The department shall serve as a state loan guarantee agency to guarantee loans and to administer a guaranteed loan program established pursuant to this article. The department shall guarantee any loan made pursuant to this article at 100 percent of the total amount of principal and interest of the loan in default. The department shall establish the ratio of reserve funds to loans outstanding. The effective interest rate to the borrower shall be a percent per annum, which is less than the fair market interest rate at the time the loan guarantee request is considered by the department, and which is based upon the ability of the borrower to pay, as determined by the department. When an application for a loan guarantee is approved by the department, the differential interest between the percent per annum approved by the department and the rate charged by the participating lender shall be prepaid by the department to the participating lender out of the Rehabilitation Revolving Loan Guarantee Fund. If the borrower defaults on any loan guaranteed by this program, the participating lender shall reimburse the department for any interest not accrued, after deduction for any unavoidable loss suffered by the lender.