Newsletter #4: Your Industry Environmental Update

PES has been a leader in Environmental Due Diligence studies for over seventeen years, primarily in Virginia, Maryland, and Washington, D.C. and secondarily in the broader Mid-Atlantic Region.   Please call us (703-938-5050) or email us (propertyinc@cox.net) anytime for advice on the level or type of study needed to fit your particular loan or circumstances.

* * * * *

Steve Butler of ButlerBank Consulting this past year shared his ideas and thoughts on environmental due diligence for the banking industry.  Mr. Butler has spent just over forty years in the banking industry as a lender, manager, CEO, and as a consultant.  In this discussion Mr. Butler was asked why bankers need to worry about environmental due diligence.

“Bank lending officers have to be concerned with the repayment of the loans they extend because they extend loans utilizing their depositors’ funds, which in turn is insured by an agency of the U.S. Government, the FDIC.  Hence each loan made must have, among other concerns, both a primary (cash flow) and secondary (collateral) source of repayment.  Whenever a bank takes real estate as collateral, it must concern itself with the environmental issues that can accompany real property.”

On a basic level I know that acquiring a piece of property through foreclosure, and in some instances, simply collateralizing a loan with potentially contaminated property, can result in some instances of the bank paying for a considerable and costly clean up/remediation.   There are three additional risks that bankers face with contaminated property: 1) reputational risk, 2) the risk of litigation involving the bank, and 3) risk of loan default if the borrower discovers environmental risks on his property subsequent to obtaining a bank loan secured by that property.  The clean-up costs could put a dent in the borrower’s cash flow and potentially in that borrower’s ability to repay the loan.

Finally, on this point, banks are facing an ever-increasing burden from their regulators, and regulatory criticism is the last thing a bank wants to worry about, especially when properly devised and implemented environmental due diligence policies and procedures can prevent the problem.   Having a loan classified by examiners as “Special Mention”, “Substandard”, or “Doubtful” can impact a bank’s business.   Reputational problems can wreck havoc for the bank.  For these reasons, bankers need to worry about environmental due diligence.”

Diane Crocker, of EDR, Inc., recently stated in the Scotsman Guide that in response to a mix of regulatory and economic forces a higher percentage of lenders are viewing more of their property loans through the lens of environmental risk to protect the bank from the liability that contamination can cause.   PES is available to help our clients navigate through the ever changing world of environmental risk management.

Leave a Reply

Your email address will not be published. Required fields are marked *