[Code of Federal Regulations]
[Title 7, Volume 11]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1786.28]

[Page 1092-1094]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER XVII--RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 1786--PREPAYMENT OF RUS GUARANTEED AND INSURED LOANS TO ELECTRIC AND TELEPHONE BORROWERS--Table of Contents
 
  Subpart B--Prepayment of RUS Guaranteed Federal Financing Bank Loans 
                Pursuant to Section 306(A) of the RE Act
 
Sec. 1786.28  Qualifications.

    (a) Borrowers.To qualify to prepay an FFB loan pursuant to this 
subpart, the borrower must:
    (1) Demonstrate that the FFB loan was outstanding on July 2, 1986;
    (2) Prepay the FFB loan by:
    (i) Using a private loan with the existing loan guarantee;
    (ii) Using internally generated funds; or
    (iii) Using a combination of a private loan with the existing loan 
guarantee and internally generated funds; and
    (3) Certify that any savings resulting from such prepayment will be 
passed on to its customers, or used to improve the financial strength of 
the borrower in cases of financial hardship.
    (b) Lenders. To participate pursuant to this subpart, in a 
borrower's prepayment of an FFB loan by means of a private loan, the 
lender must:
    (1) Be a private legally organized lender, or a lender established 
pursuant to the Farm Credit Act of 1971, as amended;
    (2)(i) Be subject to credit examination and supervision by either an 
agency of the United States or a state and be in good standing with its 
licensing authority and have met the requirements, if any, of licensing, 
lending and loan servicing in the state where the collateral for the 
Loan is located;
    (ii) Be a financially viable lender; or
    (iii) Be a trust administered. by an entity meeting the requirements 
of paragraph (b)(2) (i) or (ii) of this section; and
    (3) Have the capability to adequately service the private loan 
either by using its own resources or by contracting for such resources 
with a financially viable lender. Under no circumstances may the 
borrower or an affiliate of the borrower service the private loan. A 
qualified lender may participate out each private loan to entities other 
than a Government agency, the borrower, or an affiliate of the borrower, 
provided that such participation shall be on terms and conditions 
satisfactory to the Administrator.
    (c) Private Loans. A borrower who qualifies pursuant to 
Sec. 1786.28(a) may at its option elect to use a private loan to make a 
prepayment, or a portion of a prepayment, pursuant to this subpart. 
Private loans, the proceeds of which are used exclusively to prepay FFB 
loans, shall be eligible for a guarantee under this subpart. The 
Administrator shall endorse a guarantee on each note evidencing a 
qualifying private loan. The private loan shall be structured in a 
manner which in the judgment of RUS shall not result in an increase in 
loan guarantee risk and shall comply with the following:

[[Page 1093]]

    (1) The private loan shall provide for the periodic payment of 
interest by the borrower not less frequently than annually, at either a 
variable or fixed rate in a manner which shall not result in an increase 
in loan guarantee risk. (i.e. The dollar weighted average interest rate 
on the private loan shall be less than or equal to the dollar weighted 
average interest rate on the FFB loan being prepaid, so that:
[GRAPHIC] [TIFF OMITTED] TC16SE91.024

Where,
Cr=The revised interest rate cap;
Co=The original interest rate cap at the time of prepayment;
Ai=The average interest rate actually charged in the ith 
period;
Ti=Length of the ith period expressed in years;
n=The number of years that have elapsed since the initial prepayment;
J=The initial term of the private loan, at the time of prepayment;
Subject to the constraint that A1 must be less or equal to 
Co).

    (2) Principal payments on the private loan shall be made either 
quarterly, semiannually, or annually and shall commence on or before the 
last day of the calendar year during which the prepayment pursuant to 
this subpart was made.
    (3) With the approval of the Administrator, the lender may refund 
the private loan with the proceeds of another loan from the same lender, 
with the existing guarantee and under terms, conditions, and a structure 
substantially similar to the private loan, on such dates as the lender, 
the borrower and RUS may agree, provided however, that such a refunding 
loan shall comply with the provisions of Sec. 1786.28(c) hereof. 
Additionally, with the approval of the Administrator, the private loan 
may be prepaid either in whole or in part at any time by the borrower 
using its general funds.
    (4) The private loan and the guaranteed note evidencing the private 
loan shall not be directly or indirectly part of a transaction the 
income of which is excluded from gross income for the purposes of 
Chapter I of the Internal Revenue Code of 1986.
    (5) The guaranteed note evidencing the private loan shall not be 
transferable or assignable except
    (i) With the written approval of the Administrator;
    (ii) In the event that the guaranteed note evidencing the private 
loan is held by a trust, to a similar trust, in connection with a 
refunding loan made by the lender pursuant to Sec. 1786.28(c)(3); or
    (iii) As an undivided pro rata interest in a pool of obligations.
    (6) The loan documentation shall provide RUS with the right to 
accelerate the note evidencing the private loan upon the occurrence of 
any ``Event of Default'' under the mortgage with the effect that all of 
the unpaid principal and interest on any such note shall become 
immediately due and payable to RUS, and RUS shall continue to pay under 
its guarantee the principal of and interest on such note without taking 
into account such acceleration. The loan documentation shall also 
provide RUS with a right, upon the occurrence of such an ``Event of 
Default,'' to accelerate payment on its guarantee and accelerate payment 
on the note evidencing the private loan on the earlier of any date the 
interest rate on the private loan is reset, without premium or penalty; 
any date the borrower may prepay in accordance with the terms of the 
private loan, or the tenth anniversary of the date the private loan 
first bears interest at a fixed interest rate.
    (7) The principal of the private loan shall not include amounts 
attributable to fees associated with the private loan. At the time it 
submits its application, a borrower may request that

[[Page 1094]]

the Administrator approve the inclusion of amounts attributable to fees 
as part of the interest rate on the private loan, if the net effective 
interest rate including such fees meets the test contained in 
Sec. 1786.28(c)(1). For the purposes of these regulations, such financed 
fees shall be considered ``interest''.
    (8) Private loans and guaranteed notes evidencing private loans 
shall otherwise be in form and substance satisfactory to the 
Administrator.
    (d) Prepayments Without a Guarantee. Qualifying borrowers may elect 
to utilize internally generated funds without a guarantee to prepay an 
FFB loan, or partially prepay an FFB loan, pursuant to this subpart, if
    (1) The borrower notifies RUS, of its intent to prepay using 
internally generated funds in accordance with the application procedures 
set forth in this subpart; and
    (2) The borrower submits a certification to RUS that the prepayment 
does not, materially adversely affect the financial stability of the 
borrower and its ability to meet all its obligations, including debt 
service on all loans made, guaranteed or lien accommodated under the RE 
Act which will remain outstanding after the date of the prepayment.
    (e) The Use of both a Private Loan and Internally Generated Funds. 
Qualifying borrowers may elect to utilize a combination of private loans 
and internally generated funds without a guarantee, to prepay an FFB 
loan pursuant to this subpart, if
    (1) The private loans comply with the provisions of paragraph (c) of 
this section, and
    (2) The borrower complies with paragraph (d) of this section.
    (f) FFB loans. A borrower's FFB loans that qualify to be prepaid 
pursuant to this subpart are:
    (1) Qualifying Borrowers. In the case of qualifying borrowers other 
than financially distressed borrowers, FFB advances with long-term 
maturity dates may be prepaid pursuant to this subpart; and
    (2) Financially distressed borrowers. FFB loans that are eligible to 
be prepaid by utilizing the financially distressed borrowers' reserve 
are advances with long-term maturity dates, and which in the opinion of 
the Administrator, if prepaid, would result in an economic savings to 
the financially distressed borrower.

[55 FR 1145, Jan. 11, 1990, as amended at 55 FR 35426, Aug. 30, 1990. 
Redesignated at 55 FR 49250, Nov. 27, 1990]