A NEW JERSEY LAW THAT PROVIDES banks with limited protection from pollution liability has not sparked the anticipated burst of commercial and industrial lending. In fact, the state has not seen any significant increase at all.

The New Jersey Bankers Association says it's because Senate bill S 577, which was signed by Gov. Jim Florio May 7, was weakened by a related piece of legislation. S 1070, which was enacted on June 16, does not afford an explicit shield for banks.

Bankers had been lobbying for a change in the state's Spill Compensation and Control Act, under which foreclosing banks were liable for cleanup costs regardless of their actual responsibility for contamination.

S 577 amended the spill law with language ensuring that the banks would not be held liable as long as they did not manage, or materially engage in, the businesses at foreclosed real estate.

It is based on a U.S. Environmental Protection Agency shield, and was strongly supported by the state bankers association. However, that group's communications director, Curt Schaub, argues that shield might be ineffective because of S 1070, the Industrial Site Recovery Act. It amends the Environmental Response, Compensation, and Recovery Act.

That law had required owners -- regardless of responsibility -- to clean up sites before they could be sold. S 1070 was intended to offer the same kind of shield as S 577, enabling a bank to sell foreclosed real estate without paying for a cleanup. But last-minute amendments "put in language that's extremely vague on the |innocent landowner' definition, and that means it'll eventually be tested in the courts," says Mr. Schaub.

"And no one wants to be the first one tested," he added.

Hudson United Forges Ahead

Thomas Shara, senior vice president of Hudson United Bank, Union City, agrees that he would not want to be the first one tested. However, he is satisfied that the shield, along with due diligence, will keep his bank out of trouble.

Hudson United, a $1.1 billion-asset bank, is located in the midst of New Jersey's industrial corridor. It has funded two of three loans for sites with potential problems, and is committed to a third.

While all three are commercial sites, "it's mainly asbestos and lead abatement in residential situations, not hazardous waste, that we've seen come up as environmental problems."

Mr. Shara believes that the state's stagnant economy largely is to blame for the failure of S 577 to spur lending. Whatever the reason, the state is trying to make sure bankers are at least aware of the new shield.

"After the governor signed the bill, our commissioner of banking reached out to the lending community to find out what loans would be made," says Mary Kay, Banking Department chief of staff. "At this point, we haven't heard back." Ms. Kay adds, "We believe S 577 was a step in the right direction, and we hope that banks, like Hudson United, will start lending again once the word gets out."

Also hopeful is Gov. Florio, who as a congressman helped author the federal Superfund law and earned a reputation as one of the toughest environmentalists on Capitol Hill.

He reportedly had strong misgivings about signing S 577 but eventually was persuaded that it might help the state's economy without unduly prolonging pollution at commercial sites.

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