After seven years of legislative near misses, the banking industry finally has won the battle to clarify when lenders are liable for environmental cleanup costs.

Lender-liability provisions were included in the massive spending package signed into law Monday night by President Clinton. The new law explains when lenders will be held responsible for the contamination of property they hold as collateral.

"This is great news," said Evan Henry, Bank of America's senior vice president of environmental services. "We will be able to lend with much more comfort, and we won't have to do in-depth investigations into the environmental risks. It is going to save money for the bank and the borrower."

The law says lenders are liable for the cleanup of contaminated real estate they hold as collateral only if they participate in the management of the business that operates on the property. A lender is participating in management when it:

*Controls the decision-making of the borrower's compliance with environmental laws, or

*Takes responsibility for the handling or disposal of hazardous substances.

In addition, lenders that foreclose on collateral property will not trigger liability as long as they try to divest the property at the "earliest practicable, commercially reasonable time," the new law says.

The responsibilities of bank trust departments also were clarified. Fiduciaries are liable if their negligence causes or contributes to the release of a hazardous substance on properties they hold in trust.

"This is the road map of permissible activity that lenders and trustees have been craving since the late '80s," said John Byrne, senior federal counsel at the American Bankers Association. "The key is: If you act like a lender, you're fine."

However, banks that participate in managing businesses that contaminate their collateral property still face uncertainty, said Denise Chamberlain, associate counsel for Mellon Bank, Pittsburgh.

Under the new law, a bank could be held liable for the cleanup of all contamination on a foreclosed property even if it was not holding the property as collateral when most of the damage occurred.

"If we're participating in the management of a business that causes a spill and we have to foreclose, we need to know if we are responsible for all contamination on the property in the last 30 to 40 years," Ms. Chamberlain said.

The uncertainty faced by lenders first began to surface in the mid- 1980s, when several court decisions made it difficult to determine liability under environmental laws.

Legislation that would have clarified lender liability was approved by the Senate in 1991, but was dropped in conference for reasons unrelated to the issue. Similar language passed the Senate in 1992 but again was removed in conference.

The new law codifies a 1992 Environmental Protection Agency regulation. That rule was swept aside in February 1994 when the U.S. Court of Appeals for the District of Columbia decided that the EPA lacked the statutory authority to issue it.

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