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
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' 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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