Streamlining the Rural Utilities Service Water and Waste Program Regulations

SUMMARY: The Rural Utilities Service (RUS) hereby amends the

regulations utilized to administer the water and waste loan and grant

programs. The proposed rule will combine the water and waste loan and

grant regulations into one regulation. Unnecessary and burdensome

requirements for entities seeking financial assistance under the

programs will be eliminated. The streamlining of the regulation will

allow RUS to provide better service to rural entities needing

assistance in correcting and alleviating health and sanitary problems

in their communities, and in general improve the quality of life in

rural areas. This rule will also incorporate changes in the water and

waste loan and grant program mandated by the 1996 Farm Bill. This rule

could impact the amount of loan and grant an applicant could receive.

Therefore, RUS will honor all written commitments of loan and grant

amounts issued prior to the effective date of this rule.

DATES: Comments on the proposed rule must be received on or before

October 15, 1996.

ADDRESSES: Submit written comments on the proposed rule. RUS requires a

signed original and 3 copies of all comments (7 CFR 1700.30(e)) to the

Program Support and Regulatory Analysis Group, Rural Utilities Service,

14th & Independence Avenue SW., AG Box 1522, Washington, DC 20250,

Telephone: (202) 720-0736.

FOR FURTHER INFORMATION CONTACT: Jerry W. Cooper, Loan Specialist,

Water and Waste Division, Rural Utilities Service, USDA, South

Agriculture Building, Room 6328, AG Box 1548, Washington, DC 20250,

telephone: (202) 720-9589.

SUPPLEMENTARY INFORMATION:

Classification

We are issuing this proposed rule in conformance with Executive

Order 12866 and the Office of Management and Budget has determined that

it is a ``significant regulatory action''.

Intergovernmental Review

These programs are listed in the Catalog of Federal Domestic

Assistance under number 10.760, Water and Waste Systems For Rural

Communities and are subject to the provisions of Executive Order 12372

which requires intergovernmental consultation with State and local

officials.

Environmental Impact Statement

This action has been reviewed in accordance with FmHA Instruction

1940-G, ``Environmental Program.'' It has been determined that the

action does not constitute a major Federal action significantly

affecting the quality of the human environment, and in accordance with

the National Environmental Policy Act of 1969, Public Law 91-190, an

Environmental Impact Statement is not required.

Compliance With Executive Order 12778

The regulation has been reviewed in light of Executive Order 12778

and meets the applicable standards provided in sections 2(a) and

(2)(b)(2) of that Order. Provisions within this part which are

inconsistent with State law are controlling. All administrative

remedies pursuant to 7 CFR part 11 must be exhausted prior to filing

suit.

Information Collection and Paperwork Requirements

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

Chapter 35, as amended) RUS is requesting comments on the information

collection incorporated in this proposed rule.

Comments are invited on: (a) Whether the proposed collection of

information is necessary for the proper performance of the functions of

the agency, including whether the information will have practical

utility; (b) the accuracy of the agency's estimate of the burden of the

proposed collection of information including the validity of the

methodology and assumptions used; (c) ways to enhance the quality,

utility and clarity of the information to be collected; and (d) ways to

minimize the burden of the collection of information on those who are

to respond, including through the use of appropriate automated,

electronic, mechanical, or other technological collection techniques or

other forms of information technology.

For further information contact Jerry W. Cooper, Loan Specialist,

Water and Waste Division, Rural Utilities Service, U.S. Department of

Agriculture, 1400 Independence Ave., SW., STOP 1548, Washington, DC

20250-1548, telephone: (202) 720-9589.

Title: Water and Waste Disposal Loan and Grant Program.

OMB Control Number: 0575-0015.

Type of Request: Addendum to a previously approved information

collection.

The program provides loan and grant funds for water and waste

disposal projects serving the most financially needy rural communities.

Financial assistance should result in reasonable user costs for rural

residents, rural businesses, and other rural users. The program is

limited to rural areas and small towns with a population of 10,000 or

less. Communities seeking financial assistance through the program must

provide certain detailed information to RUS that is used to determine

eligibility and the credit worthiness of the applicant. Additional

information is needed to assure that proposed projects will meet the

needs of the community, are properly constructed, and that the

financial interest of the Government is protected. All the information

collected is used by RUS to manage and account for Government

resources. The reports and forms are required to ensure the proper and

judicious use of public funds.

This proposed rule eliminates the pre-application procedures which

were previously required under 7 CFR part 1940 subpart A. The addendum

will reflect the reduction in reporting burden by 8,726 hours due to

the elimination of this reporting requirement.

[[Page 48076]]

Estimate of Burden: The public reporting burden for this collection

of information is estimated to average 2.7 hours per respondent.

Respondents: Non-profit institutions and state, local or tribal

governments.

Estimated Number of Respondents: 10,520.

Estimated Number of Responses: 85,182.

Estimated Total Annual Burden on Respondents: 227,128 hours.

Copies of this information collection can be obtained from Dawn

Wolfgang, Program Support and Regulatory Analysis, Rural Utilities

Service, U.S. Department of Agriculture, 1400 Independence Ave., SW.,

STOP 1522, Washington, DC 20250-1522. Telephone: (202) 720-0812. Fax:

(202) 720-4120.

Comments may be sent to F. Lamont Heppe, Jr., Director, Program

Support and Regulatory Analysis, Rural Utilities Service, U.S.

Department of Agriculture, 1400 Independence Ave., SW, STOP 1522,

Washington, DC 20250-1522. Telephone: (202) 720-0812. Fax: (202) 720-

4120.

A comment to OMB is best assured of having its full effect if OMB

receives it within 30 days of publication of this rule.

All comments will become a matter of public record.

National Performance Review

This regulatory action is being taken as part of the National

Performance Review program to eliminate unnecessary regulations and

improve those that remain in force.

Unfunded Mandate Reform Act

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the Unfunded Mandate Reform Act of 1995) for

State, local, and tribal governments or the private sector. Thus

today's rule is not subject to the requirements of sections 202 and 205

of the Unfunded Mandate Reform Act of 1995.

Cross References of Regulations

The Rural Utilities Service is an Agency resulting from a

reorganization of programs administered by the former Farmers Home

Administration, the former Rural Development Administration, and the

former Rural Electrification Administration. Dual-references or cross-

references to former Farmers Home Administration regulations and forms

are provided for by the Department of Agriculture Reorganization Act of

1994.

Regulatory Flexibility Act Certification

The Administrator of RUS has determined that the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this rule.

Background

The water and waste loan and grant programs are authorized by

various sections of the Consolidated Farm and Rural Development Act, (7

U.S.C. 1921 et seq.), as amended. The regulations for these programs,

particularly the loan program, have not been completely reviewed for

many years. The recent streamlining and reorganization of the

Department of Agriculture provided an opportunity to review and rewrite

the water and waste loan and grant regulations. A task force, was

formed to review and rewrite the regulations. The aim of the task force

was to make the regulations easier to understand, eliminate unnecessary

requirements, and continue to protect the interest of the U.S.

taxpayer.

The program provides loan and grant funds for water and waste

disposal projects serving the most financially needy rural communities.

Financial assistance should result in reasonable user costs for rural

residents, rural businesses, and other rural users. The program is

limited to rural areas and small towns with a population of 10,000 or

less.

The proposed rule will divide the regulation into four subparts: A,

B, C, and D. Subpart A contains the general policies and requirements

of the loan and grant program. Subpart B contains the loan and grant

application processing requirements. Subpart C contains all the

requirements for planning, designing, bidding, contracting,

constructing, and inspections. Subpart D has information required in

the preparation of notes or bonds and bond transcript documents for

public body applicants.

Major changes are:

1. Redirects additional grant funds to communities that truly need

the assistance in order to construct a project. Communities with

incomes over 100 percent of the State nonmetropolitan median household

income will not qualify for any grant funds as in the current

regulations.

2. Stretches the grant dollars appropriated by Congress to help

more communities by changing the maximum percentage of grant funds that

a higher income community can receive from 55 percent to 45 percent of

RUS's share of the project costs. This change could have an indirect

effect of having an incentive for development of regional projects.

3. The process used to select projects for funding has been revised

to direct funds to low income, small communities that need to correct

health problems. Also, the priority points awarded for regional systems

have been increased.

4. The application process has been streamlined to reduce

unnecessary paperwork and improve service to the rural communities.

There will be less regulations and the number of pages will be greatly

reduced.

5. The application process has been shortened by eliminating the

preapplication process.

6. A preliminary engineering report (PER) must be submitted earlier

in the application process. The requirement of submitting a PER earlier

in the process will assist the staff in making better decisions. Also,

applicants have to have this type of document to help them determine

what, where, and how they are going to build needed facilities. This

change will force applicants to have a clear picture of what they want

to construct prior to applying for assistance. A majority of applicants

have a PER at the preapplication stage now, therefore the change will

tend to put all applicants on a level field.

The major 1996 Farm Bill changes are:

1. Funds made available for these programs may be made available

for a water system that is making significant progress toward meeting

the Safe Drinking Water Act standards.

2. Funds made available for water treatment discharge or waste

disposal system must meet applicable Federal and State water pollution

control standards.

3. Not earlier than 60 days before filing an application for loan

or grant assistance, a notice of intent shall be published in a general

circulation newspaper.

4. When applicants hire outside engineers, the selection of an

engineer for a project design shall be done by a request for proposals.

5. Assistance under any rural development program administered by

the Secretary or any agency of the Department of Agriculture shall not

be conditioned on any requirement that the recipient of the assistance

accept or receive electric service from any particular utility,

supplier, or cooperative. This is being implemented for the water and

waste loan and grant programs.

List of Subjects in 7 CFR Part 1780

Community development, Community facilities, Grant programs-Housing

and community development, Rural areas, Waste treatment and

[[Page 48077]]

disposal-Domestic, Water supply-Domestic.

Therefore, RUS proposes to amend chapter XVII, title 7, Code of

Federal Regulations as follows:

PART 1780--WATER AND WASTE LOANS AND GRANTS

1. Part 1780, is added to read as follows:

PART 1780--WATER AND WASTE LOANS AND GRANTS

Subpart A--General Policies and Requirements

Sec.

1780.1 General.

1780.2 Purpose.

1780.3 Definitions and grammatical rules of construction.

1780.4 Availability of forms and regulations.

1780.5 [Reserved]

1780.6 Application information.

1780.7 Eligibility.

1780.8 [Reserved]

1780.9 Eligible loan and grant purposes.

1780.10 Limitations.

1780.11 Service area requirements.

1780.12 [Reserved]

1780.13 Rates and terms.

1780.14 Security.

1780.15 Other Federal, state, and local requirements.

1780.16 [Reserved]

1780.17 Selection priorities and process.

1780.18 Public information.

1780.19-1780.22 [Reserved]

1780.23 [Reserved]

1780.24 Approval authorities.

1780.25 Exception authority.

1780.26-1780.30 [Reserved]

Subpart B--Loan and Grant Application Processing

1780.31 General.

1780.32 Timeframes for application processing.

1780.33 Application requirements.

1780.34 [Reserved]

1780.35 Processing office review.

1780.36 Approving official review.

1780.37 Applications determined ineligible.

1780.38 [Reserved]

1780.39 Application processing.

1780.40 [Reserved]

1780.41 Loan or grant approval.

1780.42 Transfer of obligations.

1780.43 [Reserved]

1780.44 Actions prior to loan or grant closing or start of

construction, whichever occurs first.

1780.45 Loan and grant closing and delivery of funds.

1780.46 [Reserved]

1780.47 Borrower accounting methods, management reporting and

audits.

1780.48 Regional commission grants.

1780.49 Rural or Native Alaskan villages.

1780.49-1780.52 [Reserved]

Subpart C--Planning, Designing, Bidding, Contracting, Constructing and

Inspections

1780.53 General.

1780.54 Technical services

1780.55 Preliminary engineering reports.

1780.56 [Reserved]

1780.57 Design policies.

1780.58-1780.60 [Reserved]

1780.61 Construction contracts.

1780.62 Utility purchase contracts.

1780.63 Sewage treatment and bulk water sales contracts.

1780.64-1780.66 [Reserved]

1780.67 Performing construction.

1780.68 Owner's contractual responsibility.

1780.69 [Reserved]

1780.70 Owner's procurement regulations.

1780.71 [Reserved]

1780.72 Procurement methods.

1780.73 [Reserved]

1780.74 Contracts awarded prior to applications.

1780.75 Contract provisions.

1780.76 Contract administration.

1780.77-1780.79 [Reserved]

Subpart D--Information Pertaining to Preparation of Notes or Bonds and

Bond Transcript Documents for Public Body Applicants

1780.80 General.

1780.81 Policies related to use of bond counsel.

1780.82 [Reserved]

1780.83 Bond transcript documents.

1780.84-1780.86 [Reserved]

1780.87 Permanent instruments for Agency loans.

1780.88 [Reserved]

1780.89 Multiple advances of Agency funds using permanent

instruments.

1780.90 Multiple advances of Agency funds using temporary debt

instruments.

1780.91-1780.93 [Reserved]

1780.94 Minimum bond specifications.

1780.95 Public bidding on bonds.

1780.96-1780.100 [Reserved]

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

Subpart A--General Policies and Requirements

Sec. 1780.1 General.

(a) This part outlines the policies and procedures for making and

processing direct loans and grants for water and waste projects. The

Rural Utilities Service (RUS) shall cooperate fully with State and

local agencies in making loans and grants to assure maximum support to

the State strategy for rural development. Agency officials and their

staffs shall maintain coordination and liaison with State agency and

substate planning districts.

(b) The income data used in this part to determine median household

income must be that which most accurately reflects the income of the

service area. The median household income of the service area and the

nonmetropolitan median household income of the State will be determined

from income data from the most recent decennial census of the United

States. If there is reason to believe that the census data is not an

accurate representation of the median household income within the area

to be served, the reasons will be documented and the applicant may

furnish, or the Agency may obtain, additional information regarding

such median household income. Information will consist of reliable data

from local, regional, State or Federal sources or from a survey

conducted by a reliable impartial source. The nonmetropolitan median

household income of the State may only be updated on a national basis

by the RUS National Office. This will be done only when median

household income data for the same year for all Bureau of the Census

areas is available from the Bureau of the Census or other reliable

sources. Bureau of the Census areas would include areas such as:

Counties, County Subdivisions, Cities, Towns, Townships, Boroughs, and

other places.

(c) RUS debt instruments will require an agreement that if at any

time it shall appear to the Government that the borrower is able to

refinance the amount of the indebtedness to the Government then

outstanding, in whole or in part, by obtaining a loan for such purposes

from responsible cooperative or private credit sources, at reasonable

rates and terms for loans for similar purposes and periods of time, the

borrower will, upon request of the Government, apply for and accept

such loan in sufficient amount to repay the Government and will take

all such actions as may be required in connection with such loan.

(d) Funds allocated for use under this part are also for the use of

Indian tribes within the State, regardless of whether State development

strategies include Indian reservations within the State's boundaries.

Native Americans residing on such reservations must have equal

opportunity to participate in the benefits of these programs as

compared with other residents of the State. Such tribes might not be

subject to State and local laws or jurisdiction. However, any

requirements of this part that affect applicant eligibility, the

adequacy of RUS's security, or the adequacy of service to users of the

facility and all other requirements of this part must be met.

(e) RUS financial programs must be extended without regard to race,

color, religion, sex, national origin, marital status, age, or physical

or mental handicap.

(f) Any processing or servicing activity conducted pursuant to this

part involving authorized assistance to Agency employees, members of

their

[[Page 48078]]

families, known close relatives, or business or close personal

associates, is subject to the provisions of subpart D of part 1900 of

this title. Applicants for assistance are required to identify any

known relationship or association with a RUS employee.

(g) Water and waste facilities will be designed, installed, and

operated in accordance with applicable laws which include but are not

limited to the Safe Drinking Water Act, Clean Water Act and the

Resource Conservation and Recovery Act.

(h) RUS financed facilities will be consistent with any current

development plans of State, multijurisdictional areas, counties, or

municipalities in which the proposed project is located.

(i) Each RUS financed facility will be in compliance with

appropriate State or Federal agency regulations which have control of

the appropriation, diversion, storage and use of water and disposal of

excess water.

(j) Water and waste applicants must demonstrate that they possess

the financial, technical, and managerial capability necessary to

consistently comply with pertinent Federal and State laws and

requirements. In developing water and waste systems, applicants must

consider alternatives of ownership, system design, and the sharing of

services.

(k) Applicants should be aware of and comply with other Federal

statute requirements including but not limited to:

(1) Section 504 of the Rehabilitation Act of 1973. Under section

504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. 794), no

handicapped individual in the United States shall, solely by reason of

their handicap, be excluded from participation in, be denied the

benefits of, or be subjected to discrimination under any program or

activity receiving RUS financial assistance;

(2) Civil Rights Act of 1964. All borrowers are subject to, and

facilities must be operated in accordance with, title VI of the Civil

Rights Act of 1964 and subpart E of part 1901 of this title,

particularly as it relates to conducting and reporting of compliance

reviews. Instruments of conveyance for loans and/or grants subject to

the Act must contain the covenant required by Sec. 1901.202(e) of this

title;

(3) The Americans with Disabilities Act (ADA) of 1990. This Act

prohibits discrimination on the basis of disability in employment,

State and local government services, public transportation, public

accommodations, facilities, and telecommunications. Title II of the Act

applies to facilities operated by State and local public entities which

provides services, programs and activities. Title III of the Act

applies to facilities owned, leased, or operated by private entities

which accommodate the public; and

(4) Age Discrimination Act of 1975. This Act provides that no

person in the United States shall on the basis of age, be excluded from

participation in, be denied the benefits of, or be subjected to

discrimination under any program or activity receiving Federal

financial assistance.

Sec. 1780.2 Purpose.

Provide loan and grant funds for water and waste projects serving

the most financially needy communities. Financial assistance should

result in reasonable user costs for rural residents, rural businesses,

and other rural users.

Sec. 1780.3 Definitions and grammatical rules of construction.

(a) Definitions. For the purposes of this part:

Agency means any United States Department of Agriculture (USDA)

employee acting on behalf of the Rural Utilities Service in accordance

with appropriate delegations of authority.

Approval official means the USDA official at the State level who

has been delegated the authority to approve loans or grants.

Equivalent Dwelling Unit (EDU) means the level of service provided

to a typical rural residential dwelling.

Parity bonds means bonds which have equal standing with other bonds

of the same Issuer.

Poverty line means the level of income for a family of four, as

defined in section 673(2) of the Community Services Block Grant Act (42

U.S.C. 9902(2)).

Processing office means the office designated by the State program

official to accept and process applications for water and waste

disposal assistance.

Project means all activity that an applicant is currently

undertaking to be financed in whole or part with RUS assistance.

Protective advances are payments made by a lender for items such as

insurance or taxes in order to preserve and protect the security or the

lien or priority of the lien securing the loan.

Rural and Rural Areas means any area not in a city, or town with a

population in excess of 10,000 inhabitants, according to the latest

decennial census of the United States.

Rural Development means the mission area of the Under Secretary for

Rural Development. Rural Development State and local offices will

administer this water and waste program on behalf of the Rural

Utilities Service.

RUS means the Rural Utilities Service, an agency of the United

States Department of Agriculture established pursuant to section 232 of

the Department of Agriculture Reorganization Act of 1994 (Pub. L. 103-

354), successor to the Farmer's Home Administration and the Rural

Development Administration with respect to certain water and waste

disposal loan and grant programs.

Service area means the area reasonably expected to be served by the

project.

Servicing office means the office designated by the State program

official to service water and waste disposal loans and grants.

Similar system cost means the average annual EDU user cost of a

system within a community having similar economic conditions and being

served by the same type of established system. Similar system cost

shall include all charges, taxes, and assessments attributable to the

system including debt service, reserves and operation and maintenance

costs.

State program official means the USDA official at the State level

who has been delegated the responsibility of administering the water

and waste disposal programs under this regulation for a particular

State or States.

Statewide nonmetropolitan median household income means the median

household income of all rural areas of a state.

(b) Rules of grammatical construction. Unless the context

otherwise indicates, ``includes'' and ``including'' are not limiting,

and ``or'' is not exclusive. The terms defined in paragraph (a) of this

section include the plural as well as the singular, and the singular as

well as the plural.

Sec. 1780.4 Availability of forms and regulations.

Information about the availability of forms, regulations, bulletins

and publications cited in this part is available from any USDA/Rural

Development office or the Rural Utilities Service, United States

Department of Agriculture, Washington, DC 20250-1500.

Sec. 1780.5 [Reserved]

Sec. 1780.6 Application information.

(a) The Rural Development State Director in each State will

determine the office and staff that will be responsible for delivery of

the program (processing office) and designate an approving

[[Page 48079]]

office. Applications will be accepted by the processing office.

(b) The applicant's governing body should designate one person to

act as contact person with the Agency during loan and grant processing.

Agency personnel should make every effort to involve the applicant's

contact person when meeting with the applicant's professional

consultants or agents.

Sec. 1780.7 Eligibility.

Facilities financed by water and waste disposal loans or grants

must serve rural areas.

(a) Eligible applicant. An applicant must be:

(1) A public body, such as a municipality, county, district,

authority, or other political subdivision of a State, territory or

commonwealth,

(2) An organization operated on a not-for-profit basis, such as an

association, cooperative, or private corporation. The organization must

be an association controlled by a local public body or bodies, or have

a broadly based ownership by or membership of people of the local

community, or

(3) Indian tribes on Federal and State reservations and other

Federally recognized Indian tribes.

(b) Eligible facilities. Facilities financed by RUS may be located

in non-rural areas. However, loan and grant funds may be used to

finance only that portion of the facility serving rural areas,

regardless of facility location.

(c) Eligible projects. (1) Projects must serve a rural area which,

if such project is completed, is not likely to decline in population

below that for which the project was designed.

(2) Projects must be designed and constructed so that adequate

capacity will or can be made available to serve the present population

of the area to the extent feasible and to serve the reasonably

foreseeable growth needs of the area to the extent practicable. Water

systems should have sufficient capacity to provide for reasonable fire

protection to the extent practicable.

(3) Projects must be necessary for orderly community development

and consistent with a current comprehensive community water, waste

disposal, or other current development plan for the rural area.

(d) Credit elsewhere. Applicants must certify in writing and the

Agency shall determine and document that the applicant is unable to

finance the proposed project from their own resources, through

commercial credit at reasonable rates and terms, or other funding

sources.

(e) Legal authority and responsibility. Each applicant must have or

will obtain the legal authority necessary for owning, constructing,

operating, and maintaining the proposed facility or service and for

obtaining, giving security for, and repaying the proposed loan. The

applicant shall be responsible for operating, maintaining, and managing

the facility, and providing for its continued availability and use at

reasonable rates and terms. This responsibility shall be exercised by

the applicant even though the facility may be operated, maintained, or

managed by a third party under contract or management agreement.

Guidance for preparing a management agreement is available from the

Agency. Such contracts, management agreements, or leases must not

contain options or other provisions for transfer of ownership.

(f) Economic feasibility. All projects financed under the

provisions of this section must be based on taxes, assessments, income,

fees, or other satisfactory sources of revenues in an amount sufficient

to provide for facility operation and maintenance, reasonable reserves,

and debt payment. If the primary use of the facility is by business and

the success or failure of the facility is dependent on the business,

then the economic viability of that business must be assessed.

(g) Federal Debt Collection Act of 1990. An outstanding judgment

obtained by the United States in a Federal Court (other than in the

United States Tax Court), which has been recorded, shall cause the

applicant to be ineligible to receive a loan or grant until the

judgment is paid in full or otherwise satisfied.

(h) Expanded eligibility for timber-dependent communities in

Pacific Northwest. In the Pacific Northwest, defined as an area

containing national forest covered by the Federal document entitled,

``Forest Plan for a sustainable Economy and a Sustainable

Environment,'' dated July 1, 1993, the population limits contained in

section 1780.3(a) of this part are expanded to include communities with

not more than 25,000 inhabitants until September 30, 1998, if:

(1) Part or all of the community lies within 100 miles of the

boundary of a national forest covered by the Federal document entitled,

``Forest Plan for a Sustainable Economy and a Sustainable

Environment,'' dated July 1, 1993; and

(2) The community is located in a county in which at least 15

percent of the total primary and secondary labor and proprietor income

is derived from forestry, wood products, or forest-related industries

such as recreation and tourism.

Sec. 1780.8 [Reserved]

Sec. 1780.9 Eligible loan and grant purposes.

Loan and grant funds may be used only for the following purposes:

(a) To construct, enlarge, extend, or otherwise improve rural

water, sanitary sewage, solid waste disposal, and storm wastewater

disposal facilities;

(b) To construct or relocate public buildings, roads, bridges,

fences, or utilities, and to make other public improvements necessary

for the successful operation or protection of facilities authorized in

paragraph (a) of this section;

(c) To relocate private buildings, roads, bridges, fences, or

utilities, and other private improvements necessary for the successful

operation or protection of facilities authorized in paragraph (a) of

this section;

(d) For payment of other utility connection charges as provided in

service contracts between utility systems; and

(e) When a necessary part of the project relates to those

facilities authorized in paragraphs (a), (b), (c) or (d) of this

section the following may be considered:

(1) Loan or grant funds may be used for:

(i) Reasonable fees and costs such as: legal, engineering,

administrative services, fiscal advisory, recording, environmental

analyses and surveys, possible salvage or other mitigation measures,

planning, establishing or acquiring rights;

(ii) Costs of acquiring interest in land; rights, such as water

rights, leases, permits, rights-of-way; and other evidence of land or

water control or protection necessary for development of the facility;

(iii) Purchasing or renting equipment necessary to install,

operate, maintain, extend, or protect facilities;

(iv) Cost of applicant labor necessary to install and extend

service; and

(v) In unusual cases, the cost for connecting the user to the main

service line.

(2) Only loan funds may be used for:

(i) Interest incurred during construction in conjunction with

multiple advances or interest on interim financing;

(ii) Initial operating expenses, including interest, for a period

ordinarily not exceeding one year when the applicant is unable to pay

such expenses;

(iii) The purchase of existing facilities when it is necessary

either to improve service or prevent the loss of service; and

[[Page 48080]]

(iv) Refinancing debts incurred by, or on behalf of, an applicant

when all of the following conditions exist:

(A) The debts being refinanced are a secondary part of the total

loan;

(B) The debts were incurred for the facility or service being

financed or any part thereof;

(C) Arrangements cannot be made with the creditors to extend or

modify the terms of the debts so that a sound basis will exist for

making a loan; and

(v) Prepayment of costs for which RUS grant funds were obligated.

(3) Grant funds may be used to restore loan funds used to prepay

grant obligated costs.

(f) Construction incurred before loan or grant approval.

(1) Funds may be used to pay obligations for construction incurred

before loan or grant approval if such requests are made in writing by

the applicant and the Agency determines that:

(i) Compelling reasons exist for incurring obligations before loan

or grant approval;

(ii) The obligations will be incurred for authorized loan or grant

purposes; and

(iii) The Agency's authorization to pay such obligations is on the

condition that it is not committed to make the loan or grant; it

assumes no responsibility for any obligations incurred by the

applicant; and the applicant must subsequently meet all loan or grant

approval requirements, including environmental and contracting

requirements.

(2) If construction is started without Agency approval, post-

approval in accordance with this section may be considered, provided

the construction meets applicable requirements including those

regarding approval and environmental matters.

(g) Water or sewer service may be provided through individual

installations or small clusters of users within an applicant's service

area. The approval official should consider items such as: Quantity and

quality of the individual installations that may be developed; cost

effectiveness of the individual facility compared with the initial and

long term user cost on a central system; health and pollution problems

attributable to individual facilities; operational or management

problems peculiar to individual installations; and permit and

regulatory agency requirements.

(1) Applicants providing service through individual facilities must

meet the eligibility requirements in Sec. 1780.7.

(2) The Agency must approve the form of agreement between the

applicant and individual users for the installation, operation,

maintenance and payment for individual facilities.

(3) If taxes or assessments are not pledged as security, applicants

providing service through individual facilities must obtain security

necessary to assure collection of any sum the individual user is

obligated to pay the applicant.

(4) Notes representing indebtedness owed the applicant by a user

for an individual facility will be scheduled for payment over a period

not to exceed the useful life of the individual facility or the RUS

loan, whichever is shorter. The interest rate will not exceed the

interest rate charged the applicant on the RUS indebtedness.

(5) Applicants providing service through individual or cluster

facilities must obtain:

(i) Easements for the installation and ingress to and egress from

the facility if determined necessary by RUS; and

(ii) An adequate method for denying service in the event of

nonpayment of user fees.

Sec. 1780.10 Limitations.

(a) Loan and grant funds may not be used to finance:

(1) Facilities which are not modest in size, design, and cost;

(2) Loan or grant finder's fees;

(3) The construction of any new combined storm and sanitary sewer

facilities;

(4) Any portion of the cost of a facility which does not serve a

rural area;

(5) That portion of project costs normally provided by a business

or industrial user, such as wastewater pretreatment, etc.;

(6) Rental for the use of equipment or machinery owned by the

applicant;

(7) For other purposes not directly related to operating and

maintenance of the facility being installed or improved; and

(8) A judgment which would disqualify an applicant for a loan or

grant as provided for in Sec. 1780.7(g) of this part.

(b) Grant funds may not be used to:

(1) Reduce EDU costs to a level less than similar system cost;

(2) Pay any costs of a project when the median household income of

the service area is and more than 100 percent of the nonmetropolitan

median household income of the State;

(3) Pay project costs when other loan funding for the project is

not at reasonable rates and terms; and

(4) Pay project costs when other funding is a guaranteed loan

obtained in accordance with subpart I of part 1980 of this chapter.

(c) Grants may not be made in excess of the following percentages

of the RUS funded project development costs. Facilities previously

installed will not be considered in determining the development costs.

(1) 75 percent when the median household income of the service area

is below the higher of the poverty line or 80% of the state

nonmetropolitan median income and the project is necessary to alleviate

a health or sanitary problem.

(2) 45 percent when the median household income of the service area

exceeds the 80 percent requirements described in paragraph (c)(1) of

this section but is not more than 100 percent of the statewide

nonmetropolitan median household income.

(3) Applicants are advised that the percentages contained in

paragraph (c)(1) and (c)(2) of this section are maximum amounts and may

be further limited due to availability of funds or the grant

determination procedures contained in Sec. 1780.35 (d) of this part.

Sec. 1780.11 Service area requirements.

(a) All facilities financed under the provisions of this part shall

be for public use. The facilities will be installed so as to serve any

potential user within the service area who desires service and can be

feasibly and legally served. This does not preclude:

(1) Financing or constructing projects in phases when it is not

practical to finance or construct the entire project at one time; and

(2) Financing or constructing facilities where it is not

economically feasible to serve the entire area, provided economic

feasibility is determined on the basis of the entire system and not by

considering the cost of separate extensions to or parts thereof; the

applicant publicly announces a plan for extending service to areas not

initially receiving service from the system; and potential users

located in the areas not to be initially served receive written notice

from the applicant that service will not be provided until such time as

it is economically feasible to do so.

(b) Should the Agency determine that inequities exist within the

applicants service area for the same type service proposed (i.e., water

or waste disposal) such inequities will be remedied by the applicant

prior to loan or grant approval or included as part of the project.

Inequities are defined as unjustified variations in availability,

adequacy or quality of service. User rate schedules for portions of

existing systems that were developed under different financing, rates,

terms or conditions do not necessarily constitute inequities.

[[Page 48081]]

(c) Developers are normally expected to provide utility-type

facilities in new or developing areas in compliance with appropriate

State statutes. RUS financing will be considered to an eligible

applicant only in such cases when failure to complete development would

result in an adverse economic condition for the rural area (not the

community being developed); the proposal is necessary to the success of

a current area development plan; and loan repayment can be assured by:

(1) The applicant already having sufficient assured revenues to

repay the loan; or

(2) Developers providing a bond or escrowed security deposit as a

guarantee sufficient to meet expenses attributable to the area in

question until a sufficient number of the building sites are occupied

and connected to the facility to provide enough revenues to meet

operating, maintenance, debt service, and reserve requirements. Such

guarantees from developers will meet the requirements in

Sec. 1780.39(c)(4)(ii); or

(3) Developers paying cash for the increased capital cost and any

increased operating expenses until the developing area will support the

increased costs; or

(4) The full faith and credit of a public body where the debt is

evidenced by general obligation bonds; or

(5) The loan is to a public body evidenced by a pledge of tax

revenue or assessments; or

(6) The user charges can become a lien upon the property being

served and income from such lien can be collected in sufficient time to

be used for its intended purposes.

Sec. 1780.12 [Reserved]

Sec. 1780.13 Rates and terms.

(a) General. (1) Each loan will bear interest at the rate

prescribed in FmHA Instruction 440.1, exhibit B. The interest rates

will be set by the Agency for each quarter of the fiscal year. All

rates will be adjusted to the nearest one-eighth of one per centum. The

rate will be the lower of the rate in effect at the time of loan

approval or the rate in effect at the time of loan closing unless the

applicant otherwise chooses.

(2) If the interest rate is to be that in effect at loan closing on

a loan involving multiple advances of RUS funds using temporary debt

instruments, the interest rate charged shall be that in effect on the

date when the first temporary debt instrument is issued.

(b) Poverty rate. The poverty interest rate will not exceed 5 per

centum per annum. All poverty rate loans must comply with the following

conditions:

(1) The primary purpose of the loan is to upgrade existing

facilities or construct new facilities required to meet applicable

health or sanitary standards; and

(2) The median household income of the service area is below the

higher of the poverty line, or 80 percent of the Statewide

nonmetropolitan median household income.

(c) Intermediate rate. The intermediate interest rate will be set

at the poverty rate plus one-half of the difference between the poverty

rate and the market rate, not to exceed 7 percent per annum. It will

apply to loans that do not meet the requirements for the poverty rate

and for which the median household income of the service area is not

more than 100 percent of the nonmetropolitan median household income of

the State.

(d) Market rate. The market interest rate will be set using as

guidance the average of the Bond Buyer Index for the four weeks prior

to the first Friday of the last month before the beginning of the

quarter. The market rate will apply to all loans that do not qualify

for a different rate under paragraph (b) or (c) of this section.

(e) Repayment terms. The loan repayment period shall not exceed the

useful life of the facility, State statute or 40 years from the date of

the note or bond, whichever is less. Where RUS grant funds are used in

connection with an RUS loan, the loan will be for the maximum term

permitted by this part, State statute, or the useful life of the

facility, whichever is less, unless there is an exceptional case where

circumstances justify making an RUS loan for less than the maximum term

permitted. In such cases, the reasons must be fully documented.

(1) Principal payments may be deferred in whole or in part for a

period not to exceed 36 months following the date the first interest

installment is due. If for any reason it appears necessary to permit a

longer period of deferment, the Agency may authorize such deferment.

Deferments of principal will not be used to:

(i) Postpone the levying of taxes or assessments;

(ii) Delay collection of the full rates which the borrower has

agreed to charge users for its services as soon as those services

become available;

(iii) Create reserves for normal operation and maintenance;

(iv) Make any capital improvements except those approved by the

Agency which are determined to be essential to the repayment of the

loan or to maintain adequate security; and

(v) Make payment on other debt.

(2) Payment date. Loan payments will be scheduled to coincide with

income availability and be in accordance with State law. If State law

only permits principal plus interest (P&I) type bonds, annual or

semiannual payments will be used. Insofar as practical monthly payments

will be scheduled one full month following the date of loan closing; or

semiannual or annual payments will be scheduled six or twelve full

months, respectively, following the date of loan closing or any

deferment period. Due dates falling on the 29th, 30th or 31st day of

the month will be avoided.

(3) In all cases, including those in which RUS is jointly financing

with another lender, the RUS payments of principal and interest should

approximate amortized installments.

Sec. 1780.14 Security.

Loans will be secured by the best security position practicable in

a manner which will adequately protect the interest of RUS during the

repayment period of the loan. Specific security requirements for each

loan will be included in a letter of conditions.

(a) Public bodies. Loans to such borrowers, including Federally

recognized Indian tribes as appropriate, will be evidenced by notes,

bonds, warrants, or other contractual obligations as may be authorized

by relevant laws and by borrower's documents, resolutions, and

ordinances. Security, in the following order of preference, will

consist of:

(1) The full faith and credit of the borrower when the debt is

evidenced by general obligation bonds; and/or

(2) Pledges of taxes or assessments; and/or

(3) Pledges of facility revenue and, when it is the customary

financial practice in the State, liens will be taken on the interest of

the applicant in all land, easements, rights-of-way, water rights,

water purchase contracts, water sales contracts, sewage treatment

contracts, and similar property rights, including leasehold interests,

used or to be used in connection with the facility whether owned at the

time the loan is approved or acquired with loan funds.

(b) Other-than-public bodies. Loans to other-than-public body

applicants and Federally recognized Indian tribes, as appropriate, will

be secured in the following order of preference:

(1) Assignments of borrower income will be taken and perfected by

filing, if legally permissible; and

(2) A lien will be taken on the interest of the applicant in all

land, easements, rights-of-way, water rights, water purchase contracts,

water sales

[[Page 48082]]

contracts, sewage treatment contracts and similar property rights,

including leasehold interest, used, or to be used in connection with

the facility whether owned at the time the loan is approved or acquired

with loan funds. In unusual circumstances where it is not legally

permissible or feasible to obtain a lien on such land (such as land

rights obtained from Federal or local government agencies, and from

railroads) and the approval official determines that the interest of

RUS is otherwise adequately secured, the lien requirement may be

omitted as to such land rights. For existing borrowers where the Agency

already has a security position on real property, the approval official

may determine that the interest of the Government is adequately secured

and not require additional liens on such land rights. When the

subsequent loan is approved or the acquisition of real property is

subject to an outstanding lien indebtedness, the next highest priority

lien obtainable will be taken if the approval official determines that

the loan is adequately secured.

(c) Joint financing security. For projects utilizing joint

financing, when adequate security of more than one type is available,

the other lender may take one type of security with RUS taking another

type. For projects utilizing joint financing with the same security to

be shared by RUS and another lender, RUS will obtain at least a parity

position with the other lender. A parity position is to ensure that

with joint security, in the event of default, each lender will be

affected on a proportionate basis. A parity position will conform with

the following unless an exception is granted by the approval official:

(1) It is not necessary for loans to have the same repayment terms.

Loans made by other lenders involved in joint financing with RUS should

be scheduled for repayment on terms similar to those customarily used

in the State for financing such facilities.

(2) The use of a trustee or other similar paying agent by the other

lender in a joint financing arrangement is acceptable to RUS. A trustee

or other similar paying agent will not normally be used for the RUS

portion of the funding unless required to comply with State law. The

responsibilities and authorities of any trustee or other similar paying

agent on projects that include RUS funds must be clearly specified by

written agreement and approved by the State program official and the

Office of the General Counsel (OGC). RUS must be able to deal directly

with the borrower to enforce the provisions of loan and grant

agreements and perform necessary servicing actions.

(3) In the event adequate funds are not available to meet regular

installments on parity loans, the funds available will be apportioned

to the lenders based on the respective current installments of

principal and interest due.

(4) Funds obtained from the sale or liquidation of secured property

or fixed assets will be apportioned to the lenders on the basis of the

pro rata amount outstanding; provided, however, funds obtained from

such sale or liquidation for a project that included RUS grant funds

will be apportioned as required by the grant agreement.

(5) Protective advances must be charged to the borrower's account

and be secured by a lien on the security property. To the extent

consistent with State law and customary lending practices in the area,

repayment of protective advances made by either lender, for the mutual

protection of both lenders, should receive first priority in

apportionment of funds between the lenders. To ensure agreement between

lenders, efforts should be made to obtain the concurrence of both

lenders before one lender makes a protective advance.

Sec. 1780.15 Other Federal, State, and local requirements.

Proposals for facilities financed in whole or in part with RUS

funds will be coordinated with appropriate Federal, State and local

agencies. If there are conflicts between this part and State or local

laws or regulatory commission regulations, the provisions of this part

will control. Applicants will be required to comply with Federal,

State, and local laws and any regulatory commission rules and

regulations pertaining to:

(a) Organization of the applicant and its authority to own,

construct, operate, and maintain the proposed facilities;

(b) Borrowing money, giving security therefore, and raising

revenues for the repayment thereof;

(c) Land use zoning; and

(d) Health and sanitation standards and design and installation

standards unless an exception is granted by RUS.

Sec. 1780.16 [Reserved]

Sec. 1780.17 Selection priorities and process.

When ranking eligible applications for consideration for limited

funds, Agency officials must consider the priority items met by each

application and the degree to which those priorities are met. Points

will be awarded as follows:

(a) Population priorities. (1) The proposed project will primarily

serve a rural area having a population not in excess of 1,000--20

points;

(2) The proposed project primarily serves a rural area having a

population between 1,001 and 2,500--15 points;

(3) The proposed project primarily serves a rural area having a

population between 2,501 and 5,500--5 points.

(b) Health priorities. The proposed project is:

(1) Needed to alleviate an emergency situation, correct

unanticipated diminution or deterioration of a water supply, or to meet

Safe Drinking Water Act requirements which pertain to a water system--

25 points;

(2) Required to correct inadequacies of a wastewater disposal

system, or to meet health standards which pertain to a wastewater

disposal system--25 points;

(3) Required to meet administrative orders issued to correct local,

State, or Federal solid waste violations--15 points.

(c) Income priorities. The median household income of the

population to be served by the proposed project is:

(1) Less than the poverty line if the poverty line is less than 80%

of the statewide nonmetropolitan median income--30 points;

(2) Less than 80 percent of the statewide nonmetropolitan median

household income--20 points;

(3) Equal to or more than the poverty line and between 80% and

100%, inclusive, of the State's nonmetropolitan median household

income--15 points.

(d) Other priorities. (1) The proposed project will: merge

ownership, management, and operation of smaller facilities providing

for more efficient management and economical service--15 points;

(2) The proposed project will enlarge, extend, or otherwise modify

existing facilities to provide service to additional rural areas--10

points;

(3) Applicant is a public body or Indian tribe--5 points;

(4) Amount of other than RUS funds committed to the project is:

(i) 50% or more--15 points;

(ii) 20% to 49%--10 points;

(iii) 5%--19% --5 points.

(5) Projects that will serve Agency identified target areas--10

points;

(6) Projects that primarily recycle solid waste products thereby

limiting the need for solid waste disposal--5 points;

(7) The proposed project will serve an area that has an unreliable

quality or supply of drinking water--10 points.

(e) In certain cases the State program official may assign up to 15

points to a project. The points may be awarded to projects in order to

improve compatibility and coordination between RUS's and other

agencies' selection

[[Page 48083]]

systems, to ensure effective RUS fund utilization, and to assist those

projects that are the most cost effective. A written justification must

be prepared and placed in the project file each time these points are

assigned.

(f) Cost overruns. An application may receive consideration for

funding before others at the State or National Office level when it is

a subsequent request for a previously approved project which has

encountered construction cost overruns. The cost overruns must be due

to high bids or unexpected construction problems that cannot be reduced

by negotiations, redesign, use of bid alternatives, rebidding or other

means. Cost overruns exceeding 20% of the development cost at time of

loan or grant approval or where the scope of the original purpose has

changed will not be considered under this paragraph.

(g) National office priorities. In selecting projects for funding

at the National Office level State program official points may or may

not be considered. The Administrator may assign up to 15 additional

points to account for items such as geographic distribution of funds,

the highest priority projects within a State, and emergency conditions

caused by economic problems or natural disasters. The Administrator may

delegate the authority to assign up to 15 of the administrator's points

to appropriate National Office staff.

Sec. 1780.18 Public information.

(a) Public notice of intent to file an application with the Agency.

Within 60 days of filing an application with the Agency the applicant

must publish a notice of intent to apply for a RUS loan or grant. The

notice of intent must be published in a newspaper of general

circulation in the proposed area to be served.

(b) General public meeting. Applicants should inform the general

public regarding the development of any proposed project. Any applicant

not required to obtain authorization by vote of its membership or by

public referendum, to incur the obligations of the proposed loan or

grant, must hold at least one public information meeting. The public

meeting must be held after the application is filed and not later than

loan or grant approval. The meeting must give the citizenry an

opportunity to become acquainted with the proposed project and to

comment on such items as economic and environmental impacts, service

area, alternatives to the project, or any other issue identified by the

Agency. To the extent possible, this meeting should cover items

necessary to satisfy all public information meeting requirements for

the proposed project. To minimize duplication of public notices and

public involvement, the applicant shall, where possible, coordinate and

integrate the public involvement activities of the environmental review

process into this requirement. The applicant will be required, at least

10 days prior to the meeting, to publish a notice of the meeting in a

newspaper of general circulation in the service area, to post a public

notice at the applicant's principal office, and to notify the Agency.

The applicant will provide the Agency a copy of the published notice

and minutes of the public meeting. A public meeting is not normally

required for subsequent loans or grants which are needed to complete

the financing of a project.

Secs. 1780.19-1780.23 [Reserved]

Sec. 1780.24 Approval authorities.

Appropriate reviews, concurrence, and authorization must be

obtained for all loans or grants in excess of the amounts indicated in

RUS Staff Instruction 1780-1.

(a) Redelegation of authority by State Directors. Unless restricted

by memorandum from the RUS Administrator, State Directors can

redelegate their approval authorities to State employees by memorandum.

(b) Restriction of approval authority by the RUS Administrator. The

RUS Administrator can make written restrictions or revocations of the

authority given to any approval official.

Sec. 1780.25 Exception Authority.

The Administrator may, in individual cases, make an exception to

any requirement or provision of this part which is not inconsistent

with the authorizing statute or other applicable law and is determined

to be in the Government's interest.

Secs. 1780.26-1780.30 [Reserved]

Subpart B--Loan and Grant Application Processing

Sec. 1780.31 General.

(a) Applicants are encouraged to contact the Agency processing

office early in the planning stages of their project. Agency personnel

are available to provide general advice and assistance regarding RUS

programs, other funding sources, and types of systems or improvements

appropriate for the applicant's needs. The Agency can also provide

access to technical engineering and environmental assistance and

information resources for other project development issues such as

public information, income surveys, developing rate schedules, system

operation and maintenance, and environmental compliance requirements.

Throughout the planning, application processing and construction of the

project, Agency personnel will work closely and cooperatively with the

applicant and their representatives, other State and Federal agencies

and technical assistance providers.

(b) The processing office will handle initial inquiries and provide

basic information about the program. They are to provide the

application, SF 424.2, ``Application for Federal Assistance (For

Construction),'' assist applicants as needed in completing SF 424.2,

and in filing a request for intergovernmental review. Federally

recognized Indian tribes are exempt from intergovernmental review. The

processing office will explain eligibility requirements and meet with

the applicant whenever necessary to discuss application processing.

(c) Applications that are not developed in a reasonable period of

time taking into account the size and complexity of the proposed

project may be removed from the State's active file. Applicants will be

consulted prior to taking such action.

(d) Starting with the earliest discussions with prospective

applicants or review of applications and continuing throughout

application processing, environmental issues must be considered.

Throughout the application process the State Environmental Coordinator

will discuss with the applicant and their engineer, environmental

review requirements for evaluating a project's potential for

environment impacts. This should provide flexibility to consider

alternatives to the project and develop methods to mitigate identified

adverse environmental impacts. The environmental review requirements

shall be performed simultaneously and concurrently with the project's

engineering design and mitigation measures integrated into the design

to minimize any adverse environmental impacts.

Sec. 1780.32 Timeframes for application processing.

(a) The processing office will determine if the application is

properly assembled. If not, the applicant will be notified within

fifteen days as to what additional submittal items are needed.

(b) The processing and approval offices will coordinate their

reviews to ensure that the applicant is advised about eligibility and

anticipated fund

[[Page 48084]]

availability within 45 days of the receipt of a completed application.

Sec. 1780.33 Application requirements.

An initial application consists of the following:

(a) One copy of a completed SF 424.2;

(b) A copy of the State intergovernmental comments or one copy of

the filed application for State intergovernmental review; and

(c) Two copies of the preliminary engineering report (PER) for the

project. The PER should be completed in accordance with RUS Bulletins

1780-2 through 1780-5.

(1) The PER may be submitted to the processing office prior to the

rest of the application material if the applicant desires a preliminary

review.

(2) The processing office will forward one copy of the PER with

comments and recommendations to the State staff engineer for review

upon receipt from the applicant.

(3) The State staff will consult with the applicant's engineer as

appropriate to resolve any questions concerning the PER and any

environmental concerns. Written comments will be provided by the State

staff engineer and State Environmental Coordinator to the processing

office to meet eligibility determination time lines.

(d) Written certification that other credit is not available.

(e) Supporting documentation necessary to make an eligibility

determination such as financial statements, audits, organizational

documents, or existing debt instruments. The processing office will

advise applicants regarding the required documents. Applicants that are

indebted to RUS will not need to submit documents already on file with

the processing office.

(f) Form FmHA 1940-20, ``Request for Environmental Information.''

The applicant should consult with the processing office to determine

what information should be included with this form.

(g) The applicants Internal Revenue Service Taxpayer Identification

Number (TIN). The TIN will be used by the Agency to assign a case

number which will be the applicant's or transferee's TIN preceded by

State and County Code numbers. Only one case number will be assigned to

each applicant regardless of the number of loans or grants or number of

separate facilities, unless an exception is authorized by the National

Office.

(h) Other Forms and certifications. Applicants will be required to

submit the following items to the processing office, upon notification

from the processing office to proceed with further development of the

full application:

(1) Form FmHA 442-7, ``Operating Budget'';

(2) Form FmHA 1910-11, ``Application Certification, Federal

Collection Policies for Consumer or Commercial Debts'';

(3) Form FmHA 400-1, ``Equal Opportunity Agreement'';

(4) Form FmHA 400-4, ``Assurance Agreement'';

(5) Form AD-1047, ``Certification Regarding Drug-Free Workplace

requirements (Grants) Alternative I for Grantees Other Than

Individuals';

(6) Form AD-1049, Certification regarding Drug-Free Workplace

Requirements (Grants) Alternative I For Grantees Other Than

Individuals;

(7) Certifications for Contracts, Grants, and Loans (Regarding

Lobbying); and

(8) Certification regarding prohibited tying arrangements.

Applicants that provide electric service must provide the Agency a

certification that they will not require users of a water or waste

facility financed under these regulations to accept electric service as

a condition of receiving assistance.

Sec. 1780.34 [Reserved]

Sec. 1780.35 Processing office review.

Review of the application will usually include the following:

(a) Nondiscrimination. Boundaries for the proposed service area

must not be chosen in such a way that any user or area will be excluded

because of race, color, religion, sex, marital status, age, handicap,

or national origin. This does not preclude construction of the project

in phases as noted in Sec. 1780.11 as long as it is not done in a

discriminatory manner.

(b) Grant determination. Grants will be determined by the

processing office in accordance with the following provisions and will

not result in EDU costs below similar system user cost.

(1) Maximum grant. Grants may not exceed the percentages in

Sec. 1780.10(c) of this part of the eligible RUS funded project

development costs listed in Sec. 1780.9 of this part.

(2) Debt service. Applicants will be considered for grant

assistance when the debt service portion of the average annual EDU

cost, for users in the applicant's service area, exceeds the following

percentages of median household income:

(i) 0.5 percent when the median household income of the service

area is equal to or below 80% of the statewide nonmetropolitan median

income.

(ii) 1.0 percent when the median household income of the service

area exceeds the 0.5 percent requirement but is not more than 100

percent the statewide nonmetropolitan household income.

(3) Similar system cost. If the grant determined in paragraph

(b)(2) of this section results in an annual EDU cost that is not

comparable with similar systems, the Agency will determine a grant

amount based on achieving EDU costs that are not below similar system

user costs.

(4) Wholesale service. When an applicant provides wholesale sales

or services on a contract basis to another system or entity, similar

wholesale system cost will be used in determining the amount of grant

needed to achieve a reasonable wholesale user cost.

(5) Subsidized cost. When annual cost to the applicant for delivery

of service is subsidized by either the State, commonwealth, or

territory, and uniform flat user charges regardless of usage are

imposed for similar classes of service throughout the service area, the

Agency may proceed with a grant in an amount necessary to reduce such

delivery cost to a reasonable level.

(c) User charges. The user charges should be reasonable and produce

enough revenue to provide for all costs of the facility after the

project is complete. The planned revenue should be sufficient to

provide for all debt service, debt reserve, operation and maintenance,

and if appropriate, additional revenue for facility replacement of

short lived assets without building a substantial surplus. Ordinarily,

the total debt reserve will be equal to one average annual loan

installment which will accumulate at the rate of one-tenth of the total

each year.

Sec. 1780.36 Approving official review.

Projects may be obligated as their applications are completed and

approved.

(a) Selection of applications for further processing. The

application and supporting information submitted will be used to

determine the applications selected for further development and

funding. After completing the review, the approval official will

normally select those eligible applications with the highest priority

scores for further processing. When authorizing the development of an

application for funding, the following will be considered:

(1) Funds available in State allocation;

(2) Anticipated allocation of funds for the next fiscal year; and

(3) Time necessary for applicant to complete the application.

[[Page 48085]]

(b) Lower scoring projects. (1) In cases where preliminary cost

estimates indicate that an eligible, high scoring application is

unfeasible or would require an amount of funding from RUS that exceeds

either 25 percent of a State's current annual allocation or an amount

greater than that remaining in the State's allocation, the approval

official may instead select the next lower scoring application for

further processing provided the high scoring applicant is notified of

this action and given an opportunity to revise the proposal and

resubmit it.

(2) If it is found that there is no effective way to reduce costs,

the approval official, after consultation with applicant, may submit a

request for an additional allocation of funds for the proposed project

to the National Office. The request should be submitted during the

fiscal year in which obligation is anticipated. Such request will be

considered along with all others on hand. A written justification must

be prepared and placed in the project file.

Sec. 1780.37 Applications determined ineligible.

If at any time an application is determined ineligible, the

processing office will notify the applicant in writing of the reasons.

The notification to the applicant will state that an appeal of this

decision may be made by the applicant under 7 CFR part 11.

Sec. 1780.38 [Reserved]

Sec. 1780.39 Application processing.

(a) Processing conference. Before starting to assemble the full

application and after the applicant selects its professional and

technical representatives, it should arrange with the processing office

for an application conference to provide a basis for orderly

application assembly. The processing office will explain program

requirements, public information requirements and provide guidance on

preparation of items necessary for approval.

(b) Professional services and contracts related to the facility.

Fees provided for in contracts or agreements shall be reasonable. The

Agency shall consider fees to be reasonable if they are not in excess

of those ordinarily charged by the profession as a whole for similar

work when RUS financing is not involved. Applicants will be responsible

for providing the services necessary to plan projects including design

of facilities, preparation of cost and income estimates, development of

proposals for organization and financing, and overall operation and

maintenance of the facility. Contracts or other forms of agreement

between the applicant and its professional and technical

representatives are required and are subject to RUS concurrence.

(1) Engineering services. Applicants selection of engineering

services for project design shall be done by publishing a request for

proposal in a newspaper of general circulation. Guidance on entering

into an agreement for engineering services is available from the

Agency.

(2) Other professional services. Professional services of the

following may be necessary: Attorney, bond counsel, accountant,

auditor, appraiser, environmental professionals, and financial advisory

or fiscal agent (if desired by applicant). Guidance on entering into an

agreement for legal services is available from the Agency.

(3) Bond counsel. Unless otherwise provided by subpart D of this

part, public bodies are required to obtain the service of recognized

bond counsel in the preparation of evidence of indebtedness.

(3) Contracts for other services. Contracts or other forms of

agreements for other services including management, operation, and

maintenance will be developed by the applicant and presented to the

Agency for review and concurrence. Guidance on entering into an

management agreement is available from the Agency.

(c) User estimates. Applicants dependent on users fees for debt

payment or operation and maintenance expenses shall base their income

and expense forecast on realistic user estimates. For users presently

not receiving service, consideration must be given to the following:

(1) An estimated number of maximum users should not be used when

setting user fees and rates since it may be several years before all

residents will need service by the system. In establishing rates a

realistic number of users should be employed.

(2) Meaningful user cash contributions. The amount of cash

contributions required will be set by the applicant and concurred in by

the approval official. Contributions should be an amount high enough to

indicate sincere interest on the part of the potential user, but not so

high as to preclude service to low income families. Contributions

ordinarily should be an amount approximating one year's minimum user

fee, and shall be paid in full before loan closing or commencement of

construction, whichever occurs first. Once economic feasibility is

ascertained based on a demonstration of meaningful potential user cash

contributions, the contribution, membership fee or other fees that may

be imposed are not a loan requirement under this section. A meaningful

user cash contribution is not required when:

(i) The Agency determines that the potential users as a whole in

the applicant's service area cannot make cash contributions, or

(ii) State statutes or local ordinances require mandatory use of

the system and the applicant or legal entity having such authority

agrees in writing to enforce such statutes, or ordinances.

(3) An enforceable user agreement with a penalty clause is required

(RUS Bulletin 1780-9 can be used) except:

(i) For users presently receiving service; or

(ii) Where mandatory use of the system is required.

(4) Individual vacant property owners will not be considered when

determining project feasibility unless:

(i) The owner has plans to develop the property in a reasonable

period of time and become a user of the facility; and

(ii) The owner agrees in writing to make a monthly payment at least

equal to the proportionate share of debt service attributable to the

vacant property until the property is developed and the facility is

utilized on a regular basis. A bond or escrowed security deposit must

be provided to guarantee this monthly payment and to guarantee an

amount at least equal to the owner's proportionate share of

construction costs. If a bond is provided, it must be executed by a

surety company that appears on the Treasury Department's most current

list (Circular 570, as amended) and be authorized to transact business

in the State where the project is located. The guarantee shall be

payable jointly to the borrower and the United States of America.

(5) Applicants must provide a positive program to encourage

connection by all users as soon as service is available. The program

will be available for review and concurrence by the processing office

before loan closing or commencement of construction, whichever occurs

first. Such a program shall include:

(i) An aggressive information program to be carried out during the

construction period. The applicant should send written notification to

all signed users in advance of the date service will be available,

stating the date users will be expected to have their connections

completed, and the date user charges will begin;

(ii) Positive steps to assure that installation services will be

available. These may be provided by the contractor installing the

system, local

[[Page 48086]]

plumbing companies, or local contractors;

(iii) Aggressive action to see that all signed users can finance

their connections.

(d) Interim financing. For all loans exceeding $500,000, where

funds can be borrowed at reasonable interest rates on an interim basis

from commercial sources for the construction period, such interim

financing may be obtained so as to preclude the necessity for multiple

advances of RUS loan funds. However, the approval official may make an

exception when interim financing is cost prohibitive or unavailable.

Guidance on informing the private lender of RUS's commitment is

available from the Agency. When interim commercial financing is used,

the application will be processed, including obtaining construction

bids, to the stage where the RUS loan would normally be closed, that is

immediately prior to the start of construction. The RUS loan should be

closed as soon as possible after the disbursal of all interim funds.

(e) Reserve requirements. Provision for the accumulation of

necessary reserves over a reasonable period of time will be included in

the loan documents.

(1) General obligation or special assessment bonds. Ordinarily, the

requirements for reserves will be considered to have been met if

general obligation or other bonds which pledge the full faith and

credit of the political subdivision are used, or special assessment

bonds are used, and if such bonds provide for the annual collection of

sufficient taxes or assessments to cover debt service.

(2) Other than general obligation or special assessment bonds. Each

borrower will be required to establish and maintain reserves sufficient

to assure that loan installments will be paid on time, for emergency

maintenance, for extensions to facilities, and for replacement of

short-lived assets which have a useful life significantly less than the

repayment period of the loan. Borrowers issuing bonds or other

evidences of debt pledging facility revenues as security will plan

their reserve to provide for a annual reserve equal to one-tenth of an

average annual loan installment each year for the life of the loan

unless prohibited by state law.

(f) Membership authorization. For organizations other than public

bodies, the membership will authorize the project and its financing.

Form FmHA 1942-8, ``Resolution of Members or Stockholders'' may be used

for this authorization. The approval official may, with the concurrence

of OGC, accept the loan resolution without such membership

authorization when State statutes and the organization's charter and

bylaws do not require such authorization; and

(1) The organization is well established and is operating with a

sound financial base; or

(2) The members of the organization have all signed an enforceable

user agreement with a penalty clause and have made the required

meaningful user cash contribution.

(g) Insurance. The purpose of RUS's insurance requirements is to

protect the government's financial interest based on the facility

financed with loan funds. It is the responsibility of the applicant and

not that of RUS to assure that adequate insurance and fidelity or

employee dishonesty bond coverage is maintained. The requirements below

apply to all types of coverage determined necessary. The approval

official may grant exceptions to normal requirements when appropriate

justification is provided establishing that it is in the best interest

of the applicant and will not adversely affect the government's

interest.

(1) Insurance requirements proposed by the applicant will be

accepted if the processing office determines that proposed coverage is

adequate to protect the government's financial interest. Applicants are

encouraged to have their attorney, consulting engineer, and/or

insurance provider(s) review proposed types and amounts of coverage,

including any deductible provisions.

(2) The use of deductibles may be allowed by RUS providing the

applicant has financial resources which would likely be adequate to

cover potential claims requiring payment of the deductible.

(3) Fidelity or employee dishonesty bonds. Applicants will provide

coverage for all persons who have access to funds, including persons

working under a contract or management agreement. Coverage may be

provided either for all individual positions or persons, or through

``blanket'' coverage providing protection for all appropriate

employees. An exception may be granted by the approval official when

funds relating to the facility financed are handled by another entity

and it is determined that the entity has adequate coverage or the

government's interest would otherwise be adequately protected. The

amount of coverage required by RUS will normally approximate the total

annual debt service requirements for the RUS loans.

(4) Property insurance. Fire and extended coverage will normally be

maintained on all structures except as noted below. Ordinarily, RUS

should be listed as mortgagee on the policy when RUS has a lien on the

property. Normally, major items of equipment or machinery located in

the insured structures must also be covered. Exceptions:

(i) Reservoirs, pipelines and other structures if such structures

are not normally insured;

(ii) Subsurface lift stations except for the value of electrical

and pumping equipment therein.

(5) General liability insurance, including vehicular coverage.

(6) Flood insurance required for facilities located in special

flood- and mudslide-prone areas.

(7) Worker's compensation. The borrower will carry worker's

compensation insurance for employees in accordance with State laws.

(h) The processing office will conduct appropriate environmental

reviews in accordance with RUS requirements.

(i) The processing office will assure that appropriate forms and

documents listed in RUS Bulletin 1780-6 are complete. Letters of

conditions will not be issued unless funds are available.

Sec. 1780.40 [Reserved]

Sec. 1780.41 Loan or grant approval.

(a) The processing office will submit the following to the approval

official:

(1) Form FmHA 1942-45, ``Project Summary'';

(2) Form FmHA 442-7, ``Operating Budget'';

(3) Form 442-3, ``Balance Sheet'' or a financial statement or audit

that includes a balance sheet;

(4) Form FmHA 442-14, ``Association Project Fund Analysis'';

(5) Letter of Conditions'';

(6) Form FmHA 1942-46, ``Letter of Intent to Meet Conditions'';

(7) Form FmHA 1940-1, ``Request for Obligation of Funds'';

(8) Completed environmental review documents including copies of

required publication evidence; and

(9) Grant determination, if applicable.

(b) Approval and applicant notification will be accomplished by

mailing to the applicant on the obligation date a copy of Form FmHA

1940-1. The date the applicant is notified is also the date the

interest rate at loan approval is established.

Sec. 1780.42 Transfer of obligations.

An obligation of funds established for an applicant may be

transferred to a different (substituted) applicant provided:

(a) The substituted applicant is eligible and has the authority to

receive

[[Page 48087]]

the assistance approved for the original applicant; and

(b) The need, purpose(s) and scope of the project for which RUS

funds will be used remain substantially unchanged.

Sec. 1780.43 [Reserved]

Sec. 1780.44 Actions prior to loan or grant closing or start of

construction, whichever occurs first.

(a) Applicants must provide evidence of adequate insurance and

fidelity or employee dishonesty bond coverage.

(b) Verification of users and other funds. In connection with a

project that involves new users and will be secured by a pledge of user

fees or revenues, the processing office will authenticate the number of

users. Ordinarily each signed user agreement will be reviewed and

checked for evidence of cash contributions. If during the review any

indication is received that all signed users may not connect to the

system, there will be such additional investigation made as deemed

necessary to determine the number of users who will connect to the

system.

(c) Initial compliance review. An initial compliance review should

be completed under subpart E of part 1901 of this chapter.

(d) Applicant contribution. An applicant contributing funds toward

the project cost shall deposit these funds in its project account

before start of construction. Project costs paid with applicant funds

prior to the required deposit time shall be appropriately accounted

for.

(e) Excess RUS loan and grant funds. If there is a significant

reduction in project cost, the applicant's funding needs will be

reassessed. Decreases in RUS funds will be based on revised project

costs and current number of users, however, other factors including RUS

regulations used at the time of loan or grant approval will remain the

same. Obligated loan or grant funds not needed to complete the proposed

project will be deobligated. Any reduction will be applied to grant

funds first. In such cases, applicable forms, the letter of conditions,

and other items will be revised.

(f) Evidence of and disbursement of other funds. Applicants

expecting funds from other sources for use in completing projects being

partially financed with RUS funds will present evidence of the

commitment of these funds from such other sources. An agreement should

be reached with all funding sources on how funds are to be disbursed

before the start of construction. RUS funds will not be used to pre-

finance funds committed to the project from other sources.

(g) Acquisition of land, easements, water rights, and existing

facilities. Applicants are responsible for acquisition of all property

rights necessary for the project and will determine that prices paid

are reasonable and fair. RUS may require an appraisal by an independent

appraiser or Agency employee.

(1) Rights-of-way and easements. Applicants will obtain valid,

continuous and adequate rights-of-way and easements needed for the

construction, operation, and maintenance of the facility.

(i) The applicant must provide a legal opinion relative to the

title to rights-of-way and easements. Form FmHA 442-22, ``Opinion of

Counsel Relative to Rights-of-Way,'' may be used. When a site is for

major structures such as a reservoir or pumping station and the

applicant is able to obtain only a right-of-way or easement on such a

site rather than a fee simple title, the applicant will furnish a title

report thereon by the applicant's attorney showing ownership of the

land and all mortgages or other lien defects, restrictions, or

encumbrances, if any.

(ii) For user connections funded by RUS, applicants will obtain

adequate rights to construct and maintain the connection line or other

facilities located on the users property. This right may be obtained

through formal easement or user agreements.

(2) Title for land or existing facilities. Title to land essential

to the successful operation of facilities or title to facilities being

purchased, must not contain any restrictions that will adversely affect

the suitability, successful operation, security value, or

transferability of the facility. Preliminary and final title opinions

must be provided by the applicant's attorney. The opinions must be in

sufficient detail to assess marketability of the property. Form FmHA

1927-9, ``Preliminary Title Opinion,'' and Form FmHA 1927-10, ``Final

Title Opinion,'' may be used to provide the required title opinions.

(i) In lieu of receiving title opinions from the applicant's

attorney, the applicant may use a title insurance company. If a title

insurance company is used, the company must provide the Agency a title

insurance binder, disclosing all title defects or restrictions, and

include a commitment to issue a title insurance policy. The policy

should be in an amount at least equal to the market value of the

property as improved. The title insurance binder and commitment should

be provided to the Agency prior to requesting closing instructions. The

Agency will be provided a title insurance policy which will insure

RUS's interest in the property without any title defects or

restrictions which have not been waived by the Agency.

(ii) The approval official may waive title defects or restrictions,

such as utility easements, that do not adversely affect the

suitability, successful operation, security value, or transferability

of the facility.

(3) Water rights. The following will be furnished as applicable:

(i) A statement by the applicant's attorney regarding the nature of

the water rights owned or to be acquired by the applicant (such as

conveyance of title, appropriation and decree, application and permit,

public notice and appropriation and use).

(ii) A copy of a contract with another company or municipality to

supply water; or stock certificates in another company which represents

the right to receive water.

(4) Lease agreements. Where the right of use or control of real

property not owned by the applicant is essential to the successful

operation of the facility during the life of the loan, such right will

be evidenced by written agreements or contracts between the owner of

the property and the applicant. Lease agreements shall not contain

provisions for restricted use of the site of facility, forfeiture or

summary cancellation clauses. Lease agreements shall provide for the

right to transfer, encumber, assign and sub-lease without restriction.

Lease agreements will ordinarily be written for a term at least equal

to the term of the loan. Such lease contracts or agreements will be

approved by the approval official with the advice and counsel of OGC,

as necessary.

(h) Obtaining loan closing instructions. The information required

by OGC will be transmitted to OGC with request for closing

instructions. Upon receipt of closing instructions, the processing

office will discuss with the applicant and its engineer, attorney, and

other appropriate representatives, the requirements contained therein

and any actions necessary to proceed with closing. State program

officials have the option to work with OGC to obtain waivers for

closing instructions in certain cases. Closing instructions are not

required for grants.

Sec. 1780.45 Loan and grant closing and delivery of funds.

(a) Loan closing. Notes and bonds will be completed on the date of

loan closing except for the entry of subsequent RUS multiple advances

where applicable. The amount of each note will be in multiples of not

less than $100. The

[[Page 48088]]

amount of each bond will ordinarily be in multiples of not less than

$1,000.

(1) Form FmHA 440-22, ``Promissory Note (Association or

Organization),'' will ordinarily be used for loans to nonpublic bodies.

(2) Forms FmHA 1942-47, ``Loan Resolution (Public Bodies),'' or

FmHA 1942-9, ``Loan Resolution (Security Agreement)'' will be adopted

by public and other-than-public bodies. These resolutions supplement

other provisions in this part.

(3) Subpart D of this part contains instructions for preparation of

notes and bonds evidencing indebtedness of public bodies.

(b) Loan disbursement.

(1) Multiple advances. Multiple advances will be used only for

loans in excess of $100,000. Advances will be made only as needed to

cover disbursements required by the borrower over a 30-day period.

(i) Subpart D of this part contains instructions for making

multiple advances to public bodies.

(ii) Advances will be requested by the borrower in writing. The

request should be in sufficient amounts to pay cost of construction,

rights-of-way and land, legal, engineering, interest, and other

expenses as needed. The borrower may use Form FmHA 440-11, ``Estimate

of Funds Needed for 30 Day Period Commencing XXX,'' to show the amount

of funds needed during the 30-day period.

(2) RUS loan funds obligated for a specific purpose, such as the

paying of interest, but not needed at the time of loan closing will

remain in the Finance Office until needed unless State statutes require

all funds to be delivered to the borrower at the time of closing. Loan

funds may be advanced to prepay costs under Sec. 1780.9(e)(2)(iv). If

all funds must be delivered to the borrower at the time of closing to

comply with State statutes, funds not needed at loan closing will be

handled as follows:

(i) Deposited in an appropriate borrower account, such as debt

service or construction accounts, or

(ii) Deposited in a joint bank account under paragraph (e)(3) of

this section.

(c) Grant closing. RUS Bulletin 1780-12 ``Water or Waste System

Grant Agreement'' of this part will be completed and executed in

accordance with the requirements of grant approval. The grant will be

considered closed when RUS Bulletin 1780-12 has been properly executed.

Processing or approval officials are authorized to sign the grant

agreement on behalf of RUS. For grants that supplement RUS loan funds,

the grant should be closed simultaneously with the closing of the loan.

However, when grant funds will be disbursed before loan closing, as

provided in paragraph (d)(1) of this section, the grant will be closed

not later than the delivery date of the first advance of grant funds.

(d) Grant disbursements. RUS policy is not to disburse grant funds

from the Treasury until they are actually needed by the applicant.

Applicant funds will be disbursed before the disbursal of any RUS grant

funds. RUS loan funds will be disbursed before the disbursal of any RUS

grant funds except when:

(1) Interim financing of the total estimated amount of loan funds

needed during construction is arranged, and

(2) All interim funds have been disbursed, and

(3) RUS grant funds are needed before the RUS loan can be closed.

(e) Use and accountability of funds.--(1) Arrangements will be

agreed upon for the prior concurrence by the Agency of the bills or

vouchers upon which warrants will be drawn. Form FmHA 402-2,

``Statement of Deposits and Withdrawals,'' or similar form will be used

by the Agency to monitor funds. Periodic reviews of these accounts

shall be made by the Agency.

(2) Pledge of collateral for grants to nonprofit organizations.

Grant funds must be deposited in a bank with Federal Deposit Insurance

Corporation (FDIC) insurance coverage. Also, if the balance in the

account containing grant funds exceeds the FDIC insurance coverage, the

excess amount must be collaterally secured. The pledge of collateral

for the excess will be in accordance with Treasury Circular 176.

(3) Joint RUS/borrower bank account. RUS funds and any funds

furnished by the borrower including contributions to purchase major

items of equipment, machinery, and furnishings will be deposited in a

joint RUS/borrower bank account if determined necessary by the approval

official. When RUS has a Memorandum of Understanding with another

agency that provides for the use of joint RUS/borrower accounts, or

when RUS is the primary source of funds for a project and has

determined that the use of a joint RUS/borrower bank account is

necessary, project funds from other sources may also be deposited in

the joint bank account. RUS shall not be accountable to the source of

the other funds nor shall RUS undertake responsibility to administer

the funding program of the other entity. Joint RUS/borrower bank

accounts should not be used for funds advanced by an interim lender.

When funds exceeds the FDIC insurance coverage, the excess must have a

pledge of collateral in accordance with Treasury Circular 176.

(4) Payment for project costs. Project costs will be monitored by

the RUS processing office. Invoices will be approved by the borrower

and their engineer, as appropriate, and submitted to the processing

office for concurrence. The review and acceptance of project costs,

including construction pay estimates, by RUS does not attest to the

correctness of the amounts, the quantities shown or that the work has

been performed under the terms of the agreements or contracts.

(f) Use of remaining funds. Funds remaining after all costs

incident to the basic project have been paid or provided for will not

include applicant contributions. Funds remaining, may be considered in

direct proportion to the amounts obtained from each source. Remaining

funds will be handled as follows:

(1) Remaining funds may be used for eligible loan or grant

purposes, provided the use will not result in major changes to the

facility design or project scope and that the purpose of the loan or

grant remains the same;

(2) RUS loan funds that are not needed will be applied as an extra

payment on the RUS indebtedness unless other disposition is required by

the bond ordinance, resolution, or State statute; and

(3) Grant funds not expended under paragraph (f)(1) of this section

will be cancelled. Prior to the actual cancellation, the borrower, its

attorney and its engineer will be notified of RUS's intent to cancel

the remaining funds. The applicant will be given appropriate appeal

rights.

(g) Post review of loan closing. In order to determine that the

loan has been properly closed the loan docket will be reviewed by OGC.

The State program official has the option to consult with OGC to obtain

waivers of this review.

Sec. 1780.46 [Reserved]

Sec. 1780.47 Borrower accounting methods, management reporting and

audits.

(a) Borrowers are required to provide RUS an annual audit or

financial statements.

(b) Method of accounting and preparation of financial statements.

Annual organization-wide financial statements must be prepared on the

accrual basis of accounting, in accordance with generally accepted

accounting principles (GAAP), unless State statutes or regulatory

agencies provide otherwise, or an exception is granted by the Agency.

An organization

[[Page 48089]]

may maintain its accounting records on a basis other than accrual

accounting, and make the necessary adjustments so that annual financial

statements are presented on the accrual basis.

(c) Record retention. Each borrower shall retain all records,

books, and supporting material for 3 years after the issuance of the

audit or management reports. Upon request, this material will be made

available to RUS, Office of the Inspector General (OIG), United States

Department of Agriculture (USDA), the Comptroller General, or to their

assignees.

(d) Audits. All audits are to be performed in accordance with the

latest revision of the generally accepted government auditing standards

(GAGAS), developed by the Comptroller General of the United States. In

addition, the audits are also to be performed in accordance with

various Office of Management and Budget (OMB) Circulars. The type of

audit each borrower is required to submit will be designated by RUS.

Further guidance on preparing an acceptable audit can be obtained from

RUS. It is not intended that audits required by this part be separate

and apart from audits performed in accordance with State and local

laws. To the extent feasible, the audit work should be done in

conjunction with those audits. Audits shall be annual unless otherwise

prohibited and supplied to the processing office as soon as possible

but in no event later than 150 days following the period covered by the

audit. OMB Circulars are available in any USDA/RUS office.

(e) Borrowers exempt from audits. All borrowers who are exempt from

audits, will, within 60 days following the end of each fiscal year,

furnish the RUS with annual financial statements, consisting of a

verification of the organization's balance sheet and statement of

income and expense by an appropriate official of the organization.

Forms FmHA 442-2, ``Statement of Budget, Income and Equity,'' and 442-3

may be used.

(f) Management reports. These reports will furnish management with

a means of evaluating prior decisions and serve as a basis for planning

future operations and financial strategies. In those cases where

revenues from multiple sources are pledged as security for an RUS loan,

two reports will be required; one for the project being financed by RUS

and one combining the entire operation of the borrower. In those cases

where RUS loans are secured by general obligation bonds or assessments

and the borrower combines revenues from all sources, one management

report combining all such revenues is acceptable. The following

management data will be submitted by the borrower to the processing

office. These reports at a minimum will include a balance sheet and

income and expense statement.

(1) Quarterly reports. A quarterly management report will be

required for the first year for new borrowers and for all borrowers

experiencing financial or management problems for one year from the

date problems were noted. If the borrower's account is current at the

end of the year, the processing office may waive the required reports.

(2) Annual management reports. Prior to the beginning of each

fiscal year the following will be submitted to the processing office.

(If Form FmHA 442-2 is used as the annual management report, enter data

in column three only of Schedule 1, and complete all of Schedule 2.)

(i) Two copies of the management reports and proposed ``Annual

Budget''.

(ii) Financial information may be reported on Form FmHA 442-2 which

includes Schedule 1, ``Statement of Budget, Income and Equity'' and

Schedule 2, ``Projected Cash Flow'' or information in similar format.

(iii) A copy of the rate schedule in effect at the time of

submission.

(g) Substitute for management reports. When RUS loans are secured

by the general obligation of the public body or tax assessments which

total 100 percent of the debt service requirements, the State program

official may authorize an annual audit to substitute for other

management reports if the audit is received within 150 days following

the period covered by the audit.

Sec. 1780.48 Regional commission grants.

Grants are sometimes made by regional commissions for projects

eligible for RUS assistance. RUS has agreed to administer such funds in

a manner similar to administering RUS assistance.

(a) When RUS has funds in the project, no charge will be made for

administering regional commission funds.

(b) When RUS has no loan or grant funds in the project, an

administrative charge will be made pursuant to the Economy Act of 1932,

as amended (31 U.S.C. 1535). A fee of 5 percent of the first $50,000 of

a regional commission grant and 1 percent of any amount over $50,000

will be paid RUS by the commission.

(1) Appalachian Regional Commission (ARC). RUS Bulletin 1780-23 of

this part will be followed in determining the responsibilities of RUS.

The ARC Federal Co-chairman and the State program official will provide

each other with the necessary notification and certification.

(2) Other regional commissions. Title V of the Public Works and

Economic Development Act of 1965 authorizes other commissions similar

to ARC. RUS Bulletin 1780-23 of this part will be used to develop a

separate project management agreement between RUS and the commission

for each project. The agreement should be prepared by the State program

official as soon as notification is received that a commission grant

will be made and the amount is confirmed.

(c) Regional commission grants should be obligated as soon as

possible in accordance with Sec. 1780.41 of this part, except that the

announcement procedure referred to in Sec. 1780.41(c) is not

applicable. Regional commission grants will be disbursed from the

Finance Office in the same manner as RUS funds.

Sec. 1789.49 Rural or Native Alaskan villages.

(a) General.--(1) This section contains regulations for providing

grants to remedy the dire sanitation conditions in rural Alaskan

villages using funds specifically made available for this purpose.

(2) Unless specifically modified by this section, grants will be

made, processed, and serviced in accordance with this subpart.

(b) Definitions.--(1) Dire sanitation condition. For the purpose of

this section a dire sanitation condition exists where:

(i) Recurring instances of a waterborne communicable disease has

been documented; or

(ii) No community-wide water and sewer system exists and individual

residents must haul water to or human waste from their homes and/or use

pit privies.

(2) Rural or Native Alaskan village. A rural or Native Alaskan

community which meets the definition of a village under State statutes

and does not have a population in excess of 10,000 inhabitants,

according to the latest decennial Census of the United States.

(c) Eligibility.--(1) The applicant must be a rural or Native

Alaskan village.

(2) The median household income of the village cannot exceed 110

percent of the statewide nonmetropolitan household income.

(3) A dire sanitation condition must exist in the village.

(4) The applicant must obtain 50 percent of project development

costs from State or local contributions. The local contribution can be

from loan funds authorized under subpart A of this part.

[[Page 48090]]

(d) Grant amount. Grants will be made for up to 50 percent of the

project development costs.

(e) Use of funds. Grant funds can be used to pay reasonable costs

associated with providing potable water or waste disposal services to

residents of rural or Native Alaskan villages.

(f) Construction. (1) If the State of Alaska is contributing to the

project costs, the project does not have to meet the construction

requirements of this subpart.

(2) If a loan is made in accordance with this part for part of the

local contribution, all of the requirements of this part apply.

Secs. 1780.50-1780.52 [Reserved]

Subpart C--Planning, Designing, Bidding, Contracting, Constructing

and Inspections.

Sec. 1780.53 General.

This subpart is specifically designed for use by owners including

the professional or technical consultants or agents who provide

assistance and services such as engineering, environmental, inspection,

financial, legal or other services related to planning, designing,

bidding, contracting, and constructing water and waste disposal

facilities. These procedures do not relieve the owner of the

contractual obligations that arise from the procurement of these

services. For this subpart, an owner is defined as an applicant,

borrower, or grantee.

Sec. 1780.54 Technical services.

Owners are responsible for providing the engineering and

environmental services necessary for planning, designing, bidding,

contracting, inspecting, and constructing their facilities. Services

may be provided by the owner's ``in house'' engineer or through

contract, subject to Agency concurrence. Engineers must be licensed in

the State where the facility is to be constructed.

Sec. 1780.55 Preliminary engineering reports.

Preliminary engineering reports (PER)s must conform with customary

professional standards. PER guidelines for water, sanitary sewer, solid

waste, and storm sewer are available from the Agency.

Sec. 1780.56 [Reserved]

Sec. 1780.57 Design policies.

Facilities financed by the Agency will be designed and constructed

in accordance with sound engineering practices, and must meet the

requirements of Federal, State and local agencies.

(a) Environmental review. Facilities financed by the Agency must

undergo an environmental impact analysis in accordance with RUS

requirements. Facility planning and design must not only be responsive

to the owner's needs but must consider the environmental impacts of the

proposed project. Facility designs shall incorporate and integrate,

where practicable, mitigation measures that avoid or minimize adverse

environmental impacts. Environmental reviews serve as a means of

assessing environmental impacts of project proposals, rather than

justifying decisions already made. Applicants may not take any action

on a project proposal that will have an adverse environmental impact or

limit the choice of reasonable project alternatives being reviewed

prior to the completion of the Agency's environmental review.

(b) Architectural barriers. All facilities intended for or

accessible to the public or in which physically handicapped persons may

be employed or reside must be developed in compliance with the

Architectural Barriers Act of 1968 (Pub. L. 90-480) as implemented by

41 CFR 101-19.6, section 504 of the Rehabilitation Act of 1973 (Pub. L.

93-112) as implemented by 7 CFR, parts 15 and 15b, and Titles II and

III of the Americans with Disabilities Act of 1990.

(c) Energy conservation. Facility design should consider cost

effective energy saving measures.

(d) Fire protection. Water facilities should have sufficient

capacity to provide reasonable fire protection to the extent

practicable.

(e) Growth capacity. Facilities should have sufficient capacity to

provide for reasonable growth to the extent practicable.

(f) Water conservation. Owners are encouraged, when economically

feasible, to incorporate water conservation practices into a facility's

design. For existing water systems, evidence must be provided showing

that the distribution system water losses do not exceed reasonable

levels.

(g) Conformity with state drinking water standards. No funds shall

be made available under this regulation for a water system unless the

Agency determines that the water system will make significant progress

toward meeting the standards established under title XIV of the Public

Health Service Act (commonly known as the `Safe Drinking Water Act')

(42 U.S.C. 300f et seq.).

(h) Conformity with federal and state water pollution control

standards. No funds shall be made available under this regulation for a

water treatment discharge or waste disposal system unless the Agency

determines that the effluent from the system conforms with applicable

Federal and State water pollution control standards.

(i) Combined sewers. New combined sanitary and storm water sewer

facilities will not be financed by the Agency. Extensions to existing

combined systems can only be financed when separate systems are

impractical.

(j) Dam safety. Projects involving any artificial barrier which

impounds or diverts water, or the rehabilitation or improvement of such

a barrier, must comply with the provisions for dam safety as set forth

in the Federal Guidelines for Dam Safety (Government Printing Office

stock No. 041-001-00187-5) as prepared by the Federal Coordinating

Council for Science, Engineering and Technology.

(j) Pipe. All pipe used shall meet current American Society for

Testing Materials (ASTM) or American Water Works Association (AWWA)

standards.

(k) Water system testing. For new water systems or extensions to

existing water systems, leakage shall not exceed limits set by either

ASTM or AWWA whichever is the more stringent.

(l) Metering devices. Water facilities financed by the Agency will

have metering devices for each connection. An exception to this

requirement may be granted by the State program official when the owner

demonstrates that installation of metering devices would be a

significant economic detriment and that environmental consideration

would not be adversely affected by not installing such devices.

Sanitary sewer projects should incorporate water system metering

devices whenever practicable.

(m) Economical service. The facility's design must provide the most

economical service practicable.

Secs. 1780.58-1780.60 [Reserved]

Sec. 1780.61 Construction contracts.

Contract documents must be sufficiently descriptive and legally

binding in order to accomplish the work as economically and

expeditiously as possible.

(a) Standard construction contract documents. If the construction

contract documents utilized are not in the format previously approved

by the Agency, OGC's review of the construction contract documents will

be obtained prior to their use.

(b) Contract review and concurrence. The owner's attorney will

review the executed contract documents, including performance and

payment bonds, and will certify that they are adequate, and that the

persons executing these

[[Page 48091]]

documents have been properly authorized to do so. The contract

documents, engineer's recommendation for award, and bid tabulation

sheets will be forwarded to the Agency for concurrence prior to

awarding the contract. All contracts will contain a provision that they

are not effective until they have been concurred in by the Agency. The

State program official or designee is responsible for concurring in

construction contracts with the legal advice and guidance of the OGC

when necessary.

Sec. 1780.62 Utility purchase contracts.

Applicants proposing to purchase water or other utility service

from private or public sources shall have written contracts for supply

or service which are reviewed and concurred in by the Agency. To the

extent practical, the Agency review and concurrence of such contracts

should take place prior to their execution by the owner. OGC advice and

guidance may be requested. Form FmHA 442-30, ``Water Purchase

Contract,'' may be used when appropriate. If the Agency loan will be

repaid from system revenues, the contract will be pledged to the Agency

as part of the security for the loan. Such contracts will:

(a) Include a commitment by the supplier to furnish, at a specified

point, an adequate quantity of water or other service and provide that,

in case of shortages, all of the supplier's users will proportionately

share shortages.

(b) Set out the ownership and maintenance responsibilities of the

respective parties including the master meter if a meter is installed

at the point of delivery.

(c) Specify the initial rates and provide a type of escalator

clause which will permit rates for the association to be raised or

lowered proportionately as certain specified rates for the supplier's

regular customers are raised or lowered. Provisions may be made for

altering rates in accordance with the decisions of the appropriate

State agency which may have regulatory authority.

(d) Cover period of time which is at least equal to the repayment

period of the loan. State program officials may approve contracts for

shorter periods of time if the supplier cannot legally contract for

such period, or if the owner and supplier find it impossible or

impractical to negotiate a contract for the maximum period permissible

under State law, provided:

(1) The supplier is subject to regulations of the Federal Energy

Regulatory Commission or other Federal or State agency whose

jurisdiction can be expected to prevent unwarranted curtailment of

supply; or

(2) The contract contains adequate provisions for renewal; or

(3) A determination is made that in the event the contract is

terminated, there are or will be other adequate sources available to

the owner that can feasibly be developed or purchased.

(e) Set out in detail the amount of connection or demand charges,

if any, to be made by the supplier as a condition to making the service

available to the owner. However, the payment of such charges from loan

funds shall not be approved unless the Agency determines that it is

more feasible and economical for the owner to pay such a connection

charge than it is for the owner to provide the necessary supply by

other means.

(f) Provide for a pledge of the contract to the Agency as part of

the security for the loan.

(g) Not contain provisions for:

(1) Construction of facilities which will be owned by the supplier.

This does not preclude the use of money paid as a connection charge for

construction to be done by the supplier.

(2) Options for the future sale or transfer. This does not preclude

an agreement recognizing that the supplier and owner may at some future

date agree to a sale of all or a portion of the facility.

(h) If it is impossible to obtain a firm commitment for either an

adequate quantity or sharing shortages proportionately, a contract may

be executed and concurred in provided adequate evidence is furnished to

enable the Agency to make a determination that the supplier has

adequate supply and/or treatment facilities to furnish its other users

and the applicant for the foreseeable future; and

(1) The supplier is subject to regulations of the Federal Energy

Regulatory Commission or other Federal or State agency whose

jurisdiction can be expected to prevent unwarranted curtailment of

supply; or

(2) A suitable alternative supply could be arranged within the

repayment ability of the borrower if it should become necessary; or

(3) Concurrence in the proposed contract is obtained from the

National Office.

Sec. 1780.63 Sewage treatment and bulk water sales contracts.

Owners entering into agreements with private or public parties to

treat sewage or supply bulk water shall have written contracts for such

service and all such contracts shall be subject to the Agency

concurrence. Section 1780.62 of this part should be used as a guide to

prepare such contracts.

Secs. 1780.64-1780.66 [Reserved]

Sec. 1780.67 Performing construction.

Owners are encouraged to accomplish construction through contracts

with qualified contractors. Owners may accomplish construction by using

their own personnel and equipment provided the owners possess the

necessary skills, abilities and resources to perform the work and

provided a licensed engineer prepares design drawings and

specifications and inspects construction and furnishes inspection

reports as required by Sec. 1780.76 of this part. Inspection services

may be provided by individuals as approved by the State staff engineer.

Payments for construction will be handled under Sec. 1780.76(d) of this

part.

Sec. 1780.68 Owner's contractual responsibility.

This part does not relieve the owner of any responsibilities under

its contract. The owner is responsible for the settlement of all

contractual and administrative issues arising out of procurement

entered into in support of a loan or grant. These include, but are not

limited to: source evaluation, protests, disputes, and claims. Matters

concerning violation of laws are to be referred to the applicable

local, State, or Federal authority.

Sec. 1780.69 [Reserved]

Sec. 1780.70 Owner's procurement regulations.

Owner's procurement requirements must comply with the following

standards:

(a) Code of conduct. Owners shall maintain a written code or

standards of conduct which shall govern the performance of their

officers, employees or agents engaged in the award and administration

of contracts supported by Agency funds. No employee, officer or agent

of the owner shall participate in the selection, award, or

administration of a contract supported by Agency funds if a conflict of

interest, real or apparent, would be involved. Examples of such

conflicts would arise when: the employee, officer or agent; any member

of their immediate family; their partner; or an organization which

employs, or is about to employ, any of the above; has a financial or

other interest in the firm selected for the award.

(1) The owner's officers, employees or agents shall neither solicit

nor accept gratuities, favors or anything of

[[Page 48092]]

monetary value from contractors, potential contractors, or parties to

subagreements.

(2) To the extent permitted by State or local law or regulations,

the owner's standards of conduct shall provide for penalties,

sanctions, or other disciplinary actions for violations of such

standards by the owner's officers, employees, agents, or by contractors

or their agents.

(b) Maximum open and free competition. All procurement

transactions, regardless of whether by sealed bids or by negotiation

and without regard to dollar value, shall be conducted in a manner that

provides maximum open and free competition. Procurement procedures

shall not restrict or eliminate competition. Examples of what are

considered to be restrictive of competition include, but are not

limited to: placing unreasonable requirements on firms in order for

them to qualify to do business; noncompetitive practices between firms;

organizational conflicts of interest; and unnecessary experience and

bonding requirements. In specifying materials, the owner and its

consultant will consider all materials normally suitable for the

project commensurate with sound engineering practices and project

requirements. The Agency shall consider fully any recommendation made

by the owner concerning the technical design and choice of materials to

be used for a facility. If the Agency determines that a design or

material, other than those that were recommended should be considered

by including them in the procurement process as an acceptable design or

material in the water or waste disposal facility, the Agency shall

provide such owner with a comprehensive justification for such a

determination. The justification will be documented in writing.

(c) Owner's review. Proposed procurement actions shall be reviewed

by the owner's officials to avoid the purchase of unnecessary or

duplicate items. Consideration should be given to consolidation or

separation of procurement items to obtain a more economical purchase.

Where appropriate, an analysis shall be made of lease versus purchase

alternatives, and any other appropriate analysis to determine which

approach would be the most economical. To foster greater economy and

efficiency, owners are encouraged to enter into State and local

intergovernmental agreements for procurement or use of common goods and

services.

(d) Solicitation of offers, whether by competitive sealed bid or

competitive negotiation, shall:

(i) Incorporate a clear and accurate description of the technical

requirements for the material, product or service to be procured. When

it is impractical or uneconomical to make a clear and accurate

description of the technical requirements, a ``brand name or equal''

description may be used to define the performance or other salient

requirements of a procurement. The specific feature of the name brands

which must be met by the offeror shall be clearly stated; and

(ii) Clearly specify all requirements which offerors must fulfill

and all other factors to be used in evaluating bids or proposals.

(e) Affirmative steps should be taken to assure that small,

minority, and women businesses are utilized when possible as sources of

supplies, equipment, construction and services.

(f) Contract pricing. Cost plus a percentage of cost method of

contracting shall not be used.

(g) Unacceptable bidders. The following will not be allowed to bid

on, or negotiate for, a contract or subcontract related to the

construction of the project:

(1) An engineer as an individual or firm who has prepared plans and

specifications or who will be responsible for monitoring the

construction;

(2) Any firm or corporation in which the owner's engineer is an

officer, employee, or holds or controls a substantial interest;

(3) The governing body's officers, employees, or agents;

(4) Any member of the immediate family or partners in the entities

referred to in paragraphs (g)(1), (g)(2) or (g)(3) of this section; or

(5) An organization which employs, or is about to employ, any

person in the entities referred to in paragraph (g)(1), (g)(2) or

(g)(3) or (g)(4) of this section.

(h) Contract award. Contracts shall be made only with responsible

parties possessing the potential ability to perform successfully under

the terms and conditions of a proposed procurement. Consideration shall

include but not be limited to matters such as integrity, record of past

performance, financial and technical resources, and accessibility to

other necessary resources. Contracts shall not be made with parties who

are suspended or debarred by any Agency of the United States

Government.

Sec. 1780.71 [Reserved]

Sec. 1780.72 Procurement methods.

Procurement shall be made by one of the following methods: small

purchase procedures; competitive sealed bids (formal advertising);

competitive negotiation; or noncompetitive negotiation. Competitive

sealed bids (formal advertising) is the preferred procurement method

for construction contracts.

(a) Small purchase procedures. Small purchase procedures are those

relatively simple and informal procurement methods that are sound and

appropriate for a procurement of services, supplies or other property,

costing in the aggregate not more than $100,000. If small purchase

procedures are used for a procurement, written price or rate quotations

shall be requested from at least three qualified sources.

(b) Competitive sealed bids. In competitive sealed bids (formal

advertising), an invitation for sealed bids is publicly advertised and

a firm-fixed-price contract (lump sum or unit price) is awarded to the

responsible bidder whose bid, conforming with all the material terms

and conditions of the invitation for bids, is lowest, price and other

factors considered. When using this method the following shall apply:

(1) The invitation for bids shall be publicly advertised at a

sufficient time prior to the date set for opening of bids. The

invitation shall comply with the requirements in Sec. 1780.70(d). Bids

shall be solicited from an adequate number of qualified sources;

(2) All bids shall be opened publicly at the time and place stated

in the invitation for bids;

(3) A firm-fixed-price contract award shall be made by written

notice to that responsible bidder whose bid, conforming to the

invitation for bids, is lowest. When specified in the bidding

documents, factors such as discounts and transportation costs shall be

considered in determining which bid is lowest; and

(4) Any or all bids may be rejected by the owner when it is in its

best interest.

(c) Competitive negotiation. Competitive negotiation is required

for the procurement of engineering services for project design. In

competitive negotiations, proposals are requested from a number of

sources and the Request for Proposal is publicized. Negotiations are

normally conducted with more than one of the sources submitting offers.

Competitive negotiation may be used if conditions are not appropriate

for the use of formal advertising and where discussions and bargaining

with a view to reaching

[[Page 48093]]

agreement on the technical quality, price, other terms of the proposed

contract and specifications may be necessary. If competitive

negotiation is used for a procurement, the following requirements shall

apply:

(1) Proposals shall be solicited from an adequate number of

qualified sources to permit reasonable competition consistent with the

nature and requirements of the Procurement. The Request for Proposal

shall be publicized and reasonable requests by other sources to compete

shall be honored to the maximum extent practicable;

(2) The Request for Proposal shall identify all significant

evaluation factors, including price or cost where required, and their

relative importance;

(3) The owner shall provide mechanisms for technical evaluation of

the proposals received, determination of responsible offerors for the

purpose of written or oral discussions, and selection for contract

award;

(4) Award may be made to the responsible offeror whose proposal

will be most advantageous to the owner, price and other factors

considered. Unsuccessful offerors should be promptly notified; and

(5) Owners may utilize competitive negotiation procedures for

procurement of other professional services, whereby competitors'

qualifications are evaluated and the most qualified competitor is

selected, subject to negotiations of fair and reasonable compensation.

(d) Noncompetitive negotiation. Noncompetitive negotiation is

procurement through solicitation of a proposal from only one source, or

after solicitation of a number of sources, competition is determined

inadequate. Noncompetitive negotiation may be used when the award of a

contract is not feasible under small purchase or competitive sealed

bids. Circumstances under which a contract may be awarded by

noncompetitive negotiations are limited to the following:

(1) The item is available only from a single source; or

(2) There exists a public exigency or emergency and the urgency for

the requirement will not permit a delay incident to competitive

solicitation; or

(3) After solicitation of a number of sources, competition is

determined inadequate; or

(4) No acceptable bids have been received after formal advertising;

or

(5) The procurement is for professional services other than design

engineering; or

(6) The aggregate amount does not exceed $100,000.

Sec. 1780.73 [Reserved]

Sec. 1780.74 Contracts awarded prior to applications.

Owners awarding construction or other procurement contracts prior

to filing an application, must provide evidence that is satisfactory to

the Agency that the contract was entered into without intent to

circumvent the requirements of Agency regulations.

(a) Modifications. The contract shall be modified to conform with

the provisions of this part. Where this is not possible, modifications

will be made to the extent practicable and, as a minimum, the contract

must comply with all State and local laws and regulations as well as

statutory requirements and executive orders related to the Agency

financing. When all construction is complete and it is impracticable to

modify the contracts, the owner must provide the certification required

by paragraph (d) of this section.

(b) Consultant's certification. Provide a certification by an

engineer, licensed in the State where the facility is constructed, that

any construction performed complies fully with the plans and

specifications.

(c) Owner's certification. Provide a certification by the owner

that the contractor has complied with applicable statutory and

executive requirements related to Agency financing for construction

already performed.

Sec. 1780.75 Contract provisions.

In addition to provisions required for a valid and legally binding

contract, any recipient of Agency funds shall include the following

contract provisions in all contracts.

(a) Remedies. Contracts other than small purchases shall contain

provisions or conditions which will allow for administrative,

contractual, or legal remedies in instances where contractors violate

or breach contract terms, and provide for such sanctions and penalties

as may be appropriate. A realistic liquidated damage provision should

also be included.

(b) Termination. All contracts exceeding $10,000, shall contain

suitable provisions for termination by the owner including the manner

by which it will be affected and the basis for settlement. In addition,

such contracts shall describe conditions under which the contract may

be terminated for default as well as conditions where the contract may

be terminated because of circumstances beyond the control of the

contractor.

(c) Surety. In all contracts for construction or facility

improvements exceeding $100,000, the owner shall require bonds or cash

deposit in escrow assuring performance and payment each in the amount

of 100 percent of the contract cost. The surety will be in the form of

performance bonds and payment bonds. For contracts of lesser amounts,

the owner may require surety. When a surety is not provided,

contractors will furnish evidence of payment in full for all materials,

labor, and any other items procured under the contract. Form FmHA 1924-

10, ``Release by Claimants,'' and Form FmHA 1924-9, ``Certificate of

Contractor's Release,'' may be used for this purpose. Companies

providing performance bonds and payment bonds must hold a certificate

of authority as an acceptable surety on Federal bonds as listed in

Treasury Circular 570 as amended and be legally doing business in the

State where the facility is located.

(d) Equal Employment Opportunity. All contracts awarded in excess

of $10,000 by owners shall contain a provision requiring compliance

with Executive Order 11246, entitled, ``Equal Employment Opportunity,''

as amended by Executive Order 11375, and as supplemented by Department

of Labor regulations 41 CFR part 60.

(e) Anti-kickback. All contracts for construction shall include a

provision for compliance with the Copeland ``Anti-Kickback'' Act (18

U.S.C. 874). This Act provides that each contractor shall be prohibited

from inducing, by any means, any person employed in the construction,

completion, or repair of public work, to give up any part of the

compensation to which they are otherwise entitled. The owner shall

report suspected or reported violations to the Agency.

(f) Records. All negotiated contracts (except those of $10,000 or

less) awarded by owners shall include a provision to the effect that

the owner, the Agency, the Comptroller General of the United States, or

any of their duly authorized representatives, shall have access to any

books, documents, papers, and records of the contractor which are

directly pertinent to a specific Federal loan or grant program for the

purpose of making audits, examinations, excerpts, and transcriptions.

Owners shall require contractors to maintain all required records for 3

years after making final payment and all other pending matters are

closed.

(g) State Energy Conservation Plan. Contracts shall incorporate

mandatory standards and policies relating to energy efficiency which

are contained in the State energy conservation plan issued in

compliance with the Energy Policy and Conservation Act (Pub. L. 94-

163).

[[Page 48094]]

(h) Change orders. The construction contract shall require that all

contract change orders be concurred in by the Agency.

(i) Agency concurrence. All contracts must contain a provision that

they shall not be effective unless and until the State program official

or designee concurs in writing.

(j) Retainage. All construction contracts shall contain adequate

provisions for retainage. No payments will be made that would deplete

the retainage nor place in escrow any funds that are required for

retainage nor invest the retainage for the benefit of the contractor.

The retainage shall not be less than an amount equal to 5 percent of an

approved partial payment estimate until the project is substantially

complete and accepted by the owner, consulting engineer and Agency. The

contract must provide that additional amounts may be retained if the

job is not proceeding satisfactorily.

(k) Other compliance requirements. Contracts in excess of $100,000

shall contain a provision which requires compliance with all applicable

standards, orders, or requirements issued under section 306 of the

Clean Air Act (42 U.S.C. 1857(h)), section 508 of the Clean Water Act

(33 U.S.C. 1368), Executive Order 11738, and Environmental Protection

Agency (EPA) regulations 40 CFR part 15, which prohibit the use under

non-exempt Federal contracts, grants or loans of facilities included on

the EPA List of Violating Facilities. The provision shall require

reporting of violations to the Agency and to the U.S. Environmental

Protection Agency, Assistant Administrator for Enforcement.

Solicitations and contract provisions shall include the requirements of

4 CFR 15.4(c) as set forth in RUS Bulletin 1780-14 of this part.

Sec. 1780.76 Contract administration.

Owners shall be responsible for maintaining a contract

administration system to monitor the contractors' performance and

compliance with the terms, conditions, and specifications of the

contracts.

(a) Preconstruction conference. Prior to beginning construction,

the owner will schedule a preconstruction conference where the

consulting engineer will review the planned development with the

Agency, owner, resident inspector, attorney, contractor, and other

interested parties. The conference will thoroughly cover applicable

items included in Form FmHA 1924-16, ``Record of Pre-construction

Conference,'' and the discussions and agreements will be documented.

(b) Monitoring reports. The owner is required to monitor

construction and provide a report to the Agency giving a full

explanation under the following circumstances:

(1) Reasons why approved construction schedules were not met.

(2) Analysis and explanation of cost overruns and how payment is to

be made for the same; and

(3) If events occur which have a significant impact upon the

project.

(c) Inspection. Full-time resident inspection is required for all

construction unless a written exception is made by the Agency upon

written request of the owner. Unless otherwise agreed, the resident

inspector will be provided by the consulting engineer. Prior to the

preconstruction conference, the consulting engineer will submit a

resume of qualifications of the resident inspector to the owner and to

the Agency for acceptance in writing. If the owner provides the

resident inspector, it must submit a resume of the inspector's

qualifications to the project engineer and the Agency for acceptance in

writing prior to the preconstruction conference. The resident inspector

will work under the technical supervision of the project engineer and

the role and responsibilities will be defined in writing.

(d) Inspector's daily diary. The resident inspector will maintain a

record of the daily construction progress in the form of a daily diary

and daily inspection reports. The daily entries shall be made available

to the Agency personnel and will be reviewed during project

inspections. The original complete set will be furnished to the owner

upon completion of construction. RUS Bulletin 1780-18 is available from

the Agency for preparing daily inspection reports.

(e) Payment for Construction. Form FmHA 1924-18, ``Partial Payment

Estimate,'' or other similar form may be used for construction

payments. If Form 1924-18 is not used, prior concurrence by the State

staff engineer must be obtained.

(1) Payment of contract retainage will not be made until such

retainage is due and payable under the terms of the contact.

(2) Invoices for the payment of construction costs must be approved

by the owner, project engineer and concurred in by the Agency.

(3) The review and acceptance of project costs, including

construction payment estimates by the Agency shall not attest to the

correctness of the amounts, the quantities shown, or that the work has

been performed under the terms of agreements or contracts.

(f) Prefinal inspections. A prefinal inspection will be made by the

owner, resident inspector, project engineer, contractor,

representatives of other agencies involved, and Agency representative

(preferably the State staff engineer or designee). The inspection

results will be recorded by the project engineer and a copy provided to

all interested parties.

(g) Final inspection. A final inspection will be made by the Agency

before final payment is made.

(h) Changes in development plans. (1) Changes in development plans

shall be reviewed and approved by the Agency provided:

(i) Funds are available to cover any additional costs; and

(ii) The change is for an authorized loan or grant purpose; and

(iii) It will not adversely affect the soundness of the facility

operation or the Agency's security; and

(iv) The change is within the scope of the contract,

(2) Changes will be recorded on Form FmHA 1924-7, ``Contract Change

Order,'' or other similar form if approved by the State program

official or designee. Regardless of the form, change orders must be

approved by the State program official or designee.

(3) Changes should be accomplished only after Agency approval and

shall be authorized only by means of contract change order. The change

order will include items such as:

(i) Any changes in labor and material;

(ii) Changes in facility design;

(iii) Any decrease or increase in quantities based on final

measurements that are different from those shown in the bidding

schedule; and

(iv) Any increase or decrease in the time to complete the project.

(4) All changes shall be recorded on chronologically numbered

contract change orders as they occur. Change orders will not be

included in payment estimates until approved by all parties.

Secs. 1780.77-1780.79 [Reserved]

Subpart D--Information Pertaining to Preparation of Notes or Bonds

and Bond Transcript Documents for Public Body Applicants

Sec. 1780.80 General.

This subpart includes information for use by public body applicants

in the preparation and issuance of evidence of debt (bonds, notes, or

debt instruments, herein referred to as bonds) and other necessary loan

documents.

[[Page 48095]]

Sec. 1780.81 Policies related to use of bond counsel.

The applicant is responsible for preparation of bonds and bond

transcript documents. The applicant will obtain the services and

opinion of recognized bond counsel experienced in municipal financing

with respect to the validity of a bond issue, except for issues of

$100,000 or less. With prior approval of the approval official, the

applicant may elect not to use bond counsel. Such issues will be closed

in accordance with the following:

(a) The applicant must recognize and accept the fact that

application processing may require additional legal and administrative

time;

(b) It must be established that not using bond counsel will produce

significant savings in total legal costs;

(c) The local attorney must be able and experienced in handling

this type of legal work;

(d) The applicant must understand that it will likely have to

obtain an opinion from bond counsel at its expense should the Agency

require refinancing of the debt;

(e) Bonds will be prepared in accordance with this regulation and

conform as closely as possible to the preferred methods of preparation

stated in section 1780.94; and

(f) Closing instructions must be issued by OGC.

Sec. 1780.82 [Reserved]

Sec. 1780.83 Bond transcript documents.

Any questions relating to Agency requirements should be discussed

with Agency representatives. Bond counsel or local counsel, as

appropriate, must furnish at least two complete sets of the following

to the applicant, who will furnish one complete set to the Agency:

(a) Copies of all organizational documents;

(b) Copies of general incumbency certificate;

(c) Certified copies of minutes or excerpts from all meetings of

the governing body at which action was taken in connection with the

authorizing and issuing of the bonds;

(d) Certified copies of documents evidencing that the applicant has

complied fully with all statutory requirements incident to calling and

holding a favorable bond election, if one is necessary;

(e) Certified copies of the resolutions, ordinances, or other

documents such as the bond authorizing resolutions or ordinances and

any resolution establishing rates and regulating use of facility, if

such documents are not included in the minutes furnished;

(f) Copies of the official Notice of Sale and the affidavit of

publication of the Notice of Sale when State statute requires a public

sale;

(g) Specimen bond, with any attached coupons;

(h) Attorney's no-litigation certificate;

(i) Certified copies of resolutions or other documents pertaining

to the bond award;

(j) Any additional or supporting documents required by bond

counsel;

(k) For loans involving multiple advances of Agency loan funds, a

preliminary approving opinion of bond counsel (or local counsel if no

bond counsel is involved) if a final unqualified opinion cannot be

obtained until all funds are advanced. The preliminary opinion for the

entire issue shall be delivered at or before the time of the first

advance of funds. It will state that the applicant has the legal

authority to issue the bonds, construct, operate and maintain the

facility, and repay the loan, subject only to changes occurring during

the advance of funds, such as litigation resulting from the failure to

advance loan funds, and receipt of closing certificates.

(l) Final unqualified approving opinion of bond counsel, (and

preliminary approving opinion, if required) or local counsel if no bond

counsel is involved, including an opinion as to whether interest on

bonds will be exempt from Federal and State income taxes. With approval

of the State program official, a final opinion may be qualified to the

extent that litigation is pending relating to Indian claims that may

affect title to land or validity of the obligation. It is permissible

for such opinion to contain language referring to the last sentence of

section 306 (a)(1) or to Section 309A (h) of the Consolidated Farm and

Rural Development Act (7 U.S.C. 1926 (a)(1) or 1929a (h)).

Secs. 1780.84 and 1780.86 [Reserved]

Sec. 1780.87 Permanent instruments for Agency loans.

Agency loans will be evidenced by an instrument determined legally

sufficient and in accordance with the following order of preference:

(a) First preference--Form FmHA 440-22, ``Promissory Note''. Refer

to paragraph (b) of this section for methods of various frequency

payment calculations; and

(b) Second preference--single instruments with amortized

installments. A single instrument providing for amortized installments

which follows Form FmHA 440-22 as closely as possible. The full amount

of the loan must show on the face of the instrument, and there must be

provisions for entering the date and amount of each advance on the

reverse or an attachment. When principal payments are deferred, the

instrument will show that ``interest only'' is due on interest-only

installment dates, rather than specific dollar amounts. The payment

period including the ``interest only'' installment cannot exceed 40

years, the useful life of the facility, or State statute limitations,

whichever occurs first. The amortized installment, computed as follows,

will be shown as due on installment dates thereafter.

(1) Monthly payments. Multiply by twelve the number of years

between the due date of the last interest-only installment and the

final installment to determine the number of monthly payments. When

there are no interest-only installments, multiply by twelve the number

of years over which the loan is amortized. Then multiply the loan

amount by the amortization factor and round to the next higher dollar.

(2) Semiannual payments.--Multiply by two the number of years

between the due date of the last interest-only installment and the due

date of the final installment to determine the correct number of

semiannual periods. When there are no interest-only installments,

multiply by two the number of years over which the loan is amortized.

Then multiply the loan amount by the applicable amortization factor.

(3) Annual payments. Subtract the due date of the last interest-

only installment from the due date of the final installment to

determine the number of annual payments. When there are no interest-

only installments, the number of annual payments will equal the number

of years over which the loan is amortized. Then multiply the loan

amount by the applicable amortization factor and round to the next

higher dollar.

(c) Third preference--single instruments with installments of

principal plus interest. If a single instrument with amortized

installments is not legally permissible, use a single instrument

providing for installments of principal plus interest accrued on the

principal balance. For bonds with semiannual interest and annual

principal, the interest is calculated by multiplying the principal

balance times the interest rate and dividing this figure by two.

Principal installments are to be scheduled so that total combined

interest and principal payments closely approximate amortized payments.

(1) The repayment terms concerning interest only installments

described in paragraph (b) of this section apply.

[[Page 48096]]

(2) The instrument shall contain in substance provisions

indicating:

(i) Principal maturities and due dates;

(ii) Regular payments shall be applied first to interest due

through the next principal and interest installment due date and then

to principal due in chronological order stipulated in the bond; and

(iii) Payments on delinquent accounts will be applied in the

following sequence:

(A) billed delinquent interest;

(B) past due interest installments;

(C) past due principal installments;

(D) interest installment due; and

(E) principal installment due.

(d) Fourth preference--serial bonds with installments of principal

plus interest. If instruments described under the first, second, and

third preferences are not legally permissible, use serial bonds with a

bond or bonds delivered in the amount of each advance. Bonds will be

numbered consecutively and delivered in chronological order. Such bonds

will conform to the minimum requirements of Sec. 1780.94 of this part.

Provisions for application of payments will be the same as those set

forth in paragraphs (c)(2)(ii) of this section.

(e) Coupon bonds. Coupon bonds will not be used unless required by

State statute. Such bonds will conform to the minimum requirements of

Sec. 1780.94 of this part.

Sec. 1780.88 [Reserved]

Sec. 1780.89 Multiple advances of Agency funds using permanent

instruments.

Where interim financing from commercial sources is not used, Agency

loan proceeds will be disbursed on an ``as needed by borrower'' basis

in amounts not to exceed the amount needed during 30-day periods.

Sec. 1780.90 Multiple advances of Agency funds using temporary debt

instruments.

When none of the instruments described in Sec. 1780.87 of this part

are legally permissible or practical, a bond anticipation note or

similar temporary debt instrument may be used. The debt instrument will

provide for multiple advances of Agency funds and will be for the full

amount of the Agency loan. The instrument will be prepared by bond

counsel, or local counsel if bond counsel is not involved, and approved

by the State program official and OGC. At the same time the Agency

delivers the last advance, the borrower will deliver the permanent bond

instrument and the canceled temporary instrument will be returned to

the borrower. The approved debt instrument will show at least the

following:

(a) The date from which each advance will bear interest;

(b) The interest rate as determined by Sec. 1780.13 of this part;

(c) A payment schedule providing for interest on outstanding

principal at least annually; and

(d) A maturity date which shall be no earlier than the anticipated

issuance date of the permanent instruments and no longer than the 40-

year statutory limit.

Secs. 1780.91-1780.93 [Reserved]

Sec. 1780.94 Minimum bond specifications.

The provisions of this paragraph are minimum specifications only

and must be followed to the extent legally permissible.

(a) Type and denominations. Bond resolutions or ordinances will

provide that the instruments be either a bond representing the total

amount of the indebtedness or serial bonds in denominations customarily

accepted in municipal financing (ordinarily in multiples of not less

than $1,000). Single bonds may provide for repayment of principal plus

interest or amortized installments. Amortized installments are

preferred by the Agency.

(b) Bond registration. Bonds will contain provisions permitting

registration for both principal and interest. Bonds purchased by the

Agency will be registered in the name of ``United States of America''

and will remain so registered at all times while the bonds are held or

insured by the Government. The Agency address for registration purposes

will be that of the Finance Office.

(c) Size and quality. Size of bonds and coupons should conform to

standard practice. Paper must be of sufficient quality to prevent

deterioration through ordinary handling over the life of the loan.

(d) Date of bond. Bonds will normally be dated as of the day of

delivery. However, the borrower may use another date if approved by the

Agency. Loan closing is the date of delivery of the bonds or the date

of delivery of the first bond when utilizing serial bonds, regardless

of the date of delivery of the funds. The date of delivery will be

stated in the bond if different from the date of the bond. In all

cases, interest will accrue from the date of delivery of the funds.

(e) Payment date. Loan payments will be scheduled to coincide with

income availability and be in accordance with State law.

(1) If income is available monthly, monthly payments are

recommended unless precluded by State law. If income is available

quarterly or otherwise more frequently than annually, payments must be

scheduled on such basis. However, if State law only permits principal

plus interest (P&I) type bonds, annual or semiannual payments will be

used.

(2) The payment schedule will be enumerated in the evidence of

debt, or if that is not feasible, in a supplemental agreement.

(3) If feasible, the first payment will be scheduled one full

month, or other period, as appropriate, from the date of loan closing

or any deferment period. Due dates falling on the 29th, 30th, and 31st

day of the month will be avoided. When principal payments are deferred,

interest-only payments will be scheduled at least annually.

(f) Extra payments. Extra payments are derived from the sale of

basic chattel or real estate security, refund of unused loan funds,

cash proceeds of property insurance and similar actions which reduce

the value of basic security. At the option of the borrower, regular

facility revenue may also be used as extra payments when regular

payments are current. Unless otherwise established in the note or bond,

extra payments will be applied as follows:

(1) For loans with amortized debt instruments, extra payments will

be applied first to interest accrued to the date of receipt of the

payment and second to principal.

(2) For loans with debt instruments with P&I installments, the

extra payment will be applied to the final unpaid principal

installment.

(3) For borrowers with more than one loan, the extra payment will

be applied to the account secured by the lowest priority of lien on the

property from which the extra payments was obtained. Any balance will

be applied to other Agency loans secured by the property from which the

extra payment was obtained.

(4) For assessment bonds, see paragraph (m) of this section.

(g) The place of payments on bonds purchased by the Agency will be

determined by the Agency.

(h) Redemptions. Bonds will normally contain customary redemption

provisions. However, no premium will be charged for early redemption on

any bonds held by the Government.

(i) Additional revenue bonds. Parity bonds may be issued to

complete the project. Otherwise, parity bonds may not be issued unless

acceptable documentation is provided establishing that net revenues for

the fiscal year following the year in which such bonds are to be issued

will be at least 120

[[Page 48097]]

percent of the average annual debt serviced requirements on all bonds

outstanding, including the newly-issued bonds. For purposes of this

section, net revenues are, unless otherwise defined by State statute,

gross revenues less essential operation and maintenance expenses. This

limitation may be waived or modified by the written consent of

bondholders representing 75 percent of the then-outstanding principal

indebtedness. Junior and subordinate bonds may be issued in accordance

with the loan resolution.

(j) Precautions. The following types of provisions in debt

instruments should be avoided:

(1) Provisions for the holder to manually post each payment to the

instrument.

(2) Provisions for returning the permanent or temporary debt

instrument to the borrower in order that it, rather than the Agency,

may post the date and amount of each advance or repayment on the

instrument.

(3) Provisions that amend covenants contained in Forms FmHA 1942-47

or FmHA 1942-9.

(4) Defeasance provisions in loan or bond resolutions. When a bond

issue is defeased, a new issue is sold which supersedes the contractual

provisions of the prior issue, including the refinancing requirement

and any lien on revenues. Since defeasance in effect precludes the

Agency from requiring refinancing before the final maturity date, it

represents a violation of the statutory refinancing requirement;

therefore, it is disallowed. No loan documents shall include a

provision of defeasance.

(k) Assessment bonds. When security includes special assessment to

be collected over the life of the loan, the instrument should address

the method of applying any payments made before they are due. It may be

desirable for such payments to be distributed over remaining payments

due, rather than to be applied in accordance with normal procedures

governing extra payments, so that the account does not become

delinquent.

(l) Multiple debt instruments. The following will be adhered to

when preparing debt instruments:

(1) When more than one loan type is used in financing a project,

each type of loan will be evidenced by a separate debt instrument or

series of debt instruments;

(2) Loans obligated in different fiscal years and those obligated

with different terms in the same fiscal year will be evidenced by

separate debt instruments;

(3) Loans obligated for the same loan type in the same fiscal year

with the same term may be combined in the same debt instrument;

(4) Loans obligated in the same fiscal year with different interest

rates that will be closed at the same interest rate may be combined in

the same debt instrument.

Sec. 1780.95 Public bidding on bonds.

Bonds offered for public sale shall be offered in accordance with

State law and in such a manner to encourage public bidding. The Agency

will not submit a bid at the advertised sale unless required by State

law, nor will reference to Agency's rates and terms be included. If no

acceptable bid is received, the Agency will negotiate the purchase of

the bonds.

Secs. 1780.96-1780.100 [Reserved]

Dated: September 4, 1996.

Inga Smulkstys,

Acting Under Secretary for Rural Development.

[FR Doc. 96-23082 Filed 9-11-96; 8:45 am]

BILLING CODE 3410-15-P