Rural Telephone Bank and Telephone Program Loan Policies, Procedures, and Requirements; and Telecommunications System Construction Policies and Procedures

DEPARTMENT OF AGRICULTURE

Rural Telephone Bank

7 CFR Part 1610

Rural Electrification Administration

7 CFR Parts 1735, 1737, 1744, 1753

Rural Telephone Bank and Telephone Program Loan Policies,

Procedures, and Requirements; and Telecommunications System

Construction Policies and Procedures

AGENCY: Rural Electrification Administration and Rural Telephone Bank,

USDA.

ACTION: Final rule.

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SUMMARY: The Rural Electrification Administration (REA) adopts, except

for the State Telecommunications Modernization Plan, its interim rule

published December 20, 1993, as a final rule with minor technical

changes. This action makes changes to the telephone program required by

the Rural Electrification Loan Restructuring Act of 1993 (RELRA or

legislation).

EFFECTIVE DATE: May 13, 1994.

FOR FURTHER INFORMATION CONTACT: Matthew P. Link, Director, Rural

Telephone Bank Management Staff, Rural Electrification Administration,

U.S. Department of Agriculture, 14th & Independence Avenue, SW., room

2832-S, Washington, DC 20250-1500, telephone number (202) 720-0530.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule has been determined to be not-significant for

purposes of Executive Order 12866, Regulatory Planning and Review, and

therefore has not been reviewed by the Office of Management and Budget

(OMB). However the interim rule was reviewed by the OMB in conformance

with Executive Order 12291 and Departmental Regulation 1512-1, and was

subsequently exempted from the OMB review under 12866.

Information Collection and Recordkeeping Requirements

The reporting and recordkeeping requirements contained in the final

rule have been approved by the OMB in accordance with the Paperwork

Reduction Act of 1980 (44 U.S.C. 3501 et seq.). These requirements are

approved under OMB control number 0572-0079.

Send comments regarding this collection of information to:

Department of Agriculture, Clearance Office, Office of Information

Resources Management, Room 404-W, Washington, DC 20250, and to the

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

Officer for USDA, room 3201, New Executive Office Building, Washington,

DC 20503.

The information set forth in the interim rule regarding Executive

Orders 12778 and 12372, the Regulatory Flexibility Act Certification,

the National Environmental Policy Act Certification, and the Catalog of

Federal Domestic Assistance, applies to this final rule without change.

Background

On December 20, 1993, REA published an interim rule (58 FR 66250)

to incorporate changes to telephone loan policies required by RELRA

(107 Stat. 1356). RELRA amended several provisions of the Rural

Electrification Act of 1936, as amended (7 U.S.C. 901 et seq.) (RE

Act), and mandated a restructuring of the telephone loan program.

REA received 81 comments regarding the interim rule. Overall, the

greatest concern on the part of the responding organizations was 7 CFR

part 1751, subpart B, the State Telecommunications Modernization Plan

(modernization plan). Because of the overwhelming response regarding

the modernization plan, related concerns and possible modifications

will be resolved in a separate notification.

This notice addresses comments on parts of the interim rule other

than 7 CFR part 1751, subpart B. All comments were taken into

consideration in preparing the final rule. Comments were received from

the following:

(1) Hills Telephone Company, Inc.

(2) Interstate Telecommunications Cooperative, Inc.

(3) Martin and Associates, Inc., submitted comments on behalf of 16

local exchange carriers located in South Dakota.

(4) Joint comments from the National Rural Telecom Association and

the Western Rural Telephone Association.

(5) National Telephone Cooperative Association.

(6) Joint comments from the Oklahoma Rural Telephone Coalition,

Rural Arkansas Telephone Systems, and Texas Statewide Telephone

Cooperative, Inc.

(7) Organization for the Protection and Advancement of Small

Telephone Companies.

(8) United States Telephone Association.

The comments will be discussed in the order in which they appear in

the final rule. This Federal Register notice serves to notify the

public that the interim rule, with the exception of 7 CFR part 1751,

subpart B (modernization plan regulations), is final.

Section 1610.1 General

Comment Summary: Two organizations objected to REA distinguishing

between authorized loan purposes for Rural Telephone Bank (RTB) loans

by establishing a preference for one classification of authorized

statutory loan purposes over another. Further, it was stated that RTB

is without authority to impose such a preference, and this provision

should be deleted from the final rule.

Response: While RELRA amended section 408(a)(2) of the RE Act to

revise certain purposes for RTB financing, section 408(a)(1) was not

amended and it references section 201 where such purposes are still

eligible for RTB financing. REA believes that RELRA, by amending

408(a)(2), indicated preference to loans for section 408(a)(2) purposes

over 408(a)(1) purposes to the extent that REA has completed

applications for loans for purposes set forth in 408(a)(2). This policy

is consistent with the RELRA provisions which provide (1) the same

purposes for REA cost-of-money loans as for 408(b)(2) loans, and (2)

that RTB and cost-of-money loans are to be concurrent.

Section 1610.6 Concurrent Bank and REA Cost-of-Money Loans

Comment Summary: Several organizations objected to REA requiring

that REA cost-of-money loans and RTB loans be made concurrently, and

stated that concurrence should remain an option of the borrower. Also,

there was concern that mandating RTB to make loans concurrently with

the REA cost-of-money program would compromise the independence of a

future, privatized RTB. Commenters requested that REA revise the

interim rule to provide borrowers with an option of selecting

concurrent RTB and REA cost-of-money loans.

Response: Concurrent loans are required by RELRA. This is also

consistent with RELRA's other amendments that only allow REA cost-of-

money and RTB loans to be made for the same purposes and that subject

those loans to the same eligibility requirements. This approach

facilitates the most effective administration of this policy.

Section 1610.10 Determination of Interest Rate on Bank Loans

Comment Summary: REA should acknowledge that future RTB interest

rates will be calculated taking into consideration RELRA's interest

rate amendment.

Response: The methodology for calculating interest rates charged on

RTB loans is provided in Sec. 1610.10. While the interest rate

amendment requires calculating a single RTB interest rate that applies

to all advances made within a given fiscal year, this amendment only

takes effect when funds have been appropriated by Congress to offset

any subsidy associated with charging a single rate. When such an

appropriation is made, RTB will calculate an interest rate in

accordance with the RELRA amendment. However, no revisions will be made

to Sec. 1610.10 because the methodology for calculating interest rates

remains unchanged.

Section 1610.11 Prepayments

Comment Summary: One commenter suggested that paragraph (b) be

changed to conform with the language of the RE Act. Others commented

that the elimination of prepayment premiums should apply to all

outstanding RTB loans, not just those approved after November 1, 1993.

Response: REA believes the language in this provision of the

interim rule correctly interprets RELRA's amendment to section

408(b)(8) of the RE Act. All RTB loan agreements entered into before

November 1, 1993, contain a prepayment premium provision. That

prepayment premium policy was determined by the RTB Board of Directors.

The original prepayment policy was established by the RTB Board of

Directors on February 10, 1972, and later revised on May 3, 1984. RELRA

eliminated the premiums only on loans approved after November 1, 1993.

Further, a provision to eliminate the prepayment premium for RTB loans

approved before November 1, 1993, was initially included in an early

draft of the legislation but was eventually removed.

Section 1735.10 General

Comment Summary: With regard to REA's use of borrower-funded

consultants (paragraph (e)), one organization commented that while the

interim rule follows the legislation, many question the intent, usage

and unfair advantages such activity could bring to small companies with

little or no capital resources.

Response: REA recognizes these concerns; however, the option of

hiring a consultant is necessary in order to adhere to the provision of

the legislation. In accordance with the legislation, the Administrator

is authorized to accept funds voluntarily provided by a borrower to be

used to obtain assistance from third party experts in the review of a

loan application. The purpose of this provision is to assist in the

expeditious review of numerous loan applications given limited REA

manpower and resources. The Administrator intends that the telephone

loan programs be administered in a fair and impartial manner.

Comment Summary: With regard to paragraph (b), one organization

commented that the language ``in REA's opinion'' should be deleted from

the final rule because REA does not possess the authority which this

reference implies to deny loans without a factual basis.

Response: This language was included to insure that (1) the main

objectives of the RE Act (i.e., provide service to the widest practical

number of rural subscribers), and (2) the provisions of the borrower's

modernization plan will be carried out by borrowers of REA telephone

loans. REA will not deny a loan without a factual basis. If the

purposes of a loan are not consistent with the goals of the

modernization plan for the borrower's State, then REA will deny the

loan. This determination will be based on the modernization plan

requirements and objectives provided in Sec. 1751.106. However, REA has

considered that strict conformity to the requirements of a borrower's

modernization plan could result in loans that would not be economically

or technically feasible. REA has expanded Sec. 1735.10(b) to take into

consideration these situations when making loans.

Section 1735.17 Facilities Financed

Comment Summary: One organization commented that the interim rule

correctly recognizes that under the legislation certain facilities and

purposes will not be financed depending on the type of loan. The

commenter further stated that the background statement fails to

acknowledge that RTB loans will still be made for section 201 loan

purposes and that loans that fall into the restricted purpose category

are the new cost-of-money loans.

Response: See the response to the comment on Sec. 1610.1.

Section 1735.22 Loan Security

Comment Summary: One commenter objected to the Times Interest

Earned Ratio (TIER) maintenance requirement stating that REA is without

authority to impose such requirement, and that the TIER range

established in the legislation as eligibility criteria is adequate to

protect loan security. Also, that the 1.75 TIER level is arbitrary.

Response: The TIER criteria put forth in the legislation determines

the borrower's loan eligibility, it does not imply that risks to loan

security are nonexistent if the borrower meets the eligibility

criteria. Using the TIER eligibility range for maintenance purposes

would require the borrower to maintain a minimum TIER of only 1.0.

Allowing the borrower to maintain net margins at a level sufficient

only to cover interest expenses does not offer much financial security

nor assure credit quality. However, during the forecast period (i.e.,

construction period) when interest expenses are higher and associated

revenues are not yet realized the borrower can maintain a TIER of 1.0.

Afterwards, the TIER maintenance requirement merely requires the

borrowers to maintain the TIER predicted by the projections given to

REA by the borrower and on which REA relied on making the loan, but not

to exceed 1.75. The TIER maintenance requirement provides some

assurance of adequate loan security without placing an additional

burden on the borrower. In fact, more than 93 percent of REA borrowers

have existing TIERS of 1.75 or greater. This standardized maintenance

requirement is needed because the new eligibility requirements rendered

the previous maintenance requirement inequitable and obsolete. As a

Federal lending institution, REA has the responsibility to protect the

Government's security interest.

Section 1735.30 Hardship Loans

Comment summary: Several commenters suggested that the priority

system established for approving REA hardship loans was unnecessary,

too complex, and non-statutory. While recognizing that one of the

objectives of the priority system is to ensure financing to the

neediest borrowers, the commenters stated that, overall, the system

would be burdensome on REA and its borrowers and would treat some

borrowers unfairly. One commenter stated that the current ``first come

first served'' policy for loan approval would be adequate for approving

loans in addition to assessing the urgency of each financing request.

Further, one commenter, stating that loan approval should be based only

on the eligibility criteria in the RELRA and not on specific plant

modifications (such as distance learning or medical link facilities),

commented that the method and criteria used in assigning points were

unfair to some borrowers. The commenters also stated borrowers may be

denied financing (within a reasonable time frame or perhaps altogether)

due to the nature of the point assignment and ranking system.

Response: The hardship loan program created by the RELRA is

intended to ensure that lower cost capital financing will be available

to those applicants most in need due to extreme operating conditions.

Since REA believes that the amount of financing available to fund the

hardship program will generally be more limited than the eligible loan

applications, it is necessary to implement a system that allows the

widest practical nationwide use of those limited funds.

The ranking criteria REA has established does not conflict with a

borrowers' eligibility to receive hardship financing. All borrowers

that meet the hardship eligibility requirements (TIER, density, and

modernization plan) will receive financing, subject to the availability

of funds. The ranking criteria does, however, provide REA with a

methodology of fairly assessing all eligible applications and provides

an equitable manner in which to disburse the limited amount of funds

available.

In addition, the ranking and subsequent prioritizing of a loan

application does not require any additional information on the part of

the borrower. All of the information needed is readily available in the

loan application and the loan study prepared by REA. Any additional

burden placed on REA is minimal and will not result in a delay in the

processing of an application.

Comment summary: Concerning paragraph (b), one commenter stated

that the size of an exchange within a borrower's service territory is

not relevant to the density provision which precludes borrowers from

receiving hardship financing for facilities in an exchange where the

average number of subscribers per mile of line is greater than 17.

Response: The RELRA clearly intended to avoid the use of lower-cost

hardship financing in densely populated ``semi-urban'' areas. RELRA

precluded borrowers from receiving hardship financing to be used in any

``area'' where the average number of subscribers per mile of line is

greater than 17. REA has defined ``area'' to mean an exchange of the

borrower. In addition, to further clarify the measure of a semi-urban

area, 1,000 existing subscribers is also used so that high density

exchanges with large populations can be distinguished from those remote

pockets of populations that have a high exchange density, but are

clearly rural areas.

Comment summary: With regard to the optimal use of loan funds

(Sec. 1735.30(e)), several commenters stated that there is no need for

REA to limit the amount of a hardship loan to any borrower. One

respondent commented that by ``splitting'' loan applications and

identifying the most urgent financing needs while seeking agreement

from all parties involved in a financing request, REA could effectively

ensure hardship financing in the neediest situations, without limiting

loan size.

Response: REA has limited the size of hardship loans for the

borrowers' (and its subscribers) benefit. Since eligible borrowers will

be competing for a limited amount of available financing, limiting the

loan size helps to ensure that (1) hardship funds will be provided for

the most urgent loan purposes and (2) the widest number of borrowers,

and consequently rural subscribers, will benefit from the hardship

program.

Section 1735.31 REA Cost-of-Money and RTB Loans

Comment Summary: With regard to Sec. 1735.31(e), one organization

commented that the TIER ratio contained in the REA cost-of-money and

RTB eligibility criteria seems to be at variance with the statutory

definition, and suggested that the final rule conform to the precise

language of the legislation.

Response: REA believes the language in the interim rule is

consistent with the language of the legislation.

Comment Summary: One organization commented that REA is without

authority to establish the requirement that interest rates on cost-of-

money loans be fixed at the time of advance rather than at the time of

loan approval. The commenter suggested that in the absence of statutory

direction to the contrary, interest rates on cost-of-money loans should

be fixed at the time of loan approval.

Response: The requirements of the interim rule reflect REA's

interpretation of the legislation, that is, interest rates based on the

cost of capital to the Government at the time of each advance of funds.

REA adopted this approach to ensure against rate disparity between the

time of loan approval and advance of funds. REA must borrow matching

funds from the U.S. Treasury when the borrower requests an advance. The

interest rate charged to the borrower is effectively the same interest

rate to be paid to Treasury on this borrowing by REA. REA believes that

such approach is true to Congress' intent that loans be made at the

then current cost of money to the Government. This is evident in the

amount of subsidy appropriated by Congress for cost-of-money loans.

Comment Summary: One organization commented that the procedure

outlined in paragraph (c)(2) for determination of the cost-of-money

interest rate is unnecessarily cumbersome and should be simplified in

the final rule. The commenter also suggested that paragraph (d) be

revised to make it clear that the borrower's request is a specific one

to conform to the language of the RE Act and Sec. 1735.32(a).

Response: With regard to paragraph (c)(2), the procedure as written

is necessary to ensure a clear and definitive method for all parties

when setting the interest rate on cost-of-money loans. Concerning

paragraph (d), REA believes the language in the interim rule is

consistent with the language of the legislation, and that it is evident

that REA will only make loan guarantees to those borrowers specifically

requesting a guarantee.

Section 1735.32 Guaranteed Loans

Comment Summary: With regard to paragraph (b), one organization

commented that the requirement to participate in a modernization plan

should be the same for all loan programs, and the rule as currently

written appears discriminatory.

Response: The legislation clearly states that the modernization

plan shall apply only to REA hardship, REA cost-of-money, and RTB

loans. The interim rule as written adheres to the legislation.

Sections 1735.74 Submission of data, and 1737.22 Supplementary

information

Comment Summary: One organization commented that the language

relating to the certification of participation in a modernization plan

should be revised to eliminate the restrictive reference to the

borrower's president by substituting chief executive officer or

preferably authorized corporate officer.

Response: Participating in a modernization plan and fulfilling its

goals may require a significant effort from the borrower, and may

effect whether a borrower receives a loan. Due to the critical nature

of these factors, REA believes it is in the interests of both the

borrower and REA to have the certification signed by the borrower's

president.

Simultaneous Loans

Comment Summary: One organization commented on REA's reference to

simultaneous loans, stating that it is not a defined term in the

interim rule nor is it a term utilized in either the legislation or the

existing RE Act. The commenter suggested this provision be deleted in

the final rule.

Response: Since certain purposes will not be financed depending on

the type of loan, REA has used the term ``simultaneously'' to clarify

that these types of loans may be made to the borrower at the same time

or in the same set of documents. The term ``simultaneously'' was used

so as not to confuse the reader since, historically, ``concurrent

loans'' has referred only to the combination of REA and RTB loans.

List of Subjects

7 CFR Part 1610

Accounting, Loan programs-communications, Reporting and

recordkeeping requirements, Rural areas, Telephone.

7 CFR Part 1735

Accounting, Loan programs-communications, Reporting and

recordkeeping requirements, Rural areas, Telephone.

7 CFR Part 1737

Accounting, Loan programs-communications, Reporting and

recordkeeping requirements, Rural areas, Telephone.

7 CFR Part 1744

Accounting, Loan programs-communications, Reporting and

recordkeeping requirements, Rural areas, Telephone.

7 CFR Part 1753

Loan programs-communications, Telecommunications, Telephone.

7 CFR CHAPTER XVI

PART 1610--LOAN POLICIES

Accordingly, the interim rule amending 7 CFR part 1610 which was

published at 58 FR 66252 on December 20, 1993, is adopted as a final

rule without change.

7 CFR CHAPTER XVII

PART 1735--GENERAL POLICIES, TYPES OF LOANS, LOAN REQUIREMENTS--

TELEPHONE PROGRAM

Accordingly, the interim rule amending 7 CFR part 1735 which was

published at 58 FR 66253 on December 20, 1993, is adopted as a final

rule with the following change:

1. The authority citation for part 1735 continues to read as

follows:

Authority: 7 U.S.C. 901 et seq., 1921 et seq.

2. Section 1735.10(b) is revised to read as follows:

Sec. 1735.10 General.

* * * * *

(b) REA will not make hardship loans, REA cost-of-money loans, or

RTB loans for any purposes that, in REA's opinion, are inconsistent

with the borrower achieving the requirements stated in the State's

telecommunications modernization plan within the time frame stated in

the plan (see 7 CFR part 1751, subpart B), unless REA has determined

that achieving the requirements as stated in such plan is not

technically or economically feasible.

* * * * *

PART 1737--PRE-LOAN POLICIES AND PROCEDURES COMMON TO GUARANTEED

AND INSURED TELEPHONE LOANS

Accordingly, the interim rule amending 7 CFR part 1737 which was

published at 58 FR 66256 on December 20, 1993, is adopted as a final

rule without change.

PART 1744--POST-LOAN POLICIES AND PROCEDURES COMMON TO GUARANTEED

AND INSURED TELEPHONE LOANS

Accordingly, the interim rule amending 7 CFR part 1744 which was

published at 58 FR 66257 on December 20, 1993, is adopted as a final

rule without change.

PART 1753--TELECOMMUNICATIONS SYSTEM CONSTRUCTION POLICIES AND

PROCEDURES

Accordingly, the interim rule amending 7 CFR part 1753 which was

published at 58 FR 66259 on December 20, 1993, is adopted as a final

rule with the following technical changes:

1. The authority citation for part 1753 continues to read as

follows:

Authority: 7 U.S.C. 901 et seq., 1921 et seq.

2. In Sec. 1753.2, remove the definition ``STMP (State

Telecommunications Modernization Plan)'' and add a new definition in

alphabetical order as follows:

Sec. 1753.2 Definitions.

* * * * *

Modernization plan. A plan, which has been approved by REA, for

improving the public switched network of a state. The modernization

plan must conform to the provisions of 7 CFR part 1751, subpart B, and

applies to all telecommunications providers in the state.

* * * * *

Secs. 1753.3, 1753.15, 1753.66 [Amended]

3. Sections 1753.3(a) introductory text and (a)(4), 1753.15(b)(4),

and 1753.66(d) are amended by adding the words ``modernization plan''

in place of the acronym ``STMP'' each place it appears.

Dated: April 6, 1994.

Bob J. Nash,

Under Secretary, Small Community and Rural Development.

[FR Doc. 94-8861 Filed 4-12-94; 8:45 am]

BILLING CODE 3410-15-P