FR Doc E7-9021

[Federal Register: May 11, 2007 (Volume 72, Number 91)]
[Proposed Rules]
[Page 26742-26759]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11my07-12]

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Proposed Rules
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

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[[Page 26742]]

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: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Utilities Service, an agency delivering the United
States Department of Agriculture's (USDA) Rural Development Utilities
Programs, hereinafter referred to as Rural Development, proposes to
amend its regulation for the Rural Broadband Access Loan and Loan
Guarantee Program (Broadband Loan Program). Since the Broadband Loan
Program's inception, the Agency has faced and continues to face
significant challenges in administering the program, including the
fierce competitive nature of the broadband market, the fact that many
companies proposing to offer broadband service are start-up
organizations with limited resources, continually evolving technology,
and economic factors such as the higher cost of serving rural
communities. Because of these challenges, the Agency has been reviewing
the characteristics of the Broadband Loan Program and has determined
that modifications are required to accelerate the deployment of
broadband service to the rural areas of the country. Therefore, this
rulemaking proposes to implement changes on the following subject
matter: funding in competitive markets and new eligibility
requirements; new equity and market survey requirements; and new legal
notice requirements to increase transparency.

DATES: Comments must be submitted on or before July 10, 2007.

ADDRESSES: Submit comments by either of the following methods:
Federal eRulemaking Portal: Go to http://www.regulations.gov
and, in the lower ``Search Regulations and Federal

Actions'' box, select ``Rural Utilities Service'' from the agency drop-
down menu, then click on ``Submit.'' In the Docket ID column, select
RUS-06-Agency-0052 to submit or view public comments and to view
supporting and related materials available electronically. 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 ``User Tips''
link.
Postal Mail/Commercial Delivery: Please send your comment
addressed to Michele Brooks, Acting 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.
Other Information: Additional information about Rural Development
and its programs is available on the Internet at http://www.rurdev.usda.gov/index.html
.

FOR FURTHER INFORMATION CONTACT: Jonathan Claffey, Deputy Assistant
Administrator, Telecommunications Program, Rural Development, U.S.
Department of Agriculture, 1400 Independence Avenue, SW., STOP 1590,
Room 4056, Washington, DC 20250-1590. Telephone number (202) 720-9554,
Facsimile (202) 720-0810.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This proposed rule has been determined to be significant for
purposes of Executive Order 12866 and, therefore, has been reviewed by
the Office of Management and Budget (OMB). 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 Rural Development upon request.

Executive Order 12988

This proposed rule has been reviewed under Executive Order 12988,
Civil Justice Reform. Rural Development has determined that this rule
meets the applicable standards provided in section 3 of that Executive
Order. In addition, all State and local laws and regulations that are
in conflict with this rule will be preempted. No retroactive effect
will be given to the rule and, in accordance with section 212(e) of the
Department of Agriculture Reorganization Act of 1994 (7 U.S.C.
6912(e)), administrative appeal procedures must be exhausted before an
action against the Department or its agencies may be initiated.

Regulatory Flexibility Act Certification

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) is not
applicable to this proposed rule because the Agency is not required by
5 U.S.C. 553 or any other law to publish a notice of proposed
rulemaking for the subject matter of this rule.

Paperwork Reduction Act and E-Government Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Chapter 35, as amended), Rural Development 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 July 10, 2007.
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.
Comments may be sent to Michele Brooks, Acting 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.
Title: 7 CFR Part 1738, Rural Broadband Access Loans and Loan
Guarantees.
OMB Control Number: 0572-0130.

[[Page 26743]]

Type of Request: Revision of a currently approved information
collection package.
Abstract: Rural Development 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. Title VI of the RE Act
requires that Rural Development make or guarantee a loan only if there
is reasonable assurance that the loan, together with all outstanding
loans and obligations of the borrower will be repaid in full within the
time agreed. The items covered by this collection include forms and
related documentation to support a loan application, including Form 532
and supporting documentation.
Revisions to the information collection include: (1) Funding in
competitive markets and new eligibility requirements (revisions will
affect the details of an application, but not the difficulty of
preparation or quantity of information provided; accordingly, the
paperwork burden associated with these changes is not expected to be
appreciably more or less than under the existing rule); (2) new equity
requirements (revisions will affect the details of an application, but
not the difficulty of preparation or quantity of information provided;
accordingly, the paperwork burden associated with these changes is not
expected to be appreciably more or less than under the existing rule);
(3) new market survey requirements (the associated paperwork burden
will be reduced by a small amount for some applicants as the
requirement will be eliminated in certain instances); and (4) new legal
notice requirements to increase transparency (the additional
information required by the proposed modification of legal notice
requirement will increase the paperwork burden of each application by a
small amount).
Estimate of Burden: Public reporting for this collection of
information is estimated to average 225 hours per response.
Respondents: Businesses and not-for-profit institutions.
Estimated Number of Respondents: 40.
Estimated Number of Responses per Respondent: 2.
Estimated Total Annual Burden on Respondents: 13,480 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. Rural
Development 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.

Catalog of Federal Domestic Assistance

The program described by this proposed rule is listed in the
Catalog of Federal Domestic Assistance Programs under No. 10.886, Rural
Broadband Access Loans and Loan Guarantees. This catalog is available
on a subscription basis from the Superintendent of Documents, the
United States Government Printing Office, Washington, DC 20402.
Telephone: (202) 512-1800 or at http://www.cfda.gov.

Executive Order 12372

This proposed rule is excluded from the scope of Executive Order
12372, Intergovernmental Consultation, which may require 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).

Unfunded Mandates

This proposed rule contains no Federal mandates (under the
regulatory provision of Title II of the Unfunded Mandate Reform Act of
1995) for State, local, and tribal governments or the private sector.
Thus, this rule is not subject to the requirements of sections 202 and
205 of the Unfunded Mandate Reform Act of 1995.

National Environmental Policy Act Certification

Rural Development has determined that this proposed rule will not
significantly affect the quality of the human environment as defined by
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).
Therefore, this action does not require an environmental impact
statement or assessment.

Background

Contents

A. Introduction
B. Regulatory History
C. Program Results
D. Program Improvements
E. Review of Rules and Processes
F. Proposed Rule Changes

A. Introduction: The Utilities Programs (the Agency) of USDA Rural
Development improve 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, USDA Rural
Development finances infrastructure that enables access to a seamless,
nation-wide 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 ``Farm Bill'' was signed
into law. The 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 Farm Bill, the Agency was directed to promulgate regulations
without public comment within 120 days from passage. 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. The current regulations were published on January 30, 2003.

[[Page 26744]]

C. Program Results: Despite the challenges in implementing this new
program, significant progress has been made in facilitating rural
broadband deployment. As of March 15, 2007, the Agency approved 68
loans totaling $1.2 billion for broadband deployment projects
headquartered in 36 states. Eight of those projects are completed in
Kansas, Louisiana, Michigan, North Dakota, Nebraska, South Dakota,
Texas and Washington. The remainder of the projects are in various
stages of construction or planning. Through these loans, more than half
a million households in more than 1,000 rural communities will receive
broadband service. Approximately 40 percent of these communities had no
broadband service at the time the loan was approved, and an additional
20 percent had limited access to broadband services.
As mandated by Congress, the program is to be administered in a
technology neutral manner. As the results show below, the Agency has
achieved that mandate by financing the deployment of a wide array of
technologies capable of meeting the needs of rural communities:

------------------------------------------------------------------------
Number of
Technology loans
approved *
------------------------------------------------------------------------
Broadband over Powerline.................................. 1
Digital Subscriber Line................................... 15
Wireless.................................................. 18
Hybrid Fiber Coax......................................... 12
Optical Fiber............................................. 27
------------------------------------------------------------------------
* Applications deploying multiple technolo- gies counted in each
category.

In addition to the various types of technology deployments, loans
have been made to a very diverse set of organizations using various
business models. Nearly 90 percent of loans approved were made to
private companies, 7 percent were made to cooperatives, 3 percent were
made to municipalities and 1 loan was awarded to a tribal authority.
D. Program Improvements: Since the Broadband Program's inception,
many modifications have been made to improve the administration of the
program. Specifically, the Agency has created a standardized loan
application; a Broadband Credit Committee to evaluate risks in the
program; a financial assessment model to measure loan feasibility; and
new standardized loan documents to cover the unique attributes of the
industry, as well as accommodate private lending from financial markets
which were not traditional Agency lending partners.
Moreover, the Agency now encourages applicants to work with Agency
local field representatives prior to submitting applications to
increase loan processing efficiency. Program outreach efforts have been
well received and are in high demand today. To date, the Agency has
conducted nearly two dozen awareness sessions with 1,488 attendees
nation-wide.
As a result of its efforts, the Agency has seen dramatic
improvements in its application processing. The average processing time
in 2006 was almost half of what it was in 2003. In addition, to
increase program awareness and transparency, modifications have been
made to the Agency's Web site to ensure that information is available
to potential applicants, potential competitors, and the public.
E. Review of Rules and Processes: While the Agency is proud of the
results achieved thus far, it is also aware that improvements to the
Broadband Program are necessary. Over the course of the last four
years, the Broadband Program has encountered challenges in
administering the program and learned from them. The challenges include
the competitive nature of the broadband communications industry, the
fact that many applicants are start-up organizations with limited
resources to meet equity requirements, the rapid pace of technology
advancement and increases in demand for bandwidth, and the need for
increased transparency in providing communities and incumbent providers
with information on new market entrants. Program participants and
industry members have since raised concerns with the implementation of
the program. The Agency's experience, coupled with input from industry
representatives, state and regional associations, and other interested
parties, has prompted the Agency to propose amendments to its
regulations to address these challenges and other critical issues
affecting the deployment of broadband service in rural America. The
Agency is, however, still committed to Title VI's direction to give
priority to eligible rural communities where broadband service is not
available. Further, the Agency is seeking comment on the proposals,
which as noted above, will be the first formal opportunity for public
comment on the rules associated with the Broadband Program.
Specifically, this proposed rule will address: (1) Funding in
competitive markets and new eligibility requirements; (2) New equity
and market survey requirements; and (3) New legal notice requirements
to increase transparency. Further, the program proposes reordering the
present rules to make them more user-friendly, and rewording certain
rules, without substantively changing them, to clarify their meaning.
In addition, the proposed changes codify processes and procedures
currently published in Agency guides (i.e., application submission
procedures, competitive analysis, reporting requirements, etc.). In
order to easily identify which sections have been modified, added,
removed, or re-ordered, the following table summarizes the proposed
changes:

[[Page 26745]]

Deleted Definitions.
Broadband pilot.
Mortgage.
Private Loan Guarantee.
RUS Telecommunications
borrower.
New Definitions--The Agency
has added definitions to
clarify existing
regulation and support
proposed rule
modifications.
Advance of Funds.
Agency.
Arm's Length Transaction.
Broadband Loan.
Census block.
Census block group.
Derivative.
Eligible Entity.
Equity or Net Worth.
Existing Broadband
Service Provider.
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 (IRU).
Loan Guarantee.
Loan Guarantee Documents.
Pre-Loan Expenses.
Security Documents.
Telecommunications Loan.
Urban Area.
Un-guaranteed Amount
Equivalent.
Un-guaranteed Loan Amount
and Un-guaranteed Loan
Portion Amount.
Subpart B--Loan Purposes and Basic
Policies:
Sec. 1738.10 General......... 1738.1(a)............. Modified/relocated.... Refinancing language in (b)
1738.2(a)............. ...................... was moved to 1738.22(e).
Moved and modified text
related to economic
composite life to
1738.2(a).
Sec. 1738.11 Availability of 1738.33............... Modified/relocated.... Legal notice language moved
broadband service. 1738.61............... ...................... to 1738.33.
(a) and (b) (1) through (3)
included in new
prioritization scheme in
1738.61.
Sec. 1738.12 Location of 1738.22(a)............ Modified.............. Clarify eligible items for
facilities. financing.
Sec. 1738.13 Allocation of 1738.62............... Modified.............. Condensed original language
funds. by citing the RE Act as
the guidance for
allocating funds.
Sec. 1738.14 One-time Deleted............... Deleted............... No longer relevant.
priority for unfunded
applications from the
broadband pilot program.
Sec. 1738.15 Priorities...... 1738.61............... Modified.............. Added new language
regarding prioritization
of applications in the
following order:
(1) Applications that
include only households
that have no broadband
access or only one
Existing Broadband Service
Provider.
(2) Applications that
include only areas where
at least 40 percent of
households have no access
to Broadband service or
access to only one
Existing Service provider;
(3) All other applications.
1738.62............... ...................... Relocated language
regarding State and
National reserves to
1738.62. Text is reworded
to reference the Act.
Sec. 1738.16 Eligible 1738.2................ Relocated/modified.... Moved language regarding
entities. the types of entities
eligible for loans to
1738.2(a).
1738.20............... ...................... Moved language regarding
1738.21............... eligible entities
(existing 1738.16(a) and
(b)) to 1738.2(a).

[[Page 26746]]

Added new section, 1738.21,
to detail requirements to
serve areas with little or
no service:
--Start-up operations and
new entrants--40% of
proposed households in a
proposed service area must
have access to no or only
one existing broadband
provider.
--Incumbent Service
Providers proposing to
extend service beyond
their existing footprint--
40% of proposed households
in extended service areas
must have access to no or
only one existing
broadband provider.
--Incumbent Service
Providers submitting
applications solely for
the purpose of upgrading
existing facilities within
Eligible Rural Communities
must offer Broadband
Service with enhanced
features.
Sec. 1738.17 Civil rights.... 1738.64............... Relocated/unmodified.. Redesignated as 1738.64 but
text is unchanged.
Sec. 1738.18 Minimum and 1738.12............... Relocated/modified.... Removed reference to plant
maximum loan amount. costs.
Moved language from
1738.30(b)(2) regarding
annual publication of max/
min to this section.
Removed language ``maximum
loan amounts apply only to
an applicant for a direct
4-percent broadband loan''
and made a general
statement that the maximum
will be set in the NOFA
published annually in the
Federal Register. This
allows the Agency the
flexibility to set the
maximum level based on
current funding levels and
portfolio concentration.
Sec. 1738.19 Facilities 1738.19............... Modified/clarified.... General reorganization to
financed. more clearly define for
applicants what is and is
not eligible for funding
by dividing the two topics
into separate sections.
Old 1738.19(h) is now in
1738.19(b) and renamed
ineligible areas.
1738.22............... ...................... 1738.22 Items Eligible to
be financed.
1738.22(a)--new language
regarding start-up and
overhead costs is a
further clarification that
these costs are eligible
for financing. Although
not specified in the
earlier rules, these costs
were considered part of
the construction costs and
therefore have been
routinely funding in the
loan program.
1738.22(b)--new language
regarding pre-loan
expenses.
1738.22(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. This
language was added because
the standard period for
advancing all funds set in
all RUS loan documents is
5 years. Any lease
extending beyond that
period should not have
funds available at that
time.
1738.22(d)--new language
clarifies the definition
of ``necessary and
incidental'' that
currently exists in
1738.21(c). The common
practice of the agency is
to interpret this clause
as 50%. We have made this
standard known in public
workshops for several
years.
1738.23............... Modified/clarified.... 1738.23(d)--clarification
that funds cannot be used
to purchase or acquire the
equipment of an affiliate.
1738.23(e)--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.
Eliminated old 1738.19(g)--
This rule specifically
addressed actions the
Agency would take prior to
October 2004. This rule is
outdated and no longer
valid.

[[Page 26747]]

Sec. 1738.20 Credit support 1738.31............... Modified.............. Now called Equity
requirement. Requirement and Additional
cash requirement.
1738.32............... ...................... Added incentive to serve
areas with little or no
broadband service: reduced
initial equity requirement
to 10% for applications
filing pursuant to
1738.31(a) or (b); 20%
equity requirement remains
for all other
applications.
Added clarification on the
use of letters of credit
and bonds to meet equity
requirements.
Added language to reserve
the Administrator's right
to modify or waive the
requirements of this
section as long as those
modifications do not
result in a projected
negative cash position in
any quarter throughout the
forecast period and the
modifications are required
to provide Broadband
Service in areas that are
not capable of receiving
Broadband Service or can
receive Broadband Service
from only one Existing
Broadband Service
Provider.
Modified cash requirement
language so that cash
requirements are
considered at time of
feasibility determination
rather than for
eligibility.
Sec. 1738.21 Interim 1738.60............... Relocated/modified.... Revised for clarification.
financing. No substantive change.
Sec. 1738.22 Loan security... 1738.41(b) (c) & (d).. Modified.............. 1738.41(b), (c) and (d)--
requirement unchanged,
reworded to provide
further clarity.
1738.37(e)............ ...................... Old 1738.22(e) language
regarding TIER was moved
to financial analysis
section--1738.37(e).
Subpart C--Types of Loans:
Sec. 1738.30 Rural broadband 1738.11............... Relocated/modified.... Modified original language
access loans and loan in 1738(b)(1)(i)(A) to
guarantees. increase the populations
test for a 4% loan from
2,500 to 5,000.
1738.43............... ...................... Modified original language
in 1738.30(b)(1)(i)(B) to
be consistent with
proposed rules. Language
located in 1738.11b(1)(ii)
now reads ``is not capable
of receiving broadband
service or can receive
service from only one
existing broadband service
provider.
Deleting original language
in 1738.30(b)(1)(ii)--This
language was intended to
promote service to
outlying rural areas
because these areas had
less access to broadband
service. The new proposed
regulations will achieve
this same goal by
requiring most applicants
to include a significant
portion of service areas
with little or no
broadband service.
Deleting original language
in 1738.30(b)(1)(i)(C)--
Our experience has
demonstrated that this
rule was too restrictive
and prevented most
applicants from qualifying
for the 4% funding. The
proposed regulations will
require most applicants to
include service to areas
with little or no
broadband service. These
areas are likely to have
lower population density
and higher deployment
costs. Removing the
original restriction in
1738.30(b)(1)(i)(C) will
better support deployment
to these areas by allowing
applicants access to lower
cost financing.
1738.11............... Relocated/modified.... Current 1738.30(b)(2) has
1738.43............... ...................... been relocated to 1738.12.
Current rules specific to
loan guarantees have been
moved to 1738.43
Sec. 1738.31 Full faith and 1738.43(f)............ Relocated/unmodified.. Moved to 1738.43(f) without
credit. substantial changes.
Subpart D--Terms of Loans:
Sec. 1738.40 General......... 1738.40(a)............ Relocated/modified.... Current text designated as
paragraph (a) and revised
to clarify for applicants.
Sec. 1738.41 Payments on 1738.42............... Relocated/modified.... Added language regarding
Loans. the Administrator's
ability to modify
requirements on a case-by-
case basis for areas that
are not capable of
receiving or can only
receive from one existing
broadband provider.
----------------------------------------------------------------------------------------------------------------

[[Page 26748]]

Broadband Loan and Loan Guarantee Program Rules--Summary of Proposed Changes
----------------------------------------------------------------------------------------------------------------
Proposed new sections Subject matter Proposed content
----------------------------------------------------------------------------------------------------------------
Subpart D--Loan Application
Requirements:
1738.34.......................... Market Survey.......... The rules proposed in this section codify
existing requirements published in Bulletin
1738-1.
Modification of Market Survey Requirement:
1738.34(b) now eliminates the requirement for a
market survey if an applicant is projecting
less than a 15 percent penetration of the
households passed, by the end of the Forecast
Period. A detailed competitive analysis is
still required for all applications. We are
proposing this modification in response to
applicants' concerns that the cost of
conducting a market survey is a barrier to
filing. The Agency has relied more heavily on
the competitive analysis and financial and risk
analysis to determine project feasibility, and
will continue to do so under the new proposal.
Added language reserving the Administrator's
right to waive the requirements on a case-by-
case basis.
1738.35.......................... Competitive analysis... The rules proposed in this section codify
existing requirements published in Bulletin
1738-1. Applicants are aware of the
requirements and currently comply with them.
1738.36.......................... Business plan.......... The rules proposed in this section codify
existing requirements published in Bulletin
1738-1. Applicants are aware of the
requirements and currently comply with them.
1738.37.......................... Financial information.. The rules proposed in this section codify
existing requirements published in Bulletin
1738-1. Applicants are aware of the
requirements and currently comply with them.
The proposed rule also allows cash-flow from
operations to be used in determination of the
cash requirement.
1738.38.......................... System design.......... The rules proposed in this section codify
existing requirements published in Bulletin
1738-1. Applicants are aware of the
requirements and currently comply with them.
New language reserving the Administrator's right
to waive the requirements on a case-by-case
basis.
1738.39.......................... Submission of New section that clarifies that applicants are
application. 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.
Subpart F--Post Application
Procedures:
1738.50.......................... Notification of This new section codifies currently existing
completeness. internal processes and is designed to help
applicants understand the post-application
process. We believe this demonstrates the
Agency's commitment to a standardized and more
transparent process.
1738.51.......................... Determination of This new section codifies currently existing
feasibility. internal processes and is designed to help
applicants understand the post-application
process. We believe this demonstrates the
Agency's commitment to a standardized and more
transparent process.
1738.52.......................... Notice to applicant of This new section codifies currently existing
decision. internal processes and is designed to help
applicants understand the post-application
process. We believe this demonstrates the
Agency's commitment to a standardized and more
transparent process.
Subpart G--Miscellaneous Requirements
and Information:
1738.63.......................... Annual audit and Codifies standard requirements currently
reporting requirements. existing in broadband loan closing documents.
Added language to 1738.63(a) to allow the
Administrator to waive the requirement that an
audit be performed in the year in which the
loan is approved if operations of the applicant
have not yet started.
1738.65.......................... Applicable laws........ Codifies standard requirements existing in all
broadband loan documents.
----------------------------------------------------------------------------------------------------------------

F. Proposed Rule Changes: The following proposals seek to implement
changes to the Broadband Program's regulations regarding: (1) Funding
in competitive markets and new eligibility requirements; (2) New equity
and market survey requirements; and (3) New legal notice requirements
to increase transparency. Through this Notice, the Agency seeks
comments on all of these proposed changes from any and all interested
parties.
(1) Funding in competitive markets and new eligibility
requirements: The most intractable problem the Broadband Program has
encountered is finding feasible loan applications which propose to
serve only rural areas which do not have broadband service. The cost of
building out a broadband system coupled with low rural population
density in unserved areas has consistently yielded loan proposals which
cannot be supported by project revenues. Consequently, in the history
of the program, the Agency has certified as complete only one
application to serve a rural area completely without broadband service.
Uniquely, that application was for an Indian reservation with a very
different competitive environment.
In order for broadband loans to be feasible, it is necessary for
applicants to serve low cost, more densely populated areas, as well as
low density high cost areas. Although it is necessary to serve high
density areas which are likely to have broadband service, the Agency
proposes to place limitations on service to such areas. The Agency
proposes changes in eligibility that would prohibit funding within
urban areas, regardless of population, and areas where a significant
share of the market is already served by incumbent providers. To
accomplish this, the Agency is adding or modifying three definitions,
Existing Broadband Service Provider, Eligible Rural Community, and
Urban Area, which will identify communities that will be ineligible for
funding by establishing that sufficient service is already being
provided.
(a) Existing Broadband Service Provider. The Agency initially
proposes the definition of an existing broadband service provider to
identify existing competition. As a basis, the Agency will use the
current definition of

[[Page 26749]]

``broadband'' established by the Federal Communications Commission
(FCC) to determine Incumbent Service Providers that are providing
broadband service to the households in the applicant's proposed
communities. To be recognized as an Existing Broadband Service
Provider, the Incumbent Service Provider must provide evidence and
certify to the Agency that 10 percent of the households passed by their
facilities are purchasing their broadband service. Using this new
definition, funding for any community where there are four or more
Existing Broadband Service Provider will be prohibited.
In establishing the benchmark of ``10 percent of households,'' the
Agency sought to establish a threshold penetration of the broadband
market in any particular community in order to separate broadband
service providers who are actively and successfully selling their
services from those who are only marginally engaged with a community.
The Agency believes that the threshold should differentiate providers
who only market to a limited segment of the community (e.g. to
businesses, densely populated areas, apartment buildings, etc.) so that
a community is not treated as having service available from a provider
who does not, in fact, serve all types of customers, throughout its
service territory.
Nationwide, slightly more than 40 percent of households are
subscribing to broadband service. This number was determined by using
the FCC's report entitled ``High-Speed Services for Internet Access:
Status as of June 30, 2006'' and comparing the number of residential
Advanced Services Lines (45.9 million) with the number of households in
the country. The FCC report indicates that the two major technologies
providing broadband service are cable modem (59.9%) and DSL (36.0%). In
most rural communities, these two types of service are offered by two
providers, the incumbent local cable company and the incumbent local
exchange carrier (ILEC). For example, assuming that a particular
community meets the national average penetration percentage of 40.9
percent and further assuming that there are only two providers
supplying these services in the same proportions as the national data
reflect, the percentage of households served by these two providers
would be 24.5 percent and 14.7 percent for the cable company and the
ILEC, respectively. This example reflects an idealized estimate.
Nonetheless, looking to the idealized case for guidance indicates that
setting a threshold at 20 percent of the households in a market
(roughly half of the average penetration) might well eliminate all but
one provider in a market. Even a 15 percent threshold seems high, since
nationwide, DSL does not yet reach that penetration. Therefore, we
propose a threshold of 10 percent of the households in a market. A
company offering broadband service will need to have a customer base of
at least 10 percent of the households in a community in order to be
considered an Existing Broadband Service Provider for the purposes of
this proposed rule
(b) Urban Area. In addition to identifying competition, the Agency
proposes limiting eligibility of those communities that qualify under
the regulations as rural in population, but are located within the
boundaries of an Urban Area. The Agency believes that using the pre-
established definition of Urban Area will clarify exactly which
communities are eligible and reduce the number of ``urban-like''
communities that technically qualify in population size but are not
representative of rural in most other characteristics.
(c) Eligible Rural Community. Tying together the preceding two
concepts, then, the Agency proposes that an Eligible Rural Community
mean a community which contains less than four Existing Broadband
Service Providers and is not located in an Urban Area. This
modification recognizes that, where there are four or more existing
providers, the market is sufficiently served and does not warrant an
additional market entrant subsidized through Federal funding.
In addition, the Agency continues to prioritize deployment of
Broadband Service to households with no or limited broadband access
while ensuring the financial feasibility of loans. To accomplish this,
the Agency will require applications from new market entrants, start-
ups or incumbent providers that are expanding their service area, to
enter areas where 40 percent of households either have no or limited
access to Broadband Service. This requirement addresses the need to
reach unserved or underserved areas while also permitting service to
more lucrative areas, which may be served by up to three Existing
Service Providers, in order to attract feasible loan proposals which
are supportable from project revenues. Permitting service in areas with
up to three Existing Service Providers addresses the need for
applicants to leverage revenues from lower-cost users (typically those
in more densely populated areas within a city or town) in order to
provide service to rural households in higher cost areas, while
excluding areas with higher levels of competition where loan
feasibility is unlikely.
Lastly, the Agency's proposed rule includes loans to incumbent
providers to upgrade existing facilities without requiring service to
additional customers as long as the upgrades enhance existing Broadband
Service. For purposes of determining whether the proposed service area
has ``four or more'' Existing Service Providers, thereby disqualifying
the area from lending consideration, the applicant will not be
considered as an Existing Broadband Service Provider. Therefore, a
facility upgrade loan may be made to an applicant operating in an area
which has three other Existing Broadband Service Providers.
The Agency believes that this approach will benefit rural residents
by allowing incumbents to keep pace with the changing needs of their
customers through continued advancement in technologies and services
(2) New equity and market survey requirements: Two requirements of
the Broadband Program have significantly precluded applicants from
being eligible for a Broadband loan, the equity requirement and the
market survey requirement. In response, the Agency is modifying both
requirements so as to provide incentives for serving markets with
limited or no broadband service and to reduce the costs to applicants
under certain circumstances.
(a) Sec. 1738.31 Equity requirement: Under the current rules, to
be eligible for a loan, applicants must have a 20 percent (of the
requested loan amount) credit support contribution and in some
instances, cash equal to the first full year's operations. The concept
of credit support was unique to the Agency and has been a source of
confusion for many applicants. In an effort to better clarify its
requirements, the Agency is proposing to replace the credit support
methodology with a straight forward equity requirement, mirroring
private industry.
With this proposed rule modification, the Agency is also addressing
our applicants' challenges in obtaining private investment capital to
provide service in less lucrative, rural markets, particularly those
with no broadband service or service from only one provider. A
significant number of applicants, many of whom are start-ups, have
noted that private financing for these areas is limited and difficult
to obtain. Further, applicants assert that the current equity
requirement proves too burdensome and serves as a barrier to entities
seeking to serve these markets. The Agency's records generally support
this assertion. Of the 106

[[Page 26750]]

applications returned since the Program's inception, more than half
were returned for lack of credit support. Therefore, the Agency is
proposing to reduce its equity requirement from 20 percent to 10
percent of the requested loan amount for applicants proposing to serve
an area wherein at least 40 percent of the households have no broadband
access or service from only one provider. The Agency proposes that all
other applicants be required to demonstrate a minimum equity position
equal to 20 percent of the requested loan amount at the time the
application is submitted.
(b) Sec. 1738.33 Market survey: Currently, the Agency uses market
surveys, competitive assessments and financial analyses as tools to
validate subscriber projections and determine loan feasibility.
Applicants have asserted that completing a market survey can prove to
be onerous, unnecessary, and cost prohibitive, especially for those
seeking to serve areas where no service exists. Based on our experience
with the program, the Agency finds that most market surveys submitted
support a 15 percent penetration rate. As a result, the Agency relies
more heavily on other means, such as the detailed competitive and
financial analyses, to determine feasibility for areas where 15 percent
or less penetration is projected. Therefore, in communities where an
applicant is proposing to serve less than 15 percent of the market, the
Agency is proposing to eliminate the requirement for a market survey,
but continue to require submission of competitive and financial
analyses.
(3) New legal notice requirements to increase transparency: The
Agency is also proposing to modify the Legal Notice requirement of
Sec. 1738.32 to improve information to customers, existing service
providers, and applicants. This requirement of the existing rule was
designed to: (i) Identify areas with no existing Broadband Service for
priority consideration, (ii) notify communities of the potential
entrant of a new service provider, and (iii) provide incumbent service
providers with an opportunity to describe their current service
territory and service offerings, market share, etc. The concept of the
legal notice is well intended and, the Agency believes, still necessary
and useful to the Agency in making lending decisions. However, based on
past experience, the current process needs to be modified. The Agency
proposes further modifications to increase transparency, reach a
broader range of interested parties, and provide more detailed
information on the extent of broadband deployment by incumbent
providers. To address concerns with timely access to legal notices, the
Agency is proposing to establish a clearly defined window for posting
of the notices. Specifically, the legal notice will be published on the
Agency's webpage after the application has been received in the
Agency's national office and will remain on the webpage for a period of
30 working days. The notice must set forth the applicant's total
proposed service area, including a service area map. An applicant will
also need to indicate if it is proposing voice and video services, in
addition to the present requirement of its intention to provide data
services. This will increase the transparency of the new application to
the incumbent provider, as well as alert customers to potential new
service offerings.
In response to the Legal Notice, incumbent providers will have new
responsibilities as well. The Legal Notice will now request any
Incumbent Service Provider to submit to the Agency the following
information (within 30 days of notice posting) on the number of
customers: (i) Capable of receiving Broadband Service in the
applicant's proposed service area; (ii) purchasing Broadband Service in
the applicant's proposed service area (including the rates of data
transmission being offered, and the cost of each level of Broadband
Service); and (iii) receiving other services that will be offered in
the applicant's proposed service area and the associated rates for
these other services. An incumbent will also be requested to submit a
map of its service territory.
It is important that the Agency receive this information, as it
will be used by the Agency to determine if the incumbent will be
classified as an Existing Broadband Service Provider, and ultimately
whether an Eligible Rural Community is eligible for funding. If,
however, an incumbent does not submit a response to the legal notice
within the applicable time period, it will not be considered an
Existing Broadband Service Provider for the purpose of determining
applicant eligibility. Nonetheless, the incumbent will still be
considered in the lending decision as a competitor. All proprietary and
confidential information submitted by the incumbent will not be
released under the Freedom of Information Act.

List of Subjects in 7 CFR Part 1738

Broadband, Loan programs-communications, Rural areas, Telephone,
Telecommunications.

For reasons set out in the preamble, the Agency proposes to amend
chapter XVII of title 7 of the Code of Federal Regulations by revising
part 1738 to read as follows:

PART 1738--RURAL BROADBAND ACCESS LOANS AND LOAN GUARANTEES

Subpart --General
Sec.
1738.1 General.
1738.2 Definitions.
1738.3--1738.9 [Reserved]
Subpart B--Types of Loans
1738.10 General.
1738.11 Broadband Loans and Loan Guarantees.
1738.12 Minimum and maximum loan amounts.
1738.13-1738.18 [Reserved]
Subpart C-- Ineligible Areas, Eligible Entities and Eligible/Not
Eligible Items
1738.19 Ineligible areas.
1738.20 Eligible entities.
1738.21 Service requirement for proposed projects.
1738.22 Items eligible to be financed.
1738.23 Items not eligible to be financed.
1738.24-1738.29 [Reserved]
Subpart D--Loan Application Requirements
1738.30 General.
1738.31 Equity requirement.
1738.32 Additional cash requirements.
1738.33 Legal notice.
1738.34 Market survey.
1738.35 Competitive analysis.
1738.36 Business plan.
1738.37 Financial information.
1738.38 System design.
1738.39 Submission of the application.
Subpart E--Terms for Loans and Loan Guarantees
1738.40 Direct 4 Percent and Cost of Money Loans.
1738.41 Loan security.
1738.42 Payments on loans.
1738.43 Loan guarantees.
1738.44-1738.49 [Reserved]
Subpart F--Post-Application Procedures
1738.50 Notification of completeness.
1738.51 Determination of feasibility.
1738.52 Notice to applicant on decision.
1738.53-1738.59 [Reserved]
Subpart G--Miscellaneous Requirements and Information
1738.60 Interim financing and construction.
1738.61 Priority for processing loan applications.
1738.62 Allocation of funds.
1738.63 Annual audit and reporting requirements.
1738.64 Applicable laws.
1738.65-1738.99 [Reserved]
1738.100 OMB control number.

Authority: Pub. L. 107-171, 7 U.S.C. 901 et seq.

[[Page 26751]]

Subpart A--General

Sec. 1738.1 General statement.

(a) This part sets forth the general policies, types of loans and
loan guarantees, and program requirements under the Rural Broadband
Access Loan and Loan Guarantee Program to provide funds on a technology
neutral basis for the costs of construction, improvement, and
acquisition of facilities and equipment for broadband service in
eligible rural communities.
(b) Additional information regarding the Rural Broadband Access
Loan and Loan Guarantee Program can be found in Bulletin 1738-1,
``Rural Broadband Access Loan and Loan Guarantee Application Guide''
and Bulletin 1738-2, ``Rural Broadband Access Loan and Loan Guarantee
Advance and Construction Procedures Guide.'' These bulletins are
located on the Agency's Web page: http://www.usda.gov/rus/telecom/broadband.htm.
or you can contact Kenneth Kuchno, Director, Broadband

Division at the following address for copies: Stop 1599, South
Agriculture Building, Room 2868, Washington , DC 20250.(c) No fees or
charges will be assessed for any loan made under this part.

Sec. 1738.2 Definitions.

(a) As used in this part:
Acquisition means the purchase of assets that will be used to
provide Broadband Service, such as 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 his or her designee.
Advance of Funds means the transfer of loan funds from the Agency
to the borrower.
Affiliate or Affiliated Company of any specified entity means any
other entity directly or indirectly controlling of, controlled by,
under direct or indirect common control with, or related to, such
specified entity. For the purpose of this definition, ``control'' of
any specified entity means the power to direct the management and
policies of such specified entity, directly or indirectly, whether
through the ownership of stock, by contract, or otherwise.
Agency shall mean the Rural Utilities Service, which administers
the United States Department of Agriculture's (USDA) Rural Development
Utilities Programs.
Applicant means an eligible entity requesting approval of a loan or
loan guarantee under this part.
Arms-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 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 transmit data to enable a
subscriber to the service to originate and receive high quality voice,
data, graphics and video. To qualify as broadband service, the project
must offer data transmission services and may provide voice, graphics,
video and other services. The Agency will publish a notice in the
Federal Register defining the minimum rate-of-data transmission
criteria to qualify as broadband service during that fiscal year's
funding period.
Census block means an area normally bounded by visible features,
such as streets, streams, and railroads, and by nonvisible features,
such as the boundary of an incorporated place, minor civil division,
county, or other tabulation entity as described in the latest decennial
census.
Census block group means a group of census blocks within a census
tract whose numbers begin with the same digit; for example, BG 3 within
a census tract includes all census blocks numbered from 3000 to 3999.
Composite economic life means the weighted (by dollar amount of
each class of facility in the loan) average economic life of all
classes of facilities in the loan.
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
as determined by the Agency.
Eligible entity means a cooperative, nonprofit or for-profit
corporation, limited dividend or mutual association, limited liability
company, Indian tribe, tribal organization as defined in 25 U.S.C. 450b
(b) and (c), state or local government, including any agency,
subdivision, or instrumentality thereof (including consortia thereof).
In addition, the entity must have sufficient authority to enter into a
contract with the Agency and to carry out the purposes of the proposed
loan. Individuals, partnerships of individuals, and entities that serve
more than 2 percent of the telephone subscriber lines installed in the
United States are not eligible entities.
Eligible Rural Community means any area, as confirmed by the latest
decennial census of the Bureau of the Census, which is not located
within:
(1) The boundaries of an Urban Area;
(2) An incorporated city or town with a population of more than
20,000; or
(3) An area that has four or more Existing Broadband Service
Providers (excluding the applicant).
Equity or Net Worth means Total Assets minus Total Liabilities. For
example, the sum of the balances of the following accounts of the
applicant: Capital Stock or Membership Units, Additional Paid-In-
Capital, Treasury Stock, Other Capital, and Retained Earnings.
Existing Broadband Service Provider means an Incumbent Service
Provider that is providing Broadband Service, and is able to provide
evidence and certify to the Agency that 10 percent of the households
passed by their facilities are purchasing their Broadband Service.
Resellers of Broadband Service who utilize the physical facilities of
other service providers to deliver their products to the subscriber
will not be considered as an Existing Broadband Service Provider.
Feasibility study means the pro forma financial analysis prepared
by the Agency, based on the financial projections supplied by the
applicant and found acceptable by the Agency, to determine the
financial feasibility of a loan.
Financial feasibility means the ability of an applicant to generate
sufficient revenues to cover its expenses and service its debt and meet
the minimum TIER requirement of 1.25 by the end of the Forecast Period.
Fiscal year means the fiscal year of the Federal Government
(October 1 to September 30).

[[Page 26752]]

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 usually based on 5-year
projections.
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 that amount of payment on account of
the Guaranteed Loan which is guaranteed under the terms of the
Guarantee.
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.
Incumbent service provider means an existing entity that is
currently providing data, voice, video and/or graphic services in the
applicant's proposed service area.
Indefeasible Right to Use Agreement (IRU) means the effective long-
term lease of a portion of the capacity of a cable, specified in terms
of a certain number of channels of a given bandwidth.
Initial loan means the first loan made under the RE Act to a
Borrower.
Interim construction means the construction, improvement, or
acquisition of facilities and equipment proposed to be funded by loan
funds, which occurs after the application is deemed complete by the
Agency.
Interim financing means funding for the Interim construction.
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 mean the loan contract, note, and security
instrument between the borrower and the Agency and any associated
documents pertaining to a loan once the loan is approved for financing.
Loan funds mean funds provided pursuant to a loan made or
guaranteed under this part by the Agency.
Loan guarantee means a loan made by another lender and guaranteed
by the Agency.
Loan guarantee documents mean the guarantee agreement, the loan
contract between the guaranteed lender and the Borrower, the loan note
guarantee, the Guaranteed Loan Note, and the Security Documents.
Pre-loan expenses means the expenses associated with the
preparation of a loan application. These expenses include costs
associated with the legal notice, market survey, competitive analysis,
financial analysis, environmental report, engineering design, and
required legal opinions. Pre-loan expenses must be fully supported and
acceptable to the Agency if they are to be considered for funding.
RE Act means the Rural Electrification Act of 1936, as amended (7
U.S.C. 901 et seq.).
Release of funds means the availability of loan funds to be
advanced for approved purposes.
RUS means the Rural Utilities Service, an agency of the United
States Department of Agriculture, and successor to the Rural
Electrification Administration.
Security Documents mean any mortgage, security agreement, and/or
financing statement, or other documents which grants to the Agency a
security interest, including any amendments and supplements thereto.
Service area means the geographical area within which the applicant
proposes to make Broadband Service available with a loan provided under
this part.
Telecommunications means the transmission and reception of voice,
data, sounds, signals, pictures, writings, or signs of all kinds, by
wire, fiber, radio, light, or other visual or electromagnetic means.
Telecommunications loan means any telecommunication loan made under
Title II, III, IV or VI 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.
Total Assets means the sum of the balances of the following
accounts of the applicant: Current Assets, Non Current-Assets, and
Total Plant, minus the following accounts of the applicant: Accumulated
Depreciation and Accumulated Amortization.
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.
Urban Area means, as defined by the Bureau of the Census, all
territory, population, and housing units located within an urbanized
area (UA) or an urban cluster (UC).
(b) Accounting terms not otherwise defined in this part shall have
the definition ascribed to them under generally accepted accounting
principles (GAAP).

Sec. Sec. 1738.3-1738.9 [Reserved]

Subpart B--Types of Loans

Sec. 1738.10 General.

Financial assistance under the Rural Broadband Access Loan and Loan
Guarantee Program shall be in the form of a Direct Cost-of-Money loan,
a Direct 4 Percent Loan, and/or a Loan Guarantee to provide Broadband
Service in Eligible Rural Communities.

[[Page 26753]]

Sec. 1738.11 Broadband Loans and Loan Guarantees.

Broadband Loans and Loan Guarantees shall consist of one or more of
the following three types of financial assistance:
(a) Direct Cost-of-Money, which shall bear interest at a rate (the
``Cost-of-Money Interest Rate'') equal to the cost of borrowing to the
Department of Treasury for obligations of comparable maturity. The
Cost-of-Money Interest Rate will be supplied by the Agency each time
funds are actually advanced to the Borrower.
(b) Direct 4 Percent, which shall bear an interest rate of 4
percent on any advance to the Borrower.
(1) To be eligible for a direct loan bearing an interest rate of 4
percent, the applicant must propose serving an Eligible Rural Community
that:
(i) Has a population of less than 5,000 inhabitants; and
(ii) Is not currently capable of receiving Broadband Service or can
receive Broadband Service from only one Existing Broadband Service
Provider.
(iii) Is located in a county with per capita personal income that
is less than or equal to that percent of the national per capita
personal income which the Agency will publish in the Federal Register
at the beginning of each fiscal year. County per capita income is
published by the Bureau of Economic Analysis, U.S. Department of
Commerce, at http://www.bea.doc.gov/bea/regional/reis/. The Agency will

use the most recent statistics published on October 1 of the fiscal
year in which the application is deemed complete by the Agency.
(2) When an approved application exceeds the maximum amount of 4
percent financing that may be available to the Borrower, a direct loan
made at 4 percent may be made simultaneously with a Cost-of-Money
Interest Rate loan.
(3) A 4 percent loan may be made simultaneously with a Cost-of-
Money Interest Rate loan or a private loan guarantee.
(c) Loan Guarantee, which shall bear interest at a rate, set by the
guaranteed lender that must be consistent with the then applicable
market rate for loans of comparable amounts and maturities.

Sec. 1738.12 Minimum and maximum loan amounts.

Applications for loans or loan guarantees of less than $100,000
will not be considered. The maximum of any single type of loan or loan
combination will be published in the Federal Register at the beginning
of each fiscal year.

Sec. Sec. 1738.13-1738.18 [Reserved]

Subpart C--Ineligible Areas, Eligible Entities and Eligible/
Ineligible Items

Sec. 1738.19 Ineligible areas.

The Agency will not approve the use of a broadband loan:
(a) To more than one applicant to provide Broadband Service within
the same Eligible Rural Community; or
(b) To an applicant proposing to provide Broadband Service in an
Eligible Rural Community where an existing Borrower is already
providing Broadband Service.

Sec. 1738.20 Eligible entities.

Only Eligible Entities which propose providing Broadband Services
in Eligible Rural Communities shall be eligible for a Broadband Loan.

Sec. 1738.21 Service requirements for proposed projects.

(a) A project in an area not currently served by the applicant
must:
(1) Be in an Eligible Rural Community.
(2) Contain at least 40 percent of households with no access to
Broadband Service or access to only one Existing Broadband Service
Provider. (For example, if a start-up company or new entrant submits a
loan application to provide Broadband Service to 1000 households, 400
(1000 x 40%) of the households must have no broadband access or have
access to only one Existing Broadband Service Provider. Likewise, if an
Incumbent Service Provider submits a loan application to provide
Broadband Service to 2000 households in its existing service territory
and 1000 households outside of its existing territory, 400 (1000 x 40%)
of the households outside its existing service territory must have no
broadband access or have access to only one Existing Broadband Service
Provider.)
(b) Applications submitted by Incumbent Service Providers solely
for the purpose of upgrading existing facilities in Eligible Rural
Communities must enhance existing service by providing or improving
Broadband Service and other services related thereto.
(c) Areas that are being acquired from an Incumbent Service
Provider will be considered existing service areas of the applicant.

Sec. 1738.22 Items eligible to be financed.

The proceeds of any loan made under this part may be used:
(a) To fund the construction, improvement, and acquisition of all
facilities, wherever located, required to provide Broadband Service to
Eligible Rural Communities, including facilities required for providing
other services over the same facilities that Broadband Services are
being provided. Start-up and overhead costs that can be capitalized and
included as part of the cost of facilities required to provide
Broadband Service are eligible for financing.
(b) To fund Pre-Loan Expenses not to exceed 5 percent of the
requested total Broadband Loan amount, excluding any amounts requested
to refinance outstanding telecommunication loans.
(c) To finance facilities to provide Broadband Service leased under
the terms of a capital lease as defined in generally accepted
accounting principles. Loan funds will be limited to the cost of the
capital lease for the first 5 years of the loan amortization period.
(d)(1) To finance an Acquisition, provided that:
(i) The Acquisition is necessary for furnishing or improving rural
Broadband Service;
(ii) The acquired Service Area, if any, is in an Eligible Rural
Community; and
(iii) Funds provided for the Acquisition do not exceed 50 percent
of the approved loan amount.
(2) For the purposes of the Acquisition, the applicant will be
considered the Incumbent Service Provider with regard to the acquired
Service Area, if any.
(e) To refinance an outstanding obligation of an applicant on
another Telecommunications Loan made under the RE Act if the use of the
proceeds realized will further the construction, improvement, or
acquisition of facilities for the provision of Broadband Service in
Eligible Rural Communities, provided that:
(1) Funds used for refinancing may not constitute more than 40
percent of the loan;
(2) The amortization period for the funds associated with the
refinancing of outstanding obligations cannot exceed the remaining
amortization period of the notes being 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; and
(3) The Applicant must be current with payments on the notes to be
refinanced.

Sec. 1738.23 Items not eligible to be financed.

The proceeds of any loan made under this part cannot be used:
(a) To fund the costs associated with facilities covered by an
Indefeasible Right of Use Agreement (IRU);

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(b) To acquire less than the majority interest of the stock of a
company offering, or capable of offering Broadband Services, unless
otherwise approved by the Agency;
(c) To acquire the stock of an affiliate;
(d) To purchase or acquire any facilities or equipment of an
affiliate of the applicant. However, the Agency may consider, on a case
by case basis, such funding if the Applicant can demonstrate that the
purchase or acquisition will be an arms-length transaction, and that
the cost is the most economically available for the facilities or
equipment in question;
(e) To finance Customer Premise Equipment (CPE) not owned by the
Applicant during its economic life and any associated inside wiring,
unless:
(1) Additional collateral, acceptable to the Agency, at least equal
to the purchase price of the CPE is pledged, which collateral has not
been purchased with loan funds, or
(2) A revolving fund for the initial purchase of CPE to be sold is
established, and as CPE is sold to the customer, at least the
Borrower's cost of such equipment is deposited back from the proceeds
of the sale into the revolving fund to purchase additional CPE units.
For additional information on this option, refer to Bulletin 1738-1.
(f) To purchase or lease vehicles not used primarily in
construction of the Broadband Service project to be financed; or
(g) To finance systems or facilities that have not been designed
and constructed in accordance with the loan contract, which
incorporates Bulletin1738-2.

Sec. Sec. 1738.24-1738.29 [Reserved]

Subpart D--Loan Application Requirements

Sec. 1738.30 General.

A loan application will be considered complete upon the submission
of acceptable information regarding:
(a) The equity requirement;
(b) The legal notice;
(c) The market survey;
(d) The competitive analysis;
(e) The business plan;
(f) The financial information; and
(g) The system design.

Sec. 1738.31 Equity requirement.

(a) To be eligible for a loan, an applicant must have a minimum
equity position in the operation proposed to be funded. For start-up
companies, new entrants into an area and Incumbent Service Providers
that are proposing to extend their service territory, the applicant
must demonstrate a minimum equity position equal to 10 percent of the
requested loan amount at the time the application is submitted. For all
other applications, the applicant must demonstrate a minimum equity
position equal to 20 percent of the requested loan amount at the time
the application is submitted. If the applicant does not have the
required equity in the operation to be funded at the time the
application is submitted, the shortfall for this requirement can be
satisfied as follows:
(1) With an investor's proposal to cover the shortfall of the
equity requirement by infusing additional capital into the operation.
The additional capital must be deposited into the applicant's operating
accounts prior to loan closing. If this option is elected, evidence
must be included in the application that clearly identifies the
investor's commitment to the project along with its bank or financial
statements that demonstrates its ability to satisfy this requirement.
This evidence must be acceptable to the Agency before the application
will be considered complete and ready for further processing. If an
investor's proposal to satisfy this requirement is not included in the
loan application, the application will be returned. The Agency reserves
the right to reject investments that are on a preferred basis for any
reason.
(2) With an unconditional, irrevocable letter of credit (LOC)
satisfactory to the Agency. If an LOC will be used to satisfy the
equity requirement, the LOC must be secured and serviced by an entity
other than the applicant applying for the loan and must remain in
effect until the applicant's financial position has reached a Net Worth
equal to 20 percent of Total Assets after 80 percent of loan funds have
been expended. The Agency must be an unconditional payee under the LOC
and the LOC must be in place prior to loan closing.
(b) For State and local governments, the equity requirement can be
satisfied with general obligation bonds. If the equity requirement is
satisfied with general obligation bonds, the Broadband Loan or loan
guarantee cannot be subordinate to the bonds.
(c) Revenue bonds supported by the operations being funded cannot
be used to satisfy the equity requirement.
(d) Based on the results of the Agency's financial analysis of the
application, additional equity requirements may be included as
covenants to a loan offer.
(e) The Administrator reserves the right to modify or waive the
requirements of this section as long as those modifications do not
result in a projected negative cash position in any quarter throughout
the forecast period and the modifications are required to provide
Broadband Service in areas that are not capable of receiving Broadband
Service or can receive Broadband Service from only one Existing
Broadband Service Provider.

Sec. 1738.32 Additional cash requirements.

(a) Once the Agency has completed its review of the loan
application, the applicant will be notified if additional cash
requirements are needed to support the feasibility of the loan.
Additional cash infusions will be necessary when the Agency's financial
analysis indicates that cash from operations and previous cash
infusions cannot sustain a positive cash position throughout the
forecast period.
(1) The amount of the additional cash infusions required must bring
the cash balance at the end of each year of the Forecast Period to
zero.
(2) For purposes of satisfying the additional cash requirement for
a start-up operation or an operation that has not demonstrated positive
cash flow for the two previous years prior to the date the application
was submitted, only 50 percent of projected revenues for each year of
the forecast period will be used in the feasibility study to determine
if an operation can sustain a positive cash position.
(3) The applicant will be required to infuse additional cash into
the operation to cover projected deficits for the first two years of
operations at loan closing and to enter into legal arrangements with
the Agency committing to additional cash infusions to ensure that the
operation will sustain a positive cash position on a quarterly basis
throughout the forecast period.
(4) If debt is incurred to satisfy the additional cash requirement,
this debt must take a subordinate lien position to the Agency debt. The
Agency will provide the applicant with options for satisfying any
additional requirements.
(5) Once the applicant has agreed to a method for satisfying the
additional cash requirements, this method will be incorporated into the
loan documents.
(6) If a loan is offered to the applicant, the applicant will have
120 days from the date of the loan contract to have the additional cash
infusions deposited into the company applying for the loan and enter
into any other legal arrangements to cover proposed deficits. If these
requirements are not completed within this timeframe, the loan offer
will be terminated, absent a written request from the applicant, and
consent thereto from the Agency.

[[Page 26755]]

(b) If additional requirements and covenants are required to obtain
loan approval, they will be detailed in the loan documents.

Sec. 1738.33 Legal notice.

(a) All applicants, as part of submitting a completed application,
must prepare a legal notice to be published on the Agency Web page
stating the applicant's intent to offer Broadband Service in a
particular community. In addition, if the applicant is proposing other
(i.e. video, voice, etc.) services, these services must also be
identified in the legal notice. The legal notice will be published on
the Agency's Web page after the application has been received in the
Agency's national office and will remain on the Web page for a period
of 30 work days. The notice must set forth the applicant's total
proposed service area, including a service area map, and request any
Incumbent Service Provider to submit to the Agency, within this 30 day
period, the following information:
(1) The number of residential and business customers capable of
receiving Broadband Service in the applicant's proposed service area;
(2) The number of residential and business customers purchasing
Broadband Service in the applicant's proposed service area, the rates
of data transmission being offered, and the cost of each level of
Broadband Service;
(3) The number of residential and business customers receiving
other services that will be offered in the applicant's proposed service
area and the associated rates for these other services;
(4) A map of its service territory.
(b) The information that is submitted by the Incumbent Service
Provider will be used by the Agency to determine if the Incumbent
Service Provider will be classified as an Existing Broadband Service
Provider. If an Incumbent Service Provider does not submit a response
to the legal notice, it will not be considered an Existing Broadband
Service Provider. However, all Incumbent Service Providers will be
considered in the Agency lending decision.
(c) All proprietary and confidential information submitted by the
incumbent in response to the legal notice will not be released under
the Freedom of Information Act.

Sec. 1738.34 Market survey.

(a) Except as provided in paragraph (b) of this section, the
applicant must complete a market survey for each area where Broadband
Service is proposed to be provided and include it as part of the
application. The survey must not only include questions about the
deployment of Broadband Services but must also address all other
services that are being proposed. The survey must be conducted on each
Eligible Rural Community where service is proposed. Additional
information on the requirements of the market survey can be found in
Bulletin 1738-1.
(b) For any service that the applicant is projecting less than a 15
percent penetration of households passed in the total proposed service
territory, by the end of the Forecast Period, a market survey does not
need to be completed. The proposed rates for these services must be
affordable as determined by the Agency. If the rates are not
affordable, the Agency will require that a market survey be completed.
(c) Generally, for a market survey to be acceptable to the Agency,
it must have been completed within six months from the date the
application was submitted to the Agency for processing. The Agency
reserves the right to reject any market survey so long as it can
demonstrate that the market survey does not support the financial
projections or the business plan or that the demographics of the
proposed service territory have significantly changed since the survey
was completed.
(d) With respect to loans for areas that do not have the capability
of receiving Broadband Service or can receive Broadband Service from
only one Existing Broadband Service Provider, the Administrator
reserves the right to waive or modify the requirements of this section
on a case by case basis.

Sec. 1738.35 Competitive analysis.

The applicant must identify all competitors, including resellers,
in their proposed service territory irregardless of the competitor's
market share and prepare a competitive analysis, for all types of
services proposed and include it as part of the application. This
analysis must include each competitor's proposed rate packages for all
services offered and to the extent possible, the level of service being
provided and the area that is being covered. Although a market survey
is not required for areas where an applicant is projecting less than 15
percent penetration of the households passed for a specific service, a
competitive analysis is required for all proposed service territories.

Sec. 1738.36 Business plan.

A business plan must be included as part of the application and
must address, at a minimum, the following items:
(a) The proposed use of loan funds and if any non-loan funds will
be required to complete the proposed project;
(b) A detailed description of working capital requirements and the
source of these funds;
(c) A description of how the equity requirements will be satisfied;
(d) A description of the services that will be offered, the rates
for the proposed services and the marketing plan to sell these
services;
(e) A description of any current operations including services
being provided, areas being served, rate structure and penetration
rates;
(f) A description of any licenses and regulatory approvals that are
required for the proposed operation including the status of obtaining
these items;
(g) A detailed description of the qualifications of the proposed
management team for the operation including a resume of each team
member detailing prior positions held for the previous 10 years from
the date the application is submitted;
(h) A description of the staffing requirements to operate the
proposed system; and
(i) A description of the workforce that is required to construct
the system. This description must agree with the build-out schedule
included in Sec. 1738.37.

Sec. 1738.37 Financial information.

The financial information that must be included in the application
to support the business plan is as follows:
(a) Copies of audited financial statements (balance sheet, income
statement, cash flow statement) for the three years preceding the date
of the application for an existing company. If audited statements are
not available, un-audited statements and tax returns for the three
previous years must be submitted;
(b) Copies of audited financial statements for the parent operation
for the year preceding the year the application was submitted if the
applicant for the Broadband Loan is a subsidiary operation. If audited
statements are not available, un-audited statements and tax returns for
the previous year must be submitted;
(c) Copies of audited financial statements for any affiliated
operation that is providing services to the applicant for the year
preceding the year the application was submitted. If audited statements
are not available, un-audited statements and tax returns for the
previous year must be submitted;
(d) Customer projections for the forecast period that substantiate
the projected revenues for each service that

[[Page 26756]]

is to be provided. The projections must at a minimum be on an annual
basis and must be provided for each Eligible Rural Community that will
be receiving service. These projections must be clearly supported by
the information contained in the market survey;
(e) Financial projections in the form of balance sheets, income
statements and cash flow statements for the 5-year forecast period.
These projections must be supported by detailed narrative assumptions
that fully explain the methodology used to develop the projections. The
financial projections submitted by the applicant and the feasibility
study prepared by the Agency must demonstrate that the proposed
operation will be able to meet a minimum TIER requirement equal to 1.25
by the end of the forecast period. (A projected TIER of 1.25 does not
guarantee that a loan will be approved.) Based on the findings of the
feasibility study, the Agency will establish a TIER maintenance
requirement in the loan documents that will remain in effect throughout
the amortization period; and
(f) A list of all outstanding obligations of the applicant. Copies
of existing notes and loan and security agreements must be included in
the application.

Sec. 1738.38 System design.

(a) The system design must fully support the delivery of Broadband
Service and any other services being provided, must demonstrate that
the project will be completed within 3 years from the date of the loan
contract, and must include the following items:
(1) A detailed description of the proposed technology that will be
used to provide the services. This description must include sufficient
information for the Agency to make the determination that all
households in the proposed service territory will have the capability
of receiving Broadband Services. For further clarification, reference
Bulletin 1738-2;
(2) Existing and proposed network diagrams that clearly demonstrate
the traffic flows through the network from the interconnection points
with the backbone providers to the end users;
(3) 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 community to be served; and
(4) A construction build-out schedule of the proposed facilities by
community on a quarterly basis. The build-out schedule must:
(i) Include a description of the work force that will be required
to complete the proposed construction;
(ii) Include a timeline demonstrating project completion within 3
years from the date of the Loan Contract;
(iii) Include detailed information showing that all households that
are proposed to be passed with facilities funded by the Agency must
have the capability of receiving Broadband Service with the completion
of construction of the system. For additional information on how to
satisfy this requirement, please refer to Bulletin 1738-1.
(iv) Include detailed information showing that construction of the
proposed facilities will start within 6 months from the date the
Administrator signs the Loan Documents.
(5) A depreciation schedule for the proposed facilities;
(6) Information required by 7 CFR part 1794, an environmental
report prepared in accordance therewith;
(7) Any other system requirements which shall be published annually
in the Federal Register, which the Administrator shall determine to be
necessary in addressing the rapidly changing technological needs of the
Broadband Program.
(b) With respect to loans for areas that are not capable of
receiving Broadband Service or can receive Broadband Service from only
one Existing Broadband Service Provider, the Administrator reserves the
right to waive or modify the requirements of this section on a case by
case basis.

Sec. 1738.39 Submission of the application.

Loan applications can be submitted directly to the Agency's
National Office or can be submitted to the Agency's general field
representative (GFR) that is assigned to the area where the applicant's
headquarters are located. Although the applications can be submitted
directly to the National Office, it is recommended that the applicant
identify and contact the appropriate GFR as early as possible when
preparing a loan application. The GFR will assist the applicant with
the preparation of the application and explain the regulations and
requirements that govern the Broadband Program. The applicant should
contact the National Office in Washington to identify the GFR that is
assigned to the area where their headquarters are located or refer to
the list