A new environmental law in Illinois has set the stage for a lending jump.
The law, which sets standards for property evaluations, will help all banks, but it's really the smaller institutions which had the most to lose before Gov. Jim Edgar signed the Environmental Assessment Act.
The law - the first state enactment of its kind - was written by the Illinois Bankers Association, which sought to shield its members from potentially staggering liability at foreclosed properties. or those they own or hold in trust.
Now that the law has been signed, banks and other lenders will know exactly how to protect themselves - and a lot of pending loan applications might finally be approved.
"It's impossible to put a number on how many loans haven't been made because of liability fears, but the assessment act will encourage more lending," says William J. Hocter, executive vice president of the IBA.
|Innocent Landowner'
The law amends the Illinois Environmental Protection Act by explaining how to satisfy its "innocent landowner" shield. Previously, borrowers and lenders who found themselves in possession of contaminated land were sometimes held liable for cleanups even if they had performed site inspections.
But that's all changed. Anyone who performs an appropriate inquiry, as defined by the act, will be protected, says Robert O. Wienke, the attorney who helped the IBA draft its bill.
The inquiry definition is based on American Society of Testing and Materials standards.
Under it, "appropriate inquiry" is defined as a Phase I investigation, which would involve, among other things, a title review ranging back at least 75 years; a review of available aerial photographs; a search for environmental liens, and a visual site inspection
The discovery of underground tanks or other sources of potential pollution would trigger a Phase II investigation, which would involve soil and groundwater testing, among other inquiries.
Lesson in Liability
Mr. Wienke notes that every environmental consulting firm has its own definition of Phase I investigations, and that meant banks never knew if the state. upon the unforeseen discovery of pollution, would be satisfied with the original inquiry.
Often, the state was not.
Forexample, prior to buying a property known to harbor a gasoline storage tank, the $16 million-asset State Bank of Whittington hired an environmental firm to sample soil and groundwater. Although the tests were negative, the bank, after buying the site and digging out the tank, learned that the tests had failed to detect extensive groundwater contamination. It then got a painful lesson in environmental liability.
"We were told it would cost us $60,000 for the tests and digging up the tank," says State Bank president Steve Swinney. "We ended up with a bill for $1.1 million."
A Lengthy Fight
Thanks to its litigation against the state's storage tank fund, the bank eventually was reimbursed for its cleanup.
"We spent $50,000 on legal fees, and the state still owes us $20,000," Mr. Swinney said.
The IBA has 800 members, of whom 70% have less than $100 million in assets. Its fight for the law was a lengthy one, with Gov. Edgar having vetoed the measure during the legislature's 1992 session.
The veto was sought by the Sierra Club, among other environmental groups, because "they didn't really understand the bill and they thought we were trying to protect polluters," says Mr. Wienke.
