7 CFR 1717 Subpart Y

Subpart Y—Settlement of Debt

Source: 62 FR 50491, Sept. 26, 1997, unless otherwise noted.
§1717.1200 Purpose and scope.
(a) Section 331(b) of the Consolidated Farm and Rural Development Act (Con Act), as amended on April
4, 1996 by Public Law 104-127, 110 Stat. 888 (7 U.S.C. 1981), grants authority to the Secretary of
Agriculture to compromise, adjust, reduce, or charge-off debts or claims arising from loans made or
guaranteed under the Rural Electrification Act of 1936, as amended (RE Act). Section 331(b) of the Con
Act also authorizes the Secretary of Agriculture to adjust, modify, subordinate, or release the terms of
security instruments, leases, contracts, and agreements entered into or administered by the Rural
Utilities Service (RUS). The Secretary, in 7 CFR 2.47, has delegated authority under section 331(b) of the
Con Act to the Administrator of the RUS, with respect to loans made or guaranteed by RUS.
(b) This subpart sets forth the policy and standards of the Administrator of RUS with respect to the
settlement of debts and claims arising from loans made or guaranteed to rural electric borrowers under
the RE Act. Nothing in this subpart limits the Administrator's authority under section 12 of the RE Act.

§1717.1201 Definitions.
Terms used in this subpart that are not defined in this section have the meanings set forth in 7 CFR part
1710. In addition, for the purposes of this subpart:
Application for debt settlement means a written application containing all of the information required
by §1717.1204(b)(2), in form and substance satisfactory to RUS.
Attorney General means the Attorney General of the United States of America.
Claim means any claim of the government arising from loans made or guaranteed under the RE Act to a
rural electric borrower.
Con Act means the Consolidated Farm and Rural Development Act (7 U.S.C. 1921 et seq.).
Debt means outstanding debt of a rural electric borrower (including, but not necessarily limited to,
principal, accrued interest, penalties, and the government's costs of debt collection) arising from loans
made or guaranteed under the RE Act.
Enforced collection procedures means any procedures available to the Administrator for the collection of
debt that are authorized by law, in equity, or under the borrower's loan documents or other agreements
with RUS.
Loan documents means the mortgage (or other security instrument acceptable to RUS), the loan
contract, and the promissory note entered into between the borrower and RUS.
RE Act means the Rural Electrification Act of 1936, as amended (7 U.S.C. 901-950b).

Restructure means to settle a debt or claim.
Settle means to reamortize, adjust, compromise, reduce, or charge-off a debt or claim.

§1717.1202 General policy.

(a) It is the policy of the Administrator that, wherever possible, all debt owed to the government,
including but not limited to principal and interest, shall be collected in full in accordance with the terms
of the borrower's loan documents.
(b) Nothing in this subpart by itself modifies, reduces, waives, or eliminates any obligation of a borrower
under its loan documents. Any such modifications regarding the debt owed by a borrower may be
granted under the authority of the Administrator only by means of the explicit written approval of the
Administrator in each case.
(c) The Administrator's authority to settle debts and claims will apply to cases where a borrower is
unable to pay its debts and claims in accordance with their terms, as further defined in
§1717.1204(b)(1), and where settlement will maximize, on a present value basis, the recovery of debts
and claims owed to the government.
(d) In structuring settlements and determining the capability of the borrower to repay debt and the
amount of debt recovery that is possible, the Administrator will consider, among other factors, the RE
Act, the National Energy Policy Act of 1992 (Pub. L. 102-486, 106 Stat. 2776), the policies and regulations
of the Federal Energy Regulatory Commission, state legislative and regulatory actions, and other market
and nonmarket forces as to their effects on competition in the electric utility industry and on rural
electric systems in particular. Other factors the Administrator will consider are set forth in more detail in
§1717.1204.

§1717.1203 Relationship between RUS and Department of Justice.

(a) The Attorney General will be notified by the Administrator whenever the Administrator intends to
use his or her authority under section 331(b)of the Con Act to settle a debt or claim.
(b) If an outstanding claim has been referred in writing to the Attorney General, the Administrator will
not use his or her own authority to settle the claim without the approval of the Attorney General.
(c) If an application for additional debt relief is received from a borrower whose debt has been settled in
the past under the authority of the Attorney General, the Administrator will promptly notify the
Attorney General before proceeding to consider the application.

§1717.1204 Policies and conditions applicable to settlements.

(a) General. Settlement of debts and claims shall be subject to the policies, requirements, and conditions
set forth in this section and in §1717.1202.
(b) Need for debt settlement. (1) The Administrator will not settle any debt or claim unless the
Administrator has determined that the borrower is unable to meet its financial obligations under its loan
documents according to the terms of those documents, or that the borrower will not be able to meet
said obligations sometime within the period of 24 months following the month the borrower submits its
application for debt settlement to RUS, and, in either case, such default is likely to continue indefinitely.
The determination of a borrower's ability to meet its financial obligations will be based on analyses and
documentation by RUS of the borrower's historical, current, and projected costs, revenues, cash flows,
assets, opportunities to reduce costs and/or increase revenues, and other factors that may be relevant
on a case by case basis.

(2) In its application to RUS for debt settlement, the borrower must provide, in form and substance
satisfactory to RUS, an in-depth analysis supporting the borrower's contention that it is unable or will
not be able to meet its financial obligations as described in paragraph (b)(1) of this section. The analysis
must include:
(i) An explanation and analysis of the causes of the borrower's inability to meet its financial obligations;
(ii) A thorough review and analysis of the opportunities available or potentially available to the borrower
to reduce administrative overhead and other costs, improve efficiency and effectiveness, and expand
markets and revenues, including but not limited to opportunities for sharing services, merging, and/or
consolidating, raising rates when appropriate, and renegotiating supplier and service contracts. In the
case of a power supply borrower, the study shall include such opportunities among the members of the
borrower, unless the Administrator waives this requirement;
(iii) Documentation of the actions taken, in progress, or planned by the borrower (and its member
systems, if applicable) to take advantage of the opportunities cited in paragraph (b)(2)(ii) of this section;
and
(iv) Other analyses and documentation prescribed by RUS on a case by case basis.

(3) RUS may require that an independent consultant provide an analysis of the efficiency and
effectiveness of the borrower's organization and operations, and those of its member systems in the
case of a power supply borrower. The following conditions will apply:

(i) RUS will select the independent consultant taking into account, among other matters, the
consultant's experience and expertise in matters relating to electric utility operations, finance, and
restructuring;

(ii) The contract with the consultant shall be to provide services to RUS on such terms and conditions as
RUS deems appropriate. The consultant's scope of work may include, but shall not be limited to, an
analysis of the following:

(A) How to maximize the value of the government's collateral, such as through mergers, consolidations,
or sales of all or part of the collateral;
(B) The viability of the borrower's system, taking into account such matters as system size, service
territory and markets, asset base, physical condition of the plant, operating efficiency, competitive
pressures, industry trends, and opportunities to expand markets and improve efficiency and
effectiveness;
(C) The feasibility and the potential benefits and risks to the borrower and the government of corporate
restructuring, including aggregation and disaggregation;
(D) In the case of a power supply borrower, the retail rate mark-up by member systems and the
potential benefits to be achieved by member restructuring through mergers, consolidations, shared
services, and other alliances;
(E) The quality of the borrower's management, management advisors, consultants, and staff;
(F) Opportunities for reducing overhead and other costs, for expanding markets and revenues, and for
improving the borrower's existing and prospective contractual arrangements for the purchase and sale
of power, procurement of supplies and services, and the operation of plant and facilities;
(G) Opportunities to achieve efficiency gains and increased revenues based on comparisons with
benchmark electric utilities; and
(H) The accuracy and completeness of the borrower's analysis provided under paragraph (b)(2) of this
section;
(iii) RUS and, as appropriate, other creditors, will determine the extent to which the borrower and third
parties (including the members of a power supply borrower) will be required to participate in funding
the costs of the independent consultant;
(iv) The borrower will be required to make available to the consultant all corporate documents, files,
and records, and to provide the consultant with access to key employees. The borrower will also
normally be required to provide the consultant with office space convenient to the borrower's
operations and records; and
(v) All analyses, studies, opinions, memoranda, and other documents and information produced by the
independent consultant shall be provided to RUS on a confidential basis for consideration in evaluating
the borrower's application for debt settlement. Such documents and information may be made available
to the borrower and other appropriate parties if authorized in writing by RUS.

(4) The borrower may be required to employ a temporary or permanent manager acceptable to the
Administrator, to manage the borrower's operations to ensure that all actions are taken to avoid or
minimize the need for debt settlement. The employment could be on a temporary basis to manage the
system during the time the debt settlement is being considered, and possibly for some time after any
debt settlement, or it could be on a permanent basis.
(5) The borrower must submit, at a time determined by RUS, a resolution of its board of directors
requesting debt settlement and stating that the borrower is either currently unable to meet its financial
obligations to the government or will not be able to meet said obligations sometime within the next 24
months, and that, in either case, the default is likely to continue indefinitely.

(c) Debt settlement measures. (1) If the Administrator determines that debt settlement is appropriate,
the debt settlement measures the Administrator will consider under this subpart with respect to direct,
insured, or guaranteed loans include, but are not limited to, the following:
(i) Reamortization of debt;
(ii) Extension of debt maturity, provided that the maturity of the borrower's outstanding debt after
settlement shall not extend more than 10 years beyond the latest maturity date prior to settlement;
(iii) Reduction of the interest rate charged on the borrower's debt, provided that the interest rate on any
portion of the restructured debt shall not be reduced to less than 5 percent, unless the Administrator
determines that reducing the rate below 5 percent would maximize debt recovery by the government;
(iv) Forgiveness of interest accrued, penalties, and costs incurred by the government to collect the debt;
and
(v) With the concurrence of the Under Secretary for Rural Development, forgiveness of loan principal.

(2) In the event that RUS has, under section 306 of the RE Act, guaranteed loans made by the Federal
Financing Bank or other third parties, the Administrator may restructure the borrower's obligations by:
acquiring and restructuring the guaranteed loan; restructuring the loan guarantee obligation;
restructuring the borrower's reimbursement obligations; or by such means as the Administrator deems
appropriate, subject to such consents and approvals, if any, that may be required by the third party
lender.

(d) Borrower's obligations to other creditors. The Administrator will not grant relief on debt owed to the
government unless similar relief, on a pro rata basis, is granted with respect to other secured obligations
of the borrower, or the other secured creditors provide other benefits or value to the debt
restructuring. Unsecured creditors will also be expected to contribute to the restructuring. If it is not
possible to obtain the expected contributions from other creditors, the Administrator may proceed to
settle a borrower's debt if that will maximize recovery by the government and will not result in material
benefits accruing to other creditors at the expense of the government.

(e) Competitive bids for system assets. If requested by RUS, the borrower or the independent consultant
provided for in paragraph (b)(3) of this section shall solicit competitive bids from potential buyers of the
borrower's system or parts thereof. The bidding process must be conducted in consultation with RUS
and use standards and procedures acceptable to RUS. The Administrator may use the competitive bids
received as a basis for requiring the sale of all or part of the borrower's system as a condition of
settlement of the borrower's debt. The Administrator may also consider the bids in evaluating
alternative settlement measures.
(f) Valuation of system. (1) The Administrator will consider the value of the borrower's system, including,
in the case of a power supply borrower, the wholesale power contracts between the borrower and its
member systems. The valuation of the wholesale power contracts shall take into account, among other
matters, the rights of the government and/or third parties, to assume the rights and obligations of the
borrower under such contracts, to charge reasonable rates for service provided under the contracts, and
to otherwise enforce the contracts in accordance with their terms. In no case will the Administrator
settle a debt or claim for less than the value (after considering the government's collection costs) of the
borrower's system and other collateral securing the debt or claim.

(2) RUS may use such methods, analyses, and assessments as the Administrator deems appropriate to
determine the value of the borrower's system.

(g) Rates. The Administrator will consider the rates charged for electric service by the borrower and, in
the case of a power supply borrower, by its members, taking into account, among other factors, the
practices of the Federal Energy Regulatory Commission (FERC), as adapted to the cooperative structure
of borrowers, and, where applicable, FERC treatment of any investments by co-owners in projects jointly
owned by the borrower.
(h) Collection action. The Administrator will consider whether a settlement is favorable to the
government in comparison with the amount that can be recovered by enforced collection procedures.
(i) Regulatory approvals. Before the Administrator will approve a settlement, the borrower must provide
satisfactory evidence that it has obtained all approvals required of regulatory bodies that the
Administrator determines are needed to implement rates or other provisions of the settlement, or that
are needed in any other way for the borrower to fulfill its obligations under the settlement.
(j) Conditions regarding management and operations. As a condition of debt settlement, the borrower,
and in the case of a power supply borrower, its members, will be required to implement those changes
in structure, management, operations, and performance deemed necessary by the Administrator. Those
changes may include, but are not limited to, the following:

(1) The borrower may be required to undertake a corporate restructuring and/or sell a portion of its
plant, facilities, or other assets

(2) The borrower may be required to replace senior management and/or hire outside experts acceptable
to the Administrator. Such changes may include a commitment by the borrower's board of directors to
restructure and/or obtain new membership to improve board oversight and leadership;
(3) The borrower may be required to agree to:

(i) Controls by RUS on the general funds of the borrower, as well as on any investments, loans or
guarantees by the borrower, notwithstanding any limitations on RUS' control rights in the borrower's
loan documents or RUS regulations; and
(ii) Requirements deemed necessary by RUS to perfect and protect its lien on cash deposits, securities,
equipment, vehicles, and other items of real or non-real property; and

(4) In the case of a power supply borrower, the borrower may be required to obtain credit support from
its member systems, as well as pledges and action plans by the members to change their operations,
management, and organizational structure (e.g., shared services, mergers, or consolidations) in order to
reduce operating costs, improve efficiency, and/or expand markets and revenues.

(k) Conveyance of assets. As a condition of a settlement, a borrower may be required to convey some or
all its assets to the government.
(l) Additional conditions. The borrower will be required to warrant and agree that no bonuses or similar
extraordinary compensation has been or will be provided, for reasons related to the settlement of
government debt, to any officer or employee of the borrower or to other persons or entities identified
by RUS. The Administrator may impose such other terms and conditions of debt settlement as the
Administrator determines to be in the government's interests.
(m) Certification of accuracy. Before the Administrator will approve a debt settlement, the manager or
other appropriate official of the borrower must certify that all information provided to the government
by the borrower or by any agent of the borrower, in connection with the debt settlement, is true,
correct, and complete in all material respects.

§1717.1205 Waiver of existing conditions on borrowers.

Pursuant to section 331(b) of the Con Act, the Administrator, at his or her sole discretion, may waive or
otherwise reduce conditions and requirements imposed on a borrower by its loan documents if the
Administrator determines that such action will contribute to enhancement of the government's
recovery of debt. Such waivers or reductions in conditions and requirements under this section shall not

include the exercise of any of the debt settlement measures set forth in §1717.1204(c), which are
subject to all of the requirements of said §1717.1204.

§1717.1206 Loans subsequent to settlement.

In considering any future loan requests from a borrower whose debt has been settled in whole or in part
(including the surviving entity of merged or consolidated borrowers, where at least one of said
borrowers had its debts settled), it will be presumed that credit support for the full amount of the
requested loan will be required. Such support may be in a number of forms, provided that they are
acceptable to the Administrator on a case by case basis. They may include, but need not be limited to,
equity infusions and guarantees of debt repayment, either from the applicant's members (in the case of
a power supply borrower), or from a third party.

§1717.1207 RUS obligations under loan guarantees.

Nothing in this subpart affects the obligations of RUS under loan guarantee commitments it has made to
the Federal Financing Bank or other lenders.

§1717.1208 Government's rights under loan documents.

Nothing in this subpart limits, modifies, or otherwise affects the rights of the government under loan
documents executed with borrowers, or under law or equity.