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Foreclosure turns lenders into owners, subjecting them to the same environmental liability that property-owners face under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). As a result, regardless of whether they conducted environmental due diligence at origination, lenders are addressing it again before foreclosure. Usually, this is with a Phase I environmental site assessment performed in accordance with the U.S. Environmental Protection Agency's All Appropriate Inquiry (AAI) Rule guidelines or its equivalent, ASTM's E 1527-05 standard.
Banks are also brushing up on their knowledge of CERCLA's secured-creditor exemptions and are being careful to avoid "participating in management" of the business, which could cause them to lose these protections.
5. SBA's new protocol
When it issued its modernized standard operating procedure (SOP) No. 50-10(5) in 2008 -- a document it has updated several times since -- the U.S. Small Business Administration (SBA) effectively made its environmental policy more stringent and set a new precedent for environmental due diligence. The agency now requires certain property types to be screened with an AAI-compliant Phase I environmental site assessment and added a new level of due diligence to the lenders' due-diligence toolkit: the records search with risk assessment.
A notable change in the policy is that the SBA uses a property's current or past use as a trigger for requiring a Phase I environmental site assessment, rather than the more-traditional loan-size criteria. This change asserts that how a property was used has more impact on its inherent risk than loan size.
Although the SBA's revised SOP pertains only to its 7(a) and 504 loans, many lenders viewed the new policy as a catalyst for revising their entire due-diligence guidelines. After familiarizing themselves with the agency's new requirements, many lenders adopted the SBA's tiered approach to environmental due diligence based on property characteristics and loan value and have added the records search with risk assessment to their own policies, even for non-SBA loans.
6. Ongoing monitoring
Economic conditions have brought the importance of ongoing property monitoring to the forefront. Environmental due diligence does not stop at loan origination. Banks are monitoring properties for changes in environmental status over the life of the loan, as per FDIC recommendations. They also are adding language to loan documents to safeguard against environmental losses.
Some companies now offer services that alert lenders when a property in their portfolio is added to a federal or state environmental database such as the Comprehensive Environmental Response, Compensation and Liability Information System and lists of leaking underground-storage tanks.
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In response to a mix of regulatory and market forces, banks' risk management has changed significantly since the start of the credit crunch. Commercial mortgage brokers who are aware of recent changes to lenders' environmental due-diligence practices will gain a competitive edge and will be prepared to navigate clients through the new world of environmental risk management.
is senior economist for and managing director of EDR's Market Research Group. With more than 15 years of experience in the environmental industry, Crocker provides strategic data and analysis on environmental-due-diligence trends to environmental consultants, lenders, corporations and other parties involved in commercial real estate transactions. Reach her at (800) 352-0050 or firstname.lastname@example.org. Visit EDR at edrnet.com.
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