(a) Loans shall be made only to water systems that:

(1) Are on the department's water system priority ranking list established pursuant to § 68-221-1205;

(2) Use the funds only for expenditures that will facilitate compliance with the federal act and the state act or otherwise significantly further the public health protection objectives of those acts;

(3) In the opinion of the authority, demonstrate technical, managerial, and financial capability to ensure compliance with the requirements of the federal act and the state act; provided, that systems without such current capability may receive loans if the owner or operator of the system agrees to undertake feasible and appropriate changes in operations as approved by the water and wastewater financing board (including ownership, management, accounting, rates, maintenance, consolidation, alternative water supply, or other procedures) to ensure that the system has the technical, managerial, and financial capability to comply with the requirements of the state and federal acts over the long term;

(4) Are not in significant noncompliance with the federal act or the state act unless the use of the assistance will ensure compliance;

(5)

(A) In the opinion of the authority, demonstrate sufficient revenues to operate and maintain the water system for its useful life and to repay the loan;

(B) Pledge security as required by the authority for the repayment of the loan;

(C) Agree to adjust periodically fees and charges for services of the water system in order that loan payments and costs of the water system are timely paid; provided, however, upon determination that fees and charges are reasonable, the authority may in its discretion make a loan to a local government which is relying upon and using ad valorem taxes or other lawful sources of revenue, in addition to fees and charges, to pay timely the loan payments and costs of the water system;

(6) Agree to maintain financial records in accordance with governmental accounting standards and to conduct an annual audit of the system's financial records in accordance with generally accepted governmental auditing standards and with minimum standards prescribed by the comptroller of the treasury, and to file such audit with the comptroller. In the event of the failure or refusal of the system to have the audit prepared, then the comptroller of the treasury may appoint an accountant or direct the department of audit to prepare the audit at the expense of the system;

(7) Provide such assurances as are reasonably requested by the authority and the department; and

(8) In the case of local governments with taxing power, agree to be subject to the jurisdiction of the water and waste water financing board established by this part; and all other local governments, notwithstanding any charter provision to the contrary, agree to be subject to the jurisdiction of the utility management review board created by title 7, chapter 82; provided, however, that any local government in existence on April 11, 2002, and under the terms of this section, subject to the jurisdiction of the utility management review board, other than utility districts formed under title 7, chapter 82, at any time after April 11, 2002, may irrevocably elect to come under the jurisdiction of the water and waste water financing board, and any such local government not in existence on April 11, 2002, may make such irrevocable election prior to obtaining a loan from the board. All such elections shall be submitted in writing to the director, with a copy to the authority.

(b) Loan funds may not be used for the acquisition of real property or interests therein, unless the acquisition is integral to a project authorized by this section and the purchase is from a willing seller.

(c) Of the amount credited to the fund in any fiscal year, fifteen percent (15%) shall be available solely for providing loan assistance to water systems which regularly serve fewer than ten thousand (10,000) persons to the extent such funds can be obligated for eligible projects of water systems.

(d) The interest rate for each loan shall be less than or equal to the market interest rate, or the loan may be interest free.

(e) Principal and interest payments on each loan will commence not later than one (1) year after completion of the project for which the loan was made, and each loan will be fully amortized not later than twenty (20) years after the completion of the project, except that in the case of a disadvantaged community, as defined in subdivision (i)(2), the authority may provide an extended term for a loan, if the extended term:

(1) Terminates not later than thirty (30) years after the date of project completion; and

(2) Does not exceed the expected design life of the project.

(f) The drinking water revolving loan fund may also be used:

(1) To buy or refinance the debt obligation of a municipality or an inter-municipal or interstate agency at an interest rate that is less than or equal to the market interest rate if the debt obligation was incurred after July 1, 1993;

(2) To guarantee, or purchase insurance for, a local obligation (all of the proceeds of which finance a project eligible for assistance under this section) if the guarantee or purchase would improve credit market access or reduce the interest rate applicable to the obligation;

(3) As a source of revenue or security for the payment of principal and interest on debt of the authority, if the proceeds of the sale of the bonds will be deposited into the fund;

(4) To earn interest on the amounts deposited into the fund;

(5) For loans to any systems to acquire land or a conservation easement from a willing seller or grantor, if the purpose of the acquisition is to protect the source water of the system from contamination and to ensure compliance with national primary drinking water regulations;

(6) For loans to any water system to implement local, voluntary source water protection measures to protect source water in areas delineated pursuant to section 1453 of the federal act, in order to facilitate compliance with national primary drinking water regulations applicable to the system under section 1412 of the federal act or otherwise significantly further the health protection objectives of this title. Funds authorized under this clause may be used to fund only voluntary, incentive-based mechanisms;

(7) For loans to any water system to provide funding in accordance with section 1454(a)(1)(B)(i) of the federal act;

(8) To provide assistance, including technical and financial assistance, to any water system as part of a capacity development strategy developed and implemented in accordance with section 1420(c) of the federal act;

(9) To make expenditures from the capitalization grant for fiscal years 1996 and 1997 to delineate and assess source water protection areas for water systems in accordance with section 1453 of the federal act, except that funds set aside for such expenditure shall be obligated within four (4) fiscal years;

(10) To make expenditures from the fund for the establishment and implementation of wellhead protection programs for water systems under section 1428 of the federal act; and

(11) For loans to privately owned for-profit community public water systems as provided in federal law pursuant to 40 CFR Part 35; provided, that:

(A) No privately owned for-profit community public water systems shall be considered for loans with principal forgiveness under this program;

(B) Privately owned for-profit community public water systems shall be categorized as one hundred percent (100%) ability to pay on the index established pursuant to § 68-221-1205;

(C) A privately owned for-profit community public water system borrower shall have at least a debt/service coverage ratio of 1.25;

(D) Privately owned for-profit community public water systems shall provide security determined by the Tennessee local development authority to be acceptable to secure a loan under this part; and

(E) The Tennessee local development authority has the authority to direct a privately owned for-profit community public water system to the water and wastewater financing board for compliance as set forth in §§ 68-221-1009 and 68-221-1010, and by the comptroller of the treasury.

(g) Loan funds may only be used for expenditures approved by the department.

(h) The requirements of this section applicable to water systems applying for loans are deemed satisfied if any one of the entities jointly participating in the project being funded pursuant to the loan agreement satisfies the requirements.

(i) Loan Subsidy. Notwithstanding any other provision of this part, in any case in which the state makes a loan pursuant to this part to a water system serving a disadvantaged community or a community that the state expects to become a disadvantaged community as the result of a proposed project, the state may provide additional subsidization (including forgiveness of principal).

(1) Total Amount of Subsidies. For each fiscal year, the total amount of loan subsidies may not exceed thirty percent (30%) of the amount of the capitalization grant received by the state for the year.

(2) Definition of Disadvantaged Community. In this subsection (i), the term “disadvantaged community” means the service area of a water system that meets affordability criteria established pursuant to this part.