Growing Cadre of Experts Leads Banks Past Cleanup Traps
William H. Hinger is a banker who defuses land mines for a living.
In his post as environmental specialist at Huntington Bancshares, Columbus, Ohio, Mr. Hinger must guide the commercial mortgage department through uncertain laws and regulations that govern liabilities far into the future.
His appointment in late 1989 followed a spate of court decisions that threatened lenders with having to pay a larger share of the $500 billion it may cost to clean up the nation's fouled environment.
Experts warn that too large a tab could swamp efforts by banks to restore capital and revive lending activities.
Considering the Long Term
As one of a growing cadre of in-house specialists leading the industry along a slippery learning curve, Mr. Hinger takes a longer view of regulation than most bankers. He is convinced that environmental risk assessments will eventually play as large a role in commercial real estate lending as appraisals and cash flow projections.
First, however, Mr. Hinger and his counterparts must teach commercial real estate developers a bracing lesson - that it is in their own best interests to pay a few thousand dollars for an environmental report. Meanwhile, banks' loan officers must come to terms with stiff federal and state laws that seem to have been designed to make their lives miserable.
"The legislation is not necessarily fair," Mr. Hinger said. "The legislation was meant to force people to clean up their messes."
Moreover, experts concede that they too are in need of some instruction before any kind of uniformity in environmental practices can emerge.
Escape Path Unclear
Many banks already are enacting procedures for environmental review. So far, however, no broad legal standards outline how a bank can escape legal liability for cleanup costs.
While several groups wrestle with that issue, an Environmental Protection Agency interpretation of lender liability and several lender liability bills are mired in Washington.
Lawyers are debating what to do in the meantime. In the South, a circuit court decision in a notorious case involving Fleet/Norstar Financial Group's factoring unit broadened the liability of banks who participate in management of a borrowers environmental problems. So some lawyers in that district advise their clients to "close their eyes to environmental problems, because once you know something, you'll be liable," noted Keith J. Willner, a lawyer with Morrison & Foerster in Washington.
Mr. Willner rejects that thinking. He says the bank's objective is "not to try to fit in a loophole" and avoid liability. He said banks should "perform tests to find out if there is contamination" and avoid lending on contaminated properties.
Unfortunately, this will drive up the cost of small loans unless steps are taken to limit a bank's liability to the loan amount, Mr. Willner said.
"You could lend someone $500,000 and suddenly he's on top of Love Canal," said Stuart Watson, Mr. Hinger's counterpart at First Interstate Bancorp, expressing bankers' worst fears of huge, hidden exposure.
"The key," said Judah W. Bernstein, department head of the construction and environmental monitoring unit of Chemical Banking Corp.'s real estate division, "is that the bank has to set a policy."
Impact of Decision
Like many of his counterparts, Mr. Hinger came to the bank in the wake of court decisions that held banks liable for potentially huge cleanup costs merely for seizing a property at foreclosure, or for participating in management of property that turned out to be contaminated.
He now spends his time poring over maps and reports prepared by outside consultants that detail the past uses of a property as well as current conditions. He estimates he reviews 20 to 30 reports a month.
Environmental review specialists are in place at many big banks, where the function was a natural extension of existing units that monitored construction projects. Now the specialization must trickle down to the smaller banks, if they are to avoid becoming dumping grounds for tainted loans, said Bramley Paulin, environmental risk analyst at Valley National Bank, in Phoenix.
Most of these experts have put policies in place that require what is generally referred to as a phase I environmental assessment of any property being put up as security for a commercial real estate loan. They also evaluate the risk of environmental liability before their banks proceed with a foreclosure.
Probing into History
In some cases, smaller loans can be approved on the basis of a questionnaire answered by the borrower. But generally, the phase I review of land records is required to determine if past uses of the property or properties nearby could have caused contamination.
This is important because the law requires anyone who has been in the chain of ownership of a property, or who has been an "operator" of the property, to pay for cleanup regardless of who's to blame.
The actual study usually is conducted by one of a list of contractors the bank has chosen to work with, and is paid for by the borrower. It is the in-house expert's duty to interpret the sometimes arcane reports.
That done, the expert advises loan officers whether additional study such as soil sampling is needed, or whether removal of asbestos or testing of a underground storage tank should be required.
No Clarity on Procedure
The cost of the initial review usually ranges from $1,800 to $5,000 for the type of loans made by the $11 billion-asset Huntington, Mr. Hinger said.
But illustrating the problem that still confronts the fledgling environmental assessment industry, it remains unclear exactly what steps a phase I assessment must include.
The American Society for Testing and Materials now has focused on the problem.
A proposal which has been approved by a special committee, but is still subject to a vote by the membership, "is set up so an institution could do a test screen in-house," said Richard D. Jones, a lawyer with the firm of Pepe & Hazard in Hartford, Conn., the committee chairman.
Rationale for System
Mr. Jones said by screening a borrower questionnaire, an institution would meet the due diligence requirement for asserting what is called the "innocent landowner defense" should cleanup be required later. If problems came up in the screening, a phase 1 audit based on current practices would have to be conducted, Mr. Jones said.
The Society's occupational safety standards have been adopted by government agencies, leading to hope that its ruling on phase I assessments would carry some weight with bank regulators and the EPA. Moreover, one of the environmental liability bills pending in the House of Representatives names the group as the one to set a standard.
But the society represents a broad spectrum of professions, so its decision is unlikely go beyond a "bare bones" approach to evaluating risk, said Margaret Noreus, manager of the real estate finance division of the American Bankers Association.
She said her trade group has put out manuals for real estate and construction lenders, for agricultural banks and for Trust Companies, detailing expert thinking on what should be included in the reviews, on how to evaluate consultants and describing sample policies.
At the same time, in California, where strict environmental laws have been in place longer than anywhere else, several bankers have formed a loosely knit association of environmental specialists.
But attempts to formalize the group and create a national association have proved frustrating.
An organizational luncheon last May attracted 50 loan officers and environmental specialists from the Western states. But few had the time to help get the association off the ground.
Bankers had better put environmental consideration high on their list when they consider a loan, Mr. Hinger warned, or be willing to pay later. Under current environmental laws, he noted, "you're guilty until you prove yourself innocent."