Desktop reports are showing promise as a new environmental-risk-assessment tool

Amy Drescher, public relations director, and Jamie Haberlen, vice president of financial services, EDR

As published in Scotsman Guide's Commercial Edition, October 2005.

Most commercial lenders are aware that contaminated property and the resulting liability exposure can wreak havoc on the bottom line. The Comprehensive Environmental Response, Compensation and Liability Act protects lenders from liability, but borrowers have no such safety net. In extreme cases, the costs associated with property contamination can force a borrower to default on the loan — definitely not good news for the lender or broker.

One way lenders and other mortgage professionals are acknowledging the importance of environmental-risk assessments is through use of desktop-due-diligence tools.

Is environmental risk real?
Yes, risk is real. A 2005 questionnaire of nearly 280 U.S. bankers revealed that environmental risks and their associated costs can reach as much as $1.5 million per transaction — not an amount most banks can afford to risk. According to the questionnaire, which was conducted by a national environmental-information firm, the institutions that could least afford such losses — small banks — were the ones taking the hits.

The environmental questionnaire also showed that of the losses attributed to contamination, most could have been avoided with a comprehensive environmental screen. In fact, one in three respondents cited inadequate property-history research as the cause for the overlooked contamination. One in four reported “unknown issues arising due to poor environmental due diligence” as the cause.

Traditionally, environmental due diligence is conducted with a transaction screen or a Phase I environmental site assessment. Some banks decide to use a simple borrower questionnaire as their only form of environmental due diligence. This is especially true of banks that lack resources to perform or manage environmental site assessments. Environmental consultants can charge more than $2,500 for a Phase I and between $700 and $1,000 for a transaction screen. Sometimes, banks skip the environmental screen completely.

Of course, skipping screening altogether is the riskiest avenue. Equally risky is relying solely on a borrower questionnaire. After all, its effectiveness is directly tied to the knowledge, availability and credibility of the property owner or occupant. Furthermore, a borrower questionnaire alone usually ignores two key components of the environmental evaluation: the site’s history and its neighbors.

Despite these limitations, 40 percent of respondents said that a borrower questionnaire is their only form of environmental due diligence “often” or “always” on loans of less than $1 million. On loans of more than $1 million, 22 percent reported that a borrower questionnaire is their only requirement for environmental due diligence.

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