(4) Electrical farm equipment for drying, curing, grading, handling, and storage of farm products; dairying, brooding; ventilating; farm shops; and for other farm production.

(5) Heat pumps and other electrical house heating and air-conditioning units, associated wiring, protective and control equipment. (6) Electrically driven irrigation pumps, pump columns, associated wiring, protective and control equipment.

(7) Electrical equipment including machinery for agricultural, commercial, and industrial enterprises.

For financing the acquisition and installation of electrical and plumbing appliances, machinery, or other equipment, other than indicated above, prior approval must be obtained from REA.

(b) Manufactured wiring, plumbing, and electrical equipment including machinery shall meet the minimum requirements established by local authorities, State health departments and recognized national organizations, such as the American Standards Association, the National Bureau of Standards, and the National Fire Protective Association (National Electrical Code) and shall be approved by recognized national testing organizations, such as the Underwriters' Laboratories.

(c) REA does not maintain an approved list of appliances or equipment, including machinery.

4. Section 5 funds may not be used for loans for financing:

(a) Wiring, plumbing or electrical equipment, including machinery.
(1) previously financed or for which arrangements for financing have
previously been made;

(2) to be used by newspapers, book or magazine publishers, radio or television broadcasters, or other enterprises engaged in molding public opinion;

(3) known to impair service on rural electric systems, or to be inconsistent with good operating practices;

(4) designed for operation by other than electric power or with heat or energy source other than electrical.

(b) Well casings and the digging, drilling, or redrilling of wells.

(c) Sprinkler irrigation main line pipe, lateral pipe, couplings, nozzles, and accessories, or irrigation ditches.

(d) Insulation and weatherproofing.

(e) The "pirating" of a commercial or industrial consumer from one area to another.

(f) Merchandising operations: Section 5 loans shall not be used to finance merchandising operations, such as: (1) the purchase and stocking of merchandise for resale, (2) the sale of merchandise on consignment, (3) lot purchases of merchandise from dealers, distributors, or manufacturers for resale.

Borrowers engaging in merchandising operations may use section 5 loan funds for consumer financing on the same basis as such loan funds are made available by them to other dealers.

B. Loan terms:

1. Loans will generally be made for a period of 10 years. Interest at the rate of 2 percent per annum shall be due and payable annually on October 31, as it accrues. Advance payments on principal may be made at any time. Principal payments are due and payable as follows:

(a) Section 5 loans used for individual farm or residential consumers: The principal shall become due and payable on the maturity date of the note. For any consumer loan in excess of $2,500, borrowers may be required to remit all collections of principal and of interest on such consumer obligations to REA as received.

Borrowers are urged to plan for such payment by anticipating the amount of cash that will be available for this purpose.

(b) Section 5 loans used for commercial or industrial consumers: Borrowers shall remit all collections of principal and of interest on such consumer obligations to REA as received. When the note to REA is retired, the remittance will be applied against other section 5 notes, or against other indebtedness to REA, or as an advance payment. In making payments, the borrower shall identify the loan account number so that the payment may be appropriately applied.

2. The provisions of this bulletin regarding loan terms are not retroactive.

C. Amount of loan:

1. The amount of a section 5 loan to be used for individual farm and residential consumers should not exceed the estimated amount needed by the borrower to finance such consumer loans for the 2-year period following the date of the loan. Generally, this amount should not exceed $100,000.

2. The amount of a section 5 loan to be used for a commercial or industrial consumer shall be based on the needs in the individual case.

D. Eligible borrowers: Section 5 loans may be made only to borrowers of funds loaned for electric facilities under the provisions of section 4 of the Rural Electrification Act which (1) are authorized under applicable State laws to finance consumer loans and (2) have demonstrated the need for such funds. Loans will not not be made in competition with private sources of credit or as a substitution for loan funds available under other Federal programs. REA will not approve the use of section 5 funds where the necessary financing is available from other

sources.

E. Loan security:

1. The security for the section 5 loan will consist of all assets of the electric borrower as provided under the REA mortgage. REA will ascertain that the electric borrower will be able to meet all of its Government and non-Government obligations.

2. In special cases REA may require as a loan condition that the consumer obligations be assigned to the Government. In such cases, the borrower will be advised of the special REA procedures and requirements involved. Consumer obligations executed under section 5 loans approved prior to September 13, 1957 will continue to be assigned.

3. The loan documents and complete instructions concerning their execution will be forwarded to the borrower. Among other provisions, loan documents will provide that:

(a) The Administrator may require at any time the assignment to the Government of all consumer obligations executed under section 5 loans when, in his judgment, such assignment is necessary for loan security.

(b) The Administrator may require the borrower to pay to the Government any sums held by the borrower in its "cash-installation loan and collection fund" at any time he determines such payment is necessary to protect the Government's interest.

(c) Consumer obligations executed under section 5 loans shall not be sold by the borrower or otherwise negotiated at less than full value. If sold, REA shall be notified.

F. Procedure for applying for a section 5 loan:

1. REA assistance in the preparation of section 5 loan applications will be provided borrowers on request. REA rural areas development representatives are available to assist borrowers in planning, organizing, and evaluating proposed loans for commercial or industrial consumers.

2. Where a borrower is contemplating two or more loans, each in excess of $2,500, for commercial or industrial consumers, a separate section 5 loan application should be submitted for each of the proposed consumer loans. REA may combine these separate applications into a single application for processing if it appears advantageous to do so.

3. The section 5 loan application for a proposed commercial or industrial consumer loan should not exceed the estimated amount of the proposed consumer loan by more than 15 percent. Depending on the firmness of the estimates, the excess will be limited to an amount that will cover reasonable differences between estimated and actual costs.

4. The section 5 loan application should consist of a letter of application and a certified copy of a board resolution supporting the loan and stating the amount of loan requested. (See sample resolution attached.)

(a) Where a borrower requests a section 5 loan for use by a commercial or industrial consumer, the data required for approval of the consumer loan must be submitted with the section 5 loan application. (See sec. III, E, 2.) (b) Where a borrower requests a section 5 loan for use by individual farm or residential consumers, the letter of application should explain the need for the loan, the general purposes for which the loan will be used, and state the rate of interest the electric borrower intends to charge on consumer loans. The letter should also include:

(1) Evidence that the necessary credit is not available in the area to finance the wiring of premises and the acquisition and installation of

electrical and plumbing appliances and equipment for the electric borrowers' members. This shall consist of:

(a) A written statement summarizing the terms and conditions under which credit, if any, is available to the borrower's consumers. The statement should describe the credit in terms of any limits on the amount which will be financed, the percentage of the installed cost which will be financed, the term for which the financing is available, the repayment period, the interest and other charges associated with the credit, and any other pertinent facts.

(b) Written statements from at least two banks or other sources of consumer credit outlining the terms and conditions under which they will provide such credit. These may be local institutions or those within a reasonable distance of the area which are authorized under State and Federal laws to provide such financing.

(c) A written statement from one or more appliance dealers evaluating the need for credit in the area.

(2) When circumstances indicate the need for a section 5 loan in excess of $100,000, the information on which the estimate of need is based should be included.

(3) If it is known that the loan will be used to make a consumer loan in excess of $2,500, requests for approval of such loan or loans may be submitted with the section 5 application. (See sec. III, E, 1.)

G. Procedure for requisitioning loan funds and reporting on their use:

1. All borrowers shall use REA form 133 in requisitioning advances and reporting on the use of loan funds. This form will be furnished by REA and must be completed and submitted quarterly as long as there remains unpaid principal on any section 5 loan.

2. For loans in excess of $2,500 for commercial or industrial consumers, advances will be made against the note covering the loan which provided funds for the consumer involved. Funds will not be advanced on account of any such loan until the borrower has complied with the conditions set forth in the letter from REA approving the consumer loan. Generally, this data should be submitted with the REA forms 133 requesting advances for such consumer loan.

H. Expenditure of loan funds: Unless otherwise authorized by REA, section 5 loan funds shall be expended by the electric borrower only in payment on behalf of the consumer to a contractor or supplier, for eligible items of wiring, plumbing, or electrical equipment or appliances, including machinery.

1. No payment should be made to a contractor or supplier on financing on behalf of a farm or residential consumer until a properly executed conditional sale contract has been received.

2. No payment should be made to a contractor or supplier on behalf of a commercial or industrial consumer loan until properly executed conditional sale contracts or REA approved security documents have been received.

I. Special accounts:

1. Advances on loans approved prior to September 13, 1957, shall be deposited in a trust account entitled "Cash-REA Installation Loan Fund." Payments received on consumer loans made from such REA loan funds shall be deposited in a trust account entitled "Cash-Installation Loan Payment," and remitted to REA in accordance with the terms of the loan contract and note.

2. Advances on section 5 loans approved on or after September 13, 1957, shall be deposited in a trust account entitled, "Cash-Installation Loan and Collection Fund." Principal and interest payments received on consumer loans made with such REA funds and any proceeds from the sale of consumer obligations by the borrower shall also be deposited in this trust account. Unless otherwise directed

by REA in accordance with section II, B, 1, a and b, and II, E, 3, b of this bulletin, all funds in this account, other than interest collections, shall be available to finance consumer loans.

III. General policy and procedure for consumer loans.—

A. Amount:

1. It is recommended that the amount of the consumer loans not exceed 80 percent of the installed cost of the wiring, plumbing or electrical equipment being financed; in no event shall it exceed 90 percent.

2. All consumer loans in excess of $2,500 require prior REA approval.

B. Terms:

1. Four percent interest per annum on the current unpaid balance of the loan is generally considered appropriate. Use of a different interest rate must be justified.

2. The terms and conditions of such loans shall be in compliance with regulations of the Federal and State agencies governing consumer financing and credit transactions.

3. Consumer payments on such loans should be on a monthly, quarterly, semiannual, or annual basis.

C. Conditional sale obligation forms and security documents:

1. Borrowers are required to obtan adequate security for the consumer loan when financing is on other than a conditional sale basis.

2. Prior REA approval must be given to the use of any consumer obligation forms other than REA forms 134 and 135. Samples of these forms are attached to be reproduced by the borrower for its use.

(a) REA form 134-Wiring and plumbing conditional sale contract: This form of contract (without recourse to the dealer) is to be used for financing wiring and plumbing installations including lighting and plumbing fixtures. It must be executed in triplicate, one copy each for the borrower, consumer, and contractor.

(b) REA form 135-Conditional sale contract: This form of contract (with recourse) is to be used for financing the purchase and installation of electrical appliances and equipment, including machinery, and must be endorsed on a recourse basis by the dealer. It must be executed in triplicate, one copy each for the borrower, consumer and dealer.

3. The borrower's attorney is required to review all consumer obligation forms, including REA forms 134 and 135, for suitability and compliance with State laws prior to their use by the borrower.

4. The borrower should obtain advice of its attorney with respect to compliance with State laws as to filing or recording of the consumer obligations involved.

D. Credit committee: The board of directors shall set up a credit committee of not less than three members, a majority of whom shall be members of the board. The success of the program rests to a large extent with the credit committee. committee shall:

The

1. Review each consumer loan in excess of $2,500 and recommend board action. 2. Review and take action on each individual nonrecourse conditional sale contract.

3. Review the financial standing of each appliance and equipment dealer signing recourse conditional sale contracts and report its findings to the board. A maximum total value of recourse contracts to be purchased by the borrower should be definitely established for each dealer and reviewed periodically.

E. Procedure for obtaining approval of consumer loan:

In requesting approval of consumer loans in excess of $2,500, the electric borrower should provide REA with the information considered by its credit committee and board of directors in giving tentative approval to the proposed financing. This should include:

1. Loan to individual farm or residential consumer:

(a) The name, address, and nature of operations of the consumer.

(b) The amount of the proposed consumer loan.

(c) The type and proposed use of the electrical appliance, equipment or machinery to be financed.

(d) The terms (including loan period, percent of cost to be financed, rate of interest, terms of repayment).

(e) Proposed forms of loan and security documents.

(f) The basis on which it was determined that the necessary credit is not available from other sources.

2. Loan to commercial or industrial consumer:

(a) Name and address of consumer.

(b) Location of site at which equipment will be used.

(e) Kind of business organization and ownership.

(d) Amount of proposed consumer loan.

(e) Terms of financing (including percent of installed cost of equipment to be financed, rate of interest, and terms of payment).

(f) Description of the equipment to be financed including size, type, unit price, manufacturer, and the electrical features of the equipment.

(g) Written evidence that the necessary financing for the equipment is not available from private sources or under other Federal programs. This should be in the form of letters of declination identifying the loan requested, by amount, and giving the reasons for the declination, including any alternate

financing terms offered. At a minimum, the consumer should make application to the following sources:

(1) Two banks or other commercial lenders. When the financial data of the consumer applicant indicates that financing might be available from large lenders outside of the area, REA will assist the borrower and the consumer in seeking such financing.

(2) The Small Business Administration, except in those cases where the section 5 funds will be used in connection with an Area Redevelopment Administration project. SBA is a normal source of financing for small profitmaking businesses when private financing is not available. (3) The Area Redevelopment Administration when the consumer is located in an ARA designated area.

(4) The appropriate Bank for Cooperatives when the consumer is a farmer cooperative.

(h) Total cost of the undertaking (amount for land, buildings, equipment, working capital, etc.) and the sources and terms of other financing involved. (1) Revenue and expense statement showing the applicant's projected revenues, principal items of expense, and cash margins available to meet its obligations, estimated as of the end of the first year the equipment is in use. The statement should be sufficiently detailed so that its completeness may be judged. It should be accompanied by a statement of anticipated outstanding indebtedness and terms of repayment.

(j) Recent balance sheet, and profit and loss statement for the preceding 3 years (or for as many years as the business has been in operation, if less than 3 years) when financing is for an existing business.

(k) Information concerning the present and potential market for the product, proposed marketing arrangements and the effect of the planned enterprise on existing businesses.

(1) Management experience of applicant.

(m) Proposed loan and security documents, completed to the point where where they are ready for execution.

(n) Comments of the electric borrower's credit committee covering its appraisal of the undertaking and of the projected income and expense statement, quality of management, and probable success of the undertaking.

(0) Anticipated kilowatt-hour sales and annual revenue to the electric borrower from the sale of electricity to this consumer. Any other benefits to the electric borrower's members or to the community which are expected to result from the financing.

(p) Number of present employees of consumer. Estimated number of persons to be employed by the consumer at the end of the first year of operation. Total number of employees anticipated.

F. Use of general funds for consumer financing:

If a borrower uses part of its general funds to finance consumer loans, it is recommended that the policy and procedures herein be adhered to. General funds so used and subsequent collections thereof are not to be commingled in depository or ledger accounts with funds from REA section 5 loans.

In the event a borrower is considering the possibility of using general funds in a rural areas development project, it should submit the proposal to REA for advice and consultation. The services of the Rural Areas Development staff, including technical and marketing assistance as well as information on other possible credit sources, are available. See REA bulletins 1-7 and 800-3 before committing the use of general funds for these purposes.

IV. Notification and certifications.

A. The Committee on Appropriations of the U.S. Senate will be notified of requests for section 5 loan funds.

B. When a section 5 loan is made, the Administrator will certify to the Secretary of Agriculture the necessity for making the loan. The Committee on Appropriations of the U.S. Senate will be furnished a copy of such certification.

V. Applications closed without loan.-If REA determines a loan application need not or cannot be processed for loan approval, or the applicant withdraws or cancels the application, the loan application shall be considered "closed without loan" and removed from official records of pending loan applications. The loan applicant and the Committee on Appropriations of the U.S. Senate will be notified accordingly.

Attachments: Sample Board resolution.

Administrator.