May a municipality use ARP funds to establish a revolving loan fund?

Under the American Rescue Plan Act (“ARP”), Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may be used to make loans including in the form of a revolving loan fund, provided that certain requirements are met, which include but are not limited to:

1. The loan supports an activity that is an eligible use of funds;
2. The CSLFRF funds used to make the loan are obligated by December 31, 2024 and expended by December 31, 2026; and
3. The cost of the loan is tracked and reported in accordance with Treasury guidelines.[1]

Amongst other things, CSLFRF funds must be used to cover costs incurred within the ARP period of performance (March 3, 2021 through December 31, 2024) and expended by December 31, 2026. Per the Final Rule, loans or grants to support affordable housing projects[2], impacted small businesses[3], and impacted nonprofits[4] are eligible uses of CSLFRF funds.

Contributions to Revolving Loan Funds

Pursuant to Treasury guidance, a recipient may likely contribute funds to a revolving loan fund if the loaned CSLFRF funds are restricted to financing eligible uses under one of the following categories:

• public health emergency/negative economic impacts,
• premium pay,
• necessary water, sewer, and broadband categories, and
• government services (this category must be used if the revolving loan fund is made using revenue loss funds).[5]

CSLFRF funds contributed to the revolving loan must be limited to the projected cost of loans made over the life of the revolving loan fund, following the approach described below for loans with maturities longer than December 31, 2026.[6] Municipalities should carefully consult the underlying rules, regulations and guidance. 

• For loans with maturities longer than December 31, 2026, the recipient may use funds for only the projected cost of the loan. Per Treasury guidance, there are two approaches for measuring the projected cost:
  • Recipients can project the cost of the loan by estimating the subsidy cost. The subsidy cost is the estimated present value of the cash flows from the recipient (excluding administrative expenses) less the estimated present value of the cash flows to the recipient resulting from a loan, discounted at the recipient’s cost of funding and discounted to the time when the loan is disbursed. The cash flows are the contractual cash flows adjusted for expected deviations from the contract terms (delinquencies, defaults, prepayments, and other factors). A recipient’s cost of funding can be determined based on the interest rates of securities with a similar maturity to the cash flow being discounted that were either (i) recently issued by the recipient or (ii) recently issued by a unit of state, local, or Tribal government similar to the recipient.[7]
  • Alternatively, recipients may treat the cost of the loan as equal to the expected credit losses over the life of the loan based on the Current Expected Credit Loss (CECL) standard. Recipients may measure projected losses either once, at the time the loan is extended, or annually over the period of performance.[8]

For loans with maturities longer than December 31, 2026, “recipients would not be subject to restrictions under 2 CFR 200.307(e)(1) and need not separately track repayment of principal or interest.”[9] regardless of measurement approach. Additionally, recipients may use funds for eligible administrative expenses incurred in the period of performance, which include the reasonable administrative expenses associated with a loan made in whole, or in part, with funds. See section IV.E of the final rule”.[10]

Loans Funded with CSLFRF Funds under the Revenue Loss Eligible Use Category

Per Treasury, if a recipient uses revenue loss funds to fund a loan, whether or not the maturity of the loan is after December 31, 2026, the loaned funds may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules. Similarly, any contribution of revenue loss funds to a revolving loan fund may also follow the approach of loans funded under the revenue loss eligible use category.[11]

Loans to Fund Investments in Affordable Housing Projects

Treasury also included additional requirements on loans to fund investments in affordable housing projects.[12] Recipients may potentially use CSLFRF funds, under the “public health and negative economic impacts” eligible use category to fund the full principal amount of the loan if the loan and project meet the following requirements:

• The loan has a term of not less than 20 years;
• The affordable housing project being financed has an affordability period of not less than 20 years after the project or assisted units are available for occupancy after having received the CSLFRF investment; and
• For loans to finance projects expected to be eligible for the low-income housing credit (LIHTC) under section 42 of the Internal Revenue Code of 1986 (the Code),
  • the project owner must agree, as a condition for accepting such a loan, to waive any right to request a qualified contract (as defined in section 42(h)(6)(F) of the Code); and the project owner must agree to repay any loaned funds to the entity that originated the loan at the time the project becomes non-compliant, including if such project ceases to satisfy the requirements to be a qualified low-income housing project (as defined in section 42(g) of the Code) or a qualified residential rental project (as defined in section 142(d) of the Code), or if such project fails to comply with any of the requirements of the extended low-income housing commitment that are described in section 42(h)(6)(B)(i)-(iv) of the Code.[13]Loans to fund investments in affordable housing projects have the following additional  

Loans under the above criteria “may be considered to be expended at the point of disbursement to the borrower, and repayments on such loans are not subject to program income rules.”[14] Additionally, “loan modifications are permitted if the modifications do not result in repayment of all or substantially all funds to the lender prior to the end of the affordability period.” [15]And for the purpose of reducing administrative complexity, “the start date of the 20-year affordability covenant may conform to the start date of other covenants on the same project or units that are required by another source of federal or state funding associated with the project or units.”[16]

In summary, loans, including revolving loans, are eligible to be funded with CSLFRF funds if the loan supports an activity that is an eligible use of ARP funds. This includes but is not limited to, affordable housing, assistance to impacted small businesses and nonprofits. Using a loan for government services is an eligible use if it uses revenue replacement funds. Finally, for additional non-enumerated uses, refer to the Treasury “Framework for Eligible Uses Beyond Those Enumerated” to determine eligibility.[17]

Recipients should refer to Treasury guidance in the Final Rule and FAQs for details on how to account for and track the funding based on the loan maturity, purpose, and structure.

Last Updated: March 20, 2023