Minimizing Lender Risk

By Tim McGahey & Lizz Barringer Lagomarsino

Environmental Policies and Risk Reviews

Limiting significant losses related to environmental issues for banks and property owners has historically been managed by a favorable regulatory and enforcement climate, a robust real estate market, and the shelter of formal lender liability protections. For many lenders, a robust environmental policy was not a priority and added unnecessary costs to doing business. Times have changed.  During the recent U.S. mortgage crisis and recession, many lenders were forced to take a hard look at some risky loans issued during the previous real estate boom. In many cases, lenders found that foreclosure was a losing proposition due to risks that should have been considered during loan origination. These troubled assets and recent changes from the Office of the Comptroller of the Currency (OCC) and the Wall Street Reform and Consumer Protection Act (Dodd-Frank) have caused some banks to reconsider their approach to environmental risk management.

Many national banks maintain a staff of environmental professionals that specialize in reviewing complex environmental due diligence documents associated with collateral property. These lenders have the advantage of in-house resources to evaluate and calculate risk. These professionals understand that risk can come in the form of remediation costs, access restrictions, reduction in collateral value due to real or implied contamination, and/or regulatory fines.

A comprehensive environmental risk review policy is paramount to protecting the bank against environmental risks.  A good policy includes a tiered approach to environmental due diligence and several products are available in the marketplace that reflect industry standards. Not every loan warrants a Phase I ESA compliant with ASTM Standard E1527. Property type, location, value, and loan amount should all drive the level of due diligence conducted and the type of tools used to quantify environmental risk. Before creating a policy, lenders should conduct an internal audit of their corporate risk tolerance and create a policy that reflects that mantra.  This approach often garners the highest level of support from credit and senior management.

It is not enough to establish a policy on paper – it must be implemented and maintained. Implementation should include staff training that covers a summary of the environmental due diligence products available, risks and costs, mitigation measures, and liabilities. There is no correlation between loan size, collateral value, and remediation/liability costs, but education and a strong risk policy can protect the bank regardless of this ratio. The policy should be a living document that is regularly reviewed and updated as changes occur in the environmental due diligence field.

A successful policy should avoid creating a “paper the file” approach to environmental risk management. Lending staff should be willing to objectively identify potential risks and include them in the loan underwriting analysis. Additional investigation should only be advised when all the obvious questions have not been adequately answered. The ultimate goal of any good policy should be to quantify the risk.

Community banks are especially vulnerable to these risk factors due to limited resources.  However, there are alternatives to “in-house” staff and policy writers. Commercial bankers can and should leverage the knowledge and expertise of third-party specialists that understand the complexities of environmental risk to augment internal capabilities to perform environmental risk reviews, create and write policy, train lender professionals, and provide third-party risk reviews. This approach is a proven strategy and practice among banks of any size and a practical way to mitigate risk for your lending institution. To learn how AKT Peerless helps lenders augment and achieve these due diligence and risk management goals, please call us at 1-800-985-7633 or visit our website at www.aktpeerless.com.

About the Authors:

Timothy J. McGahey serves as AKT Peerless’ Vice President of Environmental Due Diligence and has over 16 years of experience in environmental consulting.  Mr. McGahey has managed thousands of environmental projects associated with large-scale recreational, residential, commercial, institutional, and industrial real estate redevelopments.  Mr. McGahey helps clients navigate the complexities of environmental regulatory requirements while maintaining a cost-effective and practical approach to risk management.

Lizz Barringer Lagomarsino serves as AKT Peerless’ Vice President of Environmental Risk Management and has over 25 years experience in the environmental field encompassing lending environmental due diligence, environmental analysis, and environmental coordination for manufacturing. Barringer Management, now a division of AKT Peerless, offers environmental due diligence review services to finance and banking industry leaders. Ms. Barringer Lagomarsino’s diverse background is an asset in assisting banks with environmental risk policy and decisions.

About AKT Peerless:

We help build sustainable communities and a better environment for your business. We exceed expectations and ensure your success with a strategic focus on providing environmental, energy and sustainability, economic development, and construction loan services that are tailored to the needs of each of our clients, private and public sectors alike.  We empower our people to engage, at work and in our communities, to make a difference. Call us today at 1-800-985-7633.

NEXT ARTICLE