EPA
                                           Clean  Water
                                           State Revolving Fund
ACTIVITY  Innovative use of Clean Water State Revolving
UPDA TE  Funds for Nonpoint Source Pollution
   States are

  successfully

  using linked

  deposit and

 pass-through

 loans to fund

   important

nonpoint source

   pollution

  remediation

    projects
     Many states are successfully using the
     USEPA's Office of Water, Clean
Water State Revolving Fund (CWSRF)
loan program to fund important nonpoint
source pollution remediation projects.
Nonpoint source pollution is widely
viewed as one of the most serious threats
to our nation's water quality. State and
local governments, local watershed and
agricultural organizations, and many
others are working to devise solutions that
address nonpoint source pollution. The
CWSRF program provides very attractive
low-interest loans that spread project
costs over a repayment period of up to 20
years. Today, CWSRF programs are
funding projects that address agriculture
runoff, leaking on-site septic systems, and
urban nonpoint source pollution,
including stormwater runoff and
brownfield contamination.

During the initial operating phase of
CWSRF programs, states designed loan
options and implemented administrative
procedures that would best serve municipal
wastewater system projects.  However,
when considering how the CWSRF
program could be used to address nonpoint
source pollution, a number of states
recognized that they would need to go
beyond the typical municipal borrower and
provide loan assistance to farmers,
homeowners, and nonprofit organizations.
States also recognized that providing loans
to small private borrowers could be
challenging. The loans would fund a
variety of small projects, there would be
more of them to service and  manage, and
there would be a greater risk of loan
defaults.

States have taken different approaches to
addressing these challenges.  In  some
states, the CWSRF program  has called
upon internal expertise and the expertise of
other state personnel to help  manage loans
to private  borrowers.  Other  states have
used creative lending approaches that pass
loan risks  and loan servicing
responsibilities to financial institutions,
local governments, or other state agencies.
These lending methods include linked
deposit loan programs with local financial
institutions and pass-through loan programs
with local government or state agencies.
This activity update will highlight these
loan structures with three case studies of
successful state programs.

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.Clean Water
 Slate Revolving Fund
                                 ACTIVITY
                                 UPDATE
                What is a linked deposit loan?

                Under a linked deposit loan approach, a
                state works with local private lending
                institutions to provide assistance for
                nonpoint source pollution control.  The
                state agrees to accept a reduced rate of
                return on an investment (e.g., a certificate
                of deposit)  and the lending institution
                agrees to provide a loan to a borrower at a
                similarly reduced interest rate.  For
                example, if the typical earnings rate for a
                certificate of deposit (CD) is five percent, a
                state might agree to purchase a CD that
                earns two percent interest, and in exchange,
                the lending institution agrees to provide a
                loan to a borrower at an interest rate that is
                three percentage points lower than the
                market rate for the borrower. In this
                program, the CWSRF investment (deposit)
                is linked to a low-interest loan,
        thereby earning the description "linked
        deposit loan."

        Linked deposit loan programs provide
        benefits for CWSRF programs, local
        financial institutions, and borrowers. The
        linked-deposit approach benefits CWSRF
        programs because they support high
        priority nonpoint source projects and
        because they place risk and management
        responsibilities with local financial
        institutions. Financial institutions earn
        profits from the linked deposit agreements
        and add an additional service for their
        customers. Borrowers find linked deposit
        programs to be economical and
        comfortable; they save money with low-
        interest loans, and they are comfortable
        working with local  financial institutions.
                                     Linked  Deposit Loans
                             CWSRF
                             X
                               Bank
                            Farmer
1.   CWSRF invests in reduced interest
    CD (below market rate)

2.   Bank makes low-interest loan to
    farmer (below market rate)

3.   Farmer repays loan to bank

4.   CWSRF receives low-interest
    return on CD investment
    (investment is guaranteed
    regardless of loan repayment)
                    Figure 1. Linked deposit program flow chart

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ACTIVITY
UPDATE

What is a pass-through loan?

In a pass-through loan, a CWSRF program
makes a loan to another state or local
government agency and that agency then
lends the funds to private borrowers to
address nonpoint source pollution. The
town, county, or state agency reviews the
project and the finances of each borrower.
CWSRF loan funds are "passed-through"
another government agency to private
borrowers.

Pass-through loan programs benefit
CWSRF programs, pass-through partners
(towns, counties, and state agencies), and
borrowers. These programs benefit
CWSRF programs because they support
                                                                          .Clean Water
                                                                           State Revolving Fund
                                  high-priority nonpoint source projects and
                                  because they place risk and management
                                  responsibilities with program partners.
                                  Towns, counties, and state agencies benefit
                                  from pass-through programs because
                                  CWSRF funds support their nonpoint
                                  source priorities. Pass-through loans can
                                  offer two potential benefits to borrowers.
                                  First, pass-through loans are not provided
                                  by private lenders and, as a result, are likely
                                  to have lower interest rates.  Second, local
                                  government agencies may have greater
                                  flexibility to provide loans to borrowers
                                  with relatively weak credit conditions if the
                                  borrower's nonpoint source project is a high
                                  priority for the state or local government
                                  agency.
                    Pass-throu
                                                oans
            CWSRF
                     I
          State/local
            Agency
         I
            Farmer
                                    1.   CWSRF provides a below market
                                        rate loan to a state/local agency

                                    2.   The state/local agency manages
                                        low-interest loans to farmers

                                    3.   Farmer repays loan to state/local
                                        agency

                                    4.   State/local agency repays loan to
                                        CWSRF
Figure 2. Pass-through program flow chart

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.Clean Water
 Slate Revolving Fund
                            ACTIVITY
                            UPDATE
                 Who has benefited from these
                 programs and what have they
                 funded?

                 CWSRF linked deposit and pass-through
                 loan programs have supported borrowers
                 implementing a variety of nonpoint source
                 projects:

                 •      Homeowners have implemented
                        stormwater runoff best
                        management practices and repaired
                        or replaced failing on-site septic
                        systems.

                 •      Homeowner associations have
                        addressed failing stormwater
                        management facilities.

                 •      Farmers have addressed
                        agricultural runoff with a wide
                        variety of agricultural best
                        management practices including
                        the construction of manure storage
                        facilities, the restoration of filter
                        strips and grassed waterways, and
                        the use of conservation tillage
                        equipment.
Ohio Case Study — Linked
Deposit Loan Program

Ohio has used a linked-deposit loan
program since 1993 to fund projects that
support county watershed management
plans. This program has funded more than
300 projects, including the repair of onsite
wastewater treatment systems and the
implementation of best management
practices for agriculture, forestry,
stormwater, and land development.  The
CWSRF program developed this program
with the help of county soil and water
conservation districts and local banks.

The CWSRF program implements its
linked deposit loan program one county at
a time.  Each county's program is
developed with two concurrent steps: the
county soil and water conservation district
develops a watershed management plan,
and the CWSRF program and local
financial institutions enter into agreements
describing requirements and procedures
for linked deposit loans.

Watershed management plans describe a
watershed, identify sources of pollution,
suggest actions that would address those
pollution sources, prioritize water quality
problems, identify sources of funding, and
establish an implementation schedule. The
county soil and water district's draft plan is
reviewed by Ohio EPA and by a formal
public review process. If Ohio EPA
approves a plan after this review, the
CWSRF program and the soil and water
conservation district sign a memorandum
of understanding that describes how these
two entities will coordinate their
implementation of the management plan.

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ACTIVITY
UPDATE  *
                                          .Clean Water
                                           State Revolving Fund
 At the same time that a watershed
 management plan is developed and
 reviewed, soil and conservation districts
 contact local banks to identify institutions
 that would like to participate in a linked
 deposit program. Interested banks enter
 into agreements with the CWSRF
 program that describe requirements and
 procedures for linked deposit loans.

 Any borrower with a project that helps to
 implement a watershed management plan
 is eligible for a linked deposit loan.
 Participating banks review borrowers'
 credit using their own credit standards. If
 a bank approves a linked deposit loan, the
 CWSRF program purchases a CD of
 equal value from the bank. The CWSRF
 program accepts a CD interest rate that is
 five percentage points lower than the rate
 of a U.S. Treasury Note or Bond with the
 same term. The borrower's loan interest
rate is also reduced by five percentage
points. The bank makes semiannual
payments of principal and interest to repay
the CWSRF for its investment in the CD,
and it makes these payments even if the
borrower defaults on the linked deposit
loan.

Massachusetts Case Study —
Lending through Local
Government

Since 1995, Massachusetts' Community
Septic Management Program has used pass-
through loans with local municipalities to
fund the repair and replacement of failing
septic systems. The program has funded
more than 3,000 projects across the  state.
The CWSRF has developed this program
with the cooperation of local municipalities.

Communities that participate in
Massachusetts' Community Septic
Management Program can borrow hundreds
of thousands of dollars from the CWSRF
program, but communities must first
develop a septic management plan and
procedures for a local betterment loan
program (the community uses betterment
assessments to secure the loans).
Massachusetts provides grants of up to
$20,000 to municipalities to support these
planning activities and the administration of
the program.
    Massachusetts law defines a betterment assessment as a charge imposed on real
    property that receives a benefit from a public improvement. Municipalities
    have traditionally imposed betterments to pay for improvements such as roads,
    sidewalks and sewer lines. In the Community Septic Management Program,
    however, betterment agreements allow individuals to receive community
    support (a betterment loan) for septic system improvements, and the
    agreements allow communities to ensure that the loans are repaid as part of a
    property tax bill.  The community can place a municipal lien on property if a
    homeowner defaults on a betterment loan.

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.Clean Water
 Slate Revolving Fund
                           ACTIVITY
                           UPDATE
                 Septic management plans identify and
                 prioritize areas with septic systems that
                 require monitoring, maintaining, and
                 upgrading. As part of the planning process,
                 communities develop maintenance
                 schedules for septic systems, and they
                 develop databases that track the inspection,
                 maintenance, and upgrade of these systems.
                 The Massachusetts Department of
                 Environmental Protection reviews all
                 community septic management plans.

                 Before a community can receive a CWSRF
                 loan from the state, however, it also
                 develops the framework for a local
                 betterment loan program. Communities
                 create administrative structures to manage
                 the programs, devise a method for selecting
                 priority projects, and work with their tax
                 assessors to ensure that homeowners will
                 repay their betterment loans as part of their
                 local tax assessments.

                 Communities that develop septic
                 management plans and procedures for a
                 local betterment loan program receive loans
                 from the CWSRF program for 20 years at
                 zero percent interest. Communities
typically borrow $200,000 from this
program. Homeowners typically receive
twenty-year loans from communities at
two to five percent interest. Communities
can use interest accrued on betterment
loans to support the administrative costs
of the loan programs. Communities must
begin to repay the CWSRF within one
year after they have finished dispersing
the proceeds of each CWSRF loan.


Missouri Case Study —  Lending
through  State Agencies

Missouri's Nonpoint Source Animal
Waste Treatment Facility Loan Program is
a pass-through loan program that uses a
state agency as a loan intermediary. Since
1995, the Missouri Agriculture and  Small
Business Development Authority
(MASBDA) has borrowed $5  million
from the CWSRF program, and
MASBDA has used these funds to support
the construction of 88 animal waste
treatment systems for livestock and
poultry producers. The agricultural
operation of each borrower in this loan
program produces fewer than  1,000
animal units — concentrated animal
feeding operations are ineligible.

Missouri's Nonpoint Source Animal
Waste Treatment Facility Loan Program
does not require a regional planning effort
similar to the soil and water conservation
plans required in Ohio' linked deposit
program or the septic management plans
required in Massachusetts' pass-through
loan program. Engineers with Missouri's
CWSRF program review each project
application to ensure that CWSRF-
financed structures and equipment support
the goals of the program.

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ACTIVITY
UPDATE  *
                                         .Clean Water
                                          State Revolving Fund
 Missouri's CWSRF program provides 10-
 year loans to MASBDA that have a 1.8
 percent interest rate. Individual
 agricultural producers access these
 resources by submitting applications to
 MASBDA.  MASBDA reviews the
 financial component of each application,
 assessing cash flows and establishing
 security requirements. Borrowers must
 provide a dedicated source of repayment
 and a first or second deed of trust on their
 property.  Agricultural producers typically
 receive 10-year loans from MASBDA
 that have  interest rates from 5.3-5.8
 percent. However, MASBDA does not
 offer construction financing for animal
 waste treatment systems.  Typically,
 agricultural producers use loans from the
 Nonpoint Source Animal Waste
 Treatment Facility Loan Program to pay
 off construction loans from a private
 lender.  MASBDA uses the repayments
 from agricultural producers to repay its
 loan from the CWSRF.
Case Study Contact Information

More information on the programs
outlined in this update can be found on the
state program web sites or by contacting
the programs themselves.

Ohio Environmental Protection Agency
Div. of Environmental & Financial Assistance
Contact: Bob Monsarrat
Phone: 614-644-3655
Web site:
www.epa.state.oh.us/defa/linkdepo.html

Massachusetts Department of
Environmental Protection
Massachusetts' Community Septic
Management Program
Contact: Joseph McNealy
Phone:617-556-1068
Web site: www.state.ma.us/dep/brp

Missouri Department of Agriculture
Animal Waste Facility Loan Program
Contact: Steve Townley
Phone:573-751-1397
Web site: www.mda.state.mo.us/a2c.htm

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                                                                                    ACTIVITY
                     •••••••••••••
   ' Slate Revolving Fund
  For more information about the Clean Water Revolving Fund, or for a program representative in your State,
                                         please contact:
                              Clean Water State Revolving Fund Branch
                                U.S. Environmental Protection Agency
                           1201 Constitution Avenue, NW (Mailcode 4204M)
                                      Washington, DC 20004
                             Phone: (202) 564-0752  Fax: (202) 501-2403
                                 Internet: http://www.epa.gov/owm
                                       Clean Water
                                       State Revolving Fund
Office of Water                              July 2002                         EPA 832-F-02-004

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