Office of the Comptroller Emphasizes Environmental Risk

Tuesday, September 24th, 2013

The Office of the Comptroller of the Currency (OCC) has published a new “Commercial Real Estate Lending” (CREL) booklet of the Comptroller’s Handbook.  The revised booklet includes updated statutory and regulatory developments in environmental risk management.

The booklet provides much more guidance related to environmental risk. The CREL booklet states “Environmental contamination may negatively affect the value of real property collateral as well as create potential liability for the bank under various environmental laws. Therefore, the bank’s loan policy should establish a program for assessing the potential adverse effect of environmental contamination and ensure appropriate controls to limit the bank’s exposure to environmental liability associated with real estate taken as collateral.”

Environmental Liability is listed among five credit risk factors in addition to construction issues, market conditions, regulatory change, and interest rates. The CREL booklet explains that “Contamination may decrease the collateral’s value or render the collateral worthless. Furthermore, the cost that may be imposed on a responsible borrower for the remediation of a contaminated property may severely impair the borrower’s ability to repay the loan.”

The CREL booklet warns that lender liability exemptions do not protect the lender from the decline in value that contamination can cause due to the cost of remediation or the stigma associated with a contaminated property. Furthermore, the cost of a cleanup may severely impair the borrower’s ability to repay the loan. A Phase I Environmental Site Assessment (AAI study) is described as the best method to assess a property’s environmental condition, potential liability for a borrower, and disposition strategies upon foreclosure.

The CREL Handbook explains that an “appropriate environmental risk management program should reflect the level and nature of the bank’s real estate lending activities, its risk profile, and consideration of applicable environmental laws.” Eighteen aspects of an effective environmental risk management program are listed including:

• Specify the requirements for determining potential environmental concerns including procedures for an initial analysis of potential environmental impact and circumstances in which a qualified professional should be consulted;

• Ensure the persons responsible for evaluating environmental risk are qualified;

• Vary due diligence methods and risk thresholds based on the property use, type of loan, the amount of the loan and the risk category;

• Determine the circumstances in which the bank would normally decline loan requests based on environmental factors.

• Evaluate potential environmental liability risk and environmental factors that could impact the ability to recover loan funds in the event of a foreclosure.

• Maintain lender liability exemptions and avoid owner/operator liability if the bank acquires ownership of the property.

The Commercial Real Estate Lending booklet makes it clear; potential Environmental Liability is a credit risk factor that should not be taken lightly.  Contact us if you need a qualified Environmental Professional to conduct a Phase I Environmental Site Assessment (AAI study).

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Blog post written by Jason Gold, P.E.