteed-Amount Equivalent, as the 
case may be, and Unguaranteed Loan Amount or the respective 
Unguaranteed Loan Portion Amount or the respective Unguaranteed-Amount 
Equivalent, as the case may be;
    (4) The entire loan will be secured by the same security with equal 
lien priority for the Guaranteed Loan Amount or the respective 
Guaranteed Loan Portion Amount or the respective Guaranteed-Amount 
Equivalent, as the case may be, and Unguaranteed Loan Amount or the 
respective Unguaranteed Loan Portion Amount or the respective 
Unguaranteed-Amount Equivalent, as the case may be;
    (5) The Unguaranteed Loan Amount or the respective Unguaranteed 
Loan Portion Amount or the respective Unguaranteed-Amount Equivalent, 
as the case may be, will neither be paid first nor given any preference 
or priority over the Guaranteed Loan Amount or the respective 
Guaranteed Loan Portion Amount or the respective Guaranteed-Amount 
Equivalent, as the case may be;
    (6) Any assignment by the guaranteed lender requires the prior 
written approval from the Agency, which assignment shall entitle the 
holder to all of the guaranteed lender's rights, but which shall 
ultimately maintain the guaranteed lender responsible for servicing the 
entire loan;
    (7) The Borrower, its principal officers, members of the borrower's 
board of directors and members of the immediate families of said 
officials shall not be a holder of the guaranteed lender's loan;
    (8) The Agency will not guarantee any loan under this subpart that 
provides for a balloon payment of principal or interest at the final 
maturity date of the loan; or the payment of interest on interest;
    (9) All loan guarantee documents between the Agency and the 
guaranteed lender are prepared by the Agency; and
    (10) The guaranteed loan agreement between the borrower and the 
lender shall be subject to RUS approval.
    (d) Obligations of Guaranteed lender. Once a loan guarantee has 
been approved, the Guaranteed lender will be responsible for:
    (1) Fully servicing the loan;
    (2) Determining that all prerequisites to each advance of loan 
funds by the lender under the terms of the contract of guarantee, all 
financing documents, and all related security documents have been 
fulfilled;
    (3) Obtaining approval from the Agency to advance funds prior to 
each advance;
    (4) Billing and collecting loan payments from the Borrower;
    (5) Notifying the Administrator promptly of any default in the 
payment of principal and interest on the loan and submit a report, as 
soon thereafter as possible, setting forth its views as to the reasons 
for the default, how long it expects the borrower will be in default, 
and what corrective actions the borrower states it is taking to achieve 
a current debt service position; and
    (6) Notifying the Administrator of any known violations or defaults 
by the borrower under the lending agreement, contract of guarantee, or 
related security instruments, or conditions of which the lender is 
aware which might lead to nonpayment, violation, or other default.
    (e) Certain Agency Rights and Remedies. The Guarantee must provide 
that:

[[Page 26758]]

    (1) Upon notice to the lender, RUS may assume loan servicing 
responsibilities for the loan or the Guaranteed Loan Amount or the 
respective Guaranteed Loan Portion Amount or the respective Guaranteed-
Amount Equivalent, as the case may be, or require the lender to assign 
such responsibilities to a different entity, if the lender fails to 
perform its loan servicing responsibilities under the loan guarantee 
agreement, or if the lender becomes insolvent, makes an admission in 
writing of its inability to pay its debts generally as they become due, 
or becomes the subject of proceedings commenced under the Bankruptcy 
Reform Act of 1978 (11 U.S.C. 101 et seq.) or any similar applicable 
Federal or state law, or is no longer in good standing with its 
licensing authority, or ceases to meet the eligibility requirements of 
this section. Such negligent servicing is defined as the failure to 
perform those services which a reasonable prudent lender would perform 
in servicing its own portfolio of loans that are not guaranteed, and 
includes not only a failure to act but also not acting in a timely 
manner.
    (2) The Guarantee shall cease to be effective with respect to any 
Guaranteed Loan Amount or any Guaranteed Loan Portion Amount or any 
Guaranteed-Amount Equivalent to the extent that:
    (i) The Guaranteed Loan Amount or the respective Guaranteed Loan 
Portion Amount or the respective Guaranteed-Amount Equivalent, as the 
case may be, is separated at any time from the Unguaranteed Loan Amount 
or the respective Unguaranteed Loan Portion Amount or the respective 
Unguaranteed-Amount Equivalent, as the case may be, in any way, 
directly or through the issuance of any Guaranteed-Amount Equity 
Derivative or any Guaranteed-Amount Debt Derivative; or
    (ii) Any holder of the Guaranteed Loan Note or any Guaranteed Loan 
Portion Note or any Derivative, as the case may be, having a claim to 
payments on the Guaranteed Loan receives more than its pro-rata 
percentage of any payment due to such holder from payments made under 
the Guarantee at any time during the term of the Guaranteed Loan.
    (f) The Agency shall provide additional loan guarantee policies, 
consistent with OMB Circular A-129, in order to achieve its mission of 
promoting broadband in rural areas, which shall be published annually 
in the Federal Register.
    (g) Loan guarantees made under this part are supported by the full 
faith and credit of the United States and incontestable except for 
fraud or misrepresentation of which the holder had actual knowledge at 
the time it became a holder.


Sec. Sec.  1738.44-1738.49  [Reserved]

Subpart F--Post-Application Procedures


Sec.  1738.50  Notification of completeness.

    The Agency will conduct an initial review of the application after 
it is received in the National Office to determine if the application 
is complete and ready for further analysis.
    (a) If the application is determined to be complete, the applicant 
will be notified by the Agency and further analysis of the application 
will continue.
    (b) If the application is determined to be incomplete, the 
applicant will receive a detailed list of items requiring further 
explanation that will have to be fully addressed by the applicant and 
submitted to the Agency within a specified timeframe. If the applicant 
fails to submit the additional information in the specified timeframe, 
the application will be deemed ineligible for funding and returned to 
the applicant.
    (c) If the application is determined to be ineligible for funding, 
the application will be returned and the applicant will receive a 
detailed list explaining the reasons the application was not accepted.


Sec.  1738.51  Determination of feasibility.

    (a) Loans will only be made under this part if the applicant's 
financial operations, taking into account the impact of the facilities 
financed with the proceeds of the loan and the associated debt, are 
financially feasible, as determined by the Agency.
    (b) If the application is determined to meet all statutory and 
regulatory requirements and the feasibility study demonstrates that the 
TIER requirement can be satisfied, the application will be submitted to 
the Agency's credit committees for consideration. Submission of the 
application to the Agency's credit committees does not guarantee that a 
loan will be approved.


Sec.  1738.52  Notice to applicant on decision.

    Once the Agency's credit committees have considered the 
application, the applicant will be notified of the Agency's decision 
concerning their request for financial assistance.


Sec. Sec.  1738.53-1738.59  [Reserved]

Subpart G--Miscellaneous Requirements and Information


Sec.  1738.60  Interim financing and construction.

    (a) Upon notification by the Agency that an applicant has submitted 
all the required documentation and the application is considered 
complete for the Agency to conduct its analysis, the applicant, at it's 
own risk, may enter into an interim financing agreement with a lender 
other than the Agency or use its own internally generated funds to 
start construction that is included in the loan application. The 
Agency's determination that an application is considered complete for 
analysis is not a commitment that a loan will be approved.
    (b) To qualify for funding, interim construction must comply with 
the same requirements that apply to construction included in an 
approved broadband loan. For information on requirements, see 7 CFR 
part 1788, 7 CFR part 1794, Bulletin 1738-2, Bulletin 20-15, and 
Bulletin 320-15.


Sec.  1738.61  Priority for processing loan applications.

    (a) In making or guaranteeing loans, priority shall be given to 
applications in the following order:
    (1) Applications for service areas that include only households 
that have no broadband access or receive Broadband Service from only 
one Existing Broadband Service Provider.
    (2) Applications for service areas that include only areas where at 
least 40 percent of households have no access to Broadband service or 
access to only one Existing Broadband Service provider;
    (3) All other applications
    (b) Once an application has been prioritized according to the 
criteria listed in paragraphs (a) (1) through (3) of this section, they 
will be processed on a first-in, first-out basis within each priority 
category.
    (c) As applications are processed, using the first-in, first-out 
process, RUS may expedite for consideration for funding applications 
proposing to provide service where none is available.


Sec.  1738.62  Allocation of funds.

    For funds made available for each fiscal year, national and State 
reserves shall be established in accordance with Title VI of the RE 
ACT.


Sec.  1738.63  Annual audit and reporting requirements.

    (a) If a loan offer is accepted, the applicant will be required to 
submit an annual CPA audit. The first audit is

[[Page 26759]]

required for the calendar year in which the loan is approved. The 
Administrator can waive the requirement that an audit be performed in 
the year in which the loan is approved if operations of the applicant 
have not yet started.
    (b) If a loan offer is accepted, the applicant will be required to 
submit quarterly financial and progress reports utilizing the Agency's 
electronic reporting system.


Sec.  1738.64  Applicable laws.

    (a) Applicants are required to comply with certain regulations on 
nondiscrimination and equal employment opportunity. See RUS Bulletin 
1790-1, ``Nondiscrimination Among Beneficiaries of RUS Programs'' and 
RUS Bulletin 20-15:320-15, ``Equal Employment Opportunity in 
Construction Financed with RUS Loans''; 7 CFR parts 15 and 15b and 45 
CFR part 90.
    (b) Applicants are required to comply with all Federal, state and 
local laws, rules, regulations, ordinances, codes and orders.


Sec. Sec.  1738.65-1738.99  [Reserved]


Sec.  1738.100  OMB control number.

    The information collection requirements in this part are approved 
by the Office of Management Budget (OMB) and assigned OMB control 
number 0572-0130.

    Dated: May 4, 2007.
James M. Andrew,
Administrator, Rural Utilities Service.
[FR Doc. E7-9021 Filed 5-10-07; 8:45 am]
BILLING CODE 3410-15-P