[Federal Register Volume 65, Number 199 (Friday, October 13, 2000)]
[Notices]
[Pages 60940-60945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26353]
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ENVIRONMENTAL PROTECTION AGENCY
[FRL-6884-7]
Transfer and Cross-Collateralization of Clean Water State
Revolving Funds and Drinking Water State Revolving Funds
AGENCY: Environmental Protection Agency.
ACTION: Policy statement.
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SUMMARY: Enactment of the Safe Drinking Water Act (SDWA) Amendments of
1996 and the Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act of Fiscal Year
1999, (Appropriations Act) provide flexibility to States for both their
drinking water and wastewater needs. The SDWA Amendments established
the Drinking Water State Revolving Fund (DWSRF) and also contain a
provision authorizing States to transfer funds between the DWSRF and
the Clean Water State Revolving Fund (CWSRF). Congress also created
additional flexibility by authorizing a form of cross-collateralization
in the Appropriations Act. With proper planning, priority setting, and
public disclosure, these two provisions can assist the States in
maximizing their infrastructure funding programs by increasing the
availability of funds where they are most needed, enhancing bond
ratings, and lowering borrowing costs without increasing risks.
Since there are similarities between the two SRF programs, the
Environmental Protection Agency (EPA) intends to administer the two
programs in a similar manner in regard to transfers and cross-
collateralization. Requirements regarding transfer and cross-
collateralization of funds are contained in EPA's Interim Final Rule,
Drinking Water State Revolving Funds (see 65 FR 48286). This policy
establishes EPA policy regarding the use of these two provisions in
funding DWSRF and CWSRF projects. It identifies the process a State
must undergo to gain EPA approval for incorporating transfers and/or
cross-collateralization into its SRF program.
DATES: This policy statement is effective October 13, 2000.
FOR FURTHER INFORMATION CONTACT: For technical inquiries, contact
Sheila Platt, State Revolving Fund Branch, Municipal Support Division,
Office of Wastewater Management (MC-0064204), U.S. Environmental
Protection Agency, Ariel Rios Building, 1200 Pennsylvania Avenue, NW.,
[[Page 60941]]
Washington, DC 20460. The telephone number is (202) 260-7376 and the e-
mail address is [email protected]. Copies of this document can be
obtained from EPA's Office of Wastewater Management website at
www.epa.gov/owm/finan.html.
SUPPLEMENTARY INFORMATION:
Background
Section 302 of the SDWA Amendments authorizes a State to transfer
up to 33 percent of the amount of a fiscal year's DWSRF program
capitalization grant to the CWSRF program or an equivalent amount from
the CWSRF program to the DWSRF program. The Fiscal Year 1999
Appropriations Act (Public Law 105-276) authorizes cross-
collateralization between the DWSRF and CWSRF programs.
EPA released a draft policy entitled ``Transfer/Cross-
collateralization Policy for the DWSRF and CWSRF'' in June 1998 which
specified the provisions that States must meet in order to gain EPA
approval for incorporating transfers and cross-collateralization
provisions into their programs. The draft policy has been used for the
past two years for review and approval of State transfer and cross-
collateralization proposals. The policy was developed with substantial
review and comment from EPA Regional staff, national stakeholder
organizations, and a State/EPA SRF Work Group comprised of State DWSRF
managers, State CWSRF managers, and managers of State financial
agencies. The only major comment received pertained to extending the
September 30, 2001 sunset date for transfers. EPA will recommend to
Congress that the sunset date for transfers be dropped. This policy
statement includes the transfer and cross-collateralization
requirements for both the DWSRF and the CWSRF programs.
Dated: October 5, 2000.
J. Charles Fox,
Assistant Administrator, Office of Water.
Transfer and Cross-Collateralization of Clean Water State Revolving
Funds and Drinking Water State Revolving Funds
Table of Contents
I. Transfers
A. Statutory Authority
1. Authorized Time Period
2. Transfer Ceiling
B. Transfer Flexibility
1. Transfer Funds
2. Timely and Expeditious Use
3. Expiration of Authority to Reserve or Transfer
4. Transferring on Net Basis
C. State Match, Set-asides, Administrative Ceiling and 604(b)
Calculation
1. State Match
2. DWSRF Set-asides
3. CWSRF Administrative Ceiling and 604(b) Calculation
D. Project Funding for Small Systems
E. Intended Use Plan and Operating Agreement
1. Intended Use Plan
2. Operating Agreement
F. Transferring Federal Funds and State Match Funds
1. Payment Schedule/Grant Amendments
2. Cash Draw Proportionality
3. Binding Commitments
4. Cross-cutting Federal Authorities
G. Transferring Other Funds
H. Reporting, Monitoring and Review
II. Cross-Collateralization
A. Authorization
B. Purpose
C. Legislative Authority
D. Operating Agreement and Intended Use Plan
E. Revenues from the Bonds
F. State Match
G. Operation of SRF Programs
I. Transfers
A. Statutory Authority
Section 302 of the Safe Drinking Water Act (SDWA) Amendments of
1996 offers States the flexibility to transfer funds from one SRF
program to the other. The transfer provision reads as follows:
Sec. 302. Transfer of Funds.
(a) In General.--Notwithstanding any other provision of law, at
any time after the date 1 year after a State establishes a State
loan fund pursuant to section 1452 of the Safe Drinking Water Act
but prior to fiscal year 2002, a Governor of the State may--(1)
reserve up to 33 percent of a capitalization grant made pursuant to
such section 1452 and add the funds reserved to any funds provided
to the State pursuant to section 601 of the Federal Water Pollution
Control Act (33 U.S.C. 1381); and (2) reserve in any year a dollar
amount up to the dollar amount that may be reserved under paragraph
(1) for that year from capitalization grants made pursuant to
section 601 of such Act (33 U.S.C. 1381) and add the reserved funds
to any funds provided to the State pursuant to section 1452 of the
Safe Drinking Water Act.
(b) REPORT.--Not later than 4 years after the date of enactment
of this Act, the Administrator shall submit a report to Congress
regarding the implementation of this section, together with the
Administrator's recommendations, if any, for modifications or
improvement.
(c) STATE MATCH.--Funds reserved pursuant to this section shall
not be considered to be a State match of a capitalization grant
required pursuant to section 1452 of the Safe Drinking Water Act or
the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.).
Section 302 states that the governor of a State can reserve up to
33% of its DWSRF capitalization grant for transfer to its CWSRF or an
equivalent amount from its CWSRF to its DWSRF. Therefore, a State has
the flexibility to prioritize its funding where it has the greatest
need.
Both the CWSRF and the DWSRF programs require that an Attorney
General's opinion certifying that the SRF program is consistent with
State law be submitted with each capitalization grant application. If a
State receives a capitalization grant and later decides to transfer
funds, the capitalization grant agreement must be amended and an
Attorney General's opinion must be submitted certifying that State law
permits the State to transfer funds. Transfers must be made by the
Governor or by a State official acting pursuant to authorization from
the Governor.
1. Authorized Time Period
Funds may be reserved and transferred only during a limited time
period:
a. CWSRF or DWSRF funds may be transferred after one year has
elapsed since a State establishes its DWSRF Fund (i.e., the date of the
first DWSRF capitalization grant awarded to the State for projects),
and may include an amount equal to the allowance associated with its
fiscal year 1997 capitalization grant. For example, if a DWSRF Fund is
established on October 31, 1997 with the award of a capitalization
grant for project funds, the first day funds can be transferred is
November 1, 1998.
b. Funds may only be transferred ``prior to fiscal year 2002''
(October 1, 2001).
2. Transfer Ceiling
The amount of the total DWSRF capitalization grant, including any
portion awarded for set-aside activities, determines the amount of
funds that can be reserved and transferred.
a. The Governor of a State may reserve an amount equal to 33% of
the DWSRF capitalization grant and transfer the funds to the CWSRF.
b. The Governor may reserve funds from the CWSRF in an amount equal
to no more than 33% of the DWSRF capitalization grant and transfer
those funds to the DWSRF.
B. Transfer Flexibility
1. Transfer Funds
Based on section 302 of the SDWA, the DWSRF capitalization grant
the State is basing the transfer amount on must have been awarded prior
to the transfer of any funds. Section 302 does not limit the transfer
of funds to Federal capitalization grant dollars. States may
[[Page 60942]]
transfer Federal capitalization grant dollars, State match, investment
earnings, or principal and interest repayments. When CWSRF Federal
funds are transferred, the CWSRF capitalization grant must also have
been awarded prior to the transfer of funds. As part of the transfer
process, States must identify in both the CWSRF and DWSRF Intended Use
Plans (IUPs) that funds will be transferred, the type of funds to be
transferred (Federal capitalization grant dollars, State match,
investment earnings, etc.), and the effect that transfers will have on
the program's ability to fund projects. States may elect to reserve the
authority to transfer funds in one year, but not actually transfer
those funds until a later time, but no later than fiscal year 2001 (see
Table #1).
2. Timely and Expeditious Use
Reserving the authority to transfer funds at a future date is not
reserving the actual cash, but is a ``credit'' for future transfer.
Funds must still be used for project or set-aside activities during the
time period prior to when the actual transfer occurs. States may then
transfer other moneys present in the respective SRF at the time of the
transfer.
3. Expiration of Authority to Reserve or Transfer
Funds may not be reserved or transferred after September 30, 2001.
4. Transferring on Net Basis
Moneys may be transferred between the SRF programs on a net basis
provided that the 33% ceiling is maintained. Once money has been
transferred, even if the donor SRF reaches the 33% limit, it may still
be transferred back to the donor SRF from the receiving SRF by a
subsequent transfer. Table #2 shows the effect of multiple
capitalization grants of $100 each and transfers between the SRF
programs.
Another example is a situation where State law does not allow State
funds to be used to fund private water systems in the State's DWSRF
program. In this case, the State may designate that it will transfer
State match funds from the DWSRF to the CWSRF and Federal funds, equal
to the State match amount, from the CWSRF to the DWSRF. Since the
dollar amounts of these transfers are equal, there is no effect on the
amount available to transfer. Table #3 illustrates this example.
C. State Match, Set-asides, Administrative Ceiling and 604(b)
Calculation
Transfers do not impact the State match calculation in the
capitalization grants, the set-asides calculations in the DWSRF, or the
4% administration and 604(b) calculations in the CWSRF.
1. State Match
In both SRF programs, the State match requirement is 20% of the
capitalization grant. Transfers do not affect the calculation of those
required amounts in either program. Section 302 of the SDWA stipulates
that funds transferred under this provision cannot be considered the
required State match for the capitalization grant in either SRF
program. The transfer provision cannot be used to acquire State match.
Transferred funds cannot be used for the purposes of securing or
repaying State match bonds.
2. DWSRF Set-asides
Since set-aside ceilings in the DWSRF are calculated based on the
allotment or the capitalization grant, the ceilings are not
recalculated as a result of transferring funds.
3. CWSRF Administrative Ceiling and 604(b) Calculation
The 4% administrative ceiling is not calculated using transferred
amounts. The calculation of the 4% is based upon the initial
capitalization grant. The 604(b) funds are calculated on the allotment.
The following example illustrates the fact that a transfer will
have no impact on State match, the DWSRF set-asides, the CWSRF
administrative ceiling, and the CWSRF 604(b) calculation. The CWSRF
capitalization grant is $10,000,000 and the State match is $2,000,000.
The DWSRF capitalization grant is $10,000,000 and the State match is
$2,000,000. The State has determined it will use 31% of the
capitalization grant for set-aside activities. The State also decided
to transfer $3,000,000 from the CWSRF to the DWSRF for additional SDWA
project activities. After the transfer, the State match for each SRF
program ($2,000,000) remains unchanged because the CWSRF and DWSRF
State match is based upon the initial capitalization grants. The DWSRF
set-aside calculation does not change ($3,100,000) because the set-
asides are based upon the initial capitalization grant amount and/or
the allotment. The CWSRF 4% administrative ceiling remains at $400,000
and 604(b) is still calculated at $100,000.
D. Project Funding for Small Systems
Transfers into or out of the DWSRF Fund could impact loan
assistance for small systems that serve fewer than 10,000 persons. The
SDWA requires that a State use a minimum of 15 percent of all dollars
credited to the Fund to provide loan assistance to small public water
systems to the extent such funds can be obligated for eligible projects
of public water systems. Accordingly, 15 percent of all dollars
transferred into the DWSRF Fund must also be used in accordance with
the small systems provision of the SDWA.
E. Intended Use Plan and Operating Agreement
1. Intended Use Plan
States must develop an annual IUP for each SRF program for public
review and comment that includes a description of the funds to be
reserved and/or transferred and how those funds will be used. The IUPs
must disclose how and why the decisions to transfer funds were made.
EPA encourages States to include a discussion of wastewater and
drinking water needs to show the public that the highest priorities are
being funded. The IUP must provide sufficient information regarding
transfers for the public to understand:
a. The total amount of authority being reserved for future transfer
including the authority from previous years;
b. The total amount and type of funds being transferred during the
term of the IUP;
c. The impact on the current year's Fund and set-asides; and
d. The long-term impact on the Fund.
Both CWSRF and DWSRF IUPs must be amended if a mid-year transfer is
to occur that has not had prior disclosure to the public. For example,
the State received its DWSRF capitalization grant in June 1998 and
subsequently decides to transfer funds to its CWSRF. Because the
current year IUPs did not contain information concerning transfers, the
IUPs must be amended (and capitalization grants if transferring federal
dollars) and distributed for public review and comment in accordance
with the State procedures established for amending IUPs.
2. Operating Agreement
When a State initially decides to include the ability to transfer
in its program, the Operating Agreement must be amended to include the
method the State will use to transfer funds.
[[Page 60943]]
F. Transferring Federal Funds and State Match Funds
Because transfers can complicate the analysis of whether a State is
complying with the proper payment schedule, binding commitments, and
cross-cutting Federal authorities, the State must identify whether the
transferred amount consists of dollars on which these requirements will
apply or other dollars. The State must maintain sufficient procedures
to ensure proper accounting for transferred dollars.
1. Payment Schedule/Grant Amendments
If a State decides to transfer Federal funds subsequent to
establishing a payment schedule, a revised payment schedule will be
necessary. Changes to the payment schedule will be effected through an
amendment to the grant agreement.
2. Cash Draw Proportionality
Transfers of Federal capitalization dollars or State match dollars
will impact cash draw proportionality. Please refer to the ``Guide to
Using EPA's Automated Clearing House for the Drinking Water State
Revolving Fund Program'' (EPA-832-B98-003) published in September 1998
for details concerning recalculating proportionality.
3. Binding Commitments
When Federal funds or State match funds are transferred from one
SRF program's Fund into the other SRF program's Fund, the State must
enter into binding commitments in the receiving SRF program for the
transferred amount within one year after receipt of payment or, if
payment has already been taken, within one year of the transfer date,
in addition to the binding commitments required for its capitalization
grant and State match. If funds are transferred from the CWSRF to the
set-aside account in the DWSRF, the binding commitment requirement on
the amount transferred will not apply. The donor SRF program will not
be required to enter into binding commitments on the transferred funds.
4. Cross-cutting Federal Authorities
Cross-cutting Federal authorities apply to transferred Federal
funds in the same manner as they apply to the capitalization grant
funds in the receiving SRF program.
G. Transferring Other Funds
Since transfers do not relieve the State from complying with those
requirements that apply to the amount of the capitalization grant, the
State should consider transferring principal and interest repayments
and investment earnings rather than transferring Federal and State
match funds. Grant amendments, binding commitment requirements and
cross-cutters, except for civil rights, do not apply to transferred
funds consisting of repayments of principal and interest, and
investment earnings. Also, cash draw proportionality will not be
impacted by transfers of repayment funds and investment earnings.
Please refer to the ``Guide to Using EPA's Automated Clearing House for
the Drinking Water State Revolving Fund Program.''
H. Reporting, Monitoring and Review
A State must report transfers in the DWSRF Biennial Report and in
the CWSRF Annual Report. The reports must identify the amount of funds
transferred from one SRF program to the other and how those funds were
used. Since the State must be able to track all transfers, a schedule
of actual transfers must be included in the reports which can be
reconciled with the schedule of expected transfers in the IUP. A State
must also explain reasons that funds were not transferred in accordance
with the plan described in the IUP, including the impact on the SRF
programs.
The State must also report transfers in the financial statements of
the SRF programs with corresponding footnotes explaining the type of
funds transferred (Federal dollars, State match, principal and interest
repayments, or investment earnings).
II. Cross-Collateralization
A. Authorization
The Departments of Veteran Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act of Fiscal Year
1999 (Public Law 105-276) authorizes cross-collateralization between
the DWSRF and the CWSRF programs. The language included in the law in
regard to cross-collateralization is as follows:
* * * Provided, That, consistent with section 1452(g) of the
Safe Drinking Water Act (42 U.S.C. 300j-12(g)), section 302 of the
Safe Drinking Water Act Amendments of 1996 (Public Law 104-182) and
the accompanying joint explanatory statement of the committee on
conference (H. Rept. No. 104-741 to accompany S. 1316, the Safe
Drinking Water Act Amendments of 1996), and notwithstanding any
other provision of law, beginning in fiscal year 1999 and
thereafter, States may combine the assets of State Revolving Funds
(SRFs) established under section 1452 of the Safe Drinking Water
Act, as amended, and title VI of the Federal Water Pollution Control
Act, as amended, as security for bond issues to enhance the lending
capacity of one or both SRFs, but not to acquire the State match for
either program, provided that revenues from the bonds are allocated
to the purposes of the Safe Drinking Water Act and the Federal Water
Pollution Control Act in the same portion as the funds are used as
security for the bonds * * *
B. Purpose
The drinking water and wastewater community has advocated cross-
collateralization to increase the financing flexibility of the CWSRF
and the DWSRF. For States which issue bonds, the added security
provided by the strength of the CWSRF will enhance the funding capacity
in the DWSRF by achieving better bond ratings. Funds from one SRF
program can be used to secure the other SRF program against a default.
C. Legislative Authority
The CWSRF and the DWSRF programs require that an Attorney General's
opinion certifying that the SRF program is consistent with State law be
submitted with each capitalization grant application. If a State
receives a capitalization grant and later decides to cross-
collateralize, the capitalization grant agreement must be amended and
an Attorney General's opinion must be submitted certifying that State
law permits the State to cross-collateralize.
D. Operating Agreement and Intended Use Plan
When a State initially decides to include cross-collateralization
in its program, the Operating Agreement must be amended to detail how
cross-collateralization will be implemented. The State must annually
include in the IUP for each SRF program a description of how cross-
collateralization will be used, and provide the IUPs to the public for
review and comment prior to submitting them to the Region as part of
the capitalization grant applications. The IUPs must, at a minimum,
describe:
a. the type of moneys which will be used as security;
b. how moneys will be used in the event of a default;
c. whether or not moneys used for a default in the other program
will be repaid; and, if it will not be repaid, what will be the
cumulative impact on the Funds.
E. Revenues From the Bonds
The proceeds generated by the issuance of bonds must be allocated
to the purposes of the DWSRF and the CWSRF in the same proportion as
the assets from the two Funds that are used as security for the bonds.
States must
[[Page 60944]]
demonstrate that at the time of bond issuance, the proportionality
requirements have been or will be met. If a default should occur, and
Fund assets from one SRF program are used for debt service in the other
SRF program, the security would no longer need to be proportional.
Proportionality may be achieved at different levels of security. A
State may achieve proportionality at the debt service reserve level. If
the debt service reserve is the primary security and consists of 35%
DWSRF funds and 65% CWSRF funds, the bond proceeds must be allocated
35% to DWSRF purposes and 65% to CWSRF purposes.
A State may also achieve proportionality by requiring that loan
repayments on loans made from the CWSRF are pledged, as the primary
security, only to the CWSRF bonds (or portion of a joint bond issue)
and loan repayments on loans made from the DWSRF are pledged, as the
primary security, only to the DWSRF bonds (or portion of a joint bond
issue). If principal forgiveness is used as a subsidy for disadvantaged
communities funded with bond proceeds in the DWSRF program, this option
may not be used since the security would be disproportionate to the
security provided by the CWSRF program.
The above are only two examples which can be used to maintain the
proportionality of the security for bonds. There may be other options
the State will want to explore and submit for EPA approval.
F. State Match
States may not combine the assets of the SRF programs as security
for bond issues to acquire State match for either program. States may
not use the assets of one SRF program to secure match bonds of the
other SRF program.
G. Operation of SRF Programs
States may use, in combination, the assets of the SRF programs as
security for bond issues. However, the CWSRF and DWSRF must each
continue to be operated separately. States must maintain records so
that, for each SRF program, separate financial statements can be
compiled and separate financial audits can be conducted. The debt
service reserve and interest earned thereon for the DWSRF program and
the CWSRF program must each be accounted for separately. Repayments on
loans in the CWSRF program must be paid to the CWSRF and repayments on
loans made in the DWSRF program must be paid to the DWSRF.
Cross-collateralization does not effect the calculation of set-
asides, the 4% administrative ceiling and binding commitments. Payments
and cash draw proportionality may be affected if there are defaults.
The CWSRF Annual Report and the DWSRF Biennial Report must describe the
use of assets of the SRF programs as security for bond issues and any
use of moneys from one SRF program by the other as a result of cross-
collateralization.
Table 1.--Reserving the Right (Banking) to Transfer in Future Years
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Amount
DWSRF reserved Banked Amount
Year capitalization for transfer transferred
grant transfer ceiling
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1997..................................................... $100 $33 $33 $00
1998..................................................... 100 33 66 00
1999..................................................... 100 33 99 00
2000..................................................... 100 33 132 00
2001..................................................... 100 33 165 165
2002..................................................... 100 \1\ 00 \1\ 00 \1\ 00
------------------------------------------------------
Total................................................ 600 165 ........... 165
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\1\ No funds may be reserved or transferred after fiscal year 2001.
Table 2.--Transferring on a Net Basis
[In this example, the DWSRF capitalization grant in each year is $100. Therefore, the transfer ceiling is $33
for the first year, increasing to $66 in the second year and $99 in the third year, etc.]
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CW funds DW funds
Transaction Banked Transferred Transferred available available
Year description transfer from CWSRF- from DWSRF- for for
ceiling DWSRF CWSRF transfer transfer
--------------------------------------------------------------------------------------------\1\----------\1\----
1997......................... CG Award........ $33 ........... ........... \2\ $33 \2\ $332
1998......................... CG Award........ 66 ........... ........... 66 66
1998......................... Transfer........ 66 20 ........... 46 86
1999......................... CG Award........ 99 ........... ........... 79 119
1999......................... Transfer........ 99 ........... 86 165 33
1999......................... Transfer........ 99 90 ........... 75 123
2000......................... CG Award........ 132 ........... ........... 108 156
2000......................... Transfer........ 132 ........... 50 158 106
2001......................... CG Award........ 165 ........... ........... 191 139
2001......................... Transfer........ 165 191 ........... 0 330
2002......................... CG Award........ 0 ........... ........... 0 0
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\1\ The maximum either SRF can transfer as the result of banking and previous transfers.
\2\ Transfers cannot occur until one year after the DWSRF has been established.
[[Page 60945]]
Table 3
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Transferred Transferred CW Funds DW Funds
Transaction Banked from CWSRF- from DWSRF- available available
Year description transfer DWSRF CWSRF for for
ceiling (Federal) (State) transfer transfer
--------------------------------------------------------------------------------------------\1\----------\1\----
1997......................... CG Award........ $33 ........... ........... $33 $33
1998......................... CG Award........ 66 ........... ........... 66 66
1998......................... Transfer........ 66 $40 $40 66 66
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\1\The maximum either SRF can transfer as the result of banking and previous transfers.
[FR Doc. 00-26353 Filed 10-12-00; 8:45 am]
BILLING CODE 6560-50-P