Overview: Principal Forgiveness

​The Clean Water Act Section 603(i) states that additional subsidization (principal forgiveness) must be provided to eligible CWSRF assistance recipients or project types as described in section 603(i) of the CWA:

• To benefit a municipality that meets the state's affordability criteria as established under the CWA section 603(i)(2)
  

• To benefit a municipality that does not meet the state's affordability criteria but seeks additional subsidization to benefit individual ratepayers in the residential user rate class (ratepayer hardship)
  

• To any eligible recipient to implement a process, material, technique, or technology that addresses water or energy efficiency goals; mitigates stormwater runoff; or encourages sustainable project planning, design, and construction.
  

The Clean Water Act provides the additional definitions with respect to what is required to be included in “affordability criteria"​

1. Income

2. Unemployment

3. Population trends

4. Other data determined relevant by the state ​
   

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• 1 project, 1 loan- City A has applied for $2,000,000 design and construction loan for a wastewater collection project. The city is economically distressed, so it eligible for up to $1,000,000 in principal forgiveness. It signs a design and construction loan for $2,000,000 and it awarded $1,000,000 of the loan is principal forgiveness. City A pays principal and interest payments on $1,000,000. Typically, the design loan funds are made available first, and principal forgiveness is awarded then. If the design loan is for $500,000, the principal forgiveness will be $250,000. Then the loan amount is amended to make the construction funds available, and the additional $750,000 in principal forgiveness is awarded.
  

• 4 projects, 1 loan-City B has applied for $9,500,000 design and construction loan for 4 projects. The projects implement green infrastructure, so the City is eligible for up to $2,000,000 in principal forgiveness. The City is still only eligible for $2,000,000 in principal forgiveness.
  

• 1 project, 2 loans- City C has applied for $800,000 design and construction loan for an irrigation project. The project is environmentally innovative, so it is eligible for 50% of the total award equal to $400,000 in principal forgiveness. After 5 years, the $800,000 is spent but $500,000 more is needed to finish the project: a $1,300,000 total loan amount for the project. The first loan is closed and moves into repayment at $400,000 principal and a second loan is signed for the $500,000 with $250,000 in principal forgiveness. The project will be eligible for a total of $650,000 in principal forgiveness. ​
  

• 1 project, 2 or more loans- City D has applied for $5,000,000 design and construction loan for an irrigation project. The project is environmentally innovative, so it is eligible for up to $2,000,000 of the total award in principal forgiveness. After 5 years, the $5,000,000 is spent but $1,000,000 more is needed to finish the project: a $6,000,000 total project cost. The first loan is closed and moves into repayment at $3,000,000 ($5,000,000 disbursed minus $2,000,0000 of principal forgiveness applied) principal and a second loan is signed for the $1,000,000 with NO additional in principal forgiveness. The project can only receive up to $2,000,000 in principal forgiveness. 
  

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Applicant is determined eligible for principal forgiveness as part of application review and identified on the Intended Use Plan.

To receive principal forgiveness applicants must:

• Complete all required loan exhibits

• Be ready to sign a loan

• Principal forgiveness awards are based on availability of funds
  

Principal forgiveness amounts are finalized and awarded at loan signing based on availability of funds.

Principal forgiveness scoring

• Eligible projects may need to score higher than other eligible projects when not enough principal forgiveness funds are available.

• See Appendix 7 Principal Forgiveness - eligibility and limits of the Intended Use Plan includes a section on Principal Forgiveness Scoring with point system based on eligibilities for principal forgiveness.
  

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Principal forgiveness benefits the borrower twice:

1. Throughout the active loan period principal forgiveness is applied to each loan disbursement to reduce the amount on which interest is accruing.
   
   For example: the borrower has a loan for $1 million and $500,000 of principal forgiveness was awarded to that loan. If the first disbursement of the loan is $250,000, the CWSRF finance team writes off half of that amount ($125,000) immediately so that only the remaining half accrues interest. Future disbursements are likewise reduced and will continue being reduced until reaching $500,000. After the $500,000 amount is met; 100% of each disbursement request amount will accrue interest.
   
   CWSRF processes principal forgiveness this way to reduce the amount of interest accruing from the first disbursement to when the loan goes into repayment.
    
2. Once the project is complete and the borrower is ready to start repayment, the amount the borrower needs to repay is the total amount disbursed minus the total principal forgiveness applied to the loan.
   
   For example: the borrower has disbursed $1 million and $500,000 of principal forgiveness was awarded to that loan. When the borrower is ready to move to repayment, the total amount that is required to be repaid is $500,000. 
   

​The maximum subsidization that a borrower can receive per state fiscal year is $2,000,000. Borrowers eligible for principal forgiveness can only be awarded a maximum amount of $2,000,000 in additional subsidization per state fiscal year, regardless of the number of active loans or projects the borrower has with the program. This includes all subsidization awarded to all loan types (planning loans, design only loans, construction only loans and design and construction loans). Borrowers that are eligible recipients may only receive a maximum subsidization award per project up to the max of $2,000,000 or 50% of the loan amount, whichever is less.
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