Banks trying to unload foreclosed properties must comply with a new lead-based paint rule that begins phasing in next month.
The rule requires buyers of bank-owned properties be notified about the possibility of lead-paint contamination. It applies to houses built before 1978, the year the government outlawed the paint. Banks that own properties with five or more units must comply by Sept. 6. They have until Dec. 6 for properties with fewer units.
Compliance experts said bankers should examine their properties for lead-based paint, rewrite their policies to emphasize the disclosure requirement, and train employees to make sure the information is given.
"The rule's intended to get banks to be conscious of the risk involved with lead-based paint and have them avoid it on their own," said John Fernsler, a partner in the law firm of Reed Smith Shaw & McClay in Pittsburgh. "There's going to be growing pressure on banks to make sure these sites get cleaned up."
The new rule, from the Department of Housing and Urban Development and the Environmental Protection Agency, forces lenders to give potential buyers any record or report about the use of lead-based paint on a property. It also gives buyers 10 days to inspect for lead-based paint before the purchase becomes final.
Lenders must also give potential buyers a government pamphlet explaining the dangers of lead-based paint.
An estimated 27 million U.S. households contain lead-based paint, and most banks have borrowers living in affected properties. Though foreclosures are rare, the rule pertains to so many buildings that it must be addressed, Mr. Fernsler said.
Elizabeth Ward, vice president at Bank of the West, Walnut Creek, Calif., said banks should focus on multiunit properties, like apartment complexes.
Mr. Fernsler said cleanup costs at contaminated sites could exceed $1,000, but the penalties for inaction could be much higher. Banks can be fined up to $10,000 per day for "willful and repeated" late disclosures, he said. However, he added, regulators have said they would be lenient in the rule's first months.
Banks also can get hit with costly lawsuits from borrowers on contaminated property. The family of two children poisoned by lead paint sued Plymouth Home National Bank after buying a house from the now-defunct bank. The Federal Deposit Insurance Corp., acting as receiver for Plymouth Home, settled the claim in 1993 for $2.1 million.
Compliance experts said banks can take several steps to protect themselves. Carl M. Cowart, vice president at Wachovia Corp., Winston- Salem, N.C., said all sales contracts should tell customers of their right to know about lead-paint problems.
Also, Ms. Ward said, extensive training can help prevent bankers from making careless mistakes, like forgetting to make certain disclosures.