Clean Water Loans Deliver Housing Stability and Water Quality

Case Study

When septic systems fail, they are costly to repair or replace and, if unaddressed, they can make homes unlivable, impact public health and contaminate drinking water.

Building Relationships

A collaborative response to a pressing problem

For generations, shellfish harvesting by family-run growers and Tribes in Willapa Bay, Washington has provided a vital source of economic activity, local employment, and cultural value to the area. But by the early 2000s, that activity was jeopardized by failing on-site septic systems (OSS). These failing systems were contaminating water with harmful bacteria and pathogens - making shellfish unsafe to harvest and eat.

Residents of Pacific County cared deeply about water quality, but many couldn’t afford to address septic system issues when they arose. In those cases, when a septic system failed, it would contaminate waterways and also put residents in danger of losing their homes. Pacific County, shellfish growers, and state agency partners reached out to Craft3,then a small rural loan fund with an office in nearby Ilwaco, to create a loan program that could enable residents to pay for repairs.

Craft3 designed and launched a pilot loan – a financing mechanism to cover the full costs of repairing or replacing failing septic systems that would be accessible to residents of different income levels and financial circumstances.

The pilot generated interest from potential customers and showed promise as a way to address water quality issues. This led Craft3 to engage with community, local health, and tribal stake holders to expand the program to the nearby Hood Canal and surrounding areas of Mason ,Kitsap, and Jefferson Counties. A seed grant from Washington State Legislature and administered by the Department of Ecology, along with one-time, matching philanthropic funding, supported this expansion. The larger program area confirmed both the scale of the unmet need and also the effectiveness of Craft3’s solution as anew financial resource for residents. Unfortunately, with more than 1 million septic systems in communities across the state, a lack of scalable, statewide funding on the level needed to capitalize loans to meet demand limited any further expansion.

Washington Clean Water Loan

• Covers all eligible design, permitting and installation costs for a septic repair or replacement
• No upfront costs required
• Competitive interest rates with lower rates for lower-income borrowers
• Deferred payment options may be available for lower-income borrowers
• Includes a $2,000 reserve available to draw for borrowers' future inspections and repairs

Overcoming Challenges  

A regional approach  

By 2014, a group of stakeholders including the Washington State Departments of Health and Ecology, county and local health departments, Tribes, septic contractors, scientists, shellfish growers, community, and environmental justice representatives, began working together to apply learnings from Hood Canal and other efforts to a larger, regional program. In doing so, the stakeholders also sought to streamline program administration, moving from a county-by-county approach that required public entities with varying capacity to assume responsibility for the loans in their jurisdiction to a centrally-managed, statewide loan fund that could transfer the risk to a third party nonprofit lender.

The outcome of those discussions was a memorandum of understanding (MOU) drafted by public agency “Partners” to establish a Regional Clean Water Loan Program that enabled multiple health jurisdictions and Tribes to apply as a group to access Clean Water State Revolving Fund loans and Centennial Clean Water grant funding for hardship scenarios. The Fund would capitalize loans, but Ecology would contract with a nonprofit lender to administer and lend from it and repay Ecology. These funding mechanisms would allow the Clean Water Loan to operate across all participating counties.

After being awarded funding for this novel approach, the Partners then requested that Ecology lend CWSRF capital directly to Craft3, which by that time had undergone a competitive application process to administer the consolidated, multi-county program. As a result, Craft3 became solely responsible for lending, compliance, reporting, and repayment of the CWSRF loan to Ecology, and each Partner, regardless of their independent capacity or ability to borrow, gained access to an equitable loan for their communities.

This new structure provided reliable, low-cost capital which supported Craft3 loan features that maximize access, such as long terms, lower interest rates and deferred payment options to households with low incomes. It also enabled the use of equitable approaches to underwriting, eliminated out-of-pocket costs, and provided deposits to local contractors to pay for materials and labor. These features simply did not exist in existing loan products in the market.  

Working in Partnership

Expanding the program statewide

The Regional Clean Water Loan Program partnership eliminated the barrier to each local health jurisdiction of borrowing money and creating their own loan fund, which enabled the program to scale and expand access to more communities and Tribes. The state agency saves time and costs by managing only a contract. Partners gained resources for their local areas and residents without setting up and incurring the costs of running their own programs, and instead focus time and resources on community and environmental health needs, contractors can sustain their businesses and pay employees, and most importantly, property owners can access Clean Water Loans when the unexpected occurs.

After several successful years at less-than-statewide scale, in 2021, the partners of the Regional Clean Water Loan Program made the decision to expand statewide. This enabled several million more Washingtonians to access financial assistance from Clean Water Loans throughout the state. Beginning with Ecology's SFY 2024 Offer List and Intended Use Plan, the Regional Clean Water Loan program has been treated as an ongoing need, with funds allocated directly on an as-needed basis. This change further underscores the importance of the program in stabilizing households while addressing water quality needs, and the long-term desire of Ecology, the partners, and Craft3 to see the program be an ongoing resource for residents throughout Washington state.

“Our old program just could not scale up to that kind of volume given our limited resources. Referring people to Craft3 for septic funding assistance allows us to spend more time helping them with all the details and the technical assistance. It has been an incredible burden lifted off me to know that so many more of our residents in need are being helped.” - Island County Environmental Health

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Performance of the Clean Water Loan in Washington*

• $56.7 million leant in Washington
• 2,271 households served
• 25.4% of dollars went to low-income households
• 0.25% three-year rolling charge off rate of Clean Water Loans

*2002 through 2022

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Conclusion

Lessons learned

The close Regional Clean Water Loan Program partnership between Craft3, state agencies, local health staff, contractors, and communities enabled Craft3 to refine and scale a Clean Water Loan product across Washington – and use those learnings begin work to replicate the model in Oregon.

From Craft3’s perspective, there were several key lessons learned from refining this program over the years in close collaboration with community and regional partners:

• Traditional financing and other public assistance programs are unable to address full community needs, leaving many underserved. Traditional financing, like bank or credit union home equity loans, have credit, equity, and/or income thresholds that, even with credit enhancements, leave out many potential customers. Targeted public loans and grants could not meet full community needs because they often limit eligibility to very low household incomes, property, and project types, often require out-of-pocket contributions that homeowners can't afford, and are still only available to jurisdictions with administrative capacity.
• Product and program design must be centered in equity and reflect local needs. Systemic inequities in conventional credit and financing underwriting, as well as in public infrastructure, put greater burden on already under-resourced communities. Programs should be designed with local voices at the table to avoid excluding households needing help the most and ensure steps are taken to include inclusive underwriting and product features.
• ‍Operating at scale is critical for customer acquisition, contractor success, and ease-of-use. A tiered loan program structure provides vital capital to a much broader range of property owners, with greater resources available for those with lowest incomes and residing in low-to-moderate income and underserved communities. Combining this structure with statewide scale means more potential customers, greater geographic reach and impact, and easier use for contractors, who are critical outreach and implementation partners.
• ‍Supporting low- and moderate-income households at scale with financing requires public financial support. Clean Water Loans are miniature construction loans and, thus are expensive for lenders to administer. While many private funders played important start-up or expansion roles, private support alone simply could not scale at a price and structure to support the financing terms needed for Craft3 to meet community needs. Nor is there evidence that enough private or public funding could provide grants to all those who need to replace their septic systems. Public support that leverages additional private dollars, plus ongoing community engagement are essential.

Thanks to our partners!

We appreciate your collaboration.  

• Washington State Department of Ecology
• Washington State Department of Health
• U.S. Environmental Protection Agency

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 * In 2017, the Clean Water Loan program was recognized as a model of innovation by the EPA and Washington State Infrastructure council.

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