The FICO score, and the predictive analytics behind it, revolutionized credit decisioning not long after it was unveiled by Fair Isaac in 1989. In the same vein, Diane Baum hopes that her automated environmental assessment, dubbed “Enviroscore,” will simplify commercial lenders’ decision-making process when it comes to evaluating the environmental risk of a proposed transaction; and significantly reduce the amount would-be borrowers have to spend on the compulsory “Phase 1” environmental assessment of a property.
Despite what one might think, it’s not the recent “green” momentum that’s created a market for Enviroscore. Banks’ need to calculate environmental risk stems back to 1980 when the “Superfund” law dictated that property owners become responsible for contaminated properties regardless of when the hazard was created.
“You buy it, you clean it up, that became the rule,” says lawyer Andrea Rimer, a partner in the environmental and natural resources practice at Troutman Sanders LLP. “The only way out of it was if you were an ‘innocent purchaser’ and had conducted ‘all appropriate inquiries’ into the property and not found anything.”
After a couple of decades of murky interpretation, a revision to the law clarified what constituted “all appropriate inquiries,” and that in most cases banks wouldn’t be liable for environmental problems on properties they’d financed.
But environmental assessments on commercial loans are still a risk management requirement because “the lender is looking down the road; if the borrower defaults they don’t want to find themselves in a position where they’ve got valueless collateral,” Rimer says.
At most banks, conducting a Phase I assessment involves hiring an environmental consultant — often at a cost of $3,000 to $5,000 — who will look at the historic use of a property, permits granted, compliance and enforcement activity, and maybe a site visit to make sure all is as it should be. Typically a three-inch binder lands on the loan officer’s desk three weeks later, with an excruciating level of detail about the environmental risk of the property.
Baum, who as an environmental consultant used to produce these reports, was inspired when a loan officer greeted her binder with the response, “Diane, just tell me what all this means. You know I’m not going to read it; I’m just going to throw it in a file cabinet.”
“Loan officers don’t want the bulk of the big thick document, they just want to know whether (the property is) good or not,” Baum says. “They want someone to give them a quick, easy interpretation that’s like something they’re already using, like a credit score.”
Baum and her team found a way to automate all of the necessary inquiries to state departments of environmental quality, along with the other databases necessary, and assign each property a numerical score between one and 100. The result? Lenders can now obtain an environmental assessment in a fraction of the time, and considerably cheaper, using Enviroscore’s Internet-based system. “It’s not practical to do a $3,000 environmental review on a $50,000 or $100,000 loan, and that’s what most commercial loans are: small business,” Baum says.
Mid-South Bank signed on with Enviroscore to conduct all of the $854-million asset-institution’s Phase I environmental analyses. “We as bankers are not in the DEQ (Department of Environmental Quality) business,” says Troy Cloutier, regional president of Mid-South Bank. “This saves money for our customer...and it protects the bank too, which at the end of the day is what we’re concerned about.”
Enviroscore started out small, offering its services in just a few states. But after years of R&D, it’s reached a scale where it can handle requests from national banks for properties in all 50 states, Baum says.
For small commercial loans, automated due diligence is probably adequate. For larger players, and larger deals, issues like reputational risk, governance and social issues come into play, says Andre Abadie, a director at Sustainable Finance Limited, which helps global banks create policy frameworks to evaluate the entire spectrum of risks, and occasionally review deals. “What you’ve had over the past six years is (big) banks taking broad environmental issues into mind, particularly with regard to reputational issues,” Abadie says. “They’re asking, ‘Do I want to be lending money to Exxon Mobile for environmental, governance or social issues?’”
In contrast, small-business due diligence is ripe for automation because of the low-touch nature of it. “Are you going to start asking the gas-station owner what’s his position on climate change,” Abadie asks. “No, that’s not relevant.” (c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved. http://www.banktechnews.com http://www.sourcemedia.com