Coronavirus State and Local Fiscal Recovery Funds: Unique Loan Treatment


The American Rescue Plan Act (ARPA) was signed on March 11, 2021 and shortly thereafter, states, counties, metropolitan cities, tribal governments, territories and “non-entitlement units” of local government (NEU) received monies. At first, entities were operating under an interim final rule, but the comment period was lengthy and the comments received, voluminous.

The final rule was published on January 27, 2022, with an effective date of April 1, 2022 and contained several changes and nuances. In response to the need for additional guidance, the U.S. Department of Treasury has provided guidance on the Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) through published Frequently Asked Questions (FAQs).

We’ve outlined one of the trickier FAQ responses that has a significant impact on potential compliance.

Can CSLFRF Funds Be Used to Make Loans to Support an Eligible Use?
FAQ #4.9 asks if funds may be used to make loans to support an eligible use. The short answer provided by Treasury is “Yes”. However, the compliance consideration in the details of the response is related to the allowable cost category and whether the funds will be paid back or forgiven prior to or after December 31, 2026 , which is the deadline to expend the funds.

Allowable Use
Treasury is making a distinction on the allowable use category, that is, whether the loan is being funded under the revenue loss use category or the other categories. If a recipient uses CSLFRF funds to provide loans using the revenue loss eligible use category, the funds are considered disbursed at the point of disbursement and there are no continuing compliance considerations. Meaning, regardless of the loans being repaid prior to or after December 31, 2026, there is no reporting or compliance impact.

For the other eligible use categories, the continuing compliance requirements are dependent on the maturity date of the underlying loans. If the loans mature prior to December 31, 2026, the recipient must account for the use of funds on a cash flow basis. The principal of the loan is an expense to the CSLFRF, and the repayment or receipt of the loan (including interest) is subject to the restrictions and use of the CSLFRF, similar to the treatment of program income.

If the loans mature after December 31, 2026, the recipient may only use the “projected cost” of the loan as the expense (rather than principal). There are a couple of allowable methods for this projected cost estimate: subsidy cost and Current Expected Credit Loss (CECL).

Estimating Projected Cost
Under the subsidy cost method, the cost of the loan is the estimated present value of the cash flows both to and from a recipient as a result of the loan. Under the CECL standard, an estimation of expected losses over the life of the loans is calculated. The projected losses are measured either once at the time of the loan or annually over the period of performance.

The CECL standard is more subject to estimation as it is “expected future credit losses” versus the subsidy cost method, which is a present value calculation. Under either approach, recipients are not required to separately track repayment of principal or interest as they are not subject to continuing compliance requirements.

There are two other caveats in the Treasury guidance:

  • Revolving loan funds
  • Affordable housing projects

Contributions to revolving loan funds are allowable if the use of the revolving loan fund is an eligible project or use. The “expense” charged to the CSLFRF is the projected cost, using either the subsidy cost or CECL methods.

Treasury has deemed it allowable for CSLFRF funds to be used to finance the full principal amount of affordable housing projects, provided the following requirements are met:

  • The term is not less than 20 years
  • The affordability period is not less than 20 years after the project or assisted units are available for occupancy
  • The project owner must agree to waive any right to request a qualified contract as defined in section 42 of the Internal Revenue Code of 1986
  • 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

Loans that fund investments in affordable housing projects under the public health and negative economic impacts eligible use category and meet the above criteria are considered to be expended at the time of disbursement and there are no continuing compliance requirements, regarding the program income.

The following table illustrates the requirements:

  Matures Before 12/31/26 Matures After 12/31/26
Funding Expense Program Income Expense Program Income
Revenue Loss At idsbursement No restriction At disbursement No restriction
Other Eligible Use At disbursement Subject to Restriction Subsidy/CECL No Restriction
Revolving Loan Funds Subsidy/CECL Subject to Restriction Subsidy/CECL No Restriction
Affordable Housing N/A N/A/ At disbursement No restriction

Guidance continues to change and morph and the loan guidance is just one of the many nuances and challenges in the 58 pages in the CSLRF FAQs. We highly recommend that you continue to monitor the FAQs to stay abreast of any changes. Please reach out to our Eide Bailly government industry professionals if you have any questions.

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