Do You Know Enough to Be Dangerous?

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As a commercial lender, you have a lot on your plate.

You need to prospect for new clients, run a credit analysis and conduct proper due diligence on all new loan applications, shepherd the loan to closing, ensure loans conform with all applicable laws and regulations, manage risk at the individual loan and portfolio levels, track interest rate changes, and manage problem loans.

You’re also responsible for conducting environmental due diligence on each piece of real estate collateral that secures your loans.

With this heavy load of responsibility, it’s understandable that environmental risk management may not be at the top of your priority list. You and your team may understand the basics of environmental due diligence, and you may feel comfortable with doing just enough to get by. But is that level of knowledge sufficient to ensure that you are addressing all potential environmental risks in your portfolio? Just as importantly, are you dedicating enough time and resources to comply with the latest regulations and adhere to all current environmental due diligence standards and requirements?

In other words, do you know just enough about environmental risk to be “dangerous”?

Environmental Risk Management is No Joking Matter

U.S. lending institutions are required to follow specific environmental due diligence processes to comply with regulations and manage risks associated with real estate transactions. These processes are primarily governed by the Environmental Protection Agency (EPA) and are detailed in various guidelines and standards, including the Small Business Administration’s (SBA’s) standard operating procedures (SOP). Here are a few of the key steps involved:

  • Environmental Site Assessments (ESAs): The cornerstone of environmental due diligence is the Phase I Environmental Site Assessment (ESA). This assessment includes the review of records, site inspection(s), and interviews with owners, occupants, neighbors, and local government officials to identify potential or existing environmental contamination liabilities. Currently, this process follows the American Society for Testing and Materials (ASTM) E1527-21 standard.
  • Phase II Environmental Site Assessment: If the Phase I ESA identifies potential contamination, a Phase II ESA may be required. This involves more detailed testing of items such as soil, groundwater, and building materials to evaluate the nature and extent of any contamination.
  • Regulatory Compliance Checks: Lenders also need to ensure that the property is in compliance with environmental regulations. This includes checking for compliance with the Resource Conservation and Recovery Act (RCRA), the Clean Water Act, and other relevant environmental statutes.
  • Risk Assessment: Following the ESAs, a risk assessment is often conducted to determine the potential impact of identified environmental issues on the value of the property and the liability risks for the lender. This involves evaluating the likelihood of a release of hazardous substances and the potential costs associated with remediation and legal liabilities.
  • Environmental Insurance: In some cases, lenders may require the borrower to obtain environmental insurance to help mitigate the risk of unforeseen contamination and associated clean-up costs.
  • Ongoing Monitoring: For properties with known environmental issues or ongoing remediation, lenders may conduct periodic monitoring and reporting to ensure that the issues are being managed in compliance with regulatory standards.

These due diligence processes are essential not only for protecting the financial interests of your institution, but also for ensuring compliance with environmental laws and minimizing the impact on human health and the environment.

How Can You Manage Environmental Risk Effectively?

Given these extensive requirements, lending institutions have three options for managing environmental risk:

  1. Designate an internal “expert”: This is a common approach taken by many community banks and credit unions. Unfortunately, the person who gets “volunteered” to manage environmental property risk is often the individual who was out the day of the department meeting. Often, environmental due diligence responsibilities are added to an individual’s laundry list of existing duties, making it challenging for that staff member to keep up with the latest regulatory changes and maintain strict protocols and procedures. Unless you have the resources to dedicate a full-time individual to this important role and provide them with the ongoing training needed, this approach is often destined to fail.
  2. Hope for the best: While designating an internal team member to oversee environmental risk management has its challenges, some organizations choose the “ostrich” approach, also known as “burying your head in the sand.” For these lenders, environmental risk management falls way at the bottom of the priority list, and they choose to do only the most rudimentary due diligence practices, if any at all. This is asking for trouble, as the cost of overlooking significant risks such as a history of environmentally sensitive site use or current contamination can result in lawsuits, a loss of government guarantee, or worse.
  3. Partner with an expert outsourced risk management firm: For most lenders, this is the best option. Why dedicate significant internal resources, including staff time, training, and process development to ensure that you are complying with the latest environmental policies and procedures when you can simply hire a firm with specialized expertise to do it for you? The best news is that it can be done with little to no impact to your bottom line, as most environmental due diligence fees can be passed on to the borrower in their loan closing costs. It’s a win-win that will help you and your borrower sleep better at night.

It makes a lot of sense to outsource your environmental risk management to an experienced, diligent third party partner with the resources and expertise to help you stay compliant, and safe.

ORMS has decades of experience nationwide helping lenders manage their property risk program by evaluating, developing, implementing, and monitoring due diligence policies and procedures required by lenders.  ORMS can also take the environmental report ordering, reviewing and SBA submission processes off your to-do list, making even the most complex projects less stressful and less costly in the long run.

At ORMS, our mission is to remove the burden of environmental risk management from your plate and keep you out of danger, allowing you to focus on what’s most important: serving your borrowers and growing your business.

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