Why is an Environmental Risk Evaluation Important?
Potential environmental concerns associated with real property collateral represent a significant risk exposure. Although lenders may have secured creditor liability exemptions, in order to qualify for the exemption, lenders must demonstrate proper due diligence prior to lending and foreclosing. Even if the liability exemption is valid, the collateral may not be worth its appraised value and banks may have difficulty selling a contaminated site (if not cleaned up) without a significant discount or indemnity. Most importantly, the clean-up liability exemptions provide no protection from third party liability. Furthermore, remediation obligations may impair the borrower’s ability to repay the loan. Therefore, it is critical to evaluate environmental concerns identified in due diligence reports, establish risk control mechanisms, and manage the lender’s exposure to environmental liability.
What You Can Do
When reviewing environmental due diligence reports associated with collateral, the following considerations should be evaluated:
Ensure that the proper level of due diligence was conducted based on the Environmental Risk Policy.
Ensure that the due diligence report covers the entire collateral.
Ensure that environmental reports are prepared by qualified environmental professionals and are conducted consistent with standard industry practice and federal guidelines for environmental due diligence.
Conduct an all-inclusive review taking all aspects of the deal into consideration, such as:
type of loan (purchase, refinance, SBA, preforeclosure, trust asset acceptance)
proposed changes to land use,
environmental provisions of the Purchase and Sale Agreement
Provide an opinion as to the environmental condition of the collateral.
Provide a summary of environmental concerns and potential mitigants to assist credit management in their evaluation.
Understand and summarize any ongoing environmental regulatory requirements, remediation activities, and/or continued obligations that may be required over the life of the loan.
Evaluate potential implications associated with environmental risk/liability to the lender.
How EBA Can Help
The EBA can provide guidance and technical support from environmental risk managers experiencing the same challenges you face. The EBA provides opportunities to meet with environmental risk managers from lending institutions through the U.S and the environmental consultants that service the industry. In addition, the EBA provides opportunities to attend conferences, training sessions, and conference calls, which provide in depth coverage, discussion, and training associated with various environmental concerns and ways lenders assess and mitigate environmental concerns to minimize the potential for future environmental liability.