As we close out 2025, foreclosure activity is on the rise.

According to data from ATTOM, a nationwide property database, foreclosure filings, which include default notices, scheduled auctions, and bank repossessions, were up 17% in the third quarter of 2025 over the same period in 2024.

Foreclosure serves as an important risk management tool for lenders. But if the process is not managed carefully, it can result in unintended consequences, such as the discovery of preexisting environmental contamination. In certain cases, these risks can transfer to the lender once they take title on the subject property, resulting in additional costs and higher loan losses.

The SBA’s latest Standard Operating Procedures (SOPs) for 7(a) and 504 loan origination, servicing, and liquidation serve as best practices blueprints for environmental due diligence, even for non-SBA lenders. In this article, we share some potential environmental risk management pitfalls, and discuss how the latest SOPs can help you mitigate such risks in foreclosure.

Environmental Risks Can Transfer During Foreclosure

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes strict criteria under which parties may be held responsible for environmental contamination and hazardous materials discovered at a subject property.

Under certain circumstances, lenders can be held liable for environmental contamination of a property if it is determined that the lender is acting like an owner or operator or otherwise participates in property management activities.

These risks are potentially higher when a lender takes possession of a property through the foreclosure process.

Section 107 of CERCLA defines a liable party as:

• The current owner and operator of a contaminated property;
• Any owner or operator at the time of disposal of any hazardous substances;
• Any person who arranged for the disposal or treatment of hazardous substances, or who arranged for the transportation of hazardous substances for disposal or treatment; or
• Any person who accepts hazardous substances for transport to the property and selects the disposal site.

Under Section 101(20)(A) of CERCLA, a person is an “owner or operator” of a facility (or property) if that person: (1) owns or operates the facility or (2) owned, operated or otherwise controlled activities at that facility immediately before title to the facility, or control of the facility, was conveyed to a state or local government due to bankruptcy, foreclosure, tax delinquency, abandonment or similar means.

CERCLA Offers Some Lender Protections

CERCLA does contain certain lender liability protections, both prior to and during foreclosure. Specifically, “CERCLA Section 101(20) contains a secured creditor exemption that eliminates owner or operator liability for lenders who hold ownership in a CERCLA facility primarily to protect their security interest in that facility, provided they do not ‘participate in the management of the facility.’”

According to the EPA, “participation in management does not include actions such as conducting property inspections, requiring a response action to address contamination, providing financial advice or renegotiating or restructuring the terms of the security interest.”

Further, “the secured creditor exemption also provides that foreclosure on a property does not result in liability for a bank, provided the bank takes ‘reasonable steps’ to divest itself of the property ‘at the earliest practicable, commercially reasonable time, on commercially reasonable terms.’ Generally, a bank can maintain business activities and close down operations at a property as long as the property is listed for sale shortly after the foreclosure date or at the earliest practicable, commercially reasonable time.”

Despite these protections, it is possible for environmental risk to transfer to a lender during foreclosure. In such cases, the direct costs related to cleanup, remediation, and disposal may exceed the property’s market value, adding to losses the lender may sustain from the transaction.

Mitigating Environmental Risk During Foreclosure

“The best defense is a good offense” is an oft cited saying attributed to everyone from Sun Tzu to George Washington and Bill Belichick. As in war and football, when it comes to environmental due diligence, it pays to be proactive. It’s never prudent to cut corners in your pre-deal environmental due diligence steps, because it’s much easier to address potential issues before the ink is dry on the loan documents, rather than after a borrower relationship has gone sour.

As a best practice, we recommend performing a comprehensive environmental review starting with (at minimum) a Phase I environmental site assessment. If any potential risk is uncovered during this assessment phase, it would likely warrant a Phase II as well.

Limited-scope environmental reports like desktop reviews and transaction screens do serve a role as part of a well-appointed due diligence toolkit. They can be useful, economical alternatives for less risky deals, such as those with low-risk collateral, smaller borrowing amounts, or low LTVs.

But it’s important to recognize that if a lender chooses to take title on a property, only a full Phase I ESA provides adequate liability protection from CERCLA.

Revised SBA SOPs Offers a Clear Roadmap

Even if you’re not an SBA lender, The U.S. Small Business Administration’s latest Standard Operating Procedure (SOP 50 10 8, effective June 1, 2025) offers a clear path for conducting environmental due diligence on all types of CRE loans. Note that the latest version includes some notable changes, including heightened risks to the loan guarantee for non-compliance with environmental provisions, new document retention requirements, and a streamlined document submission process.

In addition, the SBA also released a revised SOP 50 57 4 (effective November 1, 2025) for 7(a) loan servicing and liquidation. Key updates include:

• An increase, from $5,000 to $10,000 to the personal property liquidation value threshold for certain actions.
• The addition of a new loan status category, “SBA Uncollectible,” that triggers referral to Treasury collection.
• Revisions to align with environmental review requirements in SOP 50 10 8.

For SBA lenders the message is clear: the cost of ignoring environmental issues in servicing and liquidation can jeopardize the guaranty or trigger repair actions. Lenders must address environmental risk up front because you now have fewer remediation options in liquidation.

Look Before You Leap

When the time comes to consider options related to a non-performing loan, lenders should take certain steps before beginning foreclosure proceedings, to ensure a clear-eyed view of the risks and benefits. These steps include:

• Assessing whether proper environmental due diligence was performed at the time of closing;
• Determining whether the environmental report covers the entire property used as collateral;
• Ensuring the assessment was conducted in accordance with standard industry practice and all federal and state guidelines;
• Reviewing all aspects of the deal, including: the type of loan, loan amount, environmental provisions of the Purchase and Sale Agreement, indemnity agreements, and current property conditions and market value; and
• Obtaining a current opinion of the environmental condition of the collateral, including a summary of any potential environmental concerns and mitigants.

Foreclosure can help you recover potential losses on non-performing loans. However, to ensure your institution is protected throughout the process, proper due diligence and preparation are essential.

We recommend working with a trusted risk management consultant who understands the environmental due diligence process, regulations, and best practices from the inside out. A little work upfront can help ensure that potential environmental issues don’t become giant headaches down the road.