Growing Cadre of Experts Leads Banks Past Cleanup Traps

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Growing Cadre of Experts Leads Banks Past Cleanup Traps

William H. Hinger is a banker who defuses land mines for a living.

In his post as environmental specialist at Huntington Bancshares, Columbus, Ohio, Mr. Hinger must guide the commercial mortgage department through uncertain laws and regulations that govern liabilities far into the future.

His appointment in late 1989 followed a spate of court decisions that threatened lenders with having to pay a larger share of the $500 billion it may cost to clean up the nation's fouled environment.

Experts warn that too large a tab could swamp efforts by banks to restore capital and revive lending activities.

Considering the Long Term

As one of a growing cadre of in-house specialists leading the industry along a slippery learning curve, Mr. Hinger takes a longer view of regulation than most bankers. He is convinced that environmental risk assessments will eventually play as large a role in commercial real estate lending as appraisals and cash flow projections.

First, however, Mr. Hinger and his counterparts must teach commercial real estate developers a bracing lesson - that it is in their own best interests to pay a few thousand dollars for an environmental report. Meanwhile, banks' loan officers must come to terms with stiff federal and state laws that seem to have been designed to make their lives miserable.

"The legislation is not necessarily fair," Mr. Hinger said. "The legislation was meant to force people to clean up their messes."

Moreover, experts concede that they too are in need of some instruction before any kind of uniformity in environmental practices can emerge.

Escape Path Unclear

Many banks already are enacting procedures for environmental review. So far, however, no broad legal standards outline how a bank can escape legal liability for cleanup costs.

While several groups wrestle with that issue, an Environmental Protection Agency interpretation of lender liability and several lender liability bills are mired in Washington.

Lawyers are debating what to do in the meantime. In the South, a circuit court decision in a notorious case involving Fleet/Norstar Financial Group's factoring unit broadened the liability of banks who participate in management of a borrowers environmental problems. So some lawyers in that district advise their clients to "close their eyes to environmental problems, because once you know something, you'll be liable," noted Keith J. Willner, a lawyer with Morrison & Foerster in Washington.

Mr. Willner rejects that thinking. He says the bank's objective is "not to try to fit in a loophole" and avoid liability. He said banks should "perform tests to find out if there is contamination" and avoid lending on contaminated properties.

Unfortunately, this will drive up the cost of small loans unless steps are taken to limit a bank's liability to the loan amount, Mr. Willner said.

"You could lend someone $500,000 and suddenly he's on top of Love Canal," said Stuart Watson, Mr. Hinger's counterpart at First Interstate Bancorp, expressing bankers' worst fears of huge, hidden exposure.

"The key," said Judah W. Bernstein, department head of the construction and environmental monitoring unit of Chemical Banking Corp.'s real estate division, "is that the bank has to set a policy."

Impact of Decision

Like many of his counterparts, Mr. Hinger came to the bank in the wake of court decisions that held banks liable for potentially huge cleanup costs merely for seizing a property at foreclosure, or for participating in management of property that turned out to be contaminated.

He now spends his time poring over maps and reports prepared by outside consultants that detail the past uses of a property as well as current conditions. He estimates he reviews 20 to 30 reports a month. …