Accessing Funds: Section 6.7 Revolving Loan Funds

Revolving Loan Funds are a special category of program income that allows the funds to be set aside for a designated use. A Revolving Loan Fund (RLF) is a separate fund (with a separate set of accounts that are independent of other program accounts) established to carry out specific activities that, in turn, generate payments that fund future activities. 24 CFR Part 570.489(f)

CFDA may approve the use of CDBG program income for the purpose of capitalizing a RLF for specifically identified activities.

  • RLFs are typically established to continue housing or economic development activities.
  • The establishment of a RLF must be in the evidentiary materials and approved by CFDA.

Payments to the RLF are considered program income and as such, must be substantially disbursed from the RLF before additional grant funds are drawn from CFDA. For example, if the grantee receives a loan payment on an RLF economic development activity, the loan payment back to the RLF is considered program income. The next draw request by the grantee for an economic development activity must substantially disburse the available economic development RLF before grant funds can be drawn from CFDA. If the grantee’s next draw request is for a public service activity this would not require the use of the RLF funds since the drawn request does not match the specified purpose of the RLF. The grantee does not have to expend program income for non-Revolving Loan Fund activities.

If the RLF is established to continue the activities of the grant that generated the program income, the RLF is subject to all the requirements of program income (i.e., Title I, state policies, etc.), if the grant is open at the time the funds are received.

Revolving Loan Fund (“RLF”) as described in a Program Income Reuse Plan
A Revolving Loan Fund (RLF) is an account established to make loans, if the municipality will not be making any loans, then the account is simply called a program income account. A municipality will typically establish a RLF for program income earned on CDBG grant funds used to make loans. An RLF is established for carrying out only one specific activity (e.g., loans for housing rehabilitation, homeownership assistance, or business loans), which, in turn generates repayments to the fund for use in continuing to carry out that same activity. A municipality may establish several RLFs, but each must be for a single, CDBG-eligible, lending-type activity that meets a CDBG national objective. The name of the RLF should reflect this single activity name in order to avoid confusion on CDBG reports. Each RLF must also be “substantially revolving” (see next paragraph).

The most common use of PI is placement in an RLF
Each RLF must be “substantially revolving,” meaning that at least 51 percent of the RLF expenditures must be for loans. Amounts up to the remaining 49 percent may be spent on non-revolving activities, such as general administration, program activity, and grants for the same activity as the RLF. Repayments to the RLF on loans made from the RLF is program income and cannot be recorded as Miscellaneous Revenue.

For example, a municipality makes a $20,000 residential rehabilitation loan from the RLF and receives $5,000 in principal and interest payments for the program year. The entire $5,000 is considered program income and is not subjected to the $35,000 exemption as miscellaneous revenue.

If the Revolving Loan Fund (RLF) funds are expended on the same type of activity as an existing open grant (e.g., both the RLF and the open grant are funding residential rehabilitation loans in the entire municipality), then the RLF funds must be substantially disbursed before drawing down additional funds from the open grant. This situation may be avoided by defining the activity of an RLF to be different than activities funded by the existing open grants, such as for a target area which is different from the open grant or the RLF may be for emergency repairs and the open grant for code enforcement and general repairs.

RLF Program Guidelines
Each RLF must have an approved set of program guidelines. A single set of guidelines may be used to administer the RLF and a grant-funded activity of the same type. However, if the RLF activity is different than an open grant activity then the program guidelines need to clearly reflect the differences between them.

What is the process for spending PI in this Way?
Your PI Reuse Plan must specify that you will spend the PI in the revolving loan fund in this manner. The PI Reuse Plan must be submitted and approved as part of your application for the revolving loan fund activity that generated the PI. Consequently, you must allow for meaningful local citizen comments about the proposed use of program income under the Plan during the public hearing that is held for the activity prior to submitting the Plan with the application to CFDA for approval. The minutes of the public hearing must indicate that the proposed use of program income was discussed during the hearing. You must also demonstrate compliance with all applicable federal overlay requirements, e.g. NEPA environmental review.

Development of Revolving Loan Fund Guidelines
CFDA requires that written guidelines be developed for the administration of the Revolving Loan Fund. These guidelines must be prepared and submitted to CFDA for approval prior to any program income being expended and prior to release of funds of the grant. Revolving Loan Funds may not be expended until the project national objective has been met.

The local governing body must approve the written RLF guidelines. In addition, any substantive changes to local RLF guidelines must be submitted to CFDA prior to implementation. Failure to submit local RLF guidelines in a timely manner could result in the recapture of program income by CFDA.
Administration of a RLF involves three primary areas of responsibility:

  • Loan/project review, selection and approval;
  • Maintaining a financial management system; and
  • Loan servicing and monitoring.

At a minimum, the written RLF guidelines should include the following elements that address these primary areas of responsibility:

  • RLF Goals and Objectives
  • Eligibility Requirements
  • Eligible and Ineligible Activities
  • Eligible Applicants
  • Eligible Types of Loans
  • Loan Review, Selection and Approval
  • Loan Review Committee
  • Members and Terms
  • Procedures and By-Laws
  • Application Requirements
  • Justification of Need
  • Beneficiaries
  • Necessary and Appropriate Documentation n Certifications
  • Loan Approval Procedures
  • RLF Operations and Management
  • Accounting System
  • Reporting and Record keeping
  • Loan Documentation, Disbursement and Servicing
  • Title I Compliance and Monitoring
  • Administrative Staffing, Costs and Fees
  • Audits
  • Conflict of Interest

Sub-recipients and Revolving Loan Funds
If program income/miscellaneous revenue will be retained by a sub-recipient, the RLF guidelines must identify and describe the role of the sub-recipient, as appropriate. The sub-recipient’s governing board must approve the RLF and the sub-recipient’s participation prior to release of funds. Such approval must legally bind the sub-recipient to perform in accordance with the provisions of the Revolving Loan Fund guidelines and be submitted in writing to CFDA. It is a federal requirement that a sub-recipient be governed by the CDBG regulations in the same manner and to the same extent as the grantee. In any case, the grantee remains responsible for ensuring compliance with the RLF and is liable for any misuse of program income/miscellaneous revenue funds.

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