Lenders Seeking Ways to Ease Pain of Cleanup Liability

With efforts to address lender liability for environmental cleanup costs stalled in Congress, bankers now must devise their own solutions to this long-festering problem.

Fortunately, banks are already contemplating steps to combat their dread of a huge tab for environmental cleanup. Not that they have a choice -- something must be done if bankers wish to restore their ability to lend routinely to anyone who produces, uses, or disposes of potential pollutants.

"I think they will build it into the underwriting," said Anthony Buonicore, president of Environmental Data Resources of Southport, Conn. Mr. Buonicore's company provides computer searches of land records for possible contamination problems on property being posted as collateral for bank loans.

Due Diligence Standard

Mr. Buonicore cited the American Society for Testing Materials, which will consider a screening process that could provide a clear standard for due diligence that is needed to escape liability for unexpected cleanup problems on a property securing a loan.

The screening would consist of a questionnaire for borrowers in most transactions. For businesses or properties normally associated with pollution, a record search and some testing for environmental damage also would be required.

Meanwhile, with lender liability tabled after a joint congressional committee dropped it two weeks ago from the banking reform bill, some experts are wondering whether Washington has the political will to take a stand.

Although lobbyists expect Sen. Jake Garn, R-Utah, the ranking member of the Senate Banking Committee to press for lender liability legislation in the next session of Congress, a meaningful legislative change might have to wait until 1994, when the Superfund law is due for reauthorization.

Insurers Step Up

Groups with a vested interest are likely to move more quickly than Congress. Insurance companies, for instance, are preparing to accommodate bankers by offering coverage that would facilitate lending -- albeit at greater cost to high-risk borrowers.

Some eyes turned to the Environmental Protection Agency, which is in the midst of drafting a rule interpreting the existing law.

"Now we're the prettiest face in town," said William H. Frank, director of enforcement at the agency.

EPA Reassures Banks

The EPA has promised a rule making it clear that it won't hold banks liable as operators of a property merely because they monitor the property as loan collateral.

Still, bank lobbyists have vowed to carry the fight for legislation into next year, saying the other measures are insufficient to reassure banks that small loans won't result in huge liabilities.

The Superfund law, formally called the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, says owners or operators of contaminated property can be held liable for cleanup.

The nationwide cleanup could end up costing half a trillion dollars, some say.

Definition of Owner Broadened

But court decisions, most notably a circuit court decision in Atlanta, have broadened the definition of ownership beyond what banks believe was the intention of Congress.

The outrage that followed that decision, which held that a unit of Fleet/Norstar Financial Group could be held liable because it was in a position to influence management of a borrower's property, heightened the pressure on Congress to address the matter.

Bills to relieve lenders from part of the burden have attracted numerous sponsors in Congress, as members responded to reports that liability concerns were drying up credit to small businesses in their districts.

Another Deep Pocket

But in the two sessions since the Fleet decision, the bills have fallen victim to a rare alliance of environmental and chemical industry lobbyists.

Both groups, hoping to spread the costs of environmental cleanup as widely as possible, oppose removing banks from the group that is potentially liable to the cleanup claims.

The EPA argued that there was no need to rewrite the law and that it could clarify the standards through a rulemaking.

But that process has been slow. The proposed rule is now undergoing revisions based on comments received after it was first published in the Federal Register last May.

A Round of Review

Once earlier suggestions are incorporated into the rule, it would be subject to another round of review by various concerned government agencies, said Mr. Frank of the EPA.

A main objection to the earlier rule was that it provided little protection from claims under state environmental cleanup laws or from private claims -- a problem some believe only legislation can solve.

Banks "can take some solace" from the EPA's statements that it won't sue for cleanup costs on the basis of the court decision in the Fleet case, said Keith J. Willner, a lawyer with Morrison & Foerster.

But concern among banks remains high, especially in the southern states subject to that circuit court's jurisdiction.

PHOTO : Anthony Buonicore, Environmental Data Resources

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