States are

successfully

using linked

deposit and

pass-through

loans to fund

important

nonpoint source

pollution

remediation

projects

Innovative use of Clean Water State Revolving

Funds for Nonpoint Source Pollution

any 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.

ACTIVITY

UPDATE

M
	









2

Linked Deposit Loans

Figure 1. Linked deposit program flow chart

Farmer

Bank

CWSRF CWSRF invests in reduced interest

CD (below market rate)

Bank makes low-interest loan to

farmer (below market rate)

Farmer repays loan to bank

CWSRF receives low-interest

return on CD investment

(investment is guaranteed

regardless of loan repayment)

1

2

4

3

1.

2.

3.

4.

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 lowinterest loans, and they are comfortable

working with local financial institutions.


 	





3

Pass-through Loans

Figure 2. Pass-through program flow chart

CWSRF provides a below market

rate loan to a state/local agency

The state/local agency manages

low-interest loans to farmers

Farmer repays loan to state/local

agency

State/local agency repays loan to

CWSRF

CWSRF

State/local

Agency

Farmer

2 3

1 4

1.

2.

3.

4.

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

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.
	









4

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.


 	





5

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

Massachusetts Case Study —

Lending through Local

Government

Since 1995, Massachusetts' Community

Septic Management Program has used passthrough 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.

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.

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.
	









6

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 CWSRFfinanced structures and equipment support

the goals of the program.

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.


 	





7

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
	









8

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

Office of Water July 2002 EPA 832-F-02-004