The following blog post was submitted by Mark Resch, LPG, a geologist at The Dragun Corporation.
On August 20, 2013, the U.S. Department of Treasury, Office of the Comptroller of the Currency, released the “Comptroller’s Handbook, Safety and Soundness, Commercial Real Estate Lending.” The handbook “provides guidance for bank examiners and bankers on commercial real estate (CRE) lending activities.” It provides guidance for environmental risk management for banks after the loan has been approved.
Generally, banks have established policies for environmental due diligence prior to the purchase of commercial real estate (such as the federal Standards and Practices for All Appropriate Inquiries (AAI) regulations established under 40 CFR 312). The environmental due diligence provides a process for users to qualify for one of the three defenses to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) liability act (the defenses are innocent landowner, contiguous property owner, and bona fide prospective purchaser). Although often overlooked, CERCLA also requires the user to perform various “continuing obligations” to maintain the lender liability defense. Many banks do not have a method for evaluating the users continuing obligations process. Therefore, banks may not know if the loan value is being degraded due to an environmental condition.
This handbook provides guidance for banks to establish programs for evaluating the status of the continuing obligations or changes to the business that could affect the loan. The guidance includes:
- “provide guidelines that the lending staff should follow for monitoring potential environmental concerns for the duration of loans held in the bank’s loan portfolio. These guidelines should focus on changes in business activities that might result in an increased risk of environmental contamination associated with the property, thus adversely affecting the value of the collateral.”
- “maintain guidelines for loan documentation that protect the bank from environmental liability and related losses. Loan documentation should ensure that contractual provisions, including rights of access, are sufficient to facilitate AAI-compliant evaluations.”
- “collateral monitoring and periodic inspection requirements throughout the loan term for properties with higher environmental risk.”
- “a means of evaluating potential environmental liability risk and environmental factors that could impact the ability to recover loan funds in the event of a foreclosure.”
What does this all mean? Will your lender require more documentation of continuing obligations? If they have a more “active role” in management of your environmental issues, does this create CERCLA liability for the lender? Your lender may be able to provide some insight regarding their current and potential future policies.