Tuesday, 1 March 2011
Environmental Risks

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. 

Posted on 03/01/2011 10:41 AM by test
Tuesday, 1 March 2011
Vendor Management

Vendor management is a hot button issue for banks prompted by and in the face of regulatory pressure.  Regulations are constantly changing, and regulatory enforcement continues to increase in its intensity and frequency.  There are three primary reasons why bank regulators have a heightened interest in vendor management:

•    A greater reliance on third parties by banks;
•    Regulations regarding data privacy and security; and,
•    Increased focus on data safety due to publicized data breaches.

Regulatory compliance raises the importance of vendor management concerns since members of the board of directors can be held personally liable for non-compliance situations. 

According to the FDIC statement dated June 6, 2008, the board of directors and senior management are ultimately responsible for identifying and controlling the risks associated with third-party relationships, including the potential for misuse of confidential customer information or violations of rights to privacy of bank customers.

An institution’s board of directors and senior management are ultimately responsible for managing activities conducted through third-party relationships, and identifying and controlling the risks arising from such relationships, “to the same extent as if the activity were handled within the institution.”

The first step is to develop and adopt a formal vendor compliance management policy.   The development and adoption of a policy will bring the issue to the Board’s attention, which is ultimately responsible for the process, and highlight the importance of the program to all levels of management.

There are several firms that offer viable software to assist in the development of an appropriate bank policy.  We recommend that bank management contact several of these companies and seek proposals for consideration.

A bank’s management is obviously conscious of the critical role they play in protecting their customer’s confidential information and the importance of public confidence in order to attract and maintain relationships with consumers.  Every institution that’s been involved in a compromise of confidential customer information has also experienced some loss of public confidence, affecting not only the existing customers of the institution but potential customers and an array of others that are directly or indirectly involved with it.

Gramm-Leach-Bliley crystallized the financial services industry’s responsibility in protecting personal financial information.  Once this information is compromised, in addition to the potential for loss of customer confidence, the institution also is subject to liabilities to those whose information was compromised.  This is true of information in the care and custody of a bank and of any third party vendors used by the bank that must have access to this information.

These liabilities can result in a substantial financial loss to the institution potentially affecting its profitability and capital structure.  It is critical therefore, that management institution appropriate policies and procedures in accordance with the FDIC and other federal or state banking authority mandates.

Posted on 03/01/2011 10:43 AM by test
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