§936c Refinancing and Prepayment of Ffb Loans

Summary

A borrower with a Federal Financing Bank loan guaranteed under section 936 may choose to refinance or pay off all or part of the loan or an advance. If the borrower does this, they must pay a penalty. The penalty is the smallest of three amounts: (1) the difference between the loan balance and its present value when discounted at the Treasury’s current cost-of-funds rate for a matching term; (2) up to 100% of one year’s interest on the balance, multiplied by a fraction based on the number of remaining quarterly payments compared with the number of quarterly payments from the first quarterly payment date that falls 12 years after the end of the year the advance was made to the loan’s maturity; or (3) the present value of one year’s interest plus the present value of the extra payments that would be made from the refinancing date until that 12-year quarterly date if the loan stayed at its scheduled payments instead of being reset to the Treasury rate. If the loan agreement already allows refinancing by paying one year’s interest, the borrower may use formula (2) if the advance has reached the 12-year point, or formula (3) if it has not. The borrower can pay the penalty in cash at refinancing or add it to the loan principal; if added to principal, the borrower must also pay 2.5% of that added penalty in cash at refinancing. After the penalty is paid, the loan can be refinanced at a rate equal to the Treasury cost-of-funds for a term the borrower picks, but that rate cannot exceed 7% per year. The borrower picks the term, may renew at term end, and cannot make the term go past the original maturity date. Requests to refinance or to add the penalty to principal cannot be denied, delayed, or limited, and do not depend on new appropriations. A borrower may choose to cap the new rate at 7% for part of their loans, but not for more than 50% of their outstanding principal on section 936 loans. If they use that 7% cap, they must pay a fee equal to 1% of the principal of the loans covered by the cap, in addition to other penalties. To use the 7% cap, the borrower must send a written request to the Secretary no later than 1 year after the effective date of the regulations implementing the Rural Electrification Loan Restructuring Act of 1993.