Rural Economic Development Loan and Grant Program; Grants

DEPARTMENT OF AGRICULTURE

Rural Electrification Administration

7 CFR Part 1703

RIN 0572-AA87

Rural Economic Development Loan and Grant Program; Grants

AGENCY: Rural Electrification Administration, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Electrification Administration (REA) hereby amends

its regulation on the Rural Economic Development Loan and Grant

Program. This amended regulation establishes procedures for approving

and administering grants, clarifying the eligible uses of grant funds,

supplemental funds requirements, and administrative requirements for

grant funds. The amendments contained in this final rule will

facilitate the process whereby REA borrowers can apply to REA for

community development grant funding.

EFFECTIVE DATE: This regulation is effective April 13, 1994.

FOR FURTHER INFORMATION CONTACT: Blaine D. Stockton, Jr., Assistant

Administrator, Economic Development and Technical Services, Rural

Electrification Administration, telephone number (202) 720-9552.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined to be not significant for purposes of

Executive Order 12866 and therefore has not been reviewed by OMB.

Executive Order 12778

This rule has been reviewed under Executive Order 12778, Civil

Justice Reform. This rule: (1) Will not preempt any State or local

laws, regulations, or policies, unless they present an irreconcilable

conflict with this rule; (2) will not have any retroactive effect; and

(3) will not require administrative proceedings before parties may file

suit challenging the provisions of this rule.

Regulatory Flexibility Act

The Administrator certifies that this final rule will not have a

significant economic impact on a substantial number of small entities

as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

Based on current and historical funding levels for this program and a

projected average size loan and/or grant in the range of $300,000 to

$400,000, it is estimated that 50 to 60 loans and/or grants will be

made nationwide each year. It is projected that the Rural Economic

Development Loan and Grant Program will have a limited impact upon

small businesses because of the program's unique delivery system; i.e.,

loans and grants will be made through REA financed electric and

telephone cooperatives or companies. These entities do not operate as

credit institutions, thus they do not seek funds for the expressed

purpose of loan portfolio expansion. Rather, REA financed entities

request REA funding through this program to enhance economic

development in rural areas by funding a limited number of selected

development projects. Since credit is channeled to areas which are

generally underdeveloped and financially depressed, job creation and

economic development resulting from newly emerging businesses and

community facilities funded by REA does not pose undue competition or

other adverse effects upon existing businesses. Therefore, this final

rule will have no effect upon businesses or entities other than those

to be funded through this program.

National Environmental Policy Act Certification

The Administrator has determined that this final rule will not

significantly affect the quality of the human environment as defined by

the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).

Therefore, this action does not require an environmental impact

statement or assessment.

Intergovernmental Review

The program is subject to the provisions of Executive Order 12372,

which requires intergovernmental consultation with State and local

officials, with the exception of applications for Project Feasibility

Studies. A notice informing the public of the intergovernmental review

coverage was published in the Federal Register on March 20, 1989, at 54

FR 11426.

Catalog of Federal Domestic Assistance

This program is listed in the Catalog of Federal Domestic

Assistance under No. 10.854, Rural Economic Development Loans and

Grants. This catalog is available on a subscription basis from the

Superintendent of Documents, the United States Government Printing

Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

In compliance with the Office of Management and Budget (OMB)

regulations (5 CFR part 1320) which implement the Paperwork Reduction

Act of 1980 (Pub. L. 9609511) and section 3504 of that Act, the

information collection and recordkeeping requirements contained in this

final rule have been approved by OMB under control number 0572-0090.

Comments concerning these requirements should be directed to the Office

of Information and Regulatory Affairs of OMB, Attention: Desk Officer

for USDA, room 3201, NEOB, Washington, DC 20503.

Background

On February 15, 1989, REA published the final rule, 7 CFR 1709,

subpart B, in the Federal Register (54 FR 6867), implementing the Rural

Economic Development Loan and Grant Program to provide funds to REA

Borrowers under the Rural Electrification Act of 1936, as amended (7

USC 901 et seq.) (Act). This program provides zero-interest loans to

REA Borrowers for the promotion of rural economic development and job

creation projects. On September 27, 1990, REA changed the designation

of this rule from 7 CFR part 1709 to part 1703 (55 FR 39394). On

September 25, 1992, REA published a final rule in 7 CFR 1703 subpart B

(57 FR 44317) to revise the loan program. The revision provided

additional information to potential applicants on the selection factors

and rating criteria, allowed monthly submittal of applications and

established a maximum amount of project funding as a fixed percentage

of allocated funds. Subsequently, a proposed rule was published on

October 12, 1993 (58 FR 52688), to establish procedures for approving

and administering grants and make minor changes to enhance the overall

program delivery for the zero-interest loan and grant program. This

final rule contains the provisions set forth in the proposed rule

published October 12, 1993.

This rule contains provisions for grant funds to be used for the

following purposes:

1. The establishment and/or operation of a revolving loan fund by

REA Borrowers; and,

2. Pass-through grants in conjunction with loans for: (a) Project

feasibility studies and technical assistance for community development,

business start-ups, business planning, and market research, (b)

business incubators established by non-profit organizations, (c)

community development assistance by non-profit organizations, (d)

projects operated on a profit or non-profit basis that enhance the

overall quality of medical care of rural residents, and (e) projects by

profit or non-profit organizations which encourage the use of advanced

telecommunications for educational and medical services.

Several conditions for grant making have been established under

this program in order to maximize the benefits of the grant program,

conserve the limited funds available, and provide for the efficient

administration of grant making by REA:

1. With the exception of the establishment and/or operation of a

revolving loan program, grants will be made only in conjunction with

rural development loans. For grants to REA Borrowers to establish

revolving loan funds, REA Borrowers will be required to commit their

funds in an amount no less than 20 percent of the REA grant. For all

other projects eligible for loan and grant funding, that portion of

project cost eligible for REA funding may be funded up to 20 percent

with grant funds.

2. As with zero-interest loans, all REA projects funded with grants

will require a minimum of 20 percent supplemental funding for project

costs. Supplemental funds may come from the project owner in the form

of equity funds, private sources, state and local government sources,

other Federal Government sources, the borrower, or other sources.

3. For grants made in conjunction with zero-interest loans, grant

funding will be provided only in sufficient amount necessary for a

feasible project. A project which generates sufficient revenue to show

feasibility without grant funds is not eligible for a grant.

4. In determining the eligible amount of a grant, REA will base the

appropriate amount of grant funding on a typical year of operation,

when the project has generally reached its target income earning

potential.

5. Grant funding will be channeled, to the extent practicable, to

non-profit entities which have a broad impact on rural economies.

However, grant funding will be available for project feasibility

studies and technical assistance irrespective of entity status. Also,

grant funding will be provided irrespective of entity status for

enhancement of medical care and advanced telecommunications for

educational and medical services.

In addition to grant making provisions, several changes have been

made to the loan provisions of the Rural Economic Development Loan and

Grant Program. These changes, addressed in detail in the proposed rule

published on October 12, 1993, are as follows:

(1) Paragraph (d) of Sec. 1703.21 has been revised to require

Borrowers to deposit zero-interest loan funds into their construction

accounts.

(2) Paragraph (b) of Sec. 1703.28 has been revised to eliminate the

$400,000 limitation on the size of zero-interest loans and grants and

set the maximum amount not to exceed 3 percent of the projected amount

of zero-interest loan and grant funds available each year. However, the

REA Administrator will retain the authority to limit funding below the

3 percent level, and a decision in this regard will be published in the

Federal Register for each fiscal year. For fiscal year 1994, the REA

Administrator has determined the maximum amount of a loan and grant to

be $400,000.

(3) To provide REA Borrowers additional flexibility to fund

worthwhile community development projects, paragraph (e) of

Sec. 1703.46 has been eliminated to remove the prohibition against

funding recreational facilities unless they convincingly demonstrate

that they would be an integral part of a tourism industry in their

area.

(4) Paragraph (b) of Sec. 1703.61 has been amended to clarify that

the grant portion of the zero-interest loan and grant will be disbursed

to the borrower only upon completion of the project. This will ensure

that grant funds are handled so as to minimize the time between

disbursement and authorized use to comply with USDA's Federal

Assistance Uniform Regulation, 7 CFR parts 3015 and 3016.

(5) Paragraph (b) of Sec. 1703.66 has been revised to require the

recipients of pass-through loans and grants to furnish a record of

receipts showing total project costs to verify that no greater than 80

percent of project costs have been funded with REA zero-interest loan

and grant funds.

(6) Paragraph (e) of Sec. 1703.66 has been revised to allow REA

field accountants to provide a rural economic development review of

zero-interest loans and grant funds. This revision will, in many cases,

save REA Borrowers thousands of dollars by eliminating costs of formal

audits which were previously required in accordance with the provisions

of 7 CFR part 1773, ``REA Policy on Audits of Electric and Telephone

Borrowers.''

(7) Paragraph (g) of Sec. 1703.66 has been revised to clarify that

for pass-through zero-interest loans and grants, REA Borrowers must

require project owners to provide sufficient financial, accounting and

budget information, and other records deemed necessary to facilitate

audits in accordance with 7 CFR part 3015 and 7 CFR part 3016, as

appropriate for non-profit entities, and REA rural economic development

loan reviews for projects in a for-profit status. Likewise, paragraph

(g) has been revised to require REA Borrowers receiving grants for

establishment of revolving loan funds to furnish information to allow

audits in accordance with USDA departmental grant regulations. Copies

of these grant regulations are available to REA Borrowers by request.

Comments

REA received 24 comments regarding the proposed rule which were

taken into consideration in preparing the final rule. Comments were

received from the following:

(1) Visions Five Group.

(2) Southeast Alabama Regional Planning and Development

Commission.

(3) Coastal Area District Development Authority.

(4) LaCreek Electric Association, Inc.

(5) Nebraska Rural Electric Association.

(6) National Rural Electric Cooperative Association.

(7) National Telephone Cooperative Association.

(8) Edison Electric Institute.

(9) East River Electric Power Cooperative.

(10) Carolina Electric Cooperatives.

(11) Sequachee Valley Electric Cooperative.

(12) Mid-Cumberland Area Development Corporation.

(13) Mid-East Commission.

(14) McIntosh Trail Regional Development Center.

(15) North Dakota Association of Rural Electric Cooperatives/

North Dakota Association of Telephone Cooperatives.

(16) Greater Egypt Regional Planning.

(17) Southwest Tennessee Development District.

(18) Southwest Arkansas Planning and Development District.

(19) Eastern Panhandle Regional Planning and Development

Council.

(20) Northeast South Dakota Energy Conservation Corporation.

(21) National Association of Development Organizations.

(22) North Dakota Commissioner of Agriculture.

(23) Region Nine Development Commission.

(24) Purchase Area Development District.

The comments from various organizations including REA Borrowers,

electric and telephone utility trade organizations, economic

development organizations and state governments reflected broad support

for the proposed rule.

Most of the organizations made specific recommendations on the

proposed rule. REA has considered all comments in finalizing this

regulation.

A number of the comments were from entities that administer

existing Revolving Loan Funds (RLFs) or organizations representing

entities that administer revolving loan programs. These organizations

feel that grants should not be directed to REA Borrowers exclusively,

but also to existing organizations not financed by REA that operate

RLFs, since REA Borrowers do not serve all of rural America. They also

are concerned that they would be unable to compete with the REA

Borrowers' revolving funds zero-interest rate loans.

First, grants, as well as zero-interest loans administered

exclusively through REA Borrowers are in accordance with directives

established in the Omnibus Reconciliation Act of 1987, (Pub. L. 100-

102, 101 Stat. 1330-20). This law was created in a context where

electric and telephone Borrowers who had made prepayments on loans into

cushion of credit accounts could utilize a Rural Development Subaccount

to collectively draw from the interest earnings from the Borrowers'

cumulative credit resources to reinvest into local economic development

projects. The provisions of the proposed rule making grant funds

available exclusively to REA Borrowers, as a result of their

prepayments, are governed by legislation.

REA acknowledges, however, that many rural development

organizations are well qualified to administer grant funds, and they

provide a valuable resource for local or regional rural economic

development efforts. REA will strongly encourage Borrowers operating

revolving loan funds to collaborate with existing organizations

involved in rural development activities, and those organizations are

urged to work with REA Borrowers in facilitating rural development

projects. This collaboration and assistance could include performing

local or regional studies to identify area economic development needs,

assisting community leaders and other project owners in planning and

implementing projects, loan packaging, technical assistance to REA

Borrowers in reviewing loan applications and administering the

revolving loan fund, and coordinating efforts between other entities,

including public and private lending institutions, that provide

assistance and/or funding to rural development projects. REA also

encourages state Rural Development Councils to become active

participants in planning rural development projects and coordinating

activities between local governments, economic development districts,

REA Borrowers and other entities operating RLFs. However, although

collaboration between REA Borrowers and other enitities is strongly

encouraged, legislation requires that REA Borrowers retain the ultimate

decision-making authority and responsibility for REA rural development

loan and grant funds.

Regarding possible competition between REA Borrowers and other

lenders, it should be emphasized that REA does not intend for REA

Borrowers to compete with or replace existing services of RLFs, or

other public or private lenders, but merely to augment or supplement

those sources of funds. To clarify this policy, and ensure effective

implementation, Sec. 1703.22(b) has been revised to require Borrowers,

within their RLF rural development plan, to document coordination of

lending activities with local organizations operating RLFs and other

area lenders. The rule requires such documentation to indicate that

Borrowers will not compete with, but will supplement other legal

sources of financing. Rural development plan documentation which

complies with REA policy will be stipulated in RLF agreements between

Borrowers and REA.

Some commenters expressed concern that the administrative burden

for operating RLFs would be too great and REA Borrowers may choose not

to participate. REA has minimized administrative requirements; thus the

burden should be no greater for the RLFs than for zero-interest loans.

Although the REA Borrowers will decide whether or not to establish

RLFs, REA believes the potential of significant benefits to rural

residents through the RLF provisions will encourage participation.

There were a number of recommendations concerning purposes eligible

for funding, including comments that REA should make grant funds

available for businesses in a for-profit status. REA believes there is

adequate flexibility with the rule as written regarding eligible

projects. The quality of the proposal and the degree of benefit to the

rural community or the potential for economic development are

determining factors in application approval. It should be noted that

rural for-profit and non-profit projects alike may be able to obtain

grant funds in conjunction with zero-interest loans for feasibility

studies and technical assistance. In addition, for-profit as well as

non-profit entities that enhance the overall quality of medical care or

provide advanced telecommunications services or computer networks for

medical and educational services may be considered for grants because

they may facilitate projects which will improve the rural communities

overall and provide needed services to rural America. However,

generally, REA desires to fund non-profit entities, since grants to

for-profit entities for direct business start-up costs could result in

the possibility or perception that grants would provide certain for-

profit entities an unfair competitive advantage over those entities not

receiving REA funding.

It was also suggested that housing be included as eligible for

funding under the regulation. REA recognizes the value of adequate

housing in developing rural areas. However, REA believes other federal

programs are available to provide housing, and grant funds will be

better utilized to provide broader community-wide facilities and

infrastructure improvements. REA Borrowers may, in accordance with a

rural development plan for a revolving loan fund, provide housing

assistance from those funds classified as non-Federal.

Further, it was suggested that grant funds be used for venture

capital purposes. The focus of the rural economic development loan and

grant program is to allow REA Borrowers to assist projects that will

promote rural development. REA intends to be flexible in meeting this

objective; thus, applications will be evaluated on a case by case

basis.

There were several objections to linking grants to zero-interest

loans. Some comments urged direct grants for feasibility studies and

technical assistance be provided to non-profit entities and that grants

be made outright, without loans, to economically distressed local

governments. REA feels that grants for feasibility studies or technical

assistance will most likely be effectively used in conjunction with

loans. Grants in conjunction with loans strengthen the loan program and

maximize the benefits derived from the limited amount of grant funding

available. No change is being made to allow direct grants to

economically distressed local governments; however, provisions of the

program as written will enable REA Borrowers to facilitate economic

development in distressed rural areas by funding worthwhile community

development and job creation projects.

Two commenters suggested that the 10 percent limitation for using

grant funds for administrative costs of the RLFs be revised to provide

more flexibility in determining these costs. No change is being made to

the program at this time. REA feels that limiting the funds used for

administrative costs will be an incentive to encourage REA Borrowers to

stress prudent management of the funds and maximize the benefits for

rural development. REA encourages interested rural development

organizations to work with REA Borrowers to minimize overhead costs.

Some commenters felt REA's grant funding limitation of 80 percent

of the cost of establishing the revolving fund, which will require 20

percent supplemental funding to the revolving loan fund by the

Borrower, is overly restrictive. These organizations stated that this

Borrower supplemental funding requirement, and the supplemental funding

requirement for individual projects, was too burdensome. Additionally,

commentors objected to requiring projects be funded by REA Borrowers

``up-front.'' This requirement was set forth in the proposed rule's

preamble paragraph entitled ``The establishment and/or Operation of a

Revolving Loan Fund by REA Borrowers'', Sec. 1703.22(a)(3) relating to

supplemental funding requirements, and Sec. 1703.22(h)(2),

``Requisition requirements'', which requires Borrowers be reimbursed 80

percent of funds expended for approved projects. REA believes the

supplemental funding requirement should remain applicable for Borrowers

establishing revolving loan funds, as well as supplemental funding for

individual projects presently required for zero-interest pass-through

loans. REA has found that the supplemental funding requirement

specified in Sec. 1703.23 of the regulation, as applied to individual

projects, has been beneficial for the zero-interest loan program by

maximizing the use of outside funds. Likewise, REA believes the

Borrower supplemental funding requirement for the revolving loan fund

will be equally beneficial for the grant selection process by

evidencing a degree of Borrower support and commitment to the revolving

loan fund, and it will provide REA adequate assurance of effective

project review and oversight resulting in projects having a high

probability of success.

However, REA recognizes that reimbursing Borrowers only 80 percent

of funds expended ``up front'' for community development projects, in

order to achieve Borrowers' 20 percent required contribution to RLFs,

may place an undue financial burden upon some Borrowers and discourage

program participation. In addition, REA recognizes that requiring

Borrowers to initially exhaust their financial resources, as well as

the REA grant funds, will result in no available funds for Borrowers'

revolving funds during the first year or two of operation until

payments from the funded community development projects are received.

Therefore, REA has modified the proposed rule in Sec. 1703.22(h)(2),

``Requisition requirements'', to remove the 80 percent reimbursement

provision and allow for full reimbursement of Borrowers' expended funds

for approved projects funded. However, consistent with the supplemental

funding requirements for individual projects, as well as revolving loan

funds set forth in the proposed rule, Borrowers' supplemental funding

requirements to the revolving loan fund will be maintained.

Accordingly, paragraph (a)(5) in Sec. 1703.22 of the final rule has

been added to require REA Borrowers establishing RLFs to submit a

commitment, in the form of a board resolution, to provide supplemental

funding, referred to as ``additional funding'' in an amount no less

than 20 percent of the REA grant approved. The Borrower will be

required to provide documentation that the additional funding has been

deposited in the appropriate account in Sec. 1703.22(h)(1) of this

final rule prior to grant disbursement. This paragraph also reiterates

the requirement in Sec. 1703.22(g)(2) in the proposed rule requiring

additional funding be retained within the revolving loan fund.

Additional funding for revolving loan funds may be retained initially

as non-Federal funds for any rural economic development project(s),

subject to the normal requirements outlined in Sec. 1703.22(g). For

example, for a $400,000 revolving loan fund grant from REA, the

Borrower may requisition 100 percent of REA's portion of eligible

project costs. However, the REA Borrower will commit at least $80,000

(20 percent of $400,000) of additional funds to be used for rural

economic development projects in accordance with an approved rural

development plan for non-Federal funds. Since the Borrower's funds

provided as additional funds may be considered non-Federal monies and

not subject to ``Federal monies'' restrictions for the Rural Economic

Loan and Grant Program as outlined in the regulation, the REA Borrower

can retain a worthwhile degree of flexibility to fund projects during

the first year of the revolving loan fund. It should be noted, however,

that as with pass-through zero-interest loans and grants, projects

funded with Federal grant funds under the revolving loan provision will

be subject to the supplemental funding requirements as outlined in

Sec. 1703.23 of the Rural Economic Loan and Grant Program regulation.

As pointed out in the comments, REA recognizes that many projects may

have limited sources of supplemental funding available. In this regard,

therefore, REA has provided a provision in Sec. 1703.22(a)(5), whereby

Borrowers, with prior approval from REA, may use all or a portion of

their additional funding to assist project owners receiving funding

through the revolving loan provisions to meet their supplemental

funding requirements required by Sec. 1703.23. In this case, such

additional funding will be considered as Federal funds and subject to

the requirements and restrictions of the regulation.

Finally, several technical changes have been made to the proposed

regulation for clarification as follows: (1) Section 1703.21(d) has

been revised to clarify that excess interest returned to REA will not

be used to reduce principal indebtedness. (2) For revolving loan funds,

Sec. 1703.22(a)(4) has been revised to clarify that reasonable

servicing fees may be charged regardless of whether Federal or non-

Federal funds are involved. (3) Section 1703.20(a)(8) has been revised

to clarify that the overall restriction for using zero-interest loan

and grant funds for payment of Borrower salaries is subject to the

operating expense allowance for revolving loan funds. (4) Section

1703.22(h)(1) has been revised to add to the accounting requirements,

additional ledger accounts to record interest income. (5) Section

1703.22(g)(2) has been clarified to require Borrowers to retain

interest earned from non-Federal funds within the revolving fund to be

used in accordance with their approved Rural Development Plan and Scope

of Work Plan. (6) Section 1703.22(g)(3) has been revised to require REA

Borrowers that terminate the revolving loan program without obtaining

approval by the REA Administrator to return the amount of the original

grant to REA. (7) Section 1703.22(h)(2) has been revised to delete the

requirement for account ledgers to be submitted as a prerequisite for

requisitioning grant funds for revolving loan funds. (8) Section

1703.66(g) has been revised to require REA Borrowers to include in

their legal documents the requirement for project owners to provide

sufficient financial, accounting and budget information and other

records deemed necessary to facilitate audits in accordance with 7 CFR

part 3015 and 7 CFR part 3016 for non-profit entities, and REA rural

economic development loan reviews for projects in a for-profit status.

List of Subjects in 7 CFR Part 1703

Community development, Grant programs--housing and community

development, Loan programs--housing and community development,

Reporting and recordkeeping requirements, Rural areas.

For the reasons set out in the preamble, chapter XVII of title 7 of

the Code of Federal Regulations is amended as follows:

PART 1703--RURAL DEVELOPMENT

1. The authority citation for 7 CFR part 1703 continues to read as

follows:

Authority: 7 U.S.C. 901 et seq. and 950aaa et seq.

Subpart B--Rural Economic Development Loan and Grant Program

2. In Sec. 1703.12 of this subpart B, the following definitions are

added in alphabetical order to read as follows:

Sec. 1703.12 Definitions.

* * * * *

Revolving loan program--a program established and operated by the

Borrower, using grant funds, the Borrower's contribution and loan

repayments to make loans to businesses or others for rural economic

development and job creation purposes.

RTB--the Rural Telephone Bank, established as a body corporate and

an instrumentality of the United States, to obtain supplemental funds

from non-Federal sources and utilize them in making loans, for the

purposes of financing, or refinancing, the construction, improvement,

expansion, acquisition, and operation of telephone lines, facilities,

or systems, for REA Borrowers financed under sections 201 and 408 of

the Act.

* * * * *

Rural economic development--job creation or preservation or

community facilities improvement projects in rural areas.

* * * * *

Scope of work--a detailed plan, which has been approved by the

Administrator, covering the work to be performed by the loan and/or

grant recipient using the loan and/or grant funds.

* * * * *

Technical assistance--analysis of facilities or processes,

managerial, financial and operational consultation by independent

qualified entities to assist project owners to identify and evaluate

problems or potential problems and provide training to enable project

owners to successfully implement, manage, operate and maintain viable

projects.

* * * * *

3. Paragraph (c) of Sec. 1703.17 is added to read as follows:

Sec. 1703.17 Uses of zero-interest loans and grants.

* * * * *

(c) Zero-interest loans and grants may be used for Projects that

enhance rural economic development by providing advanced

telecommunications services and computer networks for medical and

educational services, as follows: (1) For telecommunications end use

and/or transmission facilities; and (2) Other portions of the project,

such as modifications to buildings necessary to accommodate

telecommunications equipment for medical care and other services,

public or private education, and employment training.

4. Sections 1703.18 and 1703.19 are added to read as follows:

Sec. 1703.18 Types of projects eligible for grant funding.

Grants may be made for the following purposes:

(a) The establishment and operation of a revolving loan program by

Borrowers in accordance with Sec. 1703.22;

(b) Project feasibility studies to assist for-profit and non-profit

entities in conjunction with a loan for an authorized project.

Feasibility studies will include management assistance, consultation,

and research for planning individual projects that the Borrower has

determined will benefit the rural community. Feasibility studies which

may be financed under this section must be performed by qualified

entities subject to Sec. 1703.19(i), General requirements for grant

funding. Feasibility studies must address the important aspects of

project assessment and planning to ensure, to the extent practicable,

the success of projects. These include the market, technical, economic,

financial, and managerial issues related to project feasibility.

Feasibility studies may be funded in connection with viable projects as

a reimbursement to the project owner for expenses incurred during the

initial planning stages of the project prior to project funding by REA;

(c) The acquisition of technical assistance in conjunction with

projects funded with zero-interest loans to enable for-profit and non-

profit entities to obtain analysis of facilities and processes,

managerial, financial and operational consultation. Grant funds may

also be used in conjunction with zero-interest loans to enable non-

profit business incubators to provide technical assistance. Technical

assistance will enable project owners to identify and evaluate problems

or potential problems and provide training in order that they may

ultimately implement, manage, operate and maintain viable projects

which are financed with zero-interest loan funds. Technical assistance

financed under this section must be performed by qualified entities

which are independent of the project owner subject to Sec. 1703.19(i),

General requirements for grant funding;

(d) Business incubators established by non-profit organizations to

assist in developing emerging enterprises. Business incubators funded

in conjunction with zero-interest loans will include those facilities

in which single or multiple businesses may use premises, support staff,

computer software, hardware, telecommunications equipment, machinery,

janitorial services, utilities, or other overhead facilities. Grant

funding may also be provided to allow business incubators to provide

feasibility studies and technical assistance in accordance with

paragraphs (b) and (c) of this section;

(e) Community development assistance to non-profit entities and

public bodies for employment creation projects, or other projects which

provide needed community facilities and services;

(f) Facilities and equipment to public, for-profit and non-profit

entities to provide education and training to rural residents to

facilitate economic development. Equipment and facilities may be funded

to enable rural businesses to provide educational and job enhancement

skills to employees;

(g) Facilities and equipment to public, for-profit and non-profit

entities to provide medical care to rural residents. Equipment and

facilities may be funded to enable eligible entities to provide medical

training and related professional health care skills to rural health

care providers;

(h) Projects which utilize advanced telecommunications and/or

computer networks to facilitate medical or educational services or job

training in accordance with paragraphs (f) and (g) of this section.

Sec. 1703.19 General requirements for grant funding.

(a) Grants made under Sec. 1703.18(a), establishment and operation

of a revolving loan program by Borrowers, will be limited to Borrowers

and can be made without zero-interest loans. Grants made under

Sec. 1703.18 (b) through (h) will be made only in conjunction with

zero-interest loans, and on a pass-through basis.

(b) Pass-through grant funding for projects under Sec. 1703.18 (b),

(c), (f), (g) and (h) will be available for non-profit and for-profit

entities. Pass-through grant funding for projects under Sec. 1703.18

(d) and (e) will be available only for non-profit entities.

(c) All projects funded with zero-interest loans and grants will

require supplemental funding in accordance with Sec. 1703.23. For

grants made under Sec. 1703.18(a), the portion eligible for REA funding

may be fully funded with grant funds. For all other grants funded under

=1703.18, the portion of project costs eligible for REA funding may be

funded up to 20 percent with grant funds.

(d) Grant funding will be provided only to the extent necessary for

a feasible project. A feasible project is a project which expects to

generate sufficient income to pay operating expenses and debts and

compensate for depreciation of equipment and facilities for the project

which is to be funded by REA. Depreciation must be based on allowable

depreciation schedules as set forth by the United States Internal

Revenue Service. Borrowers whose analyses of projects show feasibility

without grant funds should not apply for grant funding. Borrowers

requesting pass-through grant funds will base grant funding requests on

borrower projected income and expense projections for the project, and

documentation regarding depreciation of the equipment and facilities

for the project. The Administrator will determine whether the

Borrower's projections of income, expenses and depreciation are

reasonable.

(e) For projects that project insufficient operating revenue the

first two years to show feasibility, borrowers should first consider

the deferral provisions set forth in Sec. 1703.29(b) before determining

the appropriate level of requested grant funding. Zero-interest loan

and grant funding will be approved in accordance with paragraph (d) of

this section based on the option which results in the lowest required

grant percentage.

(f) The owner of the pass-through project that receives grant funds

will be encouraged to commit that the project will be a demonstration

project.

(g) Borrowers or project owners must demonstrate the availability

and commitment of other sources of funding needed to complete a project

in addition to REA loan and/or grant funds, prior to the first advance

of REA funds.

(h) Feasibility studies and/or technical assistance funded with

grants under Sec. 1703.18 (b) and (c) must be performed by entities

which are independent of the Borrower and qualified to provide such

services. The project owner, if deemed qualified in accordance with

this paragraph, may furnish a feasibility study under Sec. 1703.18(b).

Entities furnishing technical assistance under Sec. 1703.18(c), must be

independent of the project owner. To be deemed qualified, entities

providing feasibility studies and/or technical assistance must:

(1) Provide sufficient documentation evidencing their proven

ability, background and experience to furnish such services; and

(2) Provide sufficient documentation evidencing their legal

authority and capacity to furnish such services.

5. Section 1703.20 is revised to read as follows:

Sec. 1703.20 Ineligible uses of zero-interest loans and grants.

(a) Zero-interest loans and grants must not be used:

(1) To fund or assist projects of which any director, officer,

general manager or significant stockholder of the Borrower, or close

relative thereof, is an owner, stockholder, partner or director, or

which would, in the judgment of the Administrator, create a conflict of

interest or the appearance of a conflict of interest. The Borrower must

disclose to the Administrator information regarding any conflict of

interest, potential conflict of interest or any appearance of a

conflict of interest. The Administrator will determine whether there is

a conflict of interest or whether any potential conflict of interest or

appearance of a conflict of interest may adversely affect REA's

interests. A Borrower organized as, or consisting of a cooperative,

widely held mutual corporation, tribal government, municipal power

corporation, public power district, or a similar widely held

organization would ordinarily be able to have an ownership interest in

or manage a project operated on either a for-profit or non-profit

basis. A Borrower organized as a closely held, for-profit corporation

with more than 5 percent of its stock held by one legal person, its

subsidiary or an affiliate, would ordinarily be able to own or manage a

project operated on a non-profit basis only;

(2) For any costs incurred on the project: (i) Prior to receipt of

the Borrower's completed application by REA during an application

period unless the Administrator has specifically approved such usage in

writing; or

(ii) For site development, the destruction or alteration of

buildings, or other activities that would adversely affect the

environment or limit the choice of reasonable alternatives prior to

satisfying the requirements of Sec. 1703.32;

(3) By the Borrower to purchase or lease any real property,

materials, equipment, or services from its subsidiary, an affiliate, or

significant stockholders, officers, managers or directors of the

Borrower, or close relatives thereof, where the purchase or lease has

not been fully disclosed to the Administrator and received the

Administrator's prior written approval;

(4) By the recipient of a pass-through-loan or pass-through-grant

to purchase or lease any real property, materials, equipment, or

services from the Borrower, its subsidiary, an affiliate of the

Borrower, or significant stockholders, officers, managers or directors

of the Borrower, or close relatives thereof, where the purchase or

lease has not been fully disclosed to the Administrator and received

the Administrator's prior written approval;

(5) To pay off or refinance existing indebtedness incurred prior to

receipt of the Borrower's completed application by REA or for

refinancing or repaying a loan made under the Act or a program

administered by the Administrator;

(6) For any electric or telephone purpose, as determined by the

Administrator;

(7) For the Borrower's electric or telephone operations or for any

operations affiliated with the Borrower unless the Administrator has

specifically informed the Borrower in writing that the operations are

part of the approved purposes;

(8) To pay the salaries of any employee or owner of the Borrower,

its subsidiaries, or affiliates. This restriction does not prohibit the

use of loan or grant funds for printing and similar costs for project

feasibility studies it has prepared, commissioned or purchased if

specifically approved by the Administrator. This restriction is subject

to the operating expense allowance for revolving loan funds set forth

in Sec. 1703.22 (a)(6);

(9) To fund feasibility studies and technical assistance as set

forth in Sec. 1703.18 independently of projects which are funded under

the zero-interest loan and grant program;

(10) For proposed projects located in areas covered by the Coastal

Barrier Resources Act (16 U.S.C. 3501 et seq.); or

(11) For anything other than an approved purpose.

(b) [Reserved]

6. Section 1703.21 is amended by adding a sentence at the end of

paragraph (b) and revising paragraph (d) to read as follows:

Sec. 1703.21 Limitations on the use of zero-interest loan and grant

funds.

* * * * *

(b) * * * Grant funds will be disbursed to the Borrower in

accordance with Sec. 1703.61(b).

* * * * *

(d) The Borrower may not requisition zero-interest loan funds

unless those funds are deposited into the Borrower's REA construction

fund trustee account. The Borrower will be required to set up a

separate Federally insured account called the Rural Economic

Development Account, if loan funds are not expected to be disbursed

within two months after receipt from REA. All interest earned on

temporarily deposited zero-interest loan funds in excess of $500 per

12-month period must be used for approved purposes or returned to REA.

Interest earned in excess of $500 per 12 month period and returned to

REA will not be used to reduce the Borrower's principal indebtedness.

Grant funds will be disbursed by REA in accordance with 7 CFR parts

3015 and 3016, and Sec. 1703.61 (b).

* * * * *

7. Section 1703.22 is added to read as follows:

Sec. 1703.22 Revolving loan program.

Grant funds under this section will be provided only to REA

Borrowers on a non pass-through basis. REA Borrowers will, in turn,

provide loans to foster rural economic development in accordance with

this subpart and the specific requirements of this section.

(a) General. Grant funds disbursed to REA Borrowers to establish

revolving loan programs under this section are subject to the following

requirements: (1) The uses, restrictions and limitations for zero-

interest loans set forth in Secs. 1703.17, 1703.20 and 1703.21

respectively;

(2) Loans made by REA Borrowers initially lending grant funds

disbursed by REA are limited to types of projects specified in

Sec. 1703.18 (d), (e), (f), (g) and (h). Loans may also be made for

feasibility studies and technical assistance in accordance with

Sec. 1703.18 (b) and (c), respectively, but only for those types of

projects specified in this paragraph (a)(2). Loans made from repayments

of the initial loans made by REA Borrowers may be used for any rural

economic development purpose in accordance with a prior agreement

between the Borrower and REA;

(3) All other requirements relevant to zero-interest pass-through

loans and grants outlined in this subpart, except the minimum size of a

zero-interest loan as specified in Sec. 1703.28(f);

(4) The initial loans made from the revolving loan fund using the

grant funds must carry an interest rate of zero percent; however, loans

made from repayments of the initial loan may carry an interest rate in

accordance with prior agreement with REA. In either case, the Borrower

may charge reasonable loan servicing fees;

(5) The Borrower will provide a board resolution certifying a

commitment to provide and maintain additional funding to the revolving

loan fund in an amount no less than 20 percent of the REA grant

approved. The Borrower will provide documentation that the additional

funding has been deposited in the appropriate account in

Sec. 1703.22(h)(1) prior to grant disbursement. This requirement does

not pertain to supplemental funding requirements for individual

projects as set forth in Sec. 1703.23. Additional funding required in

this paragraph pertains only to borrowers establishing revolving loan

funds, with the following provisions: (i) Use of additional funding is

subject to requirements set forth in paragraph (b) of this section and

with REA concurrence;

(ii) Individual projects funded under this section are subject to

supplemental funds requirements set forth in Sec. 1703.23;

(iii) At the Borrower's option with REA concurrence, all or a

portion of the additional funding may be used to assist project owners

receiving funding from Federal grant funds under this section to meet

their supplemental funding requirements set forth in Sec. 1703.23 of

this subpart. Such additional funding will be deemed as Federal funds

and accounted for in accordance with paragraph (h)(1)(i)(A) of this

section for electric borrowers or paragraph (h)(1)(ii)(A) of this

section for telephone borrowers, as appropriate;

(iv) At the Borrower's option, all or a portion of the additional

funding may be retained as non-Federal funds, for any rural economic

development project(s), subject to paragraph (g) of this section and

REA concurrence. Additional funding committed as non-Federal will be

accounted for in accordance with paragraph (h)(1)(i)(E) of this section

for electric borrowers or paragraph (h)(1)(ii)(E) of this section for

telephone borrowers, as appropriate;

(6) Grant funds will only be provided to an REA Borrower for a

revolving loan program when a proposed budget submitted to REA

demonstrates and the Borrower agrees in writing that no more than 10

percent of grant funds received are used to cover operating expenses of

the revolving loan program. Operating expenses include the costs of

administering the revolving loan fund and the provision of technical

assistance to project owners. All proceeds in excess of those needed to

cover authorized expenses, as described above, must revert to the

revolving fund and be available for re-lending for eligible projects.

Budgets which reflect expenses incurred in operating the fund must be

submitted to REA annually;

(7) The Borrower may charge reasonable loan servicing charges. For

purposes of this section, loan servicing charges must not exceed an

amount equal to the sum of one percent per year of the outstanding

principal on the first day of each year on each project owner's zero-

interest loan which is made from the REA grant proceeds;

(8) The Borrower will submit documentation indicating that

potential projects which are eligible for funding have sufficiently

progressed in the planning stage to allow grant funding approved for a

revolving loan program to be requisitioned by the Borrower, disbursed

by REA, and loaned to recipients within 3 years of the date of grant

approval by REA. Grant funds that have not been requisitioned within 3

years will be cancelled, unless the Administrator has approved an

extension in writing. Grant funds will be disbursed by REA in

accordance with paragraphs (d) and (g) of this section;

(9) If the revolving loan program is terminated, further

disbursement of grant funds will be cancelled. Repayments of loans made

using grant funds which have been disbursed will be used in accordance

with the Borrower's rural development plan;

(10) Payment of creditors which provide interim or construction

financing to a viable project for eligible purposes as set forth in

Sec. 1703.17 of this subpart may be authorized. Refinancing for the

sole purpose of replacing higher interest conventional financing with

zero-interest revolving loan funds is not authorized.

(b) The Borrower's rural development plan. REA requires that the

revolving loan program be administered in accordance with a rural

development plan, developed by the Borrower and approved by REA. The

plan must be of sufficient detail to provide REA with a complete

understanding of what the Borrower intends to accomplish by

administering a revolving loan program. The rural development plan will

provide the mechanics of how the revolving loan funds will be disbursed

to the project owner. The rural development plan must outline the

Borrower's plans for administering the revolving loan program, during

the initial period when REA grant funds are lent by the Borrower and

after the revolving fund becomes non-Federal in accordance with

paragraph (g) of this section. The plan must outline the following: (1)

Specific objectives for the revolving loan program, revolving loan

operating procedures, lending parameters, maximum and minimum loan

amount, and types of projects to be funded;

(2) Documentation of Borrower's coordination of lending activities

with other local entities that provide financing for rural economic

development projects. Such documentation will indicate that the

Borrower will not compete with, but supplement other sources of legal

financing;

(3) Eligibility criteria if other than outlined in this subpart;

(4) The application process and method of disposition of the funds

to the project owner; and

(5) A procedure for monitoring the project owner's accomplishments

and reporting requirements by the project owner's management.

(c) The Borrower's scope of work. Borrowers applying for grant

funding under this section must submit a scope of work to REA.

Applications for grants under this section will be evaluated for

funding based on the Borrower's rural development plan in paragraph (b)

of this section and the scope of work. The scope of work must contain

the following items: (1) Documented need for grant funds. The Borrower

must identify a sufficient number of rural development projects of the

type specified in Sec. 1703.18 (d), (e), (f), (g), and (h) which are

currently being planned requiring zero-interest loans equal to the

amount of grant assistance requested from REA. These projects may be

supported with a community facilities plan, or other development plan,

prepared by local community leaders in cooperation with the Borrower.

For each project, the Borrower will submit information required under

Sec. 1703.34;

(2) Documented authority and ability of the Borrower to administer

a revolving rural development loan program in accordance with the

provisions of this subpart. The Borrower must provide a complete

listing of all personnel responsible for administering this program

along with a statement of their qualifications and experience;

(3) Documented ability of the Borrower to commit financial

resources under the control of the Borrower to assist in the

establishment of a rural development revolving loan program. This

should include a statement of the sources of funding for the

administration of the Borrower's operations, as well as financial and

technical assistance for projects;

(4) Documentation that the Borrower has secured commitments of

significant financial support from public agencies and/or private

organizations for supplemental funding to support a rural development

loan program;

(5) A list of proposed fees and other charges the Borrower will

assess the projects it funds; and

(6) The Borrower's rural development policy for non-Federal funds

in accordance with paragraphs (b) and (g) of this section.

(d) Grant processing and approval. Applications for grants to

establish revolving loan funds will be reviewed in accordance with

Secs. 1703.45 and 1703.46, and with the Borrower's rural development

plan and scope of work outlined in paragraphs (b) and (c) of this

section. Grants will be processed in accordance with Secs. 1703.58 and

1703.59.

(e) Disbursement of grant funds. Borrowers are not authorized to

commence projects to be funded under this section until those projects

have been submitted for authorization in accordance with paragraph

(c)(1) of this section, or the projects have been submitted for

authorization subsequent to grant approval in accordance with paragraph

(e)(2) of this section. REA grant funds will be disbursed in accordance

with the provisions of 7 CFR part 3015, Uniform Federal Assistance

Regulations, on a reimbursement basis, the applicable requirements of

this subpart, the administrative provisions outlined in paragraph (g)

of this section, and the following requirements:

(1) Only projects authorized by REA in accordance with paragraphs

(c)(1) and (e)(2) of this section, for which adequate documentation,

including receipts for expenditures and certification of approved

purposes, are submitted will be considered for reimbursement;

(2) A project which was not submitted prior to grant approval in

accordance with paragraph (c)(1) of this section, may be authorized for

funding subsequent to grant approval. A project which is authorized for

funding under this paragraph will be considered for disbursement at the

first allowable time period after project authorization in accordance

with paragraphs (e)(3) and (e)(4) of this section. Project

authorization after grant approval is subject to the following

requirements: (i) The project meets the specific objectives for the

Borrower's revolving loan program as outlined in paragraph (b)(1) of

this section;

(ii) The Borrower presents evidence that the project requested for

authorization can be funded prior to projects which were authorized

prior to grant approval in accordance with paragraph (b)(1) of this

section; and

(iii) REA approves the project for funding in accordance with

Sec. 1703.34;

(3) Grant funds requisitioned for individual projects in increments

of less than $100,000, or less than 25 percent of the amount approved

for the revolving loan fund, whichever is less, may be reimbursed semi-

annually. Submission periods for requisitioning grant funds on a semi-

annual disbursement basis will be 14 days commencing from the 6-month

anniversary date of grant approval;

(4) Grant funds requisitioned for individual projects in increments

of $100,000 or greater, or at least 25 percent of the amount approved

for the revolving loan fund, whichever is less, may be submitted for

reimbursement at any time.

(f) Reporting requirements. (1) The Borrower must maintain

financial management systems and retain financial records in accordance

with 7 CFR part 3015, Uniform Federal Assistance Regulations.

(2) Borrower records must include an accurate accounting and source

documentation to support each transaction involving the revolving loan

fund. Records are subject to a rural economic loan review as set forth

in Sec. 1703.66(g).

(3) SF-269, ``Financial Status Report,'' and a revolving loan

program activity report will be required of all Borrowers on an annual

basis. Reports will be submitted no later than 90 days after December

31 of each year. The program activity report will contain an aggregate

list of projects funded, the amount funded for each project, the

project repayment schedule, a brief description of each project, the

project objectives, whether or not the project has been completed, and

the projected number of jobs created or saved by each project. Reports

under this paragraph will be required until all grant funds have been

disbursed and projects completed.

(4) A performance report will be required for each project funded

on an annual basis. Performance reports will be due no later than 90

days after December 31 of each year. Performance reports will be

submitted until one year after project completion. Project performance

reports will contain the following: (i) A comparison of actual

accomplishments during the reporting period to the objectives

established for the project and, if not attained, reasons why

established objectives were not met;

(ii) Problems, delays, or adverse conditions which will materially

affect attainment of planned project objectives, prevent the meeting of

time schedules or objectives, or preclude the attainment of project

work elements during established time periods. This disclosure shall be

accompanied by a statement of the action taken or contemplated to

resolve the situation;

(iii) Projected accomplishments for the next reporting period, if

applicable; and

(iv) Status of compliance with any special conditions for project

funding, if applicable.

(5) Borrowers must report and remit interest earned on advances of

grant funds deposited in interest accounts to REA on a quarterly basis

in accordance with 7 CFR part 3015, Uniform Federal Assistance

Regulations.

(g) Non-Federal funds. Once all REA-derived grant funds have been

utilized by the Borrower to fund rural development projects according

to the provisions of this section and the applicable provisions of this

subpart, loans made by the Borrower thereafter from repayments to the

revolving loan fund shall not be considered as being derived from

Federal funds and the requirements of these regulations will not be

imposed on the Borrower or project owners. However, the Borrower will,

as a condition for receiving a grant under this section, agree to the

following conditions: (1) To maintain a revolving loan account to

promote rural economic development in accordance with the Borrower's

rural development plan for non-Federal funds submitted in accordance

with paragraph (b) of this section;

(2) To maintain the additional funding supplied by the Borrower in

accordance with paragraph (a)(5) of this section and interest earnings

within the revolving loan fund;

(3) Approval may be granted by the Administrator to terminate the

revolving loan program, or modify the requirements set forth in

paragraphs (g)(1) and (g)(2) of this section, upon written request and

justification by the Borrower. Should the Borrower terminate the

revolving loan program without obtaining approval by the REA

Administrator, the Borrower will return the amount of the original

grant to REA.

(h) Administrative provisions. The requirements of this paragraph

set forth the procedures for accounting, requisitioning and

disbursement of Federal funds, those funds initially disbursed for

projects which may be funded in accordance with an approved rural

development plan and scope of work submitted by the Borrower.

Disbursement of grant funds will be approved on a reimbursement basis

after the grant agreement is executed by REA and the Borrower, the

applicable provisions of this subpart are met, subject to disbursement

restrictions in paragraph (e) of this section, and the requirements in

paragraphs (h) (1) through (3) of this section.

(1) Accounting requirements. Accounting will be performed in

accordance with 7 CFR part 1767, Accounting Requirements for REA

Electric Borrowers, or 7 CFR part 1770, Accounting Requirements for REA

Telephone Borrowers, as appropriate. The Borrower will maintain

accounts for the revolving funds as follows:

(i) REA electric Borrowers. (A) A general ledger Account 131.13,

``Cash-General--Economic Development Grant Funds.'' The Borrower will

debit this account in an amount equal to the amount of the grant

received from REA, any additional funds deemed Federal from the

Borrower as required by paragraph (a)(5)(iii) of this section, and all

other funds advanced for the project, regardless of the source, if

controlled by the Borrower. The Borrower will credit this account for

all expenditures made with Federal funds on behalf of the rural

development project.

(B) A general ledger Account 124.1, ``Other Investments--Federal

Economic Development Loans.'' The Borrower will debit this account in

the amount of Federal funds the Borrower advances to non-associated

organizations for authorized rural economic development projects. For

each debit in this account, a corresponding credit will be made in

Account 131.13 in paragraph (h)(1)(i)(A) of this section. This account

will be credited with repayments of loans made with Federal economic

development grant funds.

(C) A general ledger Account 123.3, ``Investment in Associated

Companies--Federal Economic Development Loans.'' The Borrower will

debit this account in the amount of Federal funds the Borrower advances

to associated organizations for authorized rural economic development

projects. For each debit in this account, a corresponding credit will

be made in Account 131.13 in paragraph (h)(1)(i)(A) of this section.

This account will be credited with repayments of loans made with

Federal economic development grant funds.

(D) Account 421, ``Miscellaneous Non-operating Income.'' The

Borrower will credit this account in the amount of grant funds

disbursed by REA resulting from an approved requisition request in

accordance with paragraph (h)(2) of this section.

(E) A general ledger Account 131.14, ``Cash-General--Economic

Development Non-Federal Revolving Funds.'' The Borrower will debit this

account with any additional funds deemed non-Federal from the borrower

as required by paragraph (a)(5)(iv) of this section, cash received from

the repayment of loans made from accounts in paragraphs (h)(1)(i)(B),

(h)(1)(i)(C), (h)(1)(i)(F), and (h)(1)(i)(G) of this section. The

Borrower will credit this account to reflect loans made for rural

economic development projects from non-Federal funds from accounts

specified in paragraphs (h)(1)(i)(F) and (h)(1)(i)(G) of this section.

(F) A general ledger Account 124.2, ``Other Investments--Non-

Federal Economic Development Loans.'' The Borrower will debit this

account in the amount of non-Federal funds the Borrower advances to

non-associated organizations for authorized rural economic development

projects. For each debit in this account, a corresponding credit will

be made in Account 131.14, in paragraph (h)(1)(i)(E) of this section.

This account will be credited with repayments of loans made from non-

Federal economic development funds.

(G) A general ledger Account 123.4, ``Investment in Associated

Companies--Non-Federal Economic Development Loans.'' The Borrower will

debit this account in the amount of non-Federal funds the Borrower

advances to associated organizations for authorized rural economic

development projects. For each debit in this account, a corresponding

credit will be made in Account 131.14, in paragraph (h)(1)(i)(E) of

this section. This account will be credited with repayments of loans

made from non-Federal economic development funds.

(H) A general ledger Account 171 ``Interest and Dividends

Receivable.'' The Borrower will debit this account with the amount of

interest earned on the revolving loan fund. The Borrower will credit

this account and debit the appropriate cash account when the cash is

received.

(I) A general ledger Account 419, ``Interest and Dividend Income.''

The Borrower will credit this account with the amount of interest

earned on the revolving loan fund.

(ii) REA telephone Borrowers. (A) A general ledger Account 1130.4,

``Cash--General Fund--Economic Development Grant Funds (Class A

Companies)'', or Account 1120.14, ``Cash-General Fund--Economic

Development Grant Funds (Class B Companies).'' The Borrower will debit

the appropriate account in an amount equal to the amount of the grant

received from REA, any additional funds deemed Federal from the

Borrower required by paragraph (a)(5)(iii) of this section, and all

other funds advanced for the project, regardless of the source, if

controlled by the Borrower. The Borrower will credit the appropriate

account for all expenditures made with Federal funds on behalf of the

rural development project.

(B) A general ledger Account 1402.4, ``Other Investments in

Nonaffiliated Companies--Federal Economic Development Grant Loans.''

The Borrower will debit this account in the amount of Federal funds the

Borrower advances to nonaffiliated organizations for authorized rural

economic development projects. For each debit in this account, a

corresponding credit will be made in the appropriate account in

paragraph (h)(1)(ii)(A) of this section. This account will be credited

with repayments of loans made from Federal economic development grant

funds.

(C) A general ledger Account 1401.1, ``Other Investments in

Affiliated Companies--Federal Economic Development Grant Loans.'' The

Borrower will debit this account in the amount of Federal funds the

Borrower advances to affiliated organizations for authorized rural

economic development projects. For each debit in this account, a

corresponding credit will be made in the appropriate account in

paragraph (h)(1)(ii)(A) of this section. This account will be credited

with repayments of loans made from Federal economic development grant

funds.

(D) Account 7360, ``Other Non-operating Income (Class A

Companies)'', or Account 7300, Non-operating Income and Expense (Class

B Companies), as appropriate. The Borrower will credit these accounts,

as appropriate, in the amount of grant funds disbursed by REA resulting

from an approved requisition request in accordance with paragraph

(h)(2) of this section.

(E) A general ledger Account 1130.5, ``Cash--General Fund--Economic

Development Non-Federal Revolving Funds (Class A Companies)'', or

Account 1120.15, ``Cash--General Fund--Economic Development Non-Federal

Revolving Funds (Class B Companies)'', as appropriate. The Borrower

will debit the appropriate account with any additional funds deemed

non-Federal from the Borrower as required by paragraph (a)(5) of this

section, cash received from the repayment of loans made from accounts

in paragraphs (h)(1)(ii)(B), (h)(1)(ii)(C), (h)(1)(ii)(F), and

(h)(1)(ii)(G) of this section. The Borrower will credit the appropriate

account to reflect loans made for rural economic development projects

from non-Federal funds from accounts specified in paragraphs

(h)(1)(ii)(F) and (h)(1)(ii)(G) of this section.

(F) A general ledger Account 1402.5, ``Other Investments in

Nonaffiliated Companies-Non-Federal Economic Development Grant Loans.''

The Borrower will debit this account in the amount of non-Federal funds

the Borrower advances to nonaffiliated organizations for authorized

rural economic development projects. For each debit in this account, a

corresponding credit will be made in the appropriate account in

paragraph (h)(1)(ii)(E) of this section. This account will be credited

with repayments of loans made from non-Federal economic development

funds.

(G) A general ledger Account 1401.2, ``Other Investments in

Affiliated Companies--Non-Federal Economic Development Grant Loans.''

The Borrower will debit this account in the amount of non-Federal funds

the Borrower advances to affiliated organizations for authorized rural

economic development projects. For each debit in this account, a

corresponding credit will be made in the appropriate account in

paragraph (h)(1)(ii)(E) of this section. This account will be credited

with repayments of loans made from non-Federal economic development

funds.

(H) A general ledger Account 1210, ``Interest and Dividends

Receivable.'' The Borrower will debit this account with the amount of

interest earned on the revolving fund loan. The borrower will credit

this account and debit the appropriate cash account when the cash is

received.

(I) A general ledger Account 7320, ``Interest Income (Class A

Companies)'', or Account 7300.2, ``Interest Income (Class B

Companies)'', as appropriate. The Borrower will credit this account

with the amount of interest earned on the revolving fund loans.

(2) Requisition requirements. Grant funds may be requisitioned by

REA Borrowers in accordance with disbursement requirements in paragraph

(e) of this section. Borrowers will be fully reimbursed for funds

expended for approved projects funded. For each completed project, the

Borrower will submit the following for reimbursement: (i) Standard Form

270, ``Request for Advance of Reimbursement'';

(ii) Copies of cancelled checks and other verifiable source records

supporting the transactions; and

(iii) Certification and evidence that the project costs to be

reimbursed are for a project which has been authorized by REA and are

authorized costs for that project.

(3) REA review. Requisition requests will be evaluated for

compliance with loan purposes previously submitted by the Borrower for

project authorization in accordance with paragraphs (c)(1) or (e)(2) of

this section, compliance with the Borrower's rural development plan,

accounting documentation submitted in paragraph (h)(1) of this section,

and the cancelled checks and source records submitted.

8. Paragraph (b) of Sec. 1703.28 is revised to read as follows:

Sec. 1703.28 Maximum and minimum sizes of a zero-interest loan or

grant application.

* * * * *

(b) Regardless of the projected total amount that will be

available, the maximum size may not be lower than $200,000.

* * * * *

9. Section 1703.30 is amended by revising the parenthetical

containing the OMB control number at the end of the section to read as

follows:

Sec. 1703.30 Approval of agreements.

* * * * *

(Approved by the Office of Management and Budget under control

number 0572-090090)

10. Section 1703.34 is amended by revising paragraphs (b)(5) (ii)

and (iii), and adding paragraphs (b)(5) (iv) and (v) to read as

follows:

Sec. 1703.34 Applications.

* * * * *

(b) * * *

(5) * * *

(ii) A section entitled ``Project Description'' as set forth in

Sec. 1703.36;

(iii) Except for applications for project feasibility studies, a

section entitled ``Environmental Impact of the Project'' as set forth

in Sec. 1703.37;

(iv) Monitoring plan. For a pass-through loan and/or grant, a copy

of the Borrower's plan to monitor the loan and/or grant and ensure that

the requirements of this subpart are met; and

(v) Scope of work. For an application for a loan and/or grant, a

proposed scope of work for the project.

* * * * *

11. Section 1703.46 is amended by revising the first sentence of

paragraph (a); by removing paragraph (e), and redesignating paragraphs

(f), (g), (h), (i), (j), (k), and (l) as paragraphs (e), (f), (g), (h),

(i), (j), and (k), respectively; and by adding a sentence at the end of

newly designated paragraph (g)(6)(iv) to read as follows:

Sec. 1703.46 Documenting the evaluation and selection of applications

for zero-interest loans and grants.

(a) The Administrator will only consider for selection applications

that request funds for purposes as set forth in Sec. 1703.17 and

Sec. 1703.18 and are not ineligible under Sec. 1703.20, as determined

by the Administrator. * * *

* * * * *

(g) * * *

(6) * * *

(iv) * * * For a pass-through loan and grant, the quality of the

Borrower's plan to monitor the loan and grant and assure that the

requirements of this subpart and 7 CFR parts 3015 and 3016 are met will

also be considered.

* * * * *

12. Section 1703.61 is amended by adding two sentences at the end

of paragraph (a) and three sentences at the end of paragraph (b) to

read as follows:

Sec. 1703.61 Disbursement of zero-interest loan and grant funds.

(a) * * * The Borrower or project owner's share in the cost of the

project must be utilized in advance of REA zero-interest loan funds, or

upon REA approval, on a pro-rata distribution basis with loan funds

during the disbursement period. The Borrower or project owner will not

be permitted to provide its contribution at the end of the loan

disbursement period.

(b) * * * Prior to the disbursement of grant funds under this

subpart, the Borrower will provide evidence of fidelity bond coverage

as required by 7 CFR 3015.17. The grant portion of a pass-through zero-

interest loan and grant will be disbursed to the Borrower on a

reimbursement basis after all other project funds have been utilized

and evidence is provided that the project has been completed. Grants to

Borrowers for establishment of revolving loan funds will be disbursed

in accordance with Sec. 1703.22 of this subpart.

* * * * *

13. Section 1703.66 is amended by revising paragraphs (b), (d), (e)

and (g), and by adding paragraphs (h), (i), and (j), to read as

follows:

Sec. 1703.66 Review and other requirements.

* * * * *

(b) The Borrower must require the recipient of a pass-through loan

and grant to provide an itemized list to the Borrower that shows the

expenditures made on the project for approved purposes, including a

certification to that effect. The Borrower will also require the

recipient to attach invoices, receipts, bills of sale, and other

evidence representing the items on the list of expenditures that at

least total the amount of the REA zero-interest loan and grant. In

addition, the Borrower will also require the recipient to furnish a

record of itemized receipts showing total project costs in such detail

that will permit auditors to establish the REA funding percentage.

REA's legal agreements will include the terms and conditions that the

Borrower must require in its agreement with the recipient of a pass-

through loan and grant covering the use and intended schedule of

expenditures of the loan funds.

* * * * *

(d) The legal documents executed between the Borrower and the

Administrator in connection with a zero-interest loan and/or grant must

contain certain provisions giving the Administrator discretionary

rights and remedies in the event a Borrower fails to comply with this

subpart, other Federal regulations and statutes, or the terms,

conditions and requirements of the executed legal documents. Regardless

of any right or remedy the Administrator chooses to assert, if the

Borrower uses any zero-interest loan and/or grant funds other than for

approved purposes, the Borrower will be required to return to REA the

amount used for unapproved purposes. An unauthorized zero-interest loan

amount which is returned will be considered a prepayment on the REA

note.

(e) Borrowers receiving zero-interest loans and/or grants will be

subject to a rural economic development review of zero-interest loan

and grant funds.

* * * * *

(g) Grants provided under this program will be administered in

accordance with 7 CFR part 3015 and 7 CFR part 3016, as appropriate.

Copies of these USDA Uniform Assistance regulations can be obtained by

contacting REA in Washington, DC. A Borrower that receives a grant for

the establishment of a revolving loan fund, or project owner that

receives a pass-through loan and grant, will be subject to requirements

under these regulations which cover, among other things, financial

reporting, accounting records, budget controls, record retention and

audit requirements. For pass-through loans and grants, REA Borrowers

will be required to include in their legal documents the requirement

for project owners to provide sufficient financial, accounting and

budget information and other records deemed necessary to facilitate

audits in accordance with 7 CFR part 3015 and 7 CFR part 3016 for non-

profit entities, and REA rural economic development loan reviews for

projects in a for-profit status.

(h) For pass-through loans and grants awarded under this subpart,

the Borrower must diligently monitor performance to ensure that time

schedules are being met, projected work by time periods is being

accomplished, and other performance objectives are being achieved. The

Borrower must submit an original and one copy of each report to REA on

an annual basis. The project performance reports shall include, but not

be limited to, the following:

(1) A comparison of actual accomplishments to the objectives

established for that period;

(2) Reasons why any established objectives were not met;

(3) A description of any problems, delays, or adverse conditions

which have occurred, or are anticipated, and which may affect the

attainment of overall project objectives, prevent meeting of time

schedules or objectives, or preclude the attainment of particular

project work elements during established time periods. This disclosure

shall be accompanied by a statement of the action taken or planned to

resolve the situation; and

(4) Objectives and timetable established for the next reporting

period.

(i) For pass-through loans and grants, a final project performance

report will be required with the last SF 269, ``Financial Status

Report,'' available from REA in Washington, DC. The final report also

must provide an evaluation of the success of the project in meeting the

objectives of the program. The final report may serve as the last

annual report.

(j) Monitoring requirements for Borrowers receiving grants for

revolving loan funds are specified in Sec. 1703.22.

14. Sections 1703.67 and 1703.68 are added to read as follows:

Sec. 1703.67 Changes in project objective or scope.

For loans and grants awarded under this subpart, the Borrower must

obtain prior approval for any material change to the scope or

objectives of the approved project, including changes to the scope of

work or budget. Failure to obtain prior approval of changes can result

in suspension or termination of grant funds.

Sec. 1703.68 Loan and grant termination provisions.

(a) Termination for cause. The Administrator may terminate any loan

and/or grant in whole, or in part, at any time before the date of

completion of loan and/or grant disbursement, whenever the Borrower has

failed to comply with the conditions of the loan and/or grant. The

Administrator will promptly notify the Borrower in writing of the

determination and the reasons for the termination, together with the

effective date. The termination date will be no less than 30 days

following receipt of the termination notice. The Borrower will have

such time to cure the default, or to state why it feels the loan and/or

grant should not be terminated. The Administrator will stay the

termination upon the curing of the default, and may delay termination

if, sufficient cause has been given by the Borrower.

(b) Termination for convenience. The Administrator or the Borrower

may terminate a loan and/or grant in whole, or in part, when both

parties agree that the continuation of the project would not produce

beneficial results commensurate with further expenditure of funds. The

two parties will agree upon termination conditions, including the

effective date, and in the case of partial terminations, the portion to

be terminated. The Borrower will not incur new obligations for the

terminated portion after the effective date, and will cancel as many

outstanding obligations as possible. The Administrator will allow full

credit to the Borrower for the Federal share of unfulfilled contractual

obligations which were incurred in good faith by the Borrower prior to

grant termination.

Subpart C--[Amended]

Secs. 1703.80-1703.99 [Reserved]

15. Sections 1703.80 through 1703.99, which are presently reserved

in subpart B, are transferred to subpart C.

Dated: March 7, 1994.

Bob J. Nash,

Under Secretary, Small Community and Rural Development.

[FR Doc. 94-5740 Filed 3-11-94; 8:45 am]

BILLING CODE 3410-15-P