Financing Septic System Repairs and Replacement Through an Intermediary

By: Sion Calabretta and Sri Vedachalam 

Onsite Septic systems or “septic systems” are commonly used to treat wastewater in urban and rural properties across the US. Poorly functioning or failing septic systems are a threat to public health and the environment, and can even make homes unlivable. However, not all property owners can afford to repair or replace these systems on their own as they can be fairly expensive. The Washington State Department of Ecology estimates the average cost of a conventional septic system to be $15,000; alternative systems that are sometimes needed to meet challenging site conditions can be even more expensive. Federal funding such as the Clean Water State Revolving Funds (CWSRF) may not be available to all homeowners as it is subject to their state having a septic financing program and participation from the local municipality or health district. 

Washington and Oregon have taken up a slightly different financing model by contracting with Craft3, a community development financial institution (CDFI) serving the Pacific Northwest that offers loans to owners of residential and commercial properties to repair or replace failing septic systems through their Clean Water Loans program. With an estimated 1 million septic tanks in Washington state and 450,000 in Oregon, Craft3 has helped more than 2,100 property owners address failing septic systems by lending more than $50 million in Clean Water Loans since 2002. 

Property owners can apply to Craft3 for loans for septic repairs and replacements or connections to offsite sewage systems when their existing systems fail. The Clean Water Loan addresses community needs by covering all eligible permitting, design, and installation costs, offering lower rates and deferred repayment options to low-income borrowers, and available to applicants who may not have perfect credit. Details on current rates, terms, and eligibility requirements can be found on their website. Over 40 percent of Clean Water Loan borrowers are low income (earning less than 80% of the area median income). There are no predetermined maximum loan amounts; while the average loan is $25,000, loan amounts could be much higher or lower depending on project costs. 

Craft3’s lending expertise and infrastructure allows for a streamlined and efficient loan program. Craft3 processes and underwrites loan applications, coordinates with health-department approved Onsite Professionals, supports clients throughout the process, disburses loan proceeds (with borrower approval), and services loans in-house. This takes the burden off of state and local health departments which have been playing multiple roles since the onset of COVID, and often don’t have many tools to help homeowners who can’t afford a solution. Craft3 disburses loan proceeds directly to eligible contractors based on project milestones and authorization from the borrowers. State and local health agencies (specifics vary by state) maintain lists of approved onsite professionals. For grants and/or loans of capital from the state (CWSRF or otherwise), For loans capitalized by State Grants (OR and WA) or Clean Water State Revolving Loan Fund (WA only) capital, Craft3 is reimbursed for the loan amount from the funder after the project is installed, approved by the LHJ, and the borrower authorizes the final loan disbursement.

Craft3 partners with local health jurisdictions, septic professionals and local community-serving organizations to build awareness about the loan program. Funding for staff time, overhead, and direct expenses for outreach, partner and contractor collaboration, client support, loan origination and servicing, is sourced from a combination of operating grants and income from loan fees and interest.   

A challenge for ongoing programs, like the Clean Water Loan, is access to long-term low-to no-cost funding to meet year-over-year emerging needs as properties age and fail. Currently, Craft3 septic loans are capitalized through combinations of state and privately-sourced grants of loan capital. In Washington state, the Clean Water State Revolving Fund is another source of loan capital. Because Craft3’s loan offers low-income households the option to defer payments for 15 or more years, ongoing infusions of capital are necessary to continue to meet the need. Without long-term sources of dedicated capital, programs risk running out of funds. 

Looking forward, Craft3 hopes to secure long-term sources of capital to continue to help households in need - especially as communities address increases in flood events and rising water tables. The federal infrastructure bill includes  $150 million over 5 years for onsite systems that may provide state and local communities resources to support similar lending programs. Furthermore, it may also provide financial support for local health jurisdictions’ essential operations and maintenance work and other best practices in ensuring communities’ long-term septic system health, and avoidance of costly premature failures.  

Can other states expect a Craft3-like lending model? Perhaps. Craft3’s primary focus is the Pacific Northwest, where they are rooted in community.  However there are over 1,200 CDFIs operating in all 50 states. CDFIs offer many advantages as they can offer financing that’s more flexible than state-administered ones and their community roots engender a higher level of trust, making them a great option for states to partner with to address  failing and aging septic systems.  Craft3’s growth from  a single county to a robust two-state program provides a model for successful public-private financing solutions to support the repair, replacement, and installation of septic systems in urban and rural communities.

Note: This write-up was based on publicly available information and an interview with senior officials at Craft3.