Environmental Bankers Association (EBA) services

Why Environmental Policy Development is Important With the heightened scrutiny from regulatory agencies, which include the SEC, FDIC, OCC, and SBA, along with competitive pressure to approve deals, environmental risk is still the last issue to evaluate when approving commercial real estate transactions. This is despite environmental contamination identified by the Office of the Comptroller Currency (OCC) as a critical risk factor that “may negatively affect the value of real property collateral as well as create potential liability for the bank under various environmental laws.”   Financial regulatory agencies issued guidelines and requirements for banks and publicly traded corporations to follow in establishing an environmental risk policy, and disclosing known environmental liabilities.  Consequently, establishing an effective risk policy is critical to meet regulatory requirements for your organization.

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.

Why Environmental Risk Mitigation is Important Upon completing environmental risk evaluation (due diligence) including cost-to-cure and the time-to-cure, bankers generally have a better understanding of the environmental conditions associated with their collateral.  Depending on the issue, there are a host of environmental risk mitigates that can help to get the deal done.