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Financial Institutions are exposed to the potential for environment risks as a result of properties it owns, properties on which it has foreclosure, properties it manages or holds in trust, and property held as collateral for a loan if the institution engages in decisions that affect the environment.
Environmental exposures can be broken down into five basic categories:
• Property – including damage to real property owned or to property of others.
• Injuries – including physical injuries to others, health effects, psychological stress, death involving employees, customers, guests and others that the courts consider as being owned some degree of care and protection.
• Business Interruption – either temporary or permanent reduction of a legitimate business activity because of an accident or event beyond the control of an owner, tenant, or the bank that results in loss of income as a result of an environmental impairment. Also, the extra expenses associated with pollution and attempt to continue business operations.
• Environmental – involving damage or potential damage to natural resources such as forests, land, air or water.
• Diminution of Value – loss from the diminished value of property as a result of being contaminated. Examples would include buildings that contain either lead paint or asbestos.
Legal liability costs and expenses involved with cleanup are not the only threat to financial institutions. For example, a mortgaged property may be so environmentally impaired that its owners may not be able to continue to service their loan obligations. Ultimately, in many cases, these loans may have to be marked down decreasing the assets of the institution, and potentially reducing its profitability and even impairing the bank’s capital.
Environmental questions that bank management should consider in terms of considering offering a loan on a specific property
• Is there any known pollution?
• Is there a possibility that contamination exists but is yet undiscovered?
• Are there underground storage tanks on the property?
• What is the potential for an environmental loss from ongoing operations?
• What impact would a loss have on the operations of the mortgagor?
• Will the damage cause an impediment to the loan?
• Is the mortgagor insured for environmental losses?
• If there is a loss, will the mortgagor be able to meet its obligations to all parties, the government, and the financial institution?
• How can the financial institution be kept informed of environmental exposures and risks?
• How can the financial institution prevent such occurrences from happening?
Today, financial institutions have become increasingly concerned with environmental risks, and typically require Phase I site assessments before granting industrial and commercial property loans and make periodic site surveys to ensure there are no developing risks or exposures that would significantly impact the mortgaged asset.
Courts have held to their original position that lenders may find some limited exemptions from direct environmental liability if they do not participate in the management of the borrower’s business and do not do anything that may contribute to pollution or take actions that would prevent avoidance or correction of a hazardous chemical spill or waste disposal.
Properties held in trust can create the potential for liability to the institution if it failed to conduct appropriate due diligence on the property. Site assessments are valuable tools to avoid potential liability by identifying any environmental risks, followed by full disclosure to the owner or beneficiaries of a trust. This followed by the establishment of appropriate direction to mitigate the potential for direct loss or liability to the trust, its beneficiaries or others is prudent.
There’s a great resource available to banks in the form of the Environmental Bankers Association, based in Alexandria, Virginia. Since its establishment, this association has been involved in establishing model environmental policies and the development of an information clearinghouse for banks.
The intent of this association is to assist its members through the use of better methods to manage their environmental risks. The principal concerns addressed by the association are environmental liabilities that arise out of lending, trust services, and management of any bank’s own properties and facilities.