Index Scaling Factor is a multiplier that affects the interest rate on tax-exempt loans with a floating or adjustable rate. You can choose whether to apply it to the index only, or to the index and the spread. When pricing an opportunity, if Index Scaling Factor has been enabled by your administrator for the product you're using, once you set a loan to be tax exempt you'll see a Scaling Factor field where you can apply Index Scaling Factor to the opportunity.
An asterisk next to the index rate shows that the index is scaled. You can also click the chevron icon in the Spread field to open the spread setup dialog box, which will allow you to enter the spread pre- or post-scale. Note that you can only see this box if you chose "Index and Spread" from the dropdown above.
You will also be able to see Index Scaling Factor displayed in the Interest Income breakdown in the Financial Statements. It will always reduce your interest income, and will always be a negative number.
Index Scaling Factor will be disabled for all products by default. Your local administrator can enable it in the Product Edit Screen in the Administration Section.