Smart bankers pride themselves on the quality of their real estate and business loan portfolio. But suddenly a lot of smart bankers have begun to realize that stricter enforcement of environmental laws is affecting loan decisions.
A lot of commercial loan business is lost these days because of unnecessary fears of a potentially expensive cleanup program.
Some lenders, rather than investigating and making a true business decision on a loan application, reject the idea if there appears to be any activity where city, state or federal regulators could step in to require an environmental cleanup.
A third-party environmental audit or assessment of the property in question, as well as a good assessment of the proposed business, could show that any damage to the environment, and a subsequent cleanup in the event of foreclosure, would not be expensive enough to warrant rejection of the business.
In these times of stricter enforcement, real estate lenders find their expertise does not lie in the legal or environmental business. For this reason, they are not sure if a potential loan is sound and a loan application may be rejected based on emotion or fear rather than business facts.
A good third-party environmental assessment should uncover any potentially damaging areas and show what must be done to meet all legal requirements. This assessment also could include a cost estimate so the value of the loan and its income could be weighed against any potential cost of cleanup.
Such an assessment also could be used after the fact for a lender to show good faith on foreclosed property. While this could not negate any legal liability to pay the cleanup costs, it would show good faith, or due diligence, that the lender attempted to follow rules and regulations and meet all his responsibilities. Such a good-faith showing could help the lender avoid any fine or penalty associated with a mandated cleanup.
In severe cases where landowners have been proven to totally neglect their responsibilities, the Environmental Protection Agency has been known to levy fines and penalties up to three times the cost of cleanup.
With an environmental assessment in hand, the property owner or lender should know exactly what the liability is and what was necessary to correct any detected fault. By discovering this and voluntarily starting a cleanup program, the owner or lender could avoid penalties and fines, in this case, the cost of an assessment would be much less expensive than any fine or penalty.
Going beyond rejecting loans because of ignorance of environmental regulations, many lenders are in a similar quandary when it comes to foreclosing on a nonperforming loan.
Several times …