Magazine article Mortgage Banking

Detecting Environmental Risk: Lenders Should Look out for Contamination They May Be Held Responsible For

Magazine article Mortgage Banking

Detecting Environmental Risk: Lenders Should Look out for Contamination They May Be Held Responsible For

Article excerpt

DETECTING ENVIRONMENTAL RISK

Lenders should look out for contamination they may be held responsible for.

In an all-out effort to pinpoint those responsible for the formation of hazardous waste sites, new government regulations are forcing mortgage lenders to manage environmental risks as never before. Arising from government attempts to control and clean up these sites, there are two primary dangers for modern lenders on industrial sites and similar properties. First, upon taking title at foreclosure, lenders may be held responsible for cleanup costs for contamination caused by the defaulting borrower or former lessees and owners. Second, upon bankruptcy of the borrower, lenders may lose the priority of their lien to that of the government for cleanup costs.

This article explains the foundations of these two risks and provides information that may be used to implement valuable risk management policies for lending institutions. It also discusses the valuable, albeit limited role that available insurance policies can play to further reduce risks.

Deliberate harshness

Congress did not intend for the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) nor its later amendment--the Superfund Amendments and Reauthorization Act of 1986 (SARA)--to be equitable legislation. Under strict liability provisions, seemingly innocent parties are often compelled to pay for cleanup of environmental contamination that they did not cause. Although faced with these inequalities, Congress also recognized that the Hazardous Substance Response Trust Fund ("Superfund") was insufficient to pay for treating or removing hazardous waste from all abandoned dump sites or from property with bankrupt owners. In some cases, the contaminated land has even escheated to state governments or has been willed to heirs. Neither can be held responsible for needed cleanup.

The primary purpose of CERCLA and SARA is to find "responsible parties" and have them pay for cleanup. The acts also enable individuals who have been harmed by the release of stored hazardous waste, such as pollution of groundwater, to recover damages.

In United States vs. Monsanto Co. (1988), the judge ruled, "Traditional elements of that culpability on which the site-owners rely simply are absent from the statute." In other words, the owners or other responsible parties can be liable without a clear personal breach of a statutory or common law duty. It is enough that they fall under the broad definition of responsible parties as defined by CERCLA and interpreted by the courts.

Responsible parties

The following individuals or corporations are deemed responsible parties and as such are liable for cleanup and environmental damage from hazardous waste:

* The generators of the waste; * The transporters of it; * The owners or operators (lessees)

of the site where the waste is

treated or stored; * Previous owners or operators of the

site at the time disposal occurred.

CERCLA and SARA also contain civil and criminal penalties, separate from cleanup liability, for persons who discover the contamination, or release of waste from the site, and do not report it to federal or state authorities.

These penalties would extend beyond the defined responsible parties and apply real estate brokers, originating loan officers, or site engineers who may discover contaminated sites or hazardous conditions as part of a real estate transaction and do not alert public authorities.

Defenses

If responsible parties can show that the environmental damage was caused entirely by someone else, such as a previous owner, they may escape liability. However, the courts have conditioned this "innocent purchaser or lessee" defense upon a thorough environmental audit prior to buying or leasing. If the title search or trial inspection yields any evidence of possible contamination, such as past ownership by a chromium plating company, the purchase or lease should be contingent upon a thorough inspection and report by an environmental engineering firm. …

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