[Federal Register Volume 76, Number 49 (Monday, March 14, 2011)]
[Rules and Regulations]
[Pages 13770-13796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5615]
[[Page 13769]]
Vol. 76
Monday,
No. 49
March 14, 2011
Part III
Department of Agriculture
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Rural Utilities Service
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7 CFR Part 1738
Rural Broadband Access Loans and Loan Guarantees; Rural Broadband
Access Loans and Loan Guarantees Program; Interim Rule and Notice
Federal Register / Vol. 76 , No. 49 / Monday, March 14, 2011 / Rules
and Regulations
[[Page 13770]]
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DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Part 1738
RIN 0572-AC06
Rural Broadband Access Loans and Loan Guarantees
AGENCY: Rural Utilities Service, USDA.
ACTION: Interim rule.
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SUMMARY: The Rural Utilities Service, an agency delivering the United
States Department of Agriculture's (USDA's) Rural Development Utilities
Programs, hereinafter referred to as the Agency, is amending its
regulation for the Rural Broadband Access Loan and Loan Guarantee
Program (Broadband Loan Program). Since the Broadband Loan Program's
inception in 2002, the Agency has faced and continues to face
significant challenges in delivering the program due to the following
factors: The competitive nature of the broadband market in certain
geographic areas; the significant number of companies proposing to
offer broadband service that are start-up organizations with limited
resources; continually evolving technology; and economic factors such
as the higher cost of serving rural communities. In addition, the
Office of Inspector General, in a 2005 report, made recommendations to
improve program efficiency. For these reasons and in an effort to
improve program operation, the Agency published proposed changes to the
program's regulation in the Federal Register on May 11, 2007. While the
Agency was reviewing public comments and revising the rule, the Food,
Conservation, and Energy Act of 2008 (2008 Farm Bill) was enacted and
changed the statute under which the program operates. In accordance
with the statute and taking into account the public comments received
regarding the proposed rule to the extent possible, this interim rule
presents the regulations that will govern the program until a final
rule is published. The Agency is seeking comments regarding this
interim rule to guide its efforts in drafting the final rule for the
Broadband Loan Program.
DATES: This rule is effective on March 14, 2011. Comments must be
submitted on or before May 13, 2011.
ADDRESSES: Submit comments by either of the following methods:
Federal eRulemaking Portal: Go to http://www.regulations.gov and in the ``Search Documents'' box, enter RUS-06-
Agency-0052, and select ``Submit.'' To submit a comment, choose ``Send
a comment or submission,'' under the Docket Title. In order to submit
your comment, the information requested on the ``Public Comment and
Submission Form'' must be completed. Information on using
Regulations.gov, including instructions for accessing documents,
submitting comments, and viewing the docket after the close of the
comment period, is available through the site's ``How to Use this
Site'' link.
Postal Mail/Commercial Delivery: Please send your comment
addressed to Michele Brooks, Director, Program Development and
Regulatory Analysis, USDA Rural Development, 1400 Independence Avenue,
STOP 1522, Room 5159, Washington, DC 20250-1522. Please state that your
comment refers to Docket No. RUS-06-Agency-0052.
Additional information about the Agency and its programs is
available on the Internet at http://www.rurdev.usda.gov/index.html.
FOR FURTHER INFORMATION CONTACT: David Villano, Assistant
Administrator, Telecommunications Program, Rural Development, U.S.
Department of Agriculture, 1400 Independence Avenue, SW., STOP 1590,
Room 5151-S, Washington, DC 20250-1590. Telephone number: (202) 720-
9554, Facsimile: (202) 720-0810.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This rule has been determined to be economically significant and
was reviewed by the Office of Management and Budget under Executive
Order 12866. In accordance with Executive Order 12866, an Economic
Impact Analysis was completed, outlining the costs and benefits of
implementing this program in rural America. The complete analysis is
available from the Agency upon request. The following is the discussion
of the Economic Benefits section of the Analysis
Economic Benefits of Broadband Deployment in Rural Areas
Bringing broadband services to rural areas does present some
challenges. Because rural systems must contend with lower household
density than urban systems, the cost to deploy fiber-to-the-home (FTTH)
and digital subscriber line (DSL) systems in urban communities is
considerably lower on a per household basis, making urban systems more
economical to construct. Other associated rural issues, such as
environmental challenges or providing wireless service through
mountainous areas, also can add to the cost of deployment. A recent
analysis by USDA's Economic Research Service concluded that broadband
investment in rural areas yields significant economic and socio-
economic gains:
Analysis suggests that rural economies benefit generally from
broadband availability. In comparing counties that had broadband access
relatively early (by 2000) with similarly situated counties that had
little or no broadband access as of 2000, employment growth was higher
and nonfarm private earnings greater in counties with a longer history
of broadband availability. By 2007, most households (82 percent) with
in-home Internet access had a broadband connection. A marked difference
exists, however, between urban and rural broadband use--only 70 percent
of rural households with in-home Internet access had a broadband
connection in 2007, compared with 84 percent of urban households. The
rural-urban difference in in-home broadband adoption among households
with similar income levels reflects the more limited availability of
broadband in rural settings.
Areas with low population size, locations that have experienced
persistent population loss and an aging population, or places where
population is widely dispersed over demanding terrain generally have
difficulty attracting broadband service providers. These
characteristics can make the fixed cost of providing broadband access
too high, or limit potential demand, thus depressing the profitability
of providing service. Clusters of lower service exist in sparsely
populated areas, such as the Dakotas, eastern Montana, northern
Minnesota, and eastern Oregon. Other low-service areas, such as the
Missouri-Iowa border and Appalachia, have aging and declining numbers
of residents. Nonetheless, rural areas in some States (such as
Nebraska, Kansas, and Vermont) have higher-than expected broadband
service, given their population characteristics, suggesting that
policy, economic, and social factors can overcome common barriers to
broadband expansion.
In general, rural America has shared in the growth of the Internet
economy. Online course offerings for students in primary, secondary,
post-secondary, and continuing education programs have improved
educational opportunities, especially in small, isolated rural areas.
And interaction among students, parents, teachers, and school
administrators has been enhanced via online forums, which is especially
significant given the importance of
[[Page 13771]]
ongoing parental involvement in children's education.
Telemedicine and telehealth have been hailed as vital to health
care provision in rural communities, whether simply improving the
perception of locally provided health care quality or expanding the
menu of medical services. More accessible health information, products,
and services confer real economic benefits on rural communities:
reducing transportation time and expenses, treating emergencies more
effectively, reducing time missed at work, increasing local lab and
pharmacy work, and savings to health facilities from outsourcing
specialized medical procedures. One study of 24 rural hospitals placed
the annual cost of not having telemedicine at $370,000 per hospital.
(See http://www.ers.usda.gov/Publications/ERR78/ERR78.pdf, at pages iv
and 24.)
Most employment growth in the U.S. over the last several decades
has been in the service sector, a sector especially conducive for
broadband applications. Broadband allows rural areas to compete for
low- and high-end service jobs, from call centers to software
development, but does not guarantee that rural communities will get
them. Rural businesses have been adopting more e-commerce and Internet
practices, improving efficiency and expanding market reach. Some rural
retailers use the Internet to satisfy supplier requirements. The farm
sector, a pioneer in rural Internet use, is increasingly comprised of
farm businesses that purchase inputs and make sales online. Farm
household characteristics such as age, education, presence of children,
and household income are significant factors in adopting broadband
Internet use, whereas distance from urban centers was not a factor.
Larger farm businesses are more apt to use broadband in managing their
operation; the more multifaceted the farm business, the more the farm
used the Internet.\1\
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\1\ Broadband Internet's Value for Rural America, Peter
Stenberg, Mitch Morehart, Stephen Vogel, John Cromartie, Vince
Breneman, and Dennis Brown.
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An analysis based on approximately $1.8 billion in approved loans
in the Farm Bill Broadband Program (based on multiple technology
platforms) yielded the following results (numbers have been rounded):
Number of communities funded: 2,800.
Average cost per community: $640,000.
Total subscribers: 1.3 million.
Most recently, the agency has concluded funding the American Recovery
and Reinvestment Act (Recovery Act) Broadband Initiatives Program (BIP)
that financed the same types of facilities and entities that are funded
under this Farm Bill program.
As noted in the ERS study, rural areas with dispersed populations
or demanding terrain generally have difficulty attracting broadband
service providers because the fixed cost of delivering broadband
service can be too high. Yet broadband is a key to economic growth. For
rural businesses, broadband gives access to national and international
markets and enables new, small, and home-based businesses to thrive.
Broadband access affords rural residents the connectivity they need to
obtain healthcare, education, financial, and many other essential goods
and services.
The Recovery Act authorized RUS to issue loans and grants to
projects that extend broadband service to unserved and underserved
rural areas. The funding provided by the Recovery Act is increasing the
availability of broadband and stimulating both short- and long-term
economic progress. RUS BIP completed two funding rounds, making a
significant investment in projects that will enhance broadband
infrastructure in scores of rural communities. This represents a
critical investment, designed to rebuild and revitalize rural
communities. Without this funding, many communities could not cover the
costs of providing broadband service to homes, schools, libraries,
healthcare providers, colleges, and other anchor institutions.
RUS awarded $3.4 billion to 297 recipients in 45 States and 1 U.S.
territory for infrastructure projects. Eighty-nine percent of the
awards and 92 percent of the total dollars awarded are for 285 last-
mile projects ($3.25 billion), which will provide broadband service to
households and other end users. Four percent of the awards and five
percent of the total dollars awarded are for 12 middle-mile projects
($173 million) that will provide necessary backbone services such as
interoffice transport, backhaul, Internet connectivity, or special
access to rural areas. The projects funded will bring broadband service
to 2.8 million households, reaching nearly 7 million people, 364,000
businesses, and 32,000 anchor institutions across more than 300,000
square miles. These projects also overlap with 31 tribal lands and 124
persistent poverty counties, traditionally the most costly to serve
areas.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance (CFDA) number assigned
to this program is 10.886, Rural Broadband Access Loans and Loan
Guarantees. The Catalog is available on the Internet and the General
Services Administration's (GSA's) free CFDA Web site at http://www.cfda.gov. The CFDA Web site also contains a PDF file version of the
Catalog that, when printed, has the same layout as the printed document
that the Government Printing Office (GPO) provides. GPO prints and
sells the CFDA to interested buyers. For information about purchasing
the Catalog of Federal Domestic Assistance from GPO, call the
Superintendent of Documents at 202-512-1800 or toll free at 866-512-
1800, or access GPO's online bookstore at http://bookstore.gpo.gov.
Executive Order 12372
This rule is excluded from the scope of Executive Order 12372,
Intergovernmental Consultation, which may require a consultation with
State and local officials. See the final rule related notice entitled,
``Department Programs and Activities Excluded From Executive Order
12372'' (50 FR 47034).
Information Collection and Recordkeeping Requirements
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
chapter 35, as amended), the Rural Utilities Service, an agency
delivering the U.S. Department of Agriculture (USDA) Rural Development
Utilities Programs, invites comments on this information collection for
which approval from the Office of Management and Budget (OMB) will be
requested.
Comments on this notice must be received by May 13, 2011.
Comments are invited on (a) whether the collection of information
is necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility; (b) the
accuracy of the agency's estimate of burden including the validity of
the methodology and assumption used; (c) ways to enhance the quality,
utility and clarity of the information to be collected; and (d) ways to
minimize the burden of the collection of information on those who are
to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques on
other forms of information technology.
Title: 7 CFR 1738, Rural Broadband Loan and Loan Guarantee Program.
OMB Control Number: 0572-0130.
[[Page 13772]]
Type of Request: Revision of a currently approved information
collection package.
Abstract: USDA Rural Development, through the Rural Utilities
Service, is authorized by Title VI, Rural Broadband Access, of the
Rural Electrification Act of 1936, as amended (RE Act), to provide
loans and loan guarantees to fund the cost of construction,
improvement, or acquisition of facilities and equipment for the
provision of broadband service in eligible rural communities in States
and Territories of the United States. In conjunction with this Interim
Rulemaking, RUS is submitting a revised information collection package
to OMB as required by the Paperwork Reduction Act of 1995, which will
include revisions authorized by the 2008 Farm Bill. The information
collection package for 7 CFR part 1738 includes estimated burden
related to the application process for the Rural Broadband Loan and
Loan Guarantee Program. Since the inception of the program in 2003, the
agency has tried to accurately determine the burden to respondents
applying for a Rural Broadband Loan including soliciting comments from
the public. The items covered by this collection include forms and
related documentation to support a loan application, including Form 532
and its supporting schedules.
The 2008 Farm Bill provided that the agency take steps to reduce,
to the maximum extent practicable, the cost and paperwork associated
with applying for a Broadband loan. The information required to process
an application is the minimum amount of information necessary to
fulfill the statutory requirements for ensuring that loans made under
this Act are technically and financially feasible and are capable of
being repaid in full, as required. Notwithstanding that requirement,
the agency has taken significant actions to reduce, to the extent
practicable, the cost and paperwork associated with applying for a loan
for all applicants, including first time applicants and start-up
applicants. Specifically, the agency has:
(1) Automated its mapping requirements for identifying proposed
service territories;
(2) Created an online ``public notice'' process;
(3) Reduced the Market Survey requirements for certain proposals;
(4) Reduced the Equity Contribution requirements; and
(5) Identified most areas that are not eligible for financing.
Each of these is discussed in more detail, as follows:
Automated Mapping: Previously, applicants were required to submit
``hard copies'' of their proposed funded service areas. This was
laborious, costly in some instances, and prone to inaccuracies. Under
the new rule, applicants will be able to submit their proposed funded
service territory online though an automated mapping tool created by
the agency, saving time and money. In addition, any changes to the
proposed service areas can be readily made without the creation of new
``paper'' maps.
Online Public Notice: Previously, applicants were required to
publish in the local newspaper in each jurisdiction their intent to
provide service to that area. This requirement proved costly and
burdensome, particularly for new or start-up entities. Under the new
rule, applicants will be able to post their notice(s) of intent to
provide service online, saving time and significant expense.
Market Survey Requirement: In its proposed rule published in 2007,
the agency proposed not to require market surveys from applicants that
were proposing to obtain a market penetration of 20 percent or less.
The 2008 Farm Bill adopted this concept and provides authority to
require a market survey if the applicant proposes a market penetration
rate of over 20 percent. This requirement will greatly reduce the
burden and expenditure, particularly for small start-ups and new market
entrants.
Equity Contribution Requirement: Similar to the Market Survey
requirement noted above, the agency's 2007 proposed rule sought to
reduce the level of up front equity contributions from the current 20
percent requirement to 15 percent. Again, the 2008 Farm Bill adopted
this concept and reduced the minimum equity contribution to 10 percent.
All applicants must demonstrate this minimum requirement at the time
they submit their application.
Addition Cash Requirement: In addition to the 10 percent minimum
equity requirement, the Agency is also implementing a procedure to
analyze the submitted business plan to determine if an equity position
greater than 10 percent will be required to sustain the operation. If
the analysis demonstrates that additional cash will be required to
sustain the operation, the applicant must agree to provide the
additional capital and demonstrate their ability to do so prior to loan
approval.
Indentifying Ineligible Areas: The agency has created several
online tools for indentifying areas that are not eligible for new
financing because they have already received agency funds. In addition,
through an online mapping tool, potential applicants can determine if
the area they wish to serve meets the eligibility requirements of a
``rural area'' as defined by the statute. This will save time in
identifying areas that are eligible for financing and prevent wasted
time spent applying for areas that are not eligible.
The agency seeks comments on its estimate of burden related to the
application process for the Rural Broadband Program and welcomes
comments related to further reducing application paperwork and costs.
Specifically comments should address the estimation of hour and cost
burden associated with each component of Form 532. Burden on
respondents is considered the time, effort, and financial resources
expended to generate, maintain, retain, disclose, or provide
information to or for a Federal Agency. The agency is also interested
in determining the information that Broadband applicants would have on
hand in a format that could be readily provided for the loan
application and which items would be prepared by parties outside the
applicant's organization. Comments may be sent to Michele Brooks,
Director, Program Development and Regulatory Analysis, Rural
Development, U.S. Department of Agriculture, 1400 Independence Ave.,
SW., Stop 1522, Room 5159 South Building, Washington, DC 20250-1522 or
via e-mail to: [email protected].
Estimate of Burden: Public reporting for this collection of
information is estimated to average 89 hours per response.
Respondents: Businesses and Not-for-profit institutions.
Estimated Number of Respondents: 75.
Estimated Number of Responses per Respondent: 3.
Estimated Total Annual Burden on Respondents: 10,545 hours.
Copies of this information collection can be obtained from Michele
Brooks, Program Development and Regulatory Analysis, at (202) 690-1078.
All responses to this information collection and recordkeeping
notice will be summarized and included in the request for OMB approval.
All comments will also become a matter of public record.
National Environmental Policy Act Certification
The Administrator has determined that this rule will not
significantly affect the quality of the human environment as defined by
the National
[[Page 13773]]
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). Therefore,
this action does not require an environmental impact statement or
assessment.
Regulatory Flexibility Act Certification
It has been determined that the Regulatory Flexibility Act is not
applicable to this rule because the Agency is not required by 5 U.S.C.
551 et seq. or any other provision of law to publish a notice of
proposed rulemaking with respect to the subject matter of this rule.
Executive Order 12988
This rule has been reviewed under Executive Order 12988, Civil
Justice Reform. The Agency has determined that this rule meets the
applicable standards provided in section 3 of the Executive Order. In
addition, all state and local laws and regulations that are in conflict
with this rule will be preempted, no retroactive effort will be given
to this rule, and, in accordance with Sec. 212(e) of the Department of
Agriculture Reorganization Act of 1994 (7 U.S.C. 6912(e)),
administrative appeal procedures, if any, must be exhausted before an
action against the Department or its agencies may be initiated.
Unfunded Mandates
This rule contains no Federal mandates (under the regulatory
provisions of Title II of the Unfunded Mandates Reform Act of 1995) for
State, local, and tribal governments for the private sector. Thus, this
rule is not subject to the requirements of section 202 and 205 of the
Unfunded Mandates Reform Act of 1995.
Executive Order 13132, Federalism
The policies contained in this rule do not have any substantial
direct effect on states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
rule impose substantial direct compliance costs on state and local
governments. Therefore, consultation with the states is not required.
Executive Order 13175, Consultation and Coordination With Indian Tribal
Governments
USDA has undertaken a series of regulation Tribal consultation
sessions to gain input by Tribal officials concerning the impact of
this rule on Tribal governments, communities, and individuals. These
sessions will establish a baseline of consultation for future actions,
should any become necessary, regarding this rule. Reports from these
sessions for consultation will be made part of the USDA annual
reporting on Tribal Consultation and Collaboration. USDA will respond
in a timely and meaningful manner to all Tribal government requests for
consultation concerning this rule and will provide additional venues,
such as webinars and teleconferences, to periodically host
collaborative conversations with Tribal leaders and their
representatives concerning ways to improve this rule in Indian country.
E-Government Act Compliance
The Agency is committed to the E-Government Act, which requires
Government agencies in general to provide the public the option of
submitting information or transacting business electronically to the
maximum extent possible.
Implementation Guidelines
Applications that were submitted after the Farm Bill was enacted
(June 18, 2008) have not been processed pending publication of this
Interim Rule. These applications will be reviewed in accordance with
subpart E of part 1738, and information about any deficiencies and the
time frame allowed for addressing them will be communicated to the
applicants in writing.
Background
A. Introduction
The Agency improves the quality of life in rural America by
providing investment capital for deployment of rural telecommunications
infrastructure. Financial assistance is provided to rural utilities;
municipalities; commercial corporations; limited liability companies;
public utility districts; Indian tribes; and cooperative, nonprofit,
limited-dividend, or mutual associations. In order to achieve the goal
of increasing economic opportunity in rural America, the Agency
finances infrastructure that enables access to a seamless, nationwide
telecommunications network. With access to the same advanced
telecommunications networks as its urban counterparts, especially
broadband networks designed to accommodate distance learning, telework,
and telemedicine, rural America will eventually see improving
educational opportunities, health care, economies, safety and security,
and ultimately higher employment. The Agency shares the assessment of
Congress, State and local officials, industry representatives, and
rural residents that broadband service is a critical component to the
future of rural America. The Agency is committed to ensuring that rural
America will have access to affordable, reliable, broadband services
and to provide a healthy, safe, and prosperous place to live and work.
B. Regulatory History
On May 13, 2002, the Farm Security and Rural Investment Act of
2002, Public Law 107-171 (2002 Farm Bill) was signed into law. The 2002
Farm Bill amended the Rural Electrification Act of 1936 to include
Title VI, the Rural Broadband Access Loan and Loan Guarantee Program
(Broadband Loan Program), to be administered by the Agency. Title VI
authorized the Agency to approve loans and loan guarantees for the
costs of construction, improvement, and acquisition of facilities and
equipment for broadband service in eligible rural communities. Under
the 2002 Farm Bill, the Agency was directed to promulgate regulations
without public comment. Implementing the program required a different
lending approach for the Agency than it employed in its earlier
telephone program because of the unregulated, highly competitive, and
technologically diverse nature of the broadband market. Those
regulations were published on January 30, 2003.
In an attempt to enhance the Broadband Loan Program and to
acknowledge growing criticism of funding competitive areas, the Agency
proposed to amend the program's regulations on May 11, 2007 at 72 FR
26742 to make eligibility of certain service areas more restrictive
than set out in the 2002 Farm Bill. In addition to eligibility changes,
the proposed rule included, among others, changes to persistent
problems the Agency had encountered while implementing the program over
the years, especially regarding equity requirements, the market survey,
and the legal notice requirements. As the Agency began analysis of the
public comments it received on the proposed regulations, the Food,
Conservation, and Energy Act of 2008, more commonly known as the 2008
Farm Bill, was working its way through Congress. The proposed rule and
key aspects of the public comments were shared with Congress during its
deliberations, and the majority of the proposed changes in the proposed
rule were incorporated into the legislation, with and without
modification. For instance, the proposed rule lowered the equity
requirement from 20 percent of the loan value to 10 percent. Congress
enacted that change.
Other changes the Congress incorporated were several new
[[Page 13774]]
restrictions not found in the 2002 Farm Bill. These were in response to
growing public criticism of federally funded competition. First,
funding is restricted in areas that contained 3 or more incumbent
service providers, which is defined as serving not less than 5 percent
of the proposed service area. Second, a requirement was added that at
least 25 percent of the proposed service area not have access to more
than one incumbent service provider. And third, for incumbent service
providers that were merely upgrading the quality of broadband service
in their existing service territory, the prior restrictions on
competition would be waived.
In response to the growing national debate on what was rural, the
2008 Farm Bill relaxed the restriction to permit urbanized areas that
were not adjacent and contiguous to areas with a population of more
than 50,000 inhabitants. And lastly, the 2008 Farm Bill incorporated
the concept of not requiring market studies for applicants that relied
on a penetration rate of less than 20 percent for the loan to be
feasible.
In the public interest of having a Broadband Program in place to
quickly address the needs of the hundreds of applications that were not
funded under the Recovery Act, and in light of the fact that the great
majority of changes herein are mandated by the 2008 Farm Bill, or have
been proposed in the Agency's prior rule, put out for comment, and
subsequently adopted by Congress in the 2008 Farm Bill itself, the
Agency is moving forward with certain changes to the Broadband Loan
Program by publishing an interim rule. The Agency also believes that
this approach is consistent with Congressional intent, given that in
section 6110(b) of the 2008 Farm Bill, Congress authorized the Agency
to publish these regulations in an interim rule. Notwithstanding the
public interest and specific authority previously discussed, the Agency
is seeking comment from the public, which will ultimately be
incorporated into a final rule. Specifically, the Agency seeks comment
on priority of applications, application requirements, the method of
determining which applicants could be eligible for 4 percent interest
rates, the notice requirement, and processing. In addition, the Agency
is seeking comment for future changes to its Broadband Program based on
``lessons learned'' from the recently concluded Broadband Initiatives
Program under the Recovery Act. The Agency believes that public comment
on these issues will help the Agency make future adjustments to the
Broadband Program to make it more responsive to the needs of rural
America. One lesson that the Agency has already learned to date is that
the broadband industry is dynamic and that the Broadband Program will
need to continue to evolve to be responsive to the needs of the
industry.
The Agency urges all interested parties to provide comments via the
Internet or postal mail. Please see instructions on how to do so in the
ADDRESSES section of this document.
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Existing location in 2003 final New location in 2009
regulation interim rule Action taken Content change
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Subpart A--General:
Sec. 1738.1 General Statement 1738.1................ Modified.............. Revised paragraph (a) to
include purpose of loan.
Deleted existing
paragraphs (b) and (c).
Added new paragraph (b)
with reference to Agency's
Web site.
Sec. 1738.2 Definitions...... 1738.2................ Modified.............. Because they are not used
in the interim rule, the
Agency removed the
following definitions:
Broadband pilot.
Eligible rural
community.
Initial loan.
Interim construction.
Loan funds.
Mortgage.
Private loan guarantee.
Release of funds.
RUS.
RUS telecommunications
borrower.
The Agency added the
following definitions to
clarify existing
regulations and support
rule modifications:
Advance.
Agency.
Arm's length
transaction.
Broadband borrower.
Broadband lending speed.
Broadband loan.
Build-out.
Competitive analysis.
Cost share.
Customer premise
equipment (CPE).
Derivative.
Equity.
Financial feasibility.
Guaranteed amount debt
derivative.
Guaranteed amount equity
derivative.
Guaranteed amount
equivalent.
Guaranteed loan amount.
Guaranteed loan note.
Guaranteed loan portion.
Guaranteed loan portion
amount.
Guaranteed loan portion
note.
Incumbent service
provider.
Indefeasible right to
use agreement.
Loan guarantee.
[[Page 13775]]
Loan guarantee
documents.
Loan funds.
Market survey.
Pre-loan expense.
Funded service area.
Reject.
Reseller.
Rural area.
Security documents.
Service level objectives
(SLOs).
Service provider.
Service territory.
Start-up.
System of accounts.
Telecommunications loan.
Underserved household or
Underserved area.
Unguaranteed amount
equivalent.
Unguaranteed loan
amount.
Unguaranteed loan
portion amount.
Subpart B--Loan Purposes and Basic
Policies:
Sec. 1738.10 General......... 1738.1(a)............. Modified/relocated.... Language regarding purpose,
paragraph (a), was merged
with language in
1738.1(a).
1738.51(f)............ Modified/relocated.... Refinancing language in (b)
was modified and moved.
1738.153.............. Relocated............. Language in (c) has been
moved to Sec.
1738.153(d).
1738.206.............. Relocated............. Language in (d) has been
moved to Sec. 1738.206--
Evaluation for
feasibility.
Sec. 1738.11 Availability of 1738.204.............. Modified/relocated.... Public notice language
broadband service. moved to Sec. 1738.204.
1738.203.............. Modified/relocated.... Paragraphs (a) and (b)
incorporated into
prioritization scheme
presented in Sec.
1738.203.
Sec. 1738.12 Location of 1738.51............... Modified/relocated.... Location of facilities now
facilities. addressed in Sec.
1738.51(a).
Sec. 1738.13 Allocation of 1738.203.............. Modified/relocated.... Moved to Sec.
funds. 1738.203(c)--Priority for
processing loan
applications and
streamlined to reference
the statute.
Sec. 1738.14 One-time priority Deleted............... Deleted............... No longer relevant.
for unfunded applications from the
broadband pilot program.
Sec. 1738.15 Priorities...... 1738.203.............. Modified/relocated.... Incorporated into
prioritization scheme
presented in Sec.
1738.203.
Sec. 1738.16 Eligible 1738.101.............. Modified/relocated.... Moved language regarding
entities. types of eligible entities
to 1738.101(a).
Sec. 1738.17 Civil rights.... 1738.156.............. Relocated............. Moved language to new
section that lists all
applicable Federal
requirements.
Sec. 1738.18 Minimum and 1738.151.............. Relocated............. Moved to 1738.151(b) and
maximum loan amounts. (c).
Sec. 1738.19 Facilities 1738.51............... Modified/relocated.... 1738.51 Eligible loan
financed. purposes replaces
paragraphs (a) through (d)
in previous rule.
1738.51(b)--new language
regarding start-up and
overhead costs is a
further clarification that
these costs are eligible
for financing.
1738.51(c)--new language
(replacing old 1738.19(b))
limiting the cost of the
capital lease for the
first 5 years of the loan
amortization period.
1738.22(d)--new language
clarifies Agency practices
regarding 1738.19(c) in
the previous rule.
1738.51(e)--new language
regarding pre-loan
expenses.
[[Page 13776]]
1738.52............... Modified/relocated.... 1738.52 Ineligible loan
purposes replaces
paragraphs (e)--(f) in
previous rule. This
includes modified language
regarding financing of CPE
equipment; applicants
often sell the CPE rather
than lease it to the end-
user. The original intent
was that this equipment
would be used as
collateral; however,
because CPE is often
physically out of the
control of the applicant
and because the value of
end-user equipment
depreciates quickly, we
have determined that other
arrangements offer the
Agency a similar level of
security, while offering
the applicant more
flexibility under our
rules. Paragraph (g) from
previous rule deleted as
it referenced actions
taken prior to October
2004. The issues addressed
in paragraph (h) from the
previous rule is addressed
in 1783.102 (Eligible
Service Area).
Paragraph (i) from the
previous rule deleted, as
the loan review process is
expected to address this
type of concern.
Sec. 1738.20 Credit support 1738.207 & 208........ Modified/relocated.... Now called Equity
requirement. requirement and Additional
cash requirement.
Applicants must have
equity equal to 10% of the
loan amount.
Added clarification on the
use of letters of credit
and bonds to meet equity
requirements.
Modified cash requirement
language so that cash
requirements are
considered at time of
feasibility determination
rather than for
eligibility.
Sec. 1738.21 Interim 1738.252.............. Modified/relocated.... Revised for clarification.
financing. No substantive change.
Sec. 1738.22 Loan security... 1738.154.............. Modified/relocated.... Requirement unchanged, but
reworded to provide
further clarity.
1738.208(b)........... Relocated............. Language regarding TIER
requirement moved.
Subpart C--Types of Loans:
Sec. 1738.30 Rural broadband 1738.151 & 152........ Modified/relocated.... Language regarding cost-of-
access loans and loan money loans in paragraph
guarantees. (a) of previous rule moved
and revised for
clarification. No
substantive changes were
made.
Language regarding 4% loans
in paragraph (b) of
previous rule revised.
When they are available,
the Agency will use 4%
loans to assist applicants
in meeting financial
feasibility requirements.
Unless announced via a
notice in the Federal
Register, no other
criteria apply with regard
to eligibility for receipt
of a 4% loan.
1738.301-307.......... Relocated............. Language regarding loan
guarantees in paragraph
(c) of the previous rule
now appears in Subpart G--
Loan Guarantee. No
substantive changes have
been made.
Sec. 1738.31 Full faith and 1738.308.............. Relocated............. Language has been
credit. relocated.
Subpart D--Terms of Loans:
Sec. 1738.40 General......... 1738.153.............. Modified/relocated.... Revised for clarification.
No substantive change.
1738.155.............. Modified/relocated.... Language regarding
establishing terms and
conditions on a case-by-
case basis moved to Sec.
1738.155--Special terms
and conditions. Language
modified to provide
additional clarity.
Sec. 1738.41 Payments on 1738.153.............. Modified/relocated.... Revised for clarification.
loans. No substantive change.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
New sections Subject matter Content
----------------------------------------------------------------------------------------------------------------
Subpart C--Eligibility
Requirements:
1738.102..................... Eligible service area......... The rules specified in this section codify
requirements included in the 2008 Farm Bill.
1738.103..................... Eligible service area The rules specified in this section codify
exceptions for broadband requirements included in the 2008 Farm Bill.
facility upgrades.
1738.104..................... Preliminary assessment of The rules specified in this section codify
service area eligibility. requirements included in the 2008 Farm Bill.
Subpart D--Direct Loan Terms:
1738.156..................... Other Federal requirements.... Codifies standard requirements existing in
all broadband loan documents.
[[Page 13777]]
Subpart E--Application Review and
Underwriting:
1738.201..................... Application submission........ New section that clarifies that applicants
are encouraged to submit applications
through the General Field Representative in
their state for review prior to final
submission. Applications will still be
accepted at the National Office.
1738.202..................... Elements of a complete This new section clearly specifies what must
application. be included in an application before it will
be reviewed by the Agency. The Agency
believes this demonstrates its commitment to
a standardized and more transparent process.
1738.205..................... Notification of completeness.. This new section codifies currently existing
internal processes and is designed to help
applicants understand the post-application
process. The Agency believes this
demonstrates its commitment to a
standardized and more transparent process.
1738.206..................... Evaluation for feasibility.... This new section codifies currently existing
internal processes and is designed to help
applicants understand the post-application
process. The Agency believes this
demonstrates its commitment to a
standardized and more transparent process.
1738.209..................... Market survey................. The rules specified in this section codify
requirements included in the 2008 Farm Bill.
1738.210..................... Competitive analysis.......... The rules specified in this section codify
existing requirements published in RUS
Bulletin 1738-1. Applicants are aware of the
requirements and currently comply with them.
1738.211..................... Financial information......... The rules specified in this section codify
existing requirements published in RUS
Bulletin 1738-1. Applicants are aware of the
requirements and currently comply with them.
1738.212..................... Network design................ The rules specified in this section codify
existing requirements published in RUS
Bulletin 1738-1. Applicants are aware of the
requirements and currently comply with them.
New language reserving the Administrator's
right to modify the requirements on a case-
by-case basis.
1738.213..................... Loan determination............ This new section codifies currently existing
internal processes and is designed to help
applicants understand the post-application
process. The Agency believes this
demonstrates its commitment to a
standardized and more transparent process.
Subpart F--Closing, Servicing,
and Reporting:
1738.251..................... Loan offer and loan closing... Codifies standard requirements currently
existing in broadband loan closing
documents.
1738.252..................... Construction.................. Codifies standard requirements currently
existing in broadband loan closing
documents.
1738.253..................... Servicing..................... Codifies standard requirements currently
existing in broadband loan closing
documents.
1738.254..................... Accounting, reporting, and Codifies standard requirements currently
monitoring requirements. existing in broadband loan closing
documents.
----------------------------------------------------------------------------------------------------------------
C. Rule Changes
The following summarizes the changes introduced in this rule. The
changes are presented in the order in which they appear within the
interim rule.
Subpart A--General
Section 1738.1 Overview
Section 1738.1 (b) of the proposed rule contained detailed
procedural information including specific contact information that may
change over time. This information has been removed in favor of a
general reference to the Agency's Web site to avoid the need for future
revisions to the regulation based on changes in personnel or procedural
guidance. Section 1738.1(c) of the proposed rule stated that no fees or
charges will be assessed for broadband loans. This policy statement has
been removed from the rule. The Agency does not presently assess fees
on broadband loans. Should the Agency's fee policy change, it would be
reflected in a separate Federal Register notice.
Section 1738.2 Definitions
To provide additional clarity throughout the regulation, the Agency
has added several new definitions and removed definitions for terms not
used in the interim rule. Each addition to and removal from the 2003
rule is listed in the preceding crosswalk. A number of definitions were
refined in the process of responding to public comments on the proposed
rule and adapting the rule in response to the 2008 Farm Bill. Key
substantive changes in existing definitions are described below, as are
new terms relating to policies set forth in this rule that may require
explanation.
Broadband Lending Speed
The ``broadband lending speed'' is the minimum bandwidth
requirement, as published by the Agency in a notice in the Federal
Register, that an applicant must deliver to the customer in order for
the Agency to fund a broadband loan. In order to treat all emerging
technologies equally, the Agency may designate a different broadband
lending speed for fixed and mobile broadband service. Broadband lending
speeds may be different from the minimum rate of data transmission
required to determine the availability of broadband service when
qualifying a service area. The Agency
[[Page 13778]]
feels strongly that in order to be a prudent lender and steward of
taxpayer dollars, it must lend to entities capable of repaying loans
received from the Agency. As such, the Agency has added this term to
make clear that it will only loan funds to entities that plan to offer
service at a level that keeps pace with technological innovations while
meeting the demands of customers in rural America. The Agency also
believes that the constant changes and rapid technological improvements
in the broadband industry necessitate that the Agency be flexible in
reviewing and, if necessary, adjusting this speed on as frequent as an
annual basis.
Equity
The Broadband Loan Program has historically used the term ``credit
support'' in lieu of ``equity.'' The Farm Bill uses the terms ``cost
share,'' ``credit support,'' and ``equity.'' In an effort to make this
regulation and associated program documents more readable, the Agency
has used the commonly-understood term ``equity'' in lieu of ``cost
share.'' Equity and other financial requirements which enhance the
security of the loan are all elements of ``credit support.'' For the
purpose of Sec. 306F of the Rural Electrification Act of 1936, (SUTA),
equity requirements in this program shall have the same meaning as
``matching fund requirements.'' SUTA provides statutory authority for
the Agency to make certain adjustments in the requirements of programs
with respect to projects on trust territories like Native American
reservations. This authority is discussed in more detail below.
Projected Revenues
In addition to the minimum 10 percent equity requirement, the
Agency will now allow the use of projected revenues to be considered in
determining if more than a 10% equity position is required to maintain
a viable operation. For start-up operations and operations that have
not demonstrated a positive cash flow, the Agency will only allow fifty
percent of the projected revenues to be used to demonstrate a
sustainable operation. A financial analysis of the business plan will
be performed with a 50 percent reduction in projected revenues to
determine if an equity position greater than 10 percent is required. If
this analysis demonstrates that a 10 percent equity position is not
sufficient to ensure a sustainable operation, the equity requirement
will be increased to the appropriate level. We are inviting comment on
the use of fifty percent of the projected revenues versus a higher or
lower percentage.
Fiscal Year
The term ``fiscal year'' had previously been defined with reference
to the US government's fiscal year. However, the majority of the
references to fiscal years in the interim regulation refer to the
applicant's fiscal year. Therefore, the term has been redefined. In the
two places where the Federal fiscal year is referenced, this is
specifically noted.
Incumbent Service Provider
Questions have been raised about the meaning of the statute's use
of the term ``providing broadband service.'' Some have argued that it
could mean either service providers with a ``take-up rate'' that meets
the specified threshold, or service providers that offer services that
``pass by'' area households without regard to whether the services are
actually purchased by the households. The Agency has concluded that the
word ``providing'' clearly indicates the Congressional intent that the
incumbent service provider determination should be based on the
services actually purchased by households, not just on the number of
households to which services are offered. This interpretation is
reflected in the definition, which defines incumbent service provider
as one that provides broadband service to at least five percent of the
households in an applicant's proposed service area rather than one that
``offers'' such service.
Rural Area
There were 19 comments received relating to the definition of an
``Eligible Rural Community.'' This issue is significant in that it
directly determines which constituencies can receive the benefits of
the Broadband Loan Program. The 2008 Farm Bill defines a rural area as
any area outside of a city, town, or incorporated area that has a
population of no more than 20,000 inhabitants provided that it is not
in an Urbanized Area (as defined by the Census Bureau) that is
contiguous and adjacent to a city or town with a population of 50,000
inhabitants. This definition replaces the definition of ``eligible
rural community'' provided in the proposed rule.
Service Territory
While the concept of a ``service area'' has been traditionally used
within the program, the 2008 Farm Bill refers to a ``service
territory.'' The Agency considers the two terms to be synonymous. The
interim rule continues to use the commonly-accepted term ``service
area.'' The term ``service territory'' has been defined in order to
clarify how the language used in the regulation links to the language
in the 2008 Farm Bill but is not used in the interim rule.
Underserved Household or Underserved Area
This definition was added to define an underserved household or
area as one that is not offered broadband service at all, or is offered
broadband service by only one incumbent service provider, a requirement
added by the 2008 Farm Bill.
Section 1738.2 Substantially Underserved Trust Areas
The Agency has developed this interim rule in accordance with
USDA's Action Plan for Tribal Consultation and Collaboration submitted
in response to President Obama's Memorandum on Tribal Consultation and
Collaboration executed November 5, 2009 during the White House Tribal
Leaders Conference (USDA Action Plan), President Clinton's Executive
Order 13175, titled ``Consultation and Coordination with Indian Tribal
Governments'' (November 6, 2000), and various USDA Departmental
Regulations on Tribal Consultation, including DR 1350-001 (September
11, 2008). DR 1350-001 directs the Agency ``to the extent practicable
and permitted by law, consider any application by an Indian tribe for a
waiver of statutory or regulatory requirements in connection with any
program administered by it with a general rule toward increasing
opportunities for utilizing flexible policy approaches at the Indian
tribal level in cases in which the proposed waiver is consistent with
the applicable Federal policy objectives and is otherwise appropriate''
(DR 1350-001 ] 11). Section 6105 of the Farm Bill amended the RE Act by
adding section 306F providing the Secretary additional statutory
authorities which have been delegated to the Administrator that may be
initiated in order to improve the availability of RUS programs in
communities located in trust lands (as defined in section 3765 of title
38, United States Code) that the Administrator has determined are in
high need of the benefits of those programs.
In order to provide effective consultation and collaboration in the
carrying out of its roles and responsibilities, the Agency has been
actively participating in a series of consultations across the country
with the implementation of its broad authorities in section 306F as a
focal point. Because these consultations are ongoing and the USDA
Action Plan announced the development of a new
[[Page 13779]]
comprehensive Departmental Regulation that will replace all existing
Departmental Regulations on Tribal Consultation (including DR 1350-
001), the implementation of section 306F is still under development.
Nevertheless, enough is known at this point to make it appropriate to
specifically recognize in this interim rule the additional authorities
that the 2008 Farm Bill created for the Secretary by explicitly
increasing the Secretary's legal authority for waivers in designated
communities in trust lands, which include Tribal communities and others
as more specifically provided in section 306F. This authority has been
delegated to the Administrator (See 7 CFR 2.17(a)(20) and 2.47(a)(1)).
This interim rule acknowledges these changes in law and reflects
the results of consultations on section 306F concluded so far. The
Agency has done so by adding a new Sec. 1738.3 entitled
``Substantially underserved trust areas'' as an initial step in
applying the broad authority contained in section 306F specifically to
the Broadband Loan Program. The addition of Sec. 1738.3 necessitated a
related change in Sec. 1738.2 to expand the definition of ``equity''
in order to clarify that ``equity'' as used in this interim rule
includes the term ``cost share'' and is included in the term ``credit
support'' as used in Title VI of the RE Act and for the purposes of
section 306F in this program is the same as ``matching fund
requirements.'' The Agency will proceed case-by-case in applying Sec.
1738.3 to particular applications considered under this interim rule.
Accordingly, it is essential that applicants that believe Sec. 1738.3
should be applied to their requests consult with the Agency early in
the development of their applications to determine how Sec. 1738.3
might affect the application of other sections of this interim rule in
their particular cases. The Agency invites comments which, together
with the results of future consultations and developments in the
implementation of USDA's Action Plan, will be considered in developing
the final version of this interim rule. From time to time, the Agency
may also publish further guidance for use of Sec. 1738.3 either in the
form of notices or guidance documents specifically regarding the
Broadband Loan Program or in notices, guidance documents or rules
relating to the general subjects of Section 306F or Tribal consultation
and collaboration.
Subpart B--Eligible and Ineligible Loan Purposes
The Farm Bill imposed no restrictions regarding eligible and
ineligible loan purposes, nor did public comments on the proposed rule
suggest the need for any change. Therefore, the substantive
requirements in this subpart remain largely unchanged from the
requirements which were presented in subpart C of the proposed rule.
The material has been edited for clarity.
Section 1738.51 Eligible Loan Purposes
This section requires that broadband loan funds be used to fund the
construction, improvement, or acquisition of facilities required to
provide broadband service. It specifies certain conditions concerning
start-up and overhead costs, leasing facilities, acquisitions, pre-loan
expenses, and refinancing telecommunications loans made under the RE
Act. The discussion of acquisitions has been expanded to include all of
the provisions associated with acquisition in one place. This involved
moving the item concerning acquiring majority stock and those items
concerning acquisitions from affiliates out of the list of ineligible
expenses and reframing them as conditions of acquisition under eligible
expenses. This was done in order to place all restrictions associated
with acquisition together. No substantive change is intended.
A discussion of pre-loan expenses is provided in Sec. 1738.51(e).
This paragraph has been edited for clarity and expanded to specify that
these expenses may be incurred prior to the date on which notification
of a complete application is issued. This is consistent with current
Agency practice. No substantive change is intended.
Section 1738.52 Ineligible Loan Purposes
This section excludes certain expenses associated with acquisition
of stock, facilities, or equipment of an affiliate, customer premise
equipment, vehicles, and systems or facilities that are not designed
and constructed in accordance with applicable requirements. The
discussion of expenses related to an acquisition has been moved to
Sec. 1738.51. For the sake of clarity, the interim rule specifies that
costs incurred prior to the date on which notification of a complete
application is issued are not considered eligible loan purposes with
the exception of eligible pre-loan expenses which are clarified in the
regulation. In addition, three ineligible purposes that had been
present in the program's application guide, but not listed in the
proposed rule, have been added. These ineligible purposes include:
broadband facilities leased under the terms of an operating lease;
merger or consolidation of entities; and operating expenses of the
project. The addition of these ineligible purposes is intended to
ensure clarity and completeness in the regulation and does not
represent a change in the Agency's policy.
Subpart C--Eligibility Requirements
Section 1738.101 Eligible Applicants
This section specifies criteria that entities must meet in order to
be eligible for a broadband loan. Generally, any entity that is not an
individual or a partnership is eligible for a broadband loan provided
that the applicant meets certain program requirements. Requirements
include that applicants: (1) Agree to complete their build-out within
three years; (2) demonstrate their ability to provide the service at
the Agency's broadband lending speed; (3) demonstrate an equity
position equal to at least 10 percent of requested loan amount; and (4)
understand that the Administrator may require additional security in
order to ensure financial feasibility. Each of these requirements was
included in some form in the proposed rule and the Agency received
several comments with regard to three of them.
The proposed rule would have required that borrowers complete the
build-out of their broadband facilities within three years. The Agency
received 10 comments about this requirement, half in favor and half
against. The 2008 Farm Bill imposed a statutory requirement that the
service described in the loan application be completed within three
years. Therefore, Sec. 1738.101(b)(2) of the interim rule requires
that all applicants agree to complete the build-out of the broadband
service described in their application within three years from the date
the borrower is notified that loan funds are available.
The requirement to provide service at the broadband lending speed
is stated at Sec. 1738.101(b)(3). While the requirement is succinct,
it represents a shift in the Agency's policy and affects definitions
and requirements in other parts of the interim rule, including Sec.
1738.102(b) concerning protection of current borrowers' service areas.
After publication of the proposed rule, the Agency received eight
comments concerning the speed at which broadband service is provided,
nearly all of which suggested that the Agency should change the
definition of broadband service to be based on a higher transmission
speed. The Agency believes the availability of affordable, high-quality
broadband service is a key
[[Page 13780]]
factor in promoting and protecting the economic growth and well-being
of rural communities. The Agency also believes that as a steward of
taxpayer dollars, it should lend money to projects that will provide
service at a level for which there is customer demand. As such, the
Agency agrees with the commenters that urged the Agency to define
broadband at a faster speed.
The concept of broadband speed matters in two different contexts in
this regulation. First, it determines what types of projects will be
eligible for a broadband loan. Second, it determines which existing
providers will be classified as incumbent service providers for the
purpose of determining what geographic areas are eligible for a
broadband loan. The implications of setting higher or lower speed
requirements differ for the two contexts. Specifically, setting a
significantly higher speed could open up vast areas of the country as
eligible areas, limiting the program's impact on those areas that are
most seriously limited in their ability to access broadband service. A
higher speed also would result in providing government funding in
markets where competition (i.e., three or more service providers)
already exists at more modest speeds. On the other hand, requiring
higher speeds would help ensure that those areas that receive
assistance through a broadband loan receive cutting-edge service that
will remain competitive, and therefore financially viable, farther into
the future.
The Agency has resolved this dilemma by introducing two different
concepts related to the speed of transmission in the interim rule. The
term ``broadband service'' is used in the context of determining
whether the services offered by existing service providers can be
considered broadband service. To account for the value of mobility, the
Agency will distinguish between fixed and mobile broadband service. The
Agency's intent is to set these levels low enough to ensure that loans
are not made in areas with sufficient competition to offer acceptable
services to rural households. The term ``broadband lending speed'' is
used in the context of determining what standards an applicant's
proposed services must attain in order to qualify for a broadband loan.
The 2008 Farm Bill does not allow for requirements that preclude the
use of evolving technologies and therefore the Agency has established
the means for setting different requirements for fixed and mobile
broadband service. The Agency also believes that these services are
sufficiently different to justify a consideration of having different
requirements. In the case of mobile service, consumers appear to be
willing to accept slower speeds in exchange for mobility. The Agency's
intent is to set these lending speeds at an aggressive level to ensure
that public funds are used to provide the highest-quality service and
that the investments will remain competitive in the long term to allow
repayment of the loan. The Agency has carefully adhered to the
statutory requirement to remain technologically neutral in its
definition of the minimum rate of data transmission that will qualify
as broadband service and the minimum bandwidth requirement that will
establish the broadband lending speed.
The Agency has not established either the minimum rate of data
transmission that will qualify as broadband service or the minimum
bandwidth requirement that will establish the broadband lending speed
in the regulation. The appropriate level for these standards will
change over time as technology evolves. To account for this reality,
the Agency will publish these speeds in the Federal Register. The
Agency's intent is to leave the standards in place over a multi-year
period to allow potential applicants to plan and develop their
proposals. However, the standards will be altered from time to time, as
changes in technology warrant. For the purposes of this interim rule,
the broadband service minimum rate of data transmission will be three
megabits per second (download plus upload speeds) for both fixed and
mobile broadband service and the broadband lending speed will be a
minimum bandwidth of 5 megabits per second for fixed and 3 megabits per
second for mobile broadband service to the household (download plus
upload speeds).
The requirement that applicants demonstrate a 10 percent equity
position is stated in Sec. 1738.101(b)(4). The Agency received
numerous comments with regard to the equity requirement after
publication of the proposed rule. This requirement is expanded upon in
Sec. 1738.207 and an explanation of the Agency's policy choices is
provided within that portion of the preamble.
Finally, paragraph Sec. 1738.101(b)(5) concerning additional
security was not previously included in the applicant eligibility
section. Its inclusion here is not meant to change the eligibility
requirements laid out in the proposed rule. Instead, it is listed here
with a reference to its fuller discussion later in the regulation to
ensure that potential applicants are made aware, as they are
considering whether they will qualify for a broadband loan, that
additional security requirements may be imposed.
Section 1738.102 Eligible Service Area
Section 1738.102(a)(1) clarifies that to be eligible for a
broadband loan, a funded service area must be completely contained
within a rural area. The specifics of what constitutes a rural area are
provided in the definitions section.
The 2008 Farm Bill requires that at least 25 percent of the
households in the proposed service area be underserved in order for the
area to qualify as an eligible service area. As presented in the
definitions, an underserved household is one that is not offered
broadband service, or that is offered broadband service by only one
incumbent service provider. This requirement is addressed in Sec.
1738.102(a)(2).
Under the proposed rule, applicants would have been precluded from
obtaining funding for projects in service areas with four or more
existing broadband service providers. The 2008 Farm Bill, however,
specified that a service area may be eligible for funding only if no
part of the area is served by three or more incumbent service
providers. This requirement is addressed in Sec. 1738.102(a)(3).
The proposed rule would have prevented the Agency from making
broadband loans in any rural community in which a current borrower was
already providing broadband service. In the present rule, the Agency
has kept this prohibition, but added further protection to grantees to
address the Broadband Initiatives Program awards recently made.
Nonetheless, the Agency encourages comments on this issue.
In some cases, applicants may propose areas within their
application that are ineligible. Such areas must be included in the
review of the financial feasibility of the project, and shown how they
are funded by outside sources. For example, an applicant may have
requested a loan to provide broadband service in three communities
located in eligible areas, but based the feasibility analysis on a
five-community strategy with two communities overlapping a current
borrower's service territory. In such a situation, the Agency would not
make a loan in the two communities that support the current borrower's
operations but could make a loan in the three communities that
constitute the eligible service area. This is reflected in Sec.
1738.102(a)(4).
Finally, Sec. 1738.102(b) specifies that, while multiple service
areas may be included in a single loan application, non-contiguous
areas are considered separate service areas and must be
[[Page 13781]]
treated separately for the purpose of determining area eligibility.
This means that non-contiguous service areas must also be treated
separately for the purposes of the market survey and competitive
analysis requirements.
Section 1738.103 Eligible Service Area Exceptions for Broadband
Facility Upgrades
The Agency firmly believes rural communities should have affordable
access to broadband services of the highest quality. The 2008 Farm Bill
supports this position by providing for an exemption from certain area
eligibility requirements if an applicant proposes to upgrade its
existing broadband service facilities. This is reflected in the interim
rule at Sec. 1738.103(a), which exempts current borrowers wishing to
upgrade their facilities from the requirements concerning number of
underserved households as set forth in Sec. 1738.102 and if the
current borrower is also an incumbent service provider, from the number
of incumbent service providers stipulated in Sec. 1738.102(a)(2) and
(3). This exception will permit the Agency to consider funding borrower
efforts to keep their facilities upgraded to current standards, even if
competition increases and the percentage of households served
increases. The Agency will offer similar consideration to incumbent
service providers wishing to upgrade their facilities, even if they are
not current borrowers, by exempting them from the requirement
concerning the number of incumbent service providers stipulated in
Sec. 1738.102(a)(3).
For loans that do not require an exception from Sec.
1738.102(a)(2) and (3) for upgrading, an applicant can treat service
areas to be upgraded and new service areas as a single service area, as
long as the areas are contiguous. In the case of an upgrade that
requires an exception to qualify for funding, however, the interim rule
at Sec. 1738.103(c) requires that the geographic area already served
by the applicant be treated as a separate service area from any
expanded service areas to be added. In this situation, the interim rule
specifies that the expansion area will be treated as a new service area
even if it is contiguous to the area to receive the exception for
upgrading. In such a situation, an applicant may provide the Agency
with only one application, but the expansion area must meet all service
area eligibility requirements and be treated separately for the
purposes of the market survey, competitive analysis, and financial
projection requirements. This requirement is necessary to prevent
potential applicants from manipulating their expanded service areas to
trigger the upgrade exceptions in ways that would circumvent the intent
of the statute.
Section 1738.104 Preliminary Assessment of Service Area Eligibility
The 2008 Farm Bill includes a new provision for determining, prior
to developing an application, whether a particular geographic area is
potentially eligible for a loan. This process is expected to help
prevent potential applicants from investing time and other resources in
developing applications for ineligible areas, thereby reducing the
paperwork burden associated with the program. To address this
requirement, the interim rule specifies at Sec. 1738.104(a) that the
Agency will make available information about whether the proposed
service area is located in a rural area, whether it overlaps with a
current borrower's service area, and whether any part of the area
overlaps with a service area specified in a pending application.
This preliminary assessment of area eligibility does not account
for all factors associated with area eligibility. For example, it is
not possible to make a preliminary assessment of whether the area is
already served by three or more incumbent service providers. This
information will not be known until after the application is submitted
and the public notice period has expired. Moreover, the situation in a
given service area may change between the preliminary assessment and
submission of the application. Section 1738.104(b) highlights the fact
that the preliminary assessment indicating that a proposed area may be
eligible is not an assurance that the proposed service area will be
eligible for a broadband loan at the time of application. The
preliminary assessment will, however, provide a basic screening tool to
help potential applicants make informed decisions about their choice to
develop an application.
Initially, the Agency will provide this preliminary assessment
information on a case-by-case basis, as requested by prospective
applicants. However, the Agency also is developing an interactive
mapping tool that is expected to allow applicants both greater
independence and greater flexibility to make informed choices about
service area selection and application development when it becomes
available.
Subpart D--Direct Loan Terms
Section 1738.151 General
Section 1738.151(a) identifies the two types of direct loans that
are available under the program: loans bearing a cost-of-money interest
rate or bearing a fixed 4 percent rate. A combination of these two
types of loans also may be offered. The details about these types of
loans, such as interest rates, terms and conditions, and security, are
discussed later in this subpart. Section 1738.151(b) specifies that the
program's minimum and maximum loan amounts will be published in the
Federal Register, along with the amount of funds available for each
type of loan. New language has been added to the proposed rule, in
light of an explicit limitation noted in the 2008 Farm Bill, on maximum
loan amount. Specifically, Sec. 1738.151(c) states that applicants
providing telecommunications or broadband service to at least 20
percent of the households in the United States are limited to a loan
amount that is no more than 15 percent of the funds available through
the program for the fiscal year.
Section 1738.152 Interest Rates
Aside from minor edits for clarity, policies regarding cost-of-
money interest rates set forth in Sec. 1738.152(a) remain unchanged
from polices stated in the proposed rule. With regard to direct 4
percent loans, the proposed rule would have made such loans available
to rural communities with no more than 5,000 residents and served by no
more than one service provider. Only two comments were filed relating
to this issue, one of which suggested a standard that favored projects
with the highest percentage of underserved communities, where
feasibility was insufficient under cost of money rates. In light of
this comment, the Agency reconsidered the potential usefulness of the
4- percent loans as a tool to help an applicant meet financial
feasibility requirements. More specifically, the Agency envisions using
4 percent loans to assist applicants that project a times interest
earned ratio (TIER) of greater than 1.00 but less than the required
ratio of 1.25. Section 1738.152(b) specifies that the 4- percent loan
can be used by the Agency to help meet such feasibility requirements.
Before implementation of using 4 percent loans, the Agency requests
public comments on the requirements of their use.
Section 1738.153 Loan Terms and Conditions
The material included in this section appeared in the proposed rule
in a section entitled ``payments on loans.''
[[Page 13782]]
Paragraph 1738.153(a) of the interim rule includes information on
repayment periods and Paragraph 1738.153(b) discusses loan payments.
These sections have been edited for clarity, but no substantive changes
have been made. Discussion of an extended maturity mentioned in the
proposed rule has been moved to Sec. 1738.155 (Special terms and
conditions). Paragraph 1738.153(c) has been added to clarify the
Agency's existing policy, specified in current loan documents,
requiring applicants to obtain a fidelity bond as a condition of
receiving the loan.
Section 1738.154 Loan Security
Paragraph 1738.154(a) and (b) states that all loans made by the
Agency must be adequately secured and that the Agency must generally be
given an exclusive first lien on all of the applicant's assets.
Paragraph 1738.154(c) and (d) go on to require that property purchased
with loan funds be owned by the applicant and to impose special
requirements on facilities that are not self-contained operating
systems. Finally, Paragraph 1738.154(e) articulates the Agency's
existing policy that financial, investment, operational, reporting, and
managerial controls may be specified in the loan documents. The 2008
Farm Bill imposed no new security requirements. The section has been
edited for clarity, but no substantive changes have been made.
The 2008 Farm Bill did add a concept related to loan security,
requiring the Agency to ensure that the type, amount, and method of
security are commensurate with the risk involved. This requirement is
addressed in Sec. 1738.155(b).
Section 1738.155 Special Terms and Conditions
Section 1738.155(a) was added to the interim rule to give the
Agency additional flexibility, as provided by the 2008 Farm Bill, to
bring broadband access to underserved areas (that is, to areas with no
service provider or with only one incumbent service provider). The
section specifies that if it aids in achieving financial feasibility,
the Agency may adjust terms and conditions such as extending the
repayment period or lessening security requirements for underserved
service areas. Section 1738.155(b) addresses the statutory requirement
that the type, amount, and method of security be commensurate with the
risk involved.
Section 1738.156 Other Federal Requirements
Applicants must agree in writing to comply with a range of Federal
regulations. This section was added to the interim rule to make clear
the various regulations and requirements contained in the loan
documents with which applicants will be required to comply. It also
clarifies that additional requirements may be imposed through the loan
documents. It further specifies that applicants must comply with all
relevant Federal, State, and local requirements.
Subpart E--Application Review and Underwriting
Section 1738.201 Application Submission
Section 1738.201(a) codifies current Agency policy that
applications may be submitted to either the Agency's General Field
Representative (GFR) or directly to the National Office. It further
specifies that the date received, which determines processing order,
will be established based on the date the application is received by
the National Office.
Section 1738.201(b) states that the Agency may publish additional
application submission requirements in the Federal Register, as well as
indicating in that document the amount of funds that will be made
available for each loan type.
Section 1738.202 Elements of a Complete Application
This section codifies current Agency policy concerning the key
elements that must be included in an application. The section does not
specify every application requirement. The details of the application
process are provided in the Rural Broadband Access Loan and Loan
Guarantee Program Application Guide (the Application Guide). This
section is sufficiently detailed, however, to allow the reader to
understand what information must be provided in the application so that
the Agency can evaluate the financial and technical feasibility of the
loan application.
Section 1738.203 Priority for Processing Loan Applications
The 2008 Farm Bill directs that the Agency establish priority
processing for applicants proposing ``to provide broadband service to
the greatest proportion of households that * * * had no incumbent
service provider.'' Although the 2008 Farm Bill uses the term
``incumbent service provider,'' Congressional deliberations suggest
that the intent of this provision was to provide priority processing to
applicants proposing to serve the highest number of households without
access to broadband service. The provision has been interpreted as such
for the purposes of this regulation.
The Agency processes applications on a rolling basis. For
applications not requesting section 306F consideration, Sec.
1738.203(a) establishes three priority categories to implement the
statute's priority requirements: (1) Applications in which no broadband
service is available in any proposed service area; (2) applications
that propose service areas in which at least 75 percent of the
households have no access to broadband service (for applications with
multiple service areas, the 75 percent calculation is based on all
service areas combined); and (3) all other applications. Once
applications have been prioritized according to these criteria, Sec.
1738.203(b) provides that they will be processed on a first-in, first-
out basis within each priority category.
Section 1738.203(c) specifies that the Agency will establish
National and State reserves, as required by the 2008 Farm Bill. Because
the method for establishing the reserves is detailed in the 2008 Farm
Bill, the section references the statute rather than repeating the
information.
Section 1738.204 Public Notice
In the proposed rule, the Agency proposed new legal notice
requirements to help identify areas with no existing broadband service
for priority consideration and to notify communities of the potential
entrance of a new service provider. Doing so was expected to provide
existing service providers with an opportunity to be classified as
incumbent service providers and to establish their current service
territory, service offerings, market share, and so on. The purpose of
these changes was to increase transparency, reach a broader range of
interested parties, and obtain more detailed information about
incumbent service providers to determine if an applicant's proposed
service area was eligible for a broadband loan.
The 2008 Farm Bill affirms the need for transparent public notice,
requiring the Administrator to publish a notice of each application
received. The interim rule addresses the statutory notice requirement
through a public notice process. The interim rule, at Sec.
1738.204(a), requires that the applicant provide all required
information but places responsibility on the Agency to publish the
notice. It is the Agency's intent to post the public notice on an
Agency webpage, which will serve as a central, universal, and easily-
accessible point of information. The Agency further intends to explore
the possibility of developing tools that
[[Page 13783]]
will proactively notify existing service providers about applications
that may potentially overlap with the geographic areas in which the
existing provider offers service (for example, via a listserv or
similar communication tool). The Agency would welcome public comment on
approaches to information dissemination that would be most useful to
the broadband community.
The 2008 Farm Bill requires that the public notice identify the
applicant, the proposed service area, and the estimated number of
households without terrestrial-based broadband service in the service
area. The interim rule requires applicants to supply this information
and to supply a map of the proposed service area identifying rural area
boundaries and underserved areas. In addition, applicants are required
to provide information about the number of underserved households in
each service area and a description of the types of services that the
applicant proposes to offer in each service area. These pieces of
information are essential to allow incumbent service providers to
respond appropriately to the published notice and to allow the Agency
to determine whether the proposed service areas are eligible for
funding.
The interim rule establishes a standard 30-calendar day notice
period that begins after an application is filed and the public notice
is posted on an Agency Web site. It requires interested parties to
provide the Agency with specified information within the 30 day window
in order for the Agency to determine whether they meet the criteria for
being an incumbent service provider. Section 1738.204(c) specifies that
service providers that do not respond to the public notice within the
30 day period will not be considered incumbent service providers for
the purpose of determining the service area's eligibility. However,
regardless of whether a service provider responds to the notice or not,
all known service providers in the proposed service area will be
considered in the competitive analysis performed by the Agency. Section
1738.204(d) clarifies that if a portion of the applicant's service area
which is proposed to be funded is ineligible, the Agency will provide
the information necessary to allow the applicant to adjust the service
areas presented in the application.
Twenty-three commenters responded to the notice requirements in the
proposed rule. Overall, the comments were supportive of the Agency's
efforts to be more transparent about proposed applications. However,
respondents were divided as to how much information should be divulged,
with some worrying that too much proprietary information would be made
accessible to the public. The Agency has considered comments on the
proposed rule in developing those portions of the interim rule where
the 2008 Farm Bill offers flexibility. The public notice requirements
in the interim rule seek to balance and address many concerns about the
notice process. Section 1738.204(e) clarifies that information will be
treated as proprietary and confidential to the extent permitted under
applicable law.
The Agency is aware that any new system will create uncertainties
as the users learn where to find information and what information is
required. The Agency is committed to developing tools and making
appropriate adjustments to ensure that existing service providers have
a fair opportunity to respond to the public notice and to enhancing
transparency while protecting proprietary information.
Section 1738.205 Notification of Completeness
This section codifies current Agency policy concerning how it
reviews applications for completeness. Section 1738.205(a) specifies
that applications must include all required documents and information
and that the information must be of adequate quality to allow further
analysis. Section 1738.205(b) clarifies that the Agency may take one of
three courses of action after reviewing an application for
completeness: (1) Notify the applicant that the application is complete
and proceed with processing; (2) notify the applicant that the
application is of adequate quality but incomplete and specify a time
frame within which to make required improvements; or (3) notify the
applicant that the application is not of adequate quality and reject
the application. By specifying these three courses of action, the
Agency is seeking to be transparent and consistent in how it reviews
and responds to applications.
The distinction between a notification of incompleteness and a
notification of rejection has important implications. When an applicant
is notified that an application is incomplete, the application holds
its place in the processing queue and the service areas that the
applicant intends to serve are not available to other potential
applicants. If an application is rejected, the applicant loses its
place in the processing queue and those service areas that had been
proposed in the rejected application are once again available as
service areas for other potential applicants. By establishing a
mechanism for rejecting applications, the Agency is seeking to ensure
that applications that do not meet a minimum standard, or which are not
making adequate progress toward completion, are removed from the
processing queue. This will help avoid blocking more feasible
applications in the same service area from being considered.
Section 1738.206 Evaluation for Feasibility
This section codifies current Agency policy concerning how it
evaluates applications. It explains how the Agency evaluates
applications in an effort to help potential borrowers provide higher-
quality applications. By clearly establishing the concepts of financial
and technical feasibility in Sec. 1738.206(a) and (b), the Agency is
seeking to be transparent about the criteria it will use to evaluate
applications. The section also clarifies the inter-related nature of
the application components, indicating that weakness in one component
of the application can impact an overall determination of feasibility.
The Agency believes applicants that understand these interconnections
will supply higher-quality applications, enhancing the likelihood of
approval.
Section 1738.207 Equity Requirement
The equity requirement for the program had stood at 20 percent of
the value of the requested loan since the program's inception in 2002.
Based on the statutory language of the 2008 Farm Bill, the Agency is
proposing a minimum equity requirement of 10 percent. To offset this
reduction in equity and to ensure that only sustainable operations are
funded, the Agency has added review procedures that can increase the
amount of equity required based on the proposed business plan.
Commenters were generally supportive of this change, with 11 out of 16
supporting the reduction to 10 percent and many of the remainder
supporting even deeper reductions (under certain circumstances).
In the changes made in the 2008 Farm Bill, the Congress also
supported the concept of a reduction in the equity requirement by
specifying that the amount of equity required must not exceed 10
percent of the amount of the loan requested. While the statute would
permit the Agency to require less than 10 percent equity, the Agency is
cognizant of the importance of balancing applicant preference for low
equity requirements with the Agency's
[[Page 13784]]
responsibility, as a steward of taxpayer dollars, to require sufficient
equity to ensure the viability of the project. Therefore, Sec.
1738.207(a) requires a minimum equity position of 10 percent of the
requested loan amount.
The Agency understands that achieving this equity position when it
is not yet known whether the loan will be approved may be difficult.
Therefore, as in the proposed rule, Sec. 1738.207(b) and (c) account
for situations in which an applicant may not have the equity available
at the time the application is submitted. The interim rule specifies
that an investor's proposal to cover the equity shortfall or, for State
and local governments, the authority to issue a general obligation
bond, can be sufficient to meet the equity requirement for the purposes
of loan approval. The interim rule requires that the 10 percent equity
position must be attained prior to execution of the loan documents.
Section 1738.208 Additional Cash Requirements
The 2008 Farm Bill permits the Agency to make additional security
requirements beyond the 10 percent minimum equity requirement when
necessary to ensure financial feasibility. This section lays out Agency
policy for when it will require an applicant to contribute additional
cash to the project. Section 1738.208(a) requires that the feasibility
analysis show a positive cash balance at the end of each year during
the five-year forecast period. Applicants unable to meet this standard
will be required to obtain additional infusions of cash necessary to
maintain an appropriate cash balance throughout the five-year forecast
period.
As the Agency considered how to count projected revenues, a key
issue was the difficulty of substantiating projected revenues for an
entity without a credible, recent history of generating positive cash
flow. To address this concern, the interim rule specifies at Sec.
1738.208(a)(2) that in addition to the initial projections, start-up
and existing companies that do not have a positive cash flow for the
two years prior to submitting an application must submit adjusted
financial projections based on 50 percent of projected revenues. These
adjusted projections will be used to determine the amount of additional
cash that will be required. Although the Agency has stated that 50
percent of projected revenues will be considered for start-up
operations, comments addressing this requirement are encouraged. For
those existing operations that have demonstrated a positive cash flow,
100 percent of projected revenues can be used in the determination of
additional cash required.
The interim rule at Sec. 1738.208(b) also permits applicants to
use an unconditional, irrevocable letter of credit (LOC) to satisfy any
additional cash requirement. Issues of how long the LOC must remain in
place and what specific standards it must meet are specified in this
section. The section concludes in Sec. 1738.208(c) with a discussion
of the timing for providing needed cash infusions.
Section 1738.209 Market Survey
The proposed rule set out to reduce the burden on applicants by
eliminating the requirement for a market survey in areas where the
applicant projects a minimal penetration rate. This proposal generated
considerable support from commenters: Out of the 13 comments filed,
eight were generally supportive of the overall initiative, while
another three pushed for more leniency. The 2008 Farm Bill settled the
question of how lenient to be by setting the penetration rate under
which applicants were exempted from conducting a market survey at 20
percent.
In an effort to improve the quality of the market surveys received,
the interim rule articulates the Agency's polices concerning what is
required from a market survey. Specifically, Sec. 1738.209(a) requires
a market survey for each service area that meets the proposed
penetration threshold of 20 percent, while Sec. 1738.209(b) exempts
those that will not achieve this penetration rate. In order for the
project to be considered feasible, the market survey must demonstrate
the need for the broadband service and support the financial
projections. Section 1738.209(c) specifies that the market study must
not be more than six months old when the application is submitted and
emphasizes that the market survey must support the financial
projections. It goes on to specify that the Agency may require an
updated market survey if the demographic characteristics in the
proposed service area have changed significantly.
The section further specifies at Sec. 1738.209(d) that the
Administrator may modify the market survey requirements for loans in
underserved service areas.
Section 1738.210 Competitive Analysis
This section codifies current Agency policy concerning its
requirements for a competitive analysis. The competitive analysis is a
critical component of the Agency's financial feasibility analysis. The
competitive analysis helps substantiate whether the applicant's
projected penetration rates are realistic given existing competition in
the area. The interim rule provides greater detail about this
requirement than the proposed rule provided in an effort to help
applicants submit higher-quality applications.
Section 1738.211 Financial Information
This section codifies current Agency policy concerning the
financial information it requires from applicants prior to making a
determination of financial feasibility. The interim rule at Sec.
1738.211(a) provides detail about acceptable documentation to
demonstrate the organization's financial capacity, while Sec.
1738.211(b) indicates the information required to demonstrate the
proposed project's financial viability. The rule specifies the types of
historical financial information required and the form in which this
information must be provided. It also provides guidance for applicants
that cannot provide audited financial statements or are start-up
organizations. The interim rule includes requirements specifying when
financial information from parent or affiliated operations is required
so the Agency can fully evaluate the financial wherewithal of these
operations when they are important to the success of the project.
In addition to the requirements presented in the interim rule, the
Application Guide provides detailed procedural guidance to ensure that
financial information submitted by the applicant matches closely with
the Agency's internal financial evaluation tools. This is expected to
provide applicants with a clearer understanding of how the Agency
evaluates financial feasibility.
The interim rule maintains the minimum TIER of 1.25 but removes the
maximum TIER of 2.0 as a regulatory ceiling. Section 1738.211(c)
indicates that specific TIER requirements will be specified in the loan
documents.
Section 1738.212 Network Design
This section codifies current Agency policy concerning the network
design components that must be clearly described in an application to
allow the Agency to make a determination of technical feasibility. In
Sec. 1738.212(a), the interim rule specifies essential categories of
information that must be provided. These include information about
service level objectives and monitoring ongoing service to ensure that
applicants are considering how they will provide high quality service
to customers after the system is built.
[[Page 13785]]
Section 1738.212(b) goes on to describe the required qualifications for
the staff responsible for the network design. Finally, Sec.
1738.212(c) notes that these requirements may be modified in
underserved service areas. Procedural details are specified in the
Application Guide. The Agency anticipates that by providing greater
detail about these requirements, the interim rule will help ensure
higher-quality applications.
As described in Sec. 1738.101 of this preamble, in its
deliberations concerning network design, the Agency wrestled with the
implications of establishing a single, aggressive, broadband lending
speed. One of the implications not discussed above is that for some
areas, it will be economically infeasible to provide service that meets
the required broadband lending speed. In such hard-to-serve areas, even
relatively slow broadband access, far below the broadband lending
speed, would be an improvement over the current lack of service.
Currently, no special provision is made for these hard-to-serve areas.
The Agency is particularly interested in receiving public comments
concerning how a policy could be formulated in a way that would be
feasible to implement fairly, that would maintain an aggressive
broadband lending speed standard in most areas, but would permit some
degree of service to be extended to hard-to-serve areas.
Section 1738.213 Loan Determination
This section codifies current Agency policies concerning loan
determination. These include ensuring that all statutory and regulatory
requirements are met and demonstrating that the TIER requirement can be
met. The section goes on to explain that applications that meet these
requirements undergo a consistent loan review process and that all
applicants receive a written response to their loan requests. By
clarifying these steps, the interim rule provides for greater
transparency concerning the Agency's loan determination process and
will help ensure consistency in how the Agency handles loan decisions.
Subpart F--Closing, Servicing, and Reporting
This subpart was added to the interim rule to provide borrowers
with additional clarity and guidance about Agency policies on closing
and post-closing activities.
Section 1738.251 Loan Offer and Loan Closing
This section provides general information about the steps and
typical timing involved in the process of moving from the loan offer to
loan closing. The section also articulates the importance for the
applicant of meeting all conditions set down by the Agency by the
required date in order to avoid termination of the loan offer. Finally,
it specifies the conditions under which the Agency may approve a
request for an extension if the applicant has difficulty meeting the
conditions required for loan closing. These policies codify the
Agency's current approach to loan offer and loan closing and do not
represent a change in Agency policy.
Section 1738.252 Construction
Agency loan documents specify that construction must comply with
various regulations and bulletins. Section 1738.252(a) lists key
documents with which construction must comply, in order to ensure that
potential applicants are aware of the requirements prior to submitting
an application.
Section 1738.252(b) discusses the circumstances under which
applicants may enter into interim financing agreements and receive
reimbursement from the loan funds if a loan is made.
Section 1738.252(c) requires borrowers to begin construction within
six months from the day they are notified that loan funds are
available. The Agency occasionally approves a loan for a borrower that
fails to follow through on the approved project within a reasonable
time. Although the loan documents address this situation, the addition
of this section to the interim rule makes explicit the Agency's policy
that the loan may be canceled if the borrower fails to perform.
Section 1738.252(d) reminds the borrower in the context of the
construction process that the build-out must be complete within three
years from the day they are notified that loan funds are available.
This requirement also is listed in Sec. 1738.101(b)(2) in the
discussion of eligible applicants.
Section 1738.253 Servicing
The borrower's responsibilities after loan closing are spelled out
in the loan documents. Sections 1738.253(a) and (b) have been added to
the interim rule to codify the Agency's essential policies that the
borrower must make payments as required in the note and must comply
with all terms, conditions, and covenants as stated therein. Section
1738.253(c) specifies that in the event of default on any required
payment or other term or condition, the Agency may exercise the default
remedies provided in the loan documents. It further stipulates that if
the Agency chooses not to exercise its default remedies, it does not
waive its right to do so in the future.
Section 1738.254 Accounting, Reporting, and Monitoring Requirements
This section summarizes the borrower's obligations with regard to
accounting, reporting, and monitoring.
Section 1738.254(a) articulates the Agency's current policy that
borrowers must adopt a system of accounts for maintaining financial
records that is acceptable to the Agency.
Section 1738.254(b) lays out the audit requirements for borrowers.
Requirements for the first year of the loan may be different than
subsequent years, and the differences are specified here.
Finally, Sec. 1738.254(e) requires borrowers to comply with all
reasonable Agency requests to support ongoing monitoring efforts. An
Agency initiative over the coming years will involve strengthening its
ongoing monitoring and servicing efforts. Borrower compliance and
cooperation will be essential to the success of this effort. This does
not represent a change in the Agency's policy but articulates it in the
regulation rather than relying upon loan documents for this authority.
Subpart G--Loan Guarantee
The Agency received few comments on the loan guarantee sections of
the proposed rule. Section 1738.301 of the interim rule clarifies that,
with a few exceptions, the eligibility requirements, loan terms, and
application review and underwriting policies are essentially the same
for loan guarantees as for direct loans. The balance of subpart G
remains substantively the same as in the proposed rule. Although loan
guarantees have not been widely used in the past, the Agency encourages
interested parties to provide feedback on the loan guarantee portion of
the regulation.
List of Subjects in 7 CFR Part 1738
Broadband, Loan programs-communications, Rural areas, Telephone,
Telecommunications.
Accordingly, chapter XVII, title 7, Code of Federal Regulations is
amended by revising part 1738 to read as follows:
PART 1738-RURAL BROADBAND ACCESS LOANS AND LOAN GUARANTEES
Subpart A--General
Sec.
1738.1 Overview.
1738.2 Definitions.
1738.3 Substantially underserved trust areas.
1738.4-1738.50 [Reserved]
[[Page 13786]]
Subpart B--Eligible and Ineligible Loan Purposes
1738.51 Eligible loan purposes.
1738.52 Ineligible loan purposes.
1738.53-1738.100 [Reserved]
Subpart C--Eligibility Requirements
1738.101 Eligible applicants.
1738.102 Eligible service area.
1738.103 Eligible service area exceptions for broadband facility
upgrades.
1738.104 Preliminary assessment of service area eligibility.
1738.105-1738.150 [Reserved]
Subpart D--Direct Loan Terms
1738.151 General.
1738.152 Interest rates.
1738.153 Loan terms and conditions.
1738.154 Loan security.
1738.155 Special terms and conditions.
1738.156 Other Federal requirements.
1738.157-1738.200 [Reserved]
Subpart E--Application Review and Underwriting
1738.201 Application submission.
1738.202 Elements of a complete application.
1738.203 Priority for processing loan applications.
1738.204 Public notice.
1738.205 Notification of completeness.
1738.206 Evaluation for feasibility.
1738.207 Equity requirement.
1738.208 Additional cash requirements.
1738.209 Market survey.
1738.210 Competitive analysis.
1738.211 Financial information.
1738.212 Network design.
1738.213 Loan determination.
1738.214-1738.250 [Reserved]
Subpart F--Closing, Servicing, and Reporting
1738.251 Loan offer and loan closing.
1738.252 Construction.
1738.253 Servicing.
1738.254 Accounting, reporting, and monitoring requirements.
1738.255-1738.300 [Reserved]
Subpart G--Loan Guarantee
1738.301 General.
1738.302 Eligible guaranteed lenders.
1738.303 Requirements for the loan guarantee.
1738.304 Terms for guarantee.
1738.305 Obligations of guaranteed lender.
1738.306 Agency rights and remedies.
1738.307 Additional policies.
1738.308 Full faith and credit of the United States.
1738.309-1738.349 [Reserved]
1738.350 OMB control number.
Authority: Pub. L. 107-171, 7 U.S.C. 901 et seq.
Subpart A--General
Sec. 1738.1 Overview.
(a) The Rural Broadband Access Loan and Loan Guarantee Program
furnishes loans and loan guarantees to provide funds for the costs of
construction, improvement, or acquisition of facilities and equipment
needed to provide service at the broadband lending speed in eligible
rural areas. This part sets forth the general policies, eligibility
requirements, types and terms of loans and loan guarantees, and program
requirements under Public Law 107-171 and 7 U.S.C. 901 et seq.
(b) Additional information and application materials regarding the
Rural Broadband Access Loan and Loan Guarantee Program can be found on
the Rural Development Web site.
Sec. 1738.2 Definitions.
(a) The following definitions apply to part 1738:
Acquisition means the purchase of assets by acquiring facilities,
equipment, operations, licenses, or majority stock interest of one or
more organizations. Stock acquisitions must be arms-length
transactions.
Administrator means the Administrator of the Rural Utilities
Service (RUS), or the Administrator's designee.
Advance means the transfer of loan funds from the Agency to the
borrower.
Affiliate or affiliated company of any specified person or entity
means any other person or entity directly or indirectly controlling of,
controlled by, under direct or indirect common control with, or related
to, such specified entity, or which exists for the sole purpose of
providing any service to one company or exclusively to companies which
otherwise meet the definition of affiliate. This definition includes
Variable Interest Entities as described in Financial Accounting
Standards Board Interpretation (FIN) No. 46(R), Consolidation of
Variable Interest Entities. For the purpose of this definition,
``control'' means the possession directly or indirectly, of the power
to direct or cause the direction of the management and policies of a
company, whether such power is exercised through one or more
intermediary companies, or alone, or in conjunction with or pursuant to
an agreement with, one or more other companies, and whether such power
is established through a majority or minority ownership voting of
securities, common directors, officers, or stockholders, voting trust,
or holding trusts (other than money exchanged) for property or
services.
Agency means the Rural Utilities Service, which administers the
United States Department of Agriculture's (USDA's) Rural Development
Utilities Programs, including the Rural Broadband Access Loan and Loan
Guarantee Program.
Applicant means an entity requesting approval of a loan or loan
guarantee under this part.
Arm's-length transaction means a transaction between two related or
affiliated parties that is conducted as if they were unrelated, so that
there is no question of conflict of interest, or a transaction between
two otherwise unrelated or unaffiliated parties.
Borrower means any organization that has an outstanding broadband
or telecommunications loan made or guaranteed by the Agency.
Broadband borrower means any organization that has an outstanding
broadband loan made or guaranteed by the Agency.
Broadband grant means a Community Connect or Broadband Initiatives
Program grant approved by the Agency.
Broadband lending speed means the minimum bandwidth requirement, as
published by the Agency in its latest notice in the Federal Register
that an applicant must propose to deliver to every customer in the
proposed funded service area in order for the Agency to approve a
broadband loan and may be different for fixed and mobile broadband
service. Broadband lending speed may be different from the minimum rate
of data transmission required to determine the availability of
broadband service when qualifying a service area. If a new broadband
lending speed is published in the Federal Register while an application
is pending, the pending application may be returned unless the proposed
broadband system can provide service at the new broadband lending
speed. Returned applications will lose their place in the processing
queue.
Broadband loan means any loan approved under Title VI of the Rural
Electrification Act of 1936 (RE Act).
Broadband service means any technology identified by the
Administrator as having the capacity to provide transmission facilities
that enable the subscriber to the service to originate and receive
high-quality voice, data, graphics, and video. The Agency will publish
the minimum rate of data transmission that will qualify as broadband
service in a notice in the Federal Register and this rate may be
different for fixed and mobile broadband service. The minimum rate of
data transmission that defines broadband service may be different than
the broadband lending speed. If a new minimum rate of data transmission
is published in the Federal Register while an application is pending,
broadband service for the purpose of reviewing the application will be
defined by the minimum rate of data transmission that
[[Page 13787]]
was required at the time the application was received by the Agency.
Build-out means the construction, improvement, or acquisition of
facilities and equipment.
Competitive analysis means a study that identifies service
providers and products in the service area that will compete with the
applicant's proposed project.
Composite economic life means the weighted (by dollar amount of
each class of facility in the loan) average economic life as determined
by the Agency of all classes of facilities financed by the loan.
Cost share means equity, as defined by generally accepted
accounting principles (GAAP).
Customer premises equipment (CPE), in the context of network
services, means any network-related equipment (e.g. routers, switches,
modems, etc.) used by a customer to connect to a service provider's
network.
Derivative means any right, interest, instrument or security issued
or traded on the credit of the guaranteed loan or any guaranteed loan
portion, including but not limited to any participation share of, or
undivided ownership or other equity interest in, the guaranteed loan or
any guaranteed loan portion; any note, bond or other debt instrument or
obligation which is collateralized or otherwise secured by a pledge of,
or security interest in, the guaranteed loan or any guaranteed loan
portion; or any such interest in such an interest or any such
instrument secured by such an instrument.
Economic life means the estimated useful service life of an asset
financed by the loan, as determined by the Agency.
Equity means total assets minus total liabilities, as determined by
GAAP and as classified according to the Agency's system of accounts and
as used in this Part for purposes of section 306F of the RE Act
includes the requirements of credit support and cost share in Title VI
of the RE Act.
Feasibility study means the evaluation of the pro forma financial
analysis prepared by the Agency, based on the financial projections
supplied by the applicant and as found acceptable by the Agency, to
determine the financial feasibility of a loan request. Financial
feasibility will be based on the entire operation of the applicant and
not limited to the funded project.
Financial feasibility means the applicant's ability to generate
sufficient revenues to cover its expenses, sufficient cash flow to
service its debts and obligations as they come due, and meet the
minimum Times Interest Earned Ratio (TIER) requirement of 1.25 (see
Sec. 1738.211(b)(2)(ii)) by the end of the forecast period, as
evaluated by the Agency.
Fiscal year refers to the applicant or borrower's fiscal year,
unless otherwise indicated.
Forecast period means the time period used in the feasibility study
to determine if an application is financially feasible. Financial
feasibility of a loan application is based on five-year projections.
Funded service area means the geographic area within which an
applicant proposes to offer service at the broadband lending speed
using loan funds. (See also ``service area.'')
GAAP means generally accepted accounting principles.
Guaranteed-amount debt derivative means any note, bond, or other
debt instrument or obligation which is collateralized or otherwise
secured by a pledge of, or security interest in, the guaranteed loan
note or any guaranteed loan portion note or any derivative, as the case
may be, which has an exclusive or preferred claim to the guaranteed
loan amount or the respective guaranteed loan portion amount or the
respective guaranteed-amount equivalent, as the case may be.
Guaranteed-amount equity derivative means any participation share
of, or undivided ownership or other equity interest in, the guaranteed
loan or any guaranteed loan portion or any derivative, as the case may
be, which has an exclusive or preferred claim to the guaranteed loan
amount or the respective guaranteed loan portion amount or the
respective guaranteed-amount equivalent, as the case may be.
Guaranteed-amount equivalent means, with respect to any derivative
which is equal in principal amount to the guaranteed loan or any
guaranteed loan portion, that amount of payment on account of such
derivative which is equal to the guaranteed loan amount or the
respective guaranteed loan portion amount, as the case may be; or with
respect to any derivative which in the aggregate are equal in principal
amount to the guaranteed loan or any guaranteed loan portion, that
amount of payment on account of such derivatives which is equal to the
guaranteed loan amount or the respective guaranteed loan portion
amount, as the case may be.
Guaranteed loan amount means the amount of the loan which is
guaranteed by the Agency.
Guaranteed loan note means, collectively, the note or notes
executed and delivered by the borrower to evidence the guaranteed loan.
Guaranteed loan portion means any portion of the guaranteed loan.
Guaranteed loan portion amount means that amount of payment on
account of any guaranteed loan portion which is guaranteed under the
terms of the guarantee.
Guaranteed loan portion note means any note executed and delivered
by the borrower to evidence a guaranteed loan portion.
Grantee means any organization that has an outstanding broadband
grant made by the Agency.
Incumbent service provider (i) Means a service provider that:
(A) Offers terrestrial broadband service in the proposed funded
service area;
(B) Has not less than five percent of the households in an
applicant's proposed funded service area subscribing to their broadband
service at the time of application submission; and
(C) Provides this information to the Agency through a timely
response to the public notice described in Sec. 1738.204.
(ii) Resellers are not considered incumbent service providers. If
an applicant proposes an acquisition, the applicant will be considered
a service provider for that area.
Indefeasible right to use agreement (IRU) means the effective long-
term lease of the capacity, or a portion thereof, of a cable, specified
in terms of a certain number of channels of a given bandwidth.
Interim financing means funds used for eligible loan purposes after
the applicant is notified by the Agency that the application is
complete. Such funds may be eligible for reimbursement from loan funds
if a loan is made.
Loan means any loan made or guaranteed under this part by the
Agency, unless otherwise noted.
Loan contract means the loan agreement between the Agency and the
borrower, including all amendments thereto.
Loan documents means the loan agreement, note(s), and security
instrument between the borrower and the Agency and any associated
documents pertaining to the broadband loan.
Loan guarantee means a loan made by another lender, some portion of
which is guaranteed by the Agency.
Loan guarantee documents means the guarantee agreement between RUS
and the lender, the loan and security agreement(s) between the
guaranteed lender and the borrower, the loan note guarantee made by
RUS, the guaranteed loan note, and other security documents.
Loan funds means funds provided pursuant to a broadband loan made
or
[[Page 13788]]
guaranteed under this part by the Agency.
Market survey means the collection of information on the supply,
demand, usage, and rates for proposed services to be offered by an
applicant within each service area. It supports the applicant's
financial projections.
Pre-loan expense means any expense associated with the preparation
of a loan application. Pre-loan expenses may be reimbursed with loan
funds, as approved by RUS.
RE Act means the Rural Electrification Act of 1936, as amended (7
U.S.C. 901 et seq.).
Reject means that the Agency returns the application to the
applicant and discontinues processing of the loan application because
the application failed to meet the requirements set forth herein. If an
application is rejected, the loan application loses its place in the
application processing queue.
Reseller means, in the context of network services, a company that
purchases network services from network service providers in bulk and
resells them to commercial businesses and residential households.
Resellers are not considered incumbent service providers.
Rural area means any area, as confirmed by the latest decennial
census of the Bureau of the Census, which is not located within:
(i) A city, town, or incorporated area that has a population of
greater than 20,000 inhabitants; or
(ii) An urbanized area contiguous and adjacent to a city or town
that has a population of greater than 50,000 inhabitants. For purposes
of the definition of rural area, an urbanized area means a densely
populated territory as defined in the latest decennial census of the
U.S. Census Bureau.
Security documents means any mortgage, deed of trust, security
agreement, financing statement, or other document which grants to the
Agency or perfects a security interest, including any amendments and
supplements thereto.
Service area means the geographic area within which a service
provider offers telecommunications service.
Service level objectives (SLOs) means the characteristics of the
service to be delivered to the customer, for example the speed with
which new service will be established, service availability, and
response time for reports of system failure at a residence.
Service provider means an entity providing telecommunications
service.
Service territory means ``service area.''
Start-up means a new business venture without operations or service
delivery available.
System of accounts means the Agency's system of accounts for
maintaining financial records as described in RUS Bulletin 1770B-1.
Telecommunications means electronic transmission and reception of
voice, data, video, and graphical information using wireline and
wireless transmission media.
Telecommunications loan means any telecommunication loan made or
guaranteed under Title II, III, or IV of the RE Act.
TIER means times interest earned ratio. TIER is the ratio of an
applicant's net income (after taxes) plus (adding back) interest
expense, all divided by interest expense (existing and that required in
the proposed loan), and with all financial terms defined by GAAP.
Underserved household or Underserved area means a household or an
area that is not offered broadband service, or that is offered
broadband service by only one incumbent service provider.
Unguaranteed amount equivalent means all amounts of payment on
account of any derivative other than the respective guaranteed-amount
equivalent.
Unguaranteed loan amount means all amounts of payment on account of
the guaranteed loan other than the guaranteed amount.
Unguaranteed loan portion amount means all amounts of payment on
account of any guaranteed loan portion other than the respective
guaranteed loan portion amount.
(b) Accounting terms not otherwise defined in this part shall have
the definition ascribed to them under GAAP and shall be recorded using
the Agency's system of accounts.
Sec. 1738.3 Substantially underserved trust areas.
(a) If the Administrator determines that a community in ``trust
land'' (as defined in section 3765 of title 38, United States Code) has
a high need for the benefits of the Broadband Loan Program, he/she may
designate the community as a ``substantially underserved trust area''
(as defined in section 306F of the RE Act).
(b) In order to improve the availability of the Broadband Loan
Program in communities in substantially underserved trust areas, the
Administrator retains the discretion to
(1) Make available to qualified utilities or applicants, financing
with an interest rate as low as 2 percent, and with extended repayment
terms;
(2) Waive nonduplication restrictions, matching fund and equity
requirements, or credit support requirements; and
(3) Give the highest funding priority to designated projects in
substantially underserved trust areas.
(c) The Administrator will only make loans and loan guarantees that
RUS finds are financially feasible and that provide eligible program
benefits to substantially underserved trust areas.
(d) Applicants should notify the National Office before preparing
their applications that they are planning to seek waivers or
adjustments based on this section (see Sec. 1738.201).
Sec. Sec. 1738.4-1738.50 [Reserved]
Subpart B--Eligible and Ineligible Loan Purposes
Sec. 1738.51 Eligible loan purposes.
Loan funds may be used to pay for the following expenses:
(a) To fund the construction, improvement, or acquisition of all
facilities required to provide service at the broadband lending speed
to rural areas, including facilities required for providing other
services over the same facilities.
(b) To fund the cost of leasing facilities required to provide
service at the broadband lending speed if such lease qualifies as a
capital lease under GAAP. Notwithstanding, loan funds can only be used
to fund the cost of the capital lease for no more than the first three
years of the loan amortization period.
(c) To fund an acquisition, provided that:
(1) The acquisition is necessary for furnishing or improving
service at the broadband lending speed;
(2) The acquired service area, if any, meets the eligibility
requirements set forth in Sec. 1738.102;
(3) The acquisition cost does not exceed 50 percent of the
broadband loan amount; and
(4) For the acquisition of another entity, the purchase provides
the applicant with a controlling majority interest in the entity
acquired.
(d) To refinance an outstanding telecommunications loan made under
the RE Act if refinancing the loan supports the construction,
improvement, or acquisition of facilities and equipment for the
provision of service at the broadband lending speed in rural areas
provided that:
(1) No more than 40 percent of the broadband loan amount is used to
refinance the outstanding telecommunications loan;
[[Page 13789]]
(2) The applicant is current with its payments on the
telecommunication loan(s) to be refinanced; and
(3) The amortization period for that portion of the broadband loan
that will be needed for refinancing will not exceed the remaining
amortization period for the telecommunications loan(s) to be
refinanced. If multiple notes are being refinanced, an average
remaining amortization period will be calculated based on the weighted
dollar average of the notes being refinanced.
(e) To fund pre-loan expenses in an amount not to exceed five
percent of the broadband loan excluding amounts requested to refinance
outstanding telecommunication loans. Pre-loan expenses may be
reimbursed only if they are incurred prior to the date on which
notification of a complete application is issued (see Sec. 1738.205).
Sec. 1738.52 Ineligible loan purposes.
Loan funds must not be used for any of the following purposes:
(a) To fund operating expenses of the applicant;
(b) To fund costs incurred prior to the date on which notification
of a complete application is issued (see Sec. 1738.205), with the
exception of eligible pre-loan expenses (see 1738.51(e)).
(c) To fund the acquisition of the stock of an affiliate.
(d) To fund the purchase or acquisition of any facilities or
equipment of an affiliate, unless approved by the Agency in writing.
The Agency may approve such a purchase or acquisition if the applicant
demonstrates that the purchase or acquisition will involve an arms-
length transaction and that the cost is advantageous for the applicant.
(e) To fund the purchase of CPE and the installation of associated
inside wiring unless the CPE will be owned by the applicant throughout
its economic life or
(1) The applicant pledges additional collateral that is not
currently owned by the applicant, acceptable to the Agency. Such
collateral must have a value at least equal to the purchase price of
the CPE and cannot be purchased with loan funds; or
(2) The applicant establishes a revolving fund for the initial
purchase of CPE to be sold, and as CPE is sold to the customer, at
least the applicant's cost of such equipment is returned to the
revolving fund and used to purchase additional CPE units.
(f) To fund the purchase or lease of any vehicle unless it is used
primarily in construction or system improvements.
(g) To fund the cost of systems or facilities that have not been
designed and constructed in accordance with the loan contract and other
applicable requirements.
(h) To fund broadband facilities leased under the terms of an
operating lease.
(i) To fund merger or consolidation of entities.
Sec. Sec. 1738.53-1738.100 [Reserved]
Subpart C--Eligibility Requirements
Sec. 1738.101 Eligible applicants.
(a) To be eligible for a broadband loan, an applicant may be either
a nonprofit or for-profit organization, and must take one of the
following forms:
(1) Corporation;
(2) Limited liability company (LLC);
(3) Cooperative or mutual organization;
(4) Indian tribe or tribal organization as defined in 25 U.S.C.
450b; or
(5) State or local government, including any agency, subdivision,
or instrumentality thereof.
(b) To be eligible for a broadband loan, the applicant must:
(1) Submit a loan application which meets the requirements set
forth herein as well as any additional requirements published in the
Federal Register;
(2) Agree to complete the build-out of the broadband system
described in the loan application within three years from the day the
applicant is notified that loan funds are available. The loan
application must demonstrate that all proposed construction be
completed within this three year period with the exception of CPE. CPE
can be funded throughout the forecast period;
(3) Demonstrate an ability to furnish, improve, or extend broadband
facilities to provide service at the broadband lending speed in rural
areas;
(4) Demonstrate an equity position equal to at least 10 percent of
the amount of the loan requested in the application (see Sec.
1738.207); and
(5) Provide additional security if it is necessary to ensure
financial feasibility (see Sec. 1738.208) as determined by the
Administrator.
Sec. 1738.102 Eligible service area.
(a) A service area may be eligible for a broadband loan if all of
the following are true:
(1) The service area is completely contained within a rural area;
(2) At least 25 percent of the households in the service area are
underserved households;
(3) No part of the service area has three or more incumbent service
providers;
(4) No part of the funded service area overlaps with the service
area of current RUS borrowers and grantees;
(5) No part of the funded service area is included in a pending
application before RUS seeking funding to provide broadband service. If
two or more applications are submitted for the same service area, a
lending decision must be made on the application that was submitted to
the Agency first before a lending decision can be made on the other
application(s).
(b) Multiple service areas may be included in a single broadband
loan application. Non-contiguous areas are considered separate service
areas and must be treated separately for the purpose of determining
service area eligibility. If non-contiguous areas within an application
are determined to be ineligible, the Agency may pursuant to this
regulation consider the remaining areas in the application. If an
applicant fails to respond to agency requests for additional
information or modifications to remove ineligible areas, the
application may be returned and the application will lose its place in
the processing queue.
Sec. 1738.103 Eligible service area exceptions for broadband facility
upgrades.
(a) Broadband borrowers that apply to upgrade existing broadband
facilities in its existing service area are exempt from the requirement
concerning the number of underserved households in Sec.
1738.102(b)(2).
(b) Incumbent service providers, including borrowers and grantees,
which apply to upgrade existing broadband facilities in existing
service territories are exempt from the requirement concerning the
number of incumbent service providers in Sec. 1738.102(b)(3) unless
they are eligible for funding under Titles II and III of the RE Act.
Eligibility requirements for entities that would be eligible under
Titles II and III can be found in 7 CFR part 1735.
(c) An applicant which is a borrower, grantee or incumbent service
provider may submit one application to upgrade existing broadband
facilities in existing service areas, which qualify for the exemptions
specified in paragraphs (a) and (b) of this section, and to expand
services at the broadband lending speed into new service areas,
provided the upgrade area and the expansion area are proposed as two
separate service areas even if the upgrade and expansion areas are
contiguous.
(d) The applicant will be asked to remove areas determined to be
ineligible from their funding request. The application will then be
evaluated on
[[Page 13790]]
the basis of what remains. The applicant may be requested to provide
additional information to the agency relating to the ineligible areas.
If the applicant fails to respond, the application will be returned and
the application will lose its place in the processing queue.
Sec. 1738.104 Preliminary assessment of service area eligibility.
(a) The Agency will make information available to prospective
applicants to allow a preliminary assessment of a proposed service
area's eligibility. At a minimum, the prospective applicant will be
able to determine:
(1) Whether the proposed service area is located in a rural area;
(2) Whether the proposed service area overlaps with any part of a
borrower's or grantee's service area; and
(3) Whether the proposed service area overlaps with any part of a
proposed service area in a pending application for a loan.
(b) A preliminary assessment of service area eligibility does not
account for all eligibility factors, and the situation within a
proposed service area may change between the preliminary assessment and
application submission. A preliminary assessment indicating that a
proposed service area may be eligible does not guarantee that the area
will remain eligible at the time of application.
Sec. Sec. 1738.105-1738.150 [Reserved]
Subpart D--Direct Loan Terms
Sec. 1738.151 General.
(a) Direct loans shall be in the form of a cost-of-money loan, a 4-
percent loan, or a combination of the two.
(b) The amount of funds available for each type of loan, as well as
maximum and minimum loan amounts, will be published in the Federal
Register.
(c) An applicant that provides telecommunications or broadband
service to at least 20 percent of the households in the United States
is limited to a loan amount that is no more than 15 percent of the
funds available to the Broadband Loan Program for the Federal fiscal
year.
Sec. 1738.152 Interest rates.
(a) Direct cost-of-money loans shall bear interest at a rate equal
to the cost of borrowing to the Department of Treasury for obligations
of comparable maturity. The applicable interest rate will be set at the
time of each advance.
(b) [Reserved].
Sec. 1738.153 Loan terms and conditions.
Terms and conditions of loans are set forth in a mortgage, note,
and loan contract. Samples of the mortgage, note, and loan contract can
be found on the Agency's Web site.
(a) Unless requested to be shorter by the applicant, broadband
loans must be repaid with interest within a period that, rounded to the
nearest whole year, is equal to the expected composite economic life of
the assets to be financed, as determined by the Agency based upon
acceptable depreciation rates.
(b) Loan advances are made at the request of the borrower.
Principal payments for each advance are amortized over the remaining
term of the loan and are due monthly. Principal payments will be
deferred until one year after the date of the first advance of loan
funds. Interest begins accruing when the advance is made and interest
payments are due monthly, with no deferral period.
(c) Borrowers are required to carry fidelity bond coverage.
Generally this amount will be 15 percent of the loan amount, not to
exceed $5 million. The Agency may reduce the percentage required if it
determines that the amount is not commensurate with the risk involved.
Sec. 1738.154 Loan security.
(a) The broadband loan must be secured by the assets purchased with
the loan funds, as well as all other assets of the applicant and any
other signer of the loan documents except as provided in Sec.
1738.155.
(b) The Agency must be given an exclusive first lien, in form and
substance satisfactory to the Agency, on all of the applicant's
property and revenues and such additional security as the Agency may
require. The Agency may share its first lien position with another
lender on a pari passu, prorated basis if security arrangements are
acceptable to the Agency.
(c) Unless otherwise designated by the Agency, all property
purchased with loan funds must be owned by the applicant.
(d) In the case of loans that include financing of facilities that
do not constitute self-contained operating systems, the applicant shall
furnish assurance, satisfactory to the Agency, that continuous and
efficient service at the broadband lending speed will be rendered.
(e) The Agency will require financial, investment, operational,
reporting, and managerial controls in the loan documents.
Sec. 1738.155 Special terms and conditions.
(a) The Agency may, when it is in the best interest of the Agency
and its mission, the affected community, and the applicant, aid in
achieving financial feasibility in an underserved area by taking the
following steps:
(1) Extend the loan term up to 35 years, and
(2) Modify its security requirements.
(b) The Agency may reduce the security requirements discussed in
Sec. 1738.154(a) to ensure that the security is commensurate with the
risk involved.
Sec. 1738.156 Other Federal requirements.
(a) To receive a broadband loan, the applicant must certify or
agree in writing to comply with a variety of Federal regulations
including, but not limited to:
(1) The nondiscrimination and equal employment opportunity
requirements of Title VI of the Civil Rights Act of 1964, as amended (7
CFR part 15);
(2) Section 504 of the Rehabilitation Act of 1973, as amended (29
U.S.C. 794 et seq.; 7 CFR part 15b);
(3) The Age Discrimination Act of 1975, as amended (42 U.S.C. 6101
et seq.; 45 CFR Part 90);
(4) Executive Order 11375, amending Executive Order (E.O.) 11246,
Relating to Equal Employment Opportunity (3 CFR, 1966-1970). See 7 CFR
parts 15 and 15b and 45 CFR part 90, RUS Bulletin 1790-1
(``Nondiscrimination Among Beneficiaries of RUS Programs''), and RUS
Bulletin 20-15:320-15 (``Equal Employment Opportunity in Construction
Financed with RUS Loans'');
(5) The Architectural Barriers Act of 1968, as amended (42 U.S.C.
4151 et seq.);
(6) The Uniform Federal Accessibility Standards (UFAS) (Appendix A
to 41 CFR subpart 101-19.6);
(7) The requirements of the National Environmental Policy Act of
1969 (NEPA), as amended;
(8) The Council on Environmental Quality Regulations for
Implementing the Procedural Provisions of NEPA and certain related
Federal environmental laws, statutes, regulations, and Executive Orders
found in 7 CFR part 1794;
(9) The Uniform Relocation Assistance and Real Property Acquisition
Policies Act of 1970, as amended, 42 U.S.C. 4601 et seq., and with
implementing Federal regulations in 49 CFR part 24 and 7 CFR part 21;
(10) The regulations implementing E.O. 12549, Debarment and
Suspension, 7 CFR 3017.510, Participants' Responsibilities;
(11) The requirements regarding Lobbying for Contracts, Grants,
Loans, and Cooperative Agreements in 31 U.S.C. 1352;
[[Page 13791]]
(12) Certification regarding Flood Hazard Area Precautions;
(13) Certification regarding Debarment, Suspension, and Other
Responsibility Matters--Primary Covered Transactions; and
(14) Certification that the borrower is not delinquent on any
Federal debt and has been informed of the collection options the
Federal Government may use to collect delinquent debt.
(b) Applicants must agree in writing to comply with all Federal,
State and local laws, rules, regulations, ordinances, codes, and orders
applicable to the project.
Sec. Sec. 1738.157-1739.200 [Reserved]
Subpart E--Application Review and Underwriting
Sec. 1738.201 Application submission.
(a) Loan applications must be submitted directly to the Agency's
National Office or to the General Field Representative (GFR) that is
assigned to the area where the applicant's headquarters are located. A
list of GFRs and the areas they are assigned can be found on the
Agency's Web site. All applications must contain two hard copies and an
electronic copy of the entire application. An application is considered
received upon receipt of the hard and electronic copies by the National
Office. The date and time of that receipt will establish the
application's placement in the processing queue.
(b) The Agency may publish additional application submission
requirements in the Federal Register.
Sec. 1738.202 Elements of a complete application.
An applicant must submit to the Agency a complete application in a
format as required by the Agency in the Rural Broadband Access Loan and
Loan Guarantee Program Application Guide (the Application Guide). To be
considered complete, the application must contain at least the
following items, each of which must be completed in a manner acceptable
to the Agency:
(a) A completed RUS Form 532, including any additional items
required by the form;
(b) Information required for the public notice to determine service
area eligibility (see Sec. 1738.204);
(c) Documentation demonstrating how the applicant will meet the
equity requirement (see Sec. 1738.207);
(d) A market survey, unless not required by Sec. 1738.209(b);
(e) A competitive analysis (see Sec. 1738.210);
(f) Required financial information (see Sec. 1738.211);
(g) A network design (see Sec. 1738.212);
(h) A legal opinion that addresses the applicant's ability to enter
into a loan as requested in the loan application, to pledge security as
required by the Agency, to describe all pending litigation matters, and
such other requirements as are detailed in the Application Guide;
(i) All required licenses and regulatory approvals for the proposed
operation or the status of obtaining these items; and
(j) Additional items that may be required by the Administrator
through a notice in the Federal Register.
Sec. 1738.203 Priority for processing loan applications.
(a) Except as provided in Section 306F of the RE Act (SUTA) and
section 1738.3 herein, in making or guaranteeing loans, the Agency
shall give priority to applications in the following order:
(1) Applications in which no broadband service is available in any
funded service area;
(2) Applications in which at least 75 percent of households in the
funded service area have no incumbent service provider. For
applications with multiple funded service areas, the 75 percent
calculation is based on all funded service areas combined;
(3) Applications in which at least 50 percent of households in the
funded service area have no incumbent service provider. For
applications with multiple funded service areas, the 50 percent
calculation is based on all funded service areas combined;
(4) Applications in which at least 25 percent of households in the
funded service area have no incumbent service provider. For
applications with multiple funded service areas, the 25 percent
calculation is based on all funded service areas combined; and
(5) All other applications.
(b) Once applications have been prioritized according to the
criteria listed in paragraph (a) of this section, the applications will
be processed on a first-in, first-out basis within each priority
category.
(c) The Agency shall establish the National and State reserve
levels in accordance with Title VI of the RE Act. In instances when
funds in a particular area are insufficient to cover a loan request,
priority will be given to processing applications for which funding is
available.
Sec. 1738.204 Public notice.
(a) The Agency will publish a public notice of each application.
The application must provide a summary of the information required for
such public notice including all of the following information:
(1) The identity of the applicant;
(2) A map of each service area showing the rural area boundaries
and the underserved areas using the Agency's Mapping Tool;
(3) The estimated number of underserved households in each service
area;
(4) The estimated number of households without terrestrial-based
broadband service in each service area; and
(5) A description of all the types of services that the applicant
proposes to offer in each service area.
(b) The Agency will publish the public notice on an Agency webpage
after the application has been received in the Agency's National
Office. The notice will remain on the webpage for a period of 30
calendar days. The notice will ask existing service providers to submit
to the Agency, within this 30-day period, the following information:
(1) The number of residential and business customers within the
applicant's service area that are currently offered broadband service
by the existing service provider;
(2) The number of residential and business customers within the
applicant's service area currently purchasing the existing service
provider's broadband service, the rates of data transmission being
offered, and the cost of each level of broadband service charged by the
existing service provider;
(3) The number of residential and business customers within the
applicant's service area receiving the existing service provider's non-
broadband services and the associated rates for these other services;
and
(4) A map showing where the existing service provider's services
coincide with the applicant's service area using the Agency's Mapping
Tool.
(5) Whether the existing service provider is an existing RUS
borrower or grantee.
(c) The Agency will use the information submitted to determine if
the existing service provider will be classified as an incumbent
service provider. If an existing service provider does not submit a
response within the timeframe specified in the public notice, it will
not be considered an incumbent service provider. However, all existing
service providers will be considered in the Agency's feasibility study
and lending decision.
(d) The Agency will determine whether the service areas included in
[[Page 13792]]
the application are eligible for funding based on the information
provided during the public notice period, whether all portions of the
service area qualify as rural areas, and the number of incumbent
service providers servicing any portion of the service area. If the
applicant's funded service area is ineligible, the Agency will contact
the applicant and require that those ineligible areas be removed from
the funded service area. If the ineligible service areas are not
removed from the funding request, the Agency will reject the
application and remove it from the processing queue. The applicant will
be notified, in writing, and the application will be returned with an
explanation of the reasons for the rejection.
(e) The information submitted by an existing service provider will
be treated as proprietary and confidential to the extent permitted
under applicable law.
Sec. 1738.205 Notification of completeness.
If all funded service areas are eligible, the Agency will review
the application for completeness. The completeness review will include
an assessment of whether all required documents and information have
been submitted and whether the information provided is of adequate
quality to allow further analysis.
(a) If the application contains all required documents and
information and is of adequate quality, the Agency will notify the
applicant, in writing, that the application is complete. The
notification of completeness will mark the date as of which costs
incurred for the eligible purposes listed in Sec. 1738.51(a) through
(d) can be reimbursed with loan funds if the loan is ultimately made
and proper procedures have been followed. A notification of
completeness is not a commitment that the loan will be approved.
(b) If the application is of adequate quality but does not contain
all required documents and information, the Agency will notify the
applicant, in writing, that the application is incomplete. The
notification of incompleteness will include a list of items that the
applicant must address and will specify a date by which the applicant's
additional information must be received.
(1) If the applicant fails to respond by the specified date, the
application will be rejected.
(2) If the applicant responds by the specified date but does not
satisfactorily address the issues identified, the Agency will assess
the applicant's progress toward submission of a complete application.
If the applicant has made progress acceptable to the Agency, a second
notification of incompleteness will be provided. If the applicant's
progress is not acceptable to the Agency, the application will be
rejected.
(c) If the application is considered to be of inadequate quality,
the Agency will notify the applicant, in writing, that the application
has been rejected. The rejection letter will include an explanation of
the reasons for the rejection and the application will be removed from
the queue.
Sec. 1738.206 Evaluation for feasibility.
After an applicant is notified that the application is complete,
the Agency will evaluate the application's financial and technical
feasibility. The Agency will only make a broadband loan if the
applicant's financial operations, taking into account the impact of the
facilities financed with the proceeds of the loan and the associated
debt, are financially and technically feasible, as determined by the
Agency.
(a) The Agency will determine financial feasibility by evaluating
the applicant's equity, market survey (if required), competitive
analysis, financial information, and other relevant information in the
application.
(b) The Agency will determine technical feasibility by evaluating
the applicant's network design and other relevant information in the
application.
Sec. 1738.207 Equity requirement.
(a) To be eligible for a loan, an applicant must demonstrate a
minimum equity position equal to 10 percent of the requested loan
amount at the time of application which must remain available at loan
closing. In addition to this minimum equity requirement, please refer
to section Sec. 1738.208, Additional Cash Requirements which could
cause the equity requirement to be higher than 10 percent.
(b) If the applicant does not have the required equity at the time
the application is submitted, the applicant may satisfy the equity
requirement at the time of application with an investor's unconditional
legal commitment to cover the shortfall by providing additional equity.
The additional equity must be transferred to the applicant prior to
loan closing. If this option is elected, the applicant must provide
evidence in the application that clearly identifies the investor's
commitment to the applicant; the amount, terms, and conditions of the
investment; and the investor's bank or financial statements that
demonstrate its ability to fulfill its commitment. The terms and
conditions of the investment must be acceptable to the Agency, which
generally prohibits redemption of the investment until such time as
stated requirements and financial thresholds are achieved by the
applicant. The Agency will reject applications that do not provide
evidence acceptable to the Agency regarding the investor's commitment.
(c) For State and local government applicants, the equity
requirement can be satisfied with a general obligation bond, as long as
the additional equity will be available to the applicant at closing. If
the equity requirement is satisfied with a general obligation bond, the
broadband loan cannot be subordinate to the bond. The applicant must
submit an opinion from its legal counsel that the applicant has the
authority to issue a general obligation bond in an amount sufficient to
meet the minimum equity requirement. Revenue bonds supported by the
operations to be funded cannot be used to satisfy the equity
requirement.
Sec. 1738.208 Additional cash requirements.
(a) If the Agency's financial analysis indicates that the
applicant's entire operation (existing operations and new operations
combined) will show a negative cash balance at the end of any year
during the five-year forecast period, the Agency will require the
applicant to obtain additional cash infusions necessary to maintain an
appropriate cash balance throughout the five-year forecast period. This
cash infusion would be in conjunction with the required 10 percent
minimum equity position.
(1) The Agency will require the applicant and its investors to:
(i) Infuse additional cash to cover projected deficits for the
first two years of operations at loan closing; and
(ii) Enter into legal arrangements that commit them to making
additional cash infusions to ensure that the operation will sustain a
positive cash position on a quarterly basis throughout the five-year
forecast period.
(2) For purposes of identifying the additional cash requirement for
a start-up operation or an operation that has not demonstrated positive
cash flow for the two years prior to the submission date of the
application, 50 percent of projected revenues for each year of the
five-year forecast period will be considered to determine if an
operation can sustain a positive cash position. In addition to the
initial financial projections required to demonstrate financial
feasibility, such applicants must complete adjusted financial
projections using the reduced revenue projections in order to identify
the amount of additional cash that will be
[[Page 13793]]
required. Projections must be fully supported with assumptions
acceptable to the Agency. The applicant may present evidence in its
loan application that projected revenues or a portion of projected
revenues are based on binding commitments and request that more than 50
percent of the projected revenues be considered for the purpose of
identifying the additional cash requirement.
(3) For purposes of satisfying the additional cash requirements for
an existing operation that has demonstrated a positive cash flow for
the two fiscal years prior to the submission date of the application,
100 percent of the projected revenues for each year of the five-year
forecast period will be used to determine if an operation can sustain a
positive cash position, as long as these projections are fully
supported with assumptions acceptable to the Agency.
(4) If debt is incurred to satisfy the additional cash requirement,
this debt must take a subordinate lien position to the Agency debt and
must be at terms acceptable to the Agency.
(b) An applicant may satisfy the additional cash requirement with
an unconditional, irrevocable letter of credit (LOC) satisfactory to
the Agency. The LOC must be issued from a financial institution
acceptable to the Agency and must remain in effect throughout the
forecast period. The applicant and the Agency must both be payees under
the LOC. The LOC must have payment conditions acceptable to the Agency,
and it must be in place prior to loan closing. The applicant cannot
secure the LOC with its assets and cannot pay for any LOC charges or
fees with its funds.
(c) If the Agency offers a loan to the applicant, the applicant
must ensure that the additional cash infusion required in the first two
years is deposited into its bank account within 120 days from the date
the applicant signs the loan offer letter (see Sec. 1738.251) and must
enter into any other legal arrangements necessary to cover further
projected operating deficits (or in the case of the LOC, to provide an
acceptable LOC to the Agency) prior to closing. If these requirements
are not completed within this timeframe, the loan offer will be
terminated, unless the applicant requests and the Agency approves an
extension based on extenuating circumstances that the Agency was not
aware of at the time the offer was made.
(d) The Administrator may modify the requirements of this section
for loans in service areas that are underserved when it is in the best
interests of the Agency.
Sec. 1738.209 Market survey.
(a) Except as provided in paragraph (b) of this section, the
applicant must complete a separate market survey for each service area
where the applicant proposes to provide service at the broadband
lending speed. Each market survey must demonstrate the need for the
service at the broadband lending speed, support the projected
penetration rates and price points for the services to be offered, and
support the feasibility analysis. The market survey must also address
all other services that will be provided in connection with the
broadband loan. Additional information on the requirements of the
market survey can be found in the Application Guide.
(b) The applicant is not required to complete a market survey for
any service offering for which the applicant is projecting less than a
20 percent penetration rate in each service area by the end of the
five-year forecast period. For example, if the applicant is projecting
a penetration rate of 30 percent for data services and 15 percent for
video services, a market survey must be completed for the data
services. The proposed prices for those services with a projected
penetration rate less than 20 percent must be affordable, as determined
by the Agency.
(c) For a market survey to be acceptable to the Agency, it must
have been completed within six months of the application submission
date. The Agency may reject any application in which the financial
projections are not supported by the market survey. If the demographics
of the proposed service area have significantly changed since the
survey was completed, the Agency may require an updated market survey.
(d) The Administrator may modify the requirements of this section
for loans in service areas that are underserved when it is in the best
interests of the Agency.
Sec. 1738.210 Competitive analysis.
The applicant must submit a competitive market analysis for each
service area regardless of projected penetration rates. Each analysis
must identify all existing service providers and all resellers in each
service area regardless of the provider's market share, for each type
of service the applicant proposes to provide. This analysis must
include each competitor's rate packages for all services offered, the
area that is being covered, and to the extent possible, the quality of
service being provided.
Sec. 1738.211 Financial information.
(a) The applicant must submit financial information acceptable to
the Agency that demonstrates that the applicant has the financial
capacity to fulfill the loan requirements and to successfully complete
the proposed project.
(1) If the applicant is an existing company, it must provide
complete copies of audited financial statements (opinion letter,
balance sheet, income statement, statement of changes in financial
position, and notes to the financial statement) for the three fiscal
years preceding the application submission. If audited statements are
not available, the applicant must submit unaudited financial statements
and tax returns for those fiscal years. Applications from start-up
entities must, at a minimum, provide an opening balance sheet dated
within 30 days of the application submission date.
(2) If the applicant is a subsidiary operation, it must also
provide complete copies of audited financial statements for the parent
operation for the fiscal year preceding the application submission. If
audited statements are not available, unaudited financial statements
and tax returns for the previous year must be submitted.
(3) If the applicant relies on services provided by an affiliated
operation, it must also provide complete copies of audited financial
statements for any affiliate for the fiscal year preceding the
application submission. If audited statements are not available,
unaudited statements and tax returns for the previous year must be
submitted.
(4) Applicants must provide a list of all its outstanding
obligations. Copies of existing notes and loan and security agreements
must be included in the application.
(5) Applicants must provide a detailed description of working
capital requirements and the source of these funds.
(b) Applicants must submit the following documents that demonstrate
the proposed project's financial viability and ability to repay the
requested loan.
(1) Customer projections for the five-year forecast period that
substantiate the projected revenues for each service that is to be
provided. The projections must be provided on at least an annual basis
and must be developed separately for each service area. These
projections must be clearly supported by the information contained in
the market survey, unless no market survey is required (see Sec.
1738.209(b)).
(2) Annual financial projections in the form of balance sheets,
income statements, and cash flow statements for the five-year forecast
period. Prior to the submission of an application, an applicant may
request that alternative
[[Page 13794]]
information related to financial viability be considered when the
applicant can for good cause demonstrate why a full five-year forecast
cannot be provided. If this request is approved by the Agency, then the
applicant can submit the application using the alternative information
that was approved.
(i) These projections must use a system of accounts acceptable to
the Agency and be supported by a detailed narrative that fully explains
the methodology and assumptions used to develop the projections.
(ii) The financial projections submitted by the applicant must
demonstrate that their entire operation will be able to meet a minimum
TIER requirement equal to 1.25 by the end of the five-year forecast
period. Demonstrating that the operation can achieve a projected TIER
of 1.25 does not ensure that the Agency will approve the loan.
(iii) If the financial analysis suggests that the operation will
not be able to achieve the required TIER ratio, the Agency will not
approve the loan without additional capital, additional cash,
additional security, and/or a change in the loan terms.
(c) Based on the financial evaluation, the loan documents will
specify TIER requirements that must be met throughout the amortization
period.
Sec. 1738.212 Network design.
(a) Applications must include a network design that demonstrates
the project's technical feasibility. The network design must fully
support the delivery of service at the broadband lending speed,
together with any other services to be provided. In measuring speed,
the Agency will take into account industry and regulatory standards.
The design must demonstrate that the project will be complete within
three years from the day the Agency notifies the applicant that loan
funds are available and must include the following items:
(1) A detailed description of the proposed technology that will be
used to provide service at the broadband lending speed. This
description must clearly demonstrate that all households in the funded
service area will be offered service at the broadband lending speed;
(2) A detailed description of the existing network. This
description should provide a synopsis of the current network
infrastructure;
(3) A detailed description of the proposed network. This
description should provide a synopsis of the proposed network
infrastructure;
(4) A description of measurable service metrics and target service
level objectives (SLOs) that will be provided to the customer, and the
methods that will be used to measure performance and respond to unmet
SLOs;
(5) A description of the approach and methodology for monitoring
ongoing service delivery and service quality for the services being
deployed;
(6) Estimated project costs detailing all facilities that are
required to complete the project. These estimated costs must be broken
down to indicate costs associated with each proposed service area and
must specify how Agency and non-Agency funds will be used to complete
the project;
(7) A construction build-out schedule of the proposed facilities by
service area on a quarterly basis. The build-out schedule must include:
(i) A description of the work force that will be required to
complete the proposed construction;
(ii) A timeline demonstrating project completion within three years
from the date the Agency notifies the applicant that loan funds are
available;
(iii) Detailed information showing that all households within the
funded service area will be offered service at the broadband lending
speed when the system is complete; and
(iv) Detailed information showing that construction of the proposed
facilities will start within six months from the date the Agency
notifies the borrower that loan funds are available.
(8) A depreciation schedule for all facilities financed with loan
and non-loan funds;
(9) An environmental report prepared in accordance with 7 CFR part
1794; and
(10) Any other system requirements required by the Administrator
through a notice published in the Federal Register.
(b) The network design must be prepared by a registered
Professional Engineer with telecommunications experience or by
qualified personnel on the applicant's staff. If the network design is
prepared by the applicant's staff, the application must clearly
demonstrate the staff's qualifications, experience, and ability to
complete the network design. To be considered qualified, staff must
have at least three years of experience in designing the type of
broadband system proposed in the application.
(c) The Administrator may modify the requirements of this section
for loans in underserved service areas.
Sec. 1738.213 Loan determination.
(a) If the application meets all statutory and regulatory
requirements and the feasibility study demonstrates that the TIER
requirement can be satisfied, the application will be submitted to the
Agency's credit committees for consideration. Submission of the
application to the Agency's credit committees does not guarantee that a
loan will be approved. In making a loan determination, the
Administrator shall consider the recommendations of the credit
committees.
(b) The applicant will be notified of the Agency's decision in
writing. If the Agency approves the loan, a loan offer will be
extended. If the Agency does not approve the loan, a rejection letter
will be sent to the applicant, and the application will be returned
with an explanation of the reasons for the rejection.
Sec. Sec. 1738.214--1738.250 [Reserved]
Subpart F--Closing, Servicing, and Reporting
Sec. 1738.251 Loan offer and loan closing.
The Agency will notify the applicant of the loan offer, in writing,
and the applicant will typically have 10 working days to accept the
offer. If the applicant accepts the loan offer, a loan contract will be
executed and sent to the applicant. The applicant must execute the loan
contract and satisfy all conditions precedent to loan closing within
the timeframe specified by the Agency which is typically 120 days from
the date of the loan contract. If the conditions are not met within
this timeframe, the loan offer will be terminated, unless the applicant
requests and the Agency approves an extension. The Agency may approve
such a request if the applicant has diligently sought to meet the
conditions required for loan closing and has been unable to do so for
reasons outside its control.
Sec. 1738.252 Construction.
(a) Construction paid for with broadband loan funds must comply
with 7 CFR part 1788, 7 CFR part 1794, RUS Bulletin 1738-2 and any
other guidance from the Agency.
(b) Upon notification by the Agency that an applicant has submitted
all the required documentation and the application is considered
complete for analysis (see Sec. 1738.205), the applicant, at its own
risk, may enter into an interim financing agreement with a third-party
lender or use its own funds to start construction that is included in
the loan application. For this construction to be eligible for
reimbursement with loan funds, all construction procedures contained
[[Page 13795]]
herein must be followed. The Agency's determination that an application
is complete is not a commitment that a loan will be approved.
(c) The borrower must begin construction within six months from the
date the Agency notifies the applicant that loan funds are available.
This is the final step in closing the loan with the applicant. If the
borrower fails to begin construction, the Agency may cancel the loan.
(d) The build-out must be complete within three years from the day
the Agency notifies the applicant that loan funds are available. Build-
out is considered complete when the network design has been fully
implemented, the service operations and management systems
infrastructure is operational, and the borrower is ready to support the
activation and commissioning of individual customers to the new system.
Sec. 1738.253 Servicing.
(a) Borrowers must make payments on the broadband loan as required
in the note.
(b) Borrowers must comply with all terms, conditions, affirmative
covenants, and negative covenants contained in the loan documents.
(c) In the event of default of any required payment or other term
or condition:
(1) A late charge shall be charged on any payment not made in
accordance with the terms of the note.
(2) The Agency may exercise the default remedies provided in the
loan documents but is not required to do so.
(3) If the Agency chooses to not exercise its default remedies, it
does not waive its right to do so in the future.
Sec. 1738.254 Accounting, reporting, and monitoring requirements.
(a) Borrowers must adopt a system of accounts for maintaining
financial records acceptable to the Agency, as described in 7 CFR 1770,
subpart B.
(b) Borrowers must submit annual audited financial statements along
with a report on compliance and on internal control over financial
reporting, and management letter in accordance with the requirements of
7 CFR part 1773. The Certified Public Accountant (CPA) conducting the
annual audit is selected by the borrower and must be approved by RUS as
set forth in 7 CFR 1773.4.
(c) Borrowers must comply with all reasonable Agency requests to
support ongoing monitoring efforts. The Borrower shall afford RUS,
through its representatives, reasonable opportunity, at all times
during business hours and upon prior notice, to have access to and the
right to inspect the Broadband System, and any other property
encumbered by the Mortgage, and any or all books, records, accounts,
invoices, contracts, leases, payrolls, timesheets, cancelled checks,
statements, and other documents, electronic or paper of every kind
belonging to or in the possession of the Borrower or in anyway
pertaining to its property or business, including its subsidiaries, if
any, and to make copies or extracts therefore.
(d) Borrowers records shall be retained and preserved in accordance
with the provisions of 7 CFR part 1770, subpart A.
Sec. Sec. 1738.255-1738.300 [Reserved]
Subpart G--Loan Guarantee
Sec. 1738.301 General.
(a) Applicants wishing to obtain a loan guarantee for private
financing are subject to the same requirements as direct loan borrowers
with respect to:
(1) Loan purposes as described in Subpart B;
(2) Eligible borrowers and eligible areas as described in Subpart
C;
(3) The loan terms described in Subpart D, with the exception of
the interest rates described in Sec. 1738.152; and
(4) The application review and underwriting requirements in Subpart
E.
(b) The Agency will publish a notice annually in the Federal
Register indicating any additional requirements, as well as the amount
of funds available, if any, for loan guarantees.
Sec. 1738.302 Eligible guaranteed lenders.
To be eligible for a loan guarantee, a guaranteed lender must be:
(a) A financial institution in good standing that has been a
concurrent lender with RUS; or
(b) A legally organized lending institution, such as commercial
bank, trust company, mortgage banking firm, insurance company, or any
other institutional investor authorized by law to loan money, which
must be subject to credit examination and supervision by a Federal or
State agency, unless the Agency determines that alternative examination
and supervisory mechanisms are adequate.
Sec. 1738.303 Requirements for the loan guarantee.
At the time of application, applicants must provide in form and
substance acceptable to the Agency:
(a) Evidence of the guaranteed lender's eligibility under Sec.
1738.302;
(b) Evidence that the guaranteed lender has the demonstrated
capacity to adequately service the guaranteed loan;
(c) Evidence that the guaranteed lender is in good standing with
its licensing authority and meets the loan making, loan servicing, and
other requirements of the jurisdiction in which the lender makes loans;
(d) Evidence satisfactory to the Agency of its qualification under
this part, along with the name of the authority that supervises it;
(e) A commitment letter from the guaranteed lender that will be
providing the funding, and the terms of such funding, all of which may
be conditioned on final approval of the broadband loan guarantee by the
Agency; and
(f) A description of any and all charges and fees for the loan,
along with documentation that they are comparable to those normally
charged other applicants for the same type of loan in the ordinary
course of business. Such charges and fees will not be included within
the Agency's loan guarantee.
Sec. 1738.304 Terms for guarantee.
Loan guarantees will only be given on the conditions that:
(a) The loan guarantee is no more than 80 percent of the principal
amount, which shall exclude any and all charges and fees;
(b) The guarantee is limited to the outstanding loan repayment
obligation of the borrower and does not extend to guaranteeing that the
guaranteed lender will remit to a holder, loan payments made by the
borrower;
(c) The interest rate must be fixed and must be the same or lesser
for the guaranteed loan amount or the respective guaranteed loan
portion amount or the respective guaranteed amount equivalent, as the
case may be, and unguaranteed loan amount or the respective
unguaranteed loan portion amount or the respective unguaranteed-amount
equivalent, as the case may be;
(d) The entire loan will be secured by the same security with equal
lien priority for the guaranteed loan amount or the respective
guaranteed loan portion amount or the respective guaranteed-amount
equivalent, as the case may be, and unguaranteed loan amount or the
respective unguaranteed loan portion amount or the respective
unguaranteed-amount equivalent, as the case may be;
(e) The unguaranteed loan amount or the respective unguaranteed
loan portion amount or the respective unguaranteed-amount equivalent,
as the case may be, will neither be paid first nor given any preference
or priority over the guaranteed loan amount or the respective
guaranteed loan portion amount or the respective guaranteed-amount
equivalent, as the case may be;
[[Page 13796]]
(f) Prior written approval is obtained from the Agency for any
assignment by the guaranteed lender. Any assignment shall entitle the
holder to all of the guaranteed lender's rights but shall maintain the
guaranteed lender responsible for servicing the entire loan;
(g) The borrower, its principal officers, members of the borrower's
board of directors and members of the immediate families of said
officials shall not be a holder of the guaranteed lender's loan;
(h) The Agency will not guarantee any loan under this subpart that
provides for a balloon payment of principal or interest at the final
maturity date of the loan or for the payment of interest on interest;
(i) All loan guarantee documents between the Agency and the
guaranteed lender are prepared by the Agency; and
(j) The guaranteed loan agreement between the borrower and the
lender shall be subject to Agency approval.
Sec. 1738.305 Obligations of guaranteed lender.
Once a loan guarantee has been approved, the guaranteed lender will
be responsible for:
(a) Servicing the loan;
(b) Determining that all prerequisites to each advance of loan
funds by the lender under the terms of the contract of guarantee, all
financing documents, and all related security documents have been
fulfilled;
(c) Obtaining approval from the Agency to advance funds prior to
each advance;
(d) Billing and collecting loan payments from the borrower;
(e) Notifying the Administrator promptly of any default in the
payment of principal and interest on the loan and submit a report no
later than 30 days thereafter, setting forth the reasons for the
default, how long it expects the borrower will be in default, and what
corrective actions the borrower states that it is taking to achieve a
current debt service position; and
(f) Notifying the Administrator of any known violations or defaults
by the borrower under the lending agreement, contract of guarantee, or
related security instruments or conditions of which the lender is aware
which might lead to nonpayment, violation, or other default.
Sec. 1738.306 Agency rights and remedies.
(a) The guarantee must provide that upon notice to the lender, the
Agency may assume loan servicing responsibilities for the loan or the
guaranteed loan amount or the respective guaranteed loan portion amount
or the respective guaranteed-amount equivalent, as the case may be, or
require the lender to assign such responsibilities to a different
entity, if the lender fails to perform its loan servicing
responsibilities under the loan guarantee agreement, or if the lender
becomes insolvent, makes an admission in writing of its inability to
pay its debts generally as they become due, or becomes the subject of
proceedings commenced under the Bankruptcy Reform Act of 1978 (11
U.S.C. 101 et seq.) or any similar applicable Federal or State law, or
is no longer in good standing with its licensing authority, or ceases
to meet the eligibility requirements of this subpart. Such negligent
servicing is defined as the failure to perform those services which a
reasonable prudent lender would perform in servicing its own portfolio
of loans that are not guaranteed and includes not only a failure to act
but also not acting in a timely manner.
(b) The guarantee shall cease to be effective with respect to any
guaranteed loan amount or any guaranteed loan portion amount or any
guaranteed-amount equivalent to the extent that:
(1) The guaranteed loan amount or the respective guaranteed loan
portion amount or the respective guaranteed amount equivalent, as the
case may be, is separated at any time from the unguaranteed loan amount
or the respective unguaranteed loan portion amount or the respective
unguaranteed-amount equivalent, as the case may be, in any way,
directly or through the issuance of any guaranteed-amount equity
derivative or any guaranteed-amount debt derivative; or
(2) Any holder of the guaranteed loan note or any guaranteed loan
portion note or any derivative, as the case may be, having a claim to
payments on the guaranteed loan receives more than its pro-rata
percentage of any payment due to such holder from payments made under
the guarantee at any time during the term of the guaranteed loan.
Sec. 1738.307 Additional policies.
The Agency shall provide additional loan guarantee policies,
consistent with OMB Circular A-129, in order to achieve its mission of
promoting broadband in rural areas, which shall be published annually
in the Federal Register.
Sec. 1738.308 Full faith and credit of the United States.
Loan guarantees made under this part are supported by the full
faith and credit of the United States and are incontestable except for
fraud or misrepresentation of which the holder had actual knowledge at
the time it became a holder.
Sec. Sec. 1738.309-1738.349 [Reserved]
Sec. 1738.350 OMB control number.
The information collection requirements in this part are approved
by the Office of Management and Budget (OMB) and assigned OMB control
number 0572-0130.
Dated: March 8, 2011.
Jessica Zufolo,
Acting Administrator, Rural Utilities Service.
[FR Doc. 2011-5615 Filed 3-11-11; 8:45 am]
BILLING CODE 3410-15-P