EBA JOURNAL Winter 2022 | Volume 7, Issue 1 - Taking Steps and Moving Forward - Environmental Bankers Association
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EBA JOURNAL
Winter 2022 | Volume 7, Issue 1
Taking Steps and Moving Forward
EBA Journal – Winter 2022 Edition
EBA and Authors Copyright
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Volume 7, Issue 1, January 2022
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including but not limited to information found EDITOR/ COMMITTEE CHAIR
through any links or references to resources,
case studies, projects and/or services Ruxandra Niculescu
referred to within these resources.
COMMITTEE
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Magazine | Page 1
EBA Journal – Winter 2022 Edition
2022 Board of Governors
President
David Lambert, Wells Fargo
Vice President
John Rybak, Truist Bank
Secretary
Fred McDonald, Popular Bank Treasurer
Mary Clare Maxwell, Chase Bank
Membership Committee Chair
Onamia Chun, First Citizens Bank Conference Committee Chair
Rita Wiggin, First Bank
Risk Management Chair Legal/ Bank Regulatory Chair
Caitlin Lozano, Rockland Trust Marty Walters, First Citizens Bank
Technical/ ASTM Chair Government Programs/
Georgina Dannatt, Bank of Emerging Issues Chair
the West Jay Bowden, US Bank
Affiliate Chair
Bill Tryon, Partner Engineering Affiliate Chair
and Science Sean Leary, GZA
Thank you for your service to the EBA!
2
EBA Journal – Winter 2022 Edition
Table of
Contents
Where Do We Go From Here? 5
A message from the EBA President, David Lambert.
The Value of EBA Membership 6-7
A look at how the EBA provides value to members.
2022 Market Outlook 8 - 11
Setbacks and Resets in the New Year as Lenders
Look Ahead with Optimism
No Further Action Letters - A Trap for the
Unwary 12 - 13
Ensure a thorough investigation has been
performed to address all possible contamination.
Legal Risks Related to Foreclosure 14 - 20
Prior to foreclosing on property and becoming the
owner, lenders must carefully identify and evaluate
environmental issues.
“All” Means “All” 21 - 22
Recent Case Underscores Need for Strict
Adherence to EPA Requirements for All Appropriate
Inquiries
3
EBA Journal – Winter 2022 Edition
Table of
Contents
An ASTM Standard for Climate
Resilience 23 - 25
Progress Report
Enhance and Improve Your City
Directory Research 26 - 27
Understanding the Resource
PFAS CORNER 28 - 29
Key takeaways from the October 2021
webinar
Environmental Justice
Whitepaper 30 - 35
Environmental Justice and Potential
Regulatory Impacts on Commercial
Lenders
Just for Laughs 36
Industry comic strips from Ruxandra
Niculescu
EBA Committee Corner 37
Get involved with EBA Committees in 2022
4
EBA Journal – Winter 2022 Edition
I am excited to assume the EBA Presidency alongside a very talented Board of
Governors. The new Board includes a diverse mix of seasoned veterans and new
faces. Congratulations to those recently elected/appointed Governors and those
continuing their terms. (see full list on page 2)
A clear result of the EBA’s efforts to promote diversity, equity, and inclusion is the equal
representation by both women and men on the new Board of Governors. We are
Where Do We Go From Here?
excited to collaborate in an open environment as we govern into the future.
I would also like to take this opportunity to thank outgoing Governors Bill Sloan, Jan
A Message from the President
Sheinson, and Michael Cole for their years of service and leadership! Under Bill’s
leadership, we became a more financially sound organization and are now positioned
to take advantage of strategic opportunities, an especially significant accomplishment
given the headwinds presented by the pandemic over the past nearly two years.
So, where do we go from here to take advantage of strategic
opportunities and execute on a late-stage/post-pandemic EBA
business model?
First, we will make every effort to return to an in-person conference in June 2022 in
Charlotte, NC. I think I speak for the majority when saying I have dearly missed the
community of in-person EBA events - a core value of the EBA! As such, annual in-
person conferences will remain a mainstay of EBA’s business model going forward
(provided it is safe to do so).
Second, the last two years of virtual conferences have taught us important
lessons. Virtual conferences and webinars are powerful tools to bring educational
content to a bigger audience within banking and affiliate organizations, to encourage
and include future EBA leaders, and to drive interest in the organization. For these
reasons, the virtual conference and webinar offerings will become an important part of
the business model moving forward. We will focus on increasing the value to
membership by expanding the depth and breadth of educational and professional
development opportunities and improving the quality of content.
Finally, in an effort to increase bank/lender membership, we will be rolling out a
promotional membership campaign for our financial institutions in 2022. Our goal here
is to increase the reach of EBA and further position the organization as THE Industry
Leader. Look for more information on this topic over the next few months.
As we transition to this new business model, we will look for every opportunity
to increase the value to membership and sponsors, including trying new things, and
EBA President adapting to change.
David Lambert In closing, on behalf of the Board of Governors, I want to personally thank all the
sponsors of the Winter Virtual Conference - your partnership is critical to our continued
success. To all the volunteers of the EBA, thank you for all your important
contributions. I look forward to seeing you at the Winter Virtual Conference, and in-
person at the Summer Conference in Charlotte!
David Lambert
EBA President
5
EBA Journal – Winter 2022 Edition
The Value of EBA Membership
Ruxandra Niculescu, CEO, Geographic Services Inc.
Although it may not always seem obvious, there is great value in being an EBA member.
There are issues we deal with on a daily basis that make our work harder than it has to be;
things that drive us crazy. Maybe it’s an email you dread opening, or a phone call that
makes you groan. Preparing yourself for the impending headache you plunge forward
because there’s nothing you can do about it.
If that resonates even a tiny bit, know that there is something you can do. We all struggle
with overcoming hurdles at work, and sometimes, the only thing holding us back is not
having the necessary resources at our fingertips. More often than you might think, there are
others right here within the Environmental Bankers Association (EBA) that are likely dealing
with the same frustrations.
We’re all familiar with the wealth of information available through EBA, but what we don’t
always take advantage of is the fact that we are an organization of industry experts and
professionals, and we don’t always realize the strength that lends to addressing struggles
within our organizations.
In July of 2021, EBA held one of its regularly scheduled Risk Management (RM) calls, this
one titled Deep(er)-Dive into SBA SOPs 50 10 6, 50 57 2, and 50 55. The RM call was a
follow up to a presentation held during one of the EBA virtual conferences and was intended
to give everyone an opportunity to delve deeper into the SBA’s SOP, ask questions, and,
hopefully, get answers. The discussion was lively, and, at times, got heated. As can be
expected, it was no surprise that not everyone was able to voice their concerns. However,
one question was put into the chat box, that some felt did not get as much visibility as was
warranted.
“What can we do about CDC ordered reports when they don’t meet the lender’s risk
tolerance, but SBA has already approved them?”
The question, while valid, was lost in the flurry of the chat box scrolling text and never made
it to the presenter. Frustration was palpable. One EBA member decided the question really
needed to make it to the SBA. After reaching out to the lender that had issued the question
to make sure it was ok to pass along, an email was sent to the SBA appeals team asking for
further clarification and asking for help on how to address an already approved SBA report.
(continued)
6
EBA Journal – Winter 2022 Edition
(continued) The Value of EBA Membership
By a stroke of luck, the SBA appeals team
was having a meeting, and an impromptu
conference call was held. During the call,
it became clear that the SBA was not
aware that some CDCs were ordering an
environmental report, getting SBA
approval, and then approaching lenders
with the report. This obviously put the
lender in a very uncomfortable situation,
especially if their scope of work was not
consistent with that of the CDC ordering
the environmental report.
Once the issue was identified, an EBA Task Group was quickly assembled, and additional calls
scheduled with the SBA. Options were considered and discarded, including adding a checklist to the
SOP with a line item being “Has a lender been identified?”, and other possible stop gaps. During one of
the calls, there was a minor revelation when it was pointed out that part of the problem lay with PLP
loans, primarily from the California region. Again, options to address the issue were analyzed for a
solution.
Through the EBA Task Group, and in collaboration with SBA, it was determined that the heart of the
issue stemmed from the SBA pre-approval process, which had been implemented as a result of the
COVID-19 pandemic. The SBA had been considering halting the pre-approval process but there was
no urgency to implement a change. When the EBA membership came together, voiced their concerns,
and worked to find a solution, it prompted change. SBA obliged in halting the pre-approval process and
the result was almost instant.
Shockingly, this entire process took only two months. When dealing with a government agency,
instituting change in that short amount of time is no small matter.
The EBA was instrumental in making a change with widespread reach throughout the industry. To their
credit, SBA was more than accommodating in working with the EBA and has since added training
sessions for CDCs and lenders, stressing that collaboration is key for a smooth approval process.
This specific incident was a huge success for all involved, and all it took was someone asking a
question, for the motivated EBA membership to come together and help find a solution. So, the next
time you’re at work and something drives you bonkers, consider whether you can tap into the resources
available through EBA. Sometimes, all it takes is asking a question and having a dedicated support
group.
~
7
EBA Journal – Winter 2022 Edition
2022: Setbacks and Resets in the New Year
as Lenders Look Ahead with Optimism
Dianne P. Crocker, Principal Analyst, LightBox
Given the choppy start to the year, this was a more challenging market update to write than the one I did
for the Summer edition. Typically, the start of a new year brings a round of predictions and optimism—and
2022 is no exception. This time last year, promising news of the long-awaited vaccine pointed to light at the
end of the tunnel, and economic engines benefitted from pent-up demand after months of sheltering-in-
place. Today, the market’s recovery marches onward, but the third quarter Delta variant and fourth
quarter’s omicron remind us that the pandemic is not yet in the rear-view mirror.
Despite uncertainty from the omicron variant and other risks, the forecast of one of rational exuberance, a
combination of optimism led by healthy investment and underwriting activity but tempered by concerns
about the COVID variant’s effect on the market and inflation. Activity across LightBox’s platforms in the
environmental due diligence, valuation, lending, and investment sectors points to positive momentum
moving into 2022, but uncertainty clouds the forecast. How long can the market sustain this pace? Where
are the green shoots? When will the long-anticipated round of distressed assets surface? What about
inflation and interest rates? What risks threaten to derail recovery? Below are my thoughts on how 2021
played out, and the mix of tailwinds and headwinds facing the market in the New Year.
U.S. Property Market Back in a Big Way
In U.S. commercial real estate, there is a wide range of dynamics at play, but the good news is strong
economic growth continues, and property deals, lending and Phase I ESA volume have all rebounded to
pre-pandemic highs. By 3Q21, Real Capital Analytics reported that commercial property sales in the U.S. hit
a record high, increasing 29% above pre-pandemic sales of 3Q19. Worth noting is that the rebound was led
largely by single-asset sales, a better barometer of overall market health than bigger portfolio or entity
deals. By November (the latest data available at press time), RCA reported that “the market is so strong
that the volume through November alone is propelling the year to a record high” even before December
data was in the books. Single-asset sales were $426.4 billion in 2021 through November, just below the
historic high of $437.5b set in 2019.
Wherefore Art Thou, Distress?
Opportunistic investors and fund managers with distressed asset opportunities in their crosshairs for 2021
were largely disappointed. One year ago, 2021 forecasts included aggressive predictions of distressed loan
and property sales trigged by the widespread closures during the early pandemic. For various reasons,
distress has yet to surface in any material way. One key factor is that compassionate capitalism kept
distress at bay. Historic federal relief like the CARES Act provided much-needed relief to tenants and
property owners. In fact, according to Spencer Levy, CBRE’s Global Chief Client Officer and Senior
Economic Advisor, “The landlord/tenant relationship at beginning of COVID was more cooperative than ever
before. They now have more of a partnership relationship which is a cause for optimism in the market right
now.”
(continued)
8
EBA Journal – Winter 2022 Edition continued: 2022: Setbacks and Resets in the New Year as Lenders Look Ahead with Optimism The willingness of lenders to meet borrowers halfway by exercising forbearance and extending or restructuring loans to offer relief to struggling borrowers kept distress levels to date lower than initially expected. Although distressed deals are happening, the price decline expectations have moderated. As a result, distressed asset sales are still minimal. For historical reference, six quarters into the Great Financial Crisis, distressed asset sales represented 7% of the market and eventually rose to a 20% share of the total. In 3Q21, 18 months after the onset of the health crisis, distressed asset sales represented just less than 1% of total property sales. In 2022, distress will likely surface with properties struggling, but forecasters have tempered expectations compared to the start of 2021. Contrary to forecasts early in the recovery, it seems less likely that there will be a systematic decline in CRE prices like we saw after the GFC. Part of the reason is that lenders and investors in general were more well behaved prior to the onset of COVID. The widespread availability of debt capital also means there is less pressure on owners to sell at bargain basement pricing. CRE Lending in the Age of Uncertainty A few trends in commercial real estate lending worth noting. Robust refinancing activity helped compensate for the slower pace of transactions early in 2021, and lending levels have returned to pre-pandemic levels, with the strongest activity in multifamily and industrial. Collections across asset classes remain high, and commercial delinquencies continue to decrease across all property types but loan performance continues to be very property type- and metro-dependent. Also notable is that regional and community banks were the single largest source of commercial mortgage financing in the first half of 2021, capturing 22% of the market as these smaller banks experienced less of a pull-back in lending during the health crisis than their larger counterparts. CMBS originators collapsed in 2020 in the wake of COVID-19 but have now recovered to previous levels. Although the credit market risks of 2020 caused private equity lenders to pull back, they are now actively back in the game. Market Confidence Elevated Based on LightBox’s latest Market Confidence Index, based on a broad survey of commercial real estate professionals across the U.S., the index now stands at 149.2, slightly lower than 154.4 in 2Q21, but still well above the Q2’20 low point of 114.1 (adjusted to an April 2020 baseline of 100). The index tracks overall confidence levels based on results from three key barometers: respondent’s views of the overall CRE market, the pace of their own activity, and staffing plans. While the third quarter results reflect fewer respondents experiencing “significant increases” in their business as the pace of recovery slows, the percentage hiring employees now stands at its highest level since April 2020. Notably, most respondents are operating at full or near full capacity relative to pre-pandemic levels, a significant improvement over mid-2020 results. (continued) 9
EBA Journal – Winter 2022 Edition
continued:
2022: Setbacks and Resets in the New Year as Lenders Look Ahead with Optimism
Cities Remain a Draw Even As Secondary Markets Gain Traction
Today’s market is characterized not only by strong differences across asset class and sub-asset class,
but also by geographic area. One pandemic-led trend with implications for the future of real estate is that
the health crisis drove a migration into smaller, secondary cities. Those cities experiencing the strongest
population bursts will drive redevelopment and investment over the near-term, particularly in secondary
metros in need of infrastructure spending.
The LightBox ScoreKeeper model tracks trends in the volume of environmental due diligence across the
U.S., and its output is widely viewed as an early indicator for where commercial real estate investment
activity is increasing—or losing steam. An analysis of year-end Phase I ESA activity by metro reveals that
the 20 strongest markets in the U.S. last year were led by Las Vegas, Houston, and Miami with growth
well above the U.S. average of 41% growth over 2020. Tampa and Orlando round out the top 5, making
Florida the state accounting for three out of five of the year’s hot spots.
Also notable is that 9 of the 20 strongest metros last year are smaller, secondary metros (denoted with an
* in the accompanying graph). Austin, Nashville, and Raleigh are on the list, and examples of strong
emerging cities that are competing with more traditional magnets for top technology talent, business
headquarters and development dollars.
Interestingly, the three biggest Phase I ESA markets (i.e., New York City, Los Angeles and Chicago) didn’t
make the cut, with growth rates last year of 14%, 18% and 25%, respectively. The data suggests that
smaller markets are recovering very well, and these “new kid on the block markets” (to use a term
Spencer Levy coined) are competing with the larger gateway markets. Levy is bullish on the future of
cities, however, given their draw for live-work-play communities. While dense urban areas experienced an
outflow of residents during the pandemic, “the numbers also support an inflow of educated, productive,
talented professionals, and those are the ones who drive CRE demand,” Levy noted.
10EBA Journal – Winter 2022 Edition
continued:
2022: Setbacks and Resets in the New Year as Lenders Look Ahead with Optimism
The Headwinds and Tailwinds of 2022
The list of tailwinds boosting the market right now starts with the sheer brute power of the U.S.
economy, one that keeps performing no matter what this health crisis throws at it. Also boosting the
market are the healthy levels of debt and equity capital, still-low interest rates and underwriting
standards holding firm at disciplined levels. Strong attention on reuse and redevelopment, especially in
high population growth areas, will drive activity in 2022. As the tone of conversation shifts to the post-
COVID future, the market tone is one of optimism with a nod toward market risks and uncertainty.
On the headwinds side of the ledger, and thoughts of what could derail recovery, first and foremost is
omicron which will likely continue to disrupt market activity well into the first quarter, but ultimately
should prove of little consequence to commercial real estate in 2022 for the year as cases peak and
then decline. The risk posed by new variants or other complicating factors remains, and until we finally
emerge from the pandemic tunnel, the forecast is clouded.
Rising inflation is also a notable 2022 headwind. And while it should start to slow as the year
progresses and inventories are built back up, inflation will remain elevated, increasing the risk that
monetary policy could tighten too quickly, slowing the economy too much.
Third, the Fed is announcing three to four hikes in interest rates this year so rises in the cost of capital
are coming. These increases have been long expected however and most outlooks have already
accounted for a higher rate environmental and some inflation. If rate hikes are larger than expected or
inflation more dramatic, capital markets could start to retreat.
Emerging from the pandemic, lenders, investors and other CRE professionals will be more focused on
technology given increasing pressures on efficiency and accuracy to support property transactions in
an uncertain and competitive market. New best practices are being established as financial institutions
centralize vendor management; jointly procure environmental due diligence, appraisal, and other
underwriting functions; and integrate previously disparate functions. Pricing and turnaround time
pressures for both Phase I ESAs and appraisals continue to be intense, with lenders starting to view
speed more favorably than price as a procurement consideration.
Last, is that climate risk awareness is now the number one issue in commercial real estate, according to
the latest ULI/PwC Emerging Trends report. Bank regulators are turning an eye toward the risk banks
face given the increase in climate-driven events like flooding, wildfires, hurricanes, and tornadoes. First
Street, one of LightBox’s data partners, just completed its first analysis to qualify the dollar value of
commercial real estate at risk from flood, one of the largest national disasters in the U.S. Their results
of the analysis indicate that there are currently 729,999 retail, office, and multi-unit residential
properties at risk of annualized flood damage in the contiguous United States, and the absolute count
of buildings at risk will grow by about 8% by the year 2052 as a result of climate change. The top five
metros with the highest aggregated total structural damage costs at commercial properties are Miami,
New York, Pittsburgh, Boston, and Houston. Climate change is likely to be a strong theme, not just for
2022 but for the next decade as awareness grows and the market recognizes the risk to properties.
Despite concerns about the impact of the omicron variant, inflation, interest rates and other risks,
market barometers point to a choppy but still strong start to 2022 across the environmental due
diligence, lending, and investor segments. The major topics I’m watching are climate risk, technology
adoption as a competitive differentiator, and infrastructure spending, all of which have strong
implications for opportunities in CRE.
~
Ms. Crocker’s bio can be found online at https://www.envirobank.org/page/CrockerBio
11EBA Journal – Winter 2022 Edition
No Further Action
Letters - A Trap for
the Unwary!
Bill Tryon, Chief Strategy Officer – Principal; and Steve Luzkow, Technical Director;
Partner Engineering and Science, Inc.
It can be tempting to hope that a no further action (NFA) letter issued by a regulatory agency is proof
that a thorough investigation has been performed to address all possible contamination at a property
and that related environmental liabilities and limitations can be disregarded when evaluating a
property. In some cases this may be true, but it's impossible to be sure without a deeper dive.
Changes in investigation and cleanup criteria; property use; satisfaction of closure requirements and
continuing obligations; and related impacts on marketability and value can significantly affect
investment and underwriting decisions. Some of these considerations are evaluated within the Phase
I scope of work, but others require an understanding of the overall context of a transaction or even
may even require additional research or inspection.
Whether or not a Phase I ESA classifies the related release as a Recognized Environmental Condition
(REC), Controlled REC, or Historical REC, an evaluation of NFA letters within the context of a specific
transaction is essential to managing long term impacts. EBA members can download more
comprehensive guidance at the EBA website (Tip Sheet 402), but for those short on time, the
following outline should provide a useful starting point.
Documentation
• As a starting point, obtain a copy of the NFA letter and closure report. Copies of prior assessments
such as a remedial action plan can also be useful. Depending on closure requirements, it may also
be necessary to obtain copies of deed restrictions, maintenance plans, inspection records, and
other evidence of post-closure compliance.
• Be sure the NFA letter and closure reports are not in draft form.
• Where activity and use limitations or engineering controls apply, request copies of related
documentation such as title records, management plans, and inspection records.
Contaminants of Concern – Over time, the contaminants considered during evaluation of a
property may change. As a result, the NFA letter may not conform to current requirements.
• Identify contaminants considered at the time of closure.
• Identify contaminants typically considered in similar closure investigations.
• Evaluate whether additional assessment of contaminants not previously considered is warranted.
Media Affected – NFA letters can sometimes be limited to soil or groundwater, and the
consideration of vapor impacts was rare in investigations performed prior to 2000. Documents should
be evaluated to assess the handling of impacts to soil, groundwater, and vapor.
• Review investigation and cleanup activities to verify all appropriate media have been considered.
(continued)
12EBA Journal – Winter 2022 Edition
continued: No Further Action Letters - A Trap for the Unwary!
Cleanup Thresholds – Where concentrations left in place exceed current cleanup thresholds
additional evaluation may be warranted.
• Identify contaminants of concern (COCs) that were considered during closure.
• Identify concentrations of each COC left in place at the time of closure.
• Identify current cleanup thresholds for each COC considered during closure.
• Evaluate whether concentrations left in place exceed current cleanup thresholds.
• Identify current COCs that were not considered during closure and evaluate the need for additional
investigation or cleanup.
Institutional and Engineering Controls (IC/ECs) – NFA letters may not be valid if institutional
controls or engineering are not maintained.
• Review the NFA letter and closure report to identify institutional controls and engineering controls that
are:
• Expressly required as a condition of the NFA;
• Implied based on cleanup to commercial/industrial use; and
• Implied based on other criteria that do not support unrestricted use.
• Evaluate conformance with express and implied IC/ECs.
• When a change in use is proposed, evaluate whether changes are consistent with identified IC/ECs.
Jurisdiction – In some states, more than one agency may have jurisdiction over cleanup requirements.
As a result, an NFA letter may not address all possible requirements that apply to the property. Depending
upon the information available and objectives of the review, an evaluation of additional jurisdictional
requirements may be warranted.
Valuation and Marketability – Since a closure letter is not necessarily a clean bill of health, the value
and marketability of properties can be affected. Appraisers and other market experts may be able to
provide meaningful guidance regarding impacts to the highest and best use, marketing time, etc.
Remaining Areas of Concern – NFA letters typically address specific areas of concern; however,
underlying reports may include information concerning other issues in relation to the property. For
example, an NFA letter for a sump pit may provide no comfort regarding a release from underground
storage tanks in another area of the property; however, groundwater investigations conducted during
closure of the sump pit may be useful in evaluating groundwater impact from the underground storage
tanks.
NFA letters can be incredibly useful in bracketing risks when evaluating properties, but careful review can
be critical to the success of any investment. When in doubt, reach out to your EBA colleagues to talk
through thorny issues. Most of us enjoy the opportunity to dig into issues like this, which can make all the
difference.
13EBA Journal – Winter 2022 Edition
Legal Risks Related to
Foreclosure
Jimmy Kirkland, Partner, Womble Bond Dickinson (US) LLP;
Brenna M. Durden, Shareholder, Lewis, Longman & Walker,
P.A.; and Jessica Crutchfield, Shareholder, McRoberts &
Hartis, P.C.
Lending money on real property and taking a security interest generally does not result in direct lender
liability for contamination that is present on the property unless the lender acts like a property owner or
becomes an operator by participating in the management of the business. Prior to foreclosing on property
and becoming the owner, lenders must carefully identify and evaluate environmental issues and the federal
and state legal requirements that may be applicable to the property and any activities that have been
conducted on the property subsequent to the loan. Lenders can be held liable for contamination on
foreclosed property if they do not carefully follow the requirements contained in the statutes for lenders to
avoid being an owner or operator of the property and document their actions. Additionally, lenders need to
be aware that there are state and federal environmental statutes that impose liability that contain no lender
liability protections. This article, which is part II of a three-part series on foreclosure, will address
frameworks for federal, state and common law liability, and protections available to address liability in the
context of foreclosure.
A. Federal Statutory Liability
CERCLA and secured creditor exemption
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes liability
that is strict (liable without fault) and joint and several (one party can be liable for the entire cleanup) and
applies to any “person” that is a current or former owner of a property where there has been a release of a
CERCLA hazardous substance. Under CERCLA, an owner or operator of a property can be held liable for
remediation costs even if the contamination pre-dated its ownership or operation on the contaminated
property.
CERCLA includes an exemption from liability for secured creditors (lenders) that provides liability
protection for both pre and post foreclosure of collateral property. 42 U.S.C. § 9601(20)(A). This exemption
is applicable if the secured creditor carefully follows the requirements set out in the statute and
regulations. Failure to follow these requirements can put a lender in the position of being solely
responsible for all costs of site cleanup. CERCLA also provides an exclusion for petroleum which is often
associated with collateral properties. 42 U.S.C. § 9601(14). Since petroleum is not a CERCLA hazardous
substance there is no CERCLA liability for releases of petroleum and petroleum products. However, the
CERCLA petroleum exclusion may not apply to petroleum that that has been contaminated with hazardous
substances or waste petroleum such as used oil, or constituents of petroleum.
Prior to foreclosure, lenders can be held liable under CERCLA (and other environmental statutes) when
they are found to act more like an owner or operator by participating in the management of the property.
42 U.S.C. § 9601(20)(F). Generally, as long as the lender does not participate in the management of the
site, the lender will not be liable. The lender will not lose protections if it engages in financial or
administrative activities of the borrower’s operations. 42 U.S.C. § 9601(20)(G). A lender must not exercise
decision-making over day-to-day environmental compliance that results in taking responsibility for
hazardous substances.
(continued)
14EBA Journal – Winter 2022 Edition
continued: Legal Risks Related to Foreclosure
The CERCLA secured creditor exemption also provides that after foreclosure the secured creditor is not
liable under CERLCA as an owner, provided the lender takes “reasonable steps” to divest itself of the
property “at the earliest practicable, commercially reasonable time, on commercially reasonable terms.”
Generally, a lender can maintain business activities and close down operations at a property and take
actions to preserve the property for sale. 42 U.S.C. § 9601(20)(F)(ii). EPA guidance states the property
should be divested within 12 months of foreclosure. Efforts to sell the property should be carefully
documented. Additionally, a lender must not reject a bona fide offer of fair consideration or outbid
other bidders.
See https://www.epa.gov/sites/default/files/documents/lender-liab-07-fs.pdf for more information.
Resource Conservation and Recovery Act
RCRA provides comprehensive regulation of the handling, storage, treatment, transport, and disposal
of hazardous and nonhazardous waste, including petroleum-related materials. 42 U.S.C. §6901, et seq.
RCRA does not include a broad liability exemption for lenders for hazardous waste activities. Most of
the RCRA hazardous waste regulations are not likely to apply to lenders unless they engage in
managing the waste operations at a facility. However, if the facility that is being foreclosed on
generates hazardous waste which will be present at the time of foreclosure, the lender may be
responsible of the proper management and disposal of those wastes.
RCRA contains a secured creditor exception for underground storage tank (“UST”) liability which
provides that a secured creditor who holds indicia of ownership primarily to protect a security interest,
does not participate in the management of an UST and is not engaged in petroleum production, refining
and marketing is not an owner or operator. 42 U.S.C. 6991b(h)(9). The liability protection is limited to
USTs containing petroleum products and does not extend to USTs used to store hazardous substances
or hazardous wastes (which would fall under CERCLA). Post foreclosure, the lender will not be
considered an operator if a third party assumes control of or takes responsibility for the daily operation
of the UST system and complies with UST regulatory requirements. 40 C.F.R. §280.230(b)(1). However,
if the lender assumes responsibility for the operation of the USTs, to maintain the secured lender
exemption the lender must empty the UST system within 60 calendar days following foreclosure and
“permanently” or “temporarily” close the UST or UST system to avoid qualifying as an UST operator. 40
C.F.R. §280.230(b)(2) and (3).
RCRA also contains a citizen suit provision. Any “person” is authorized to bring a lawsuit to obtain a
court to address contamination that “may present an imminent and substantial endangerment to health
or the environment.” 42 U.S.C. §6972(a)(1)(B). Such a lawsuit may be brought “against any person . . .
who has contributed or who is contributing to the past or present handling, storage, treatment,
transportation, or disposal” of waste. Id. The citizen suit statute contains no exemption for lenders.
Although courts have broadly interpreted the phrase “contributing to,” the cases hold there must be
some affirmative “causal relationship” or “causal connection” between the contamination and the liable
party. See, e.g., Forest Park National Bank & Trust v. Ditchfield, 881 F.Supp.2d 949, 973 (N.D.Ill. 2012);
Sycamore Industrial Park Associates v. Ericsson, Inc., 546 F.3d 847, 854.
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15EBA Journal – Winter 2022 Edition
continued: Legal Risks Related to Foreclosure
Clean Water Act
The Federal Clean Water Act (“CWA”) regulates the discharge of pollutants into the Waters of the United
States unless a permit has been obtained. The type of permits required under the CWA include permits for
industrial discharges, stormwater permits and discharges to jurisdictional wetlands. Stormwater permits
and Section 404 permits are required for developers that engage in land disturbing activities and activities
that impact wetlands. Failure to comply with the CWA and permits can result in significant civil penalties
and civil suits by regulatory agencies and citizens.
The CWA does not contain a lender liability exemption. Therefore, foreclosing lenders are responsible for
complying with the CWA regulations and permits. The lender may also be responsible for pre-existing
violations. This may be a particular consideration for construction projects. If there are CWA requirements
for collateral, lender should evaluate compliance and understand cost and steps to get into and maintain
compliance. Lender will likely avoid holding CWA permits and may consider facilitating permit transfer
directly to a purchaser without taking title or involving a receiver to hold permits.
The CWA is implemented by all states except Idaho, Massachusetts, New Hampshire, and New Mexico.
Many states have issued guidance discussing lender liability under the CWA on foreclosed properties. For
example, in Georgia, a lender that forecloses on a property that is a construction site must file a Notice of
Intent to be covered under the general stormwater permit by the earlier of 7 days prior to beginning work
on the construction site or within 30 days of acquiring title. See Georgia General NPDES Permit No.
GAR100001 – Construction Activity at https://epd.georgia.gov/forms-permits/watershed-protection-
branch-forms-permits/storm-water-forms/npdes-construction-storm. Prior to foreclosure, a careful
review of all state permit and regulatory requirements should be conducted to determine and evaluate the
obligations of a lender that forecloses on property subject to the Clean Water Act.
Other Federal Statutes
There is no secured creditor protection under the Toxic Substance Control Act for polychlorinated
biphenyls ("PCBs") or for complying with the lead-based (“LBP”) disclosure rules
B. States Laws
Many states have enacted state environmental laws that impose environmental liability risks similar to
CERCLA for lenders who foreclose and repossess property used to secure loans. CERCLA and RCRA do not
preempt state laws governing the cleanup of hazardous substances that may be more stringent or have a
different liability scheme than the federal requirements.
The following summarizes a few examples of state liability schemes:
CALIFORNIA
The California equivalent to CERCLA is the Hazardous Substances Account Act (“HSAA”) codified at
California Health & Safety Code, Section 25300, et seq. Generally, lenders who maintain indicia of
ownership primarily to protect a security interest or who acquire property through foreclosure or a deed in
lieu are exempt from: statutory liability; being required to take removal or remedial action; and paying
penalties or fines (subject to certain conditions). The exception to the liability, set forth at §25548, HSAA,
is triggered when a lender “made, secured, held or acquired the loan or obligation primarily for investment
purposes.” Section 25548, HSAA, further states that “the exemption will not protect lenders or fiduciaries
in transactions that are structures for the purpose of evading liability for hazardous material
contamination.” Generally, active marketing to divest the asset should be the standard for lenders to avoid
the application of this exception.
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FLORIDA
In addition to defenses generally available in Florida to all persons for acts of war, of government, of God or
of third parties (provided certain caveats can be established) for hazardous substances and hazardous
wastes as set forth in Chapter 403, Florida Statutes, express lender liability defenses are set forth in
Chapter 376, Florida Statutes for “petroleum” and “petroleum products” contamination (§ 376.308(3), F.S.).
The defenses include: (1) a lender serving as a trustee, personal representative or other type of fiduciary,
provided the lender has not otherwise caused or contributed to the discharge; (2) a lender which holds
indicia of ownership in the site to protect a security interest and has not engaged in decision-making
control over the site operations (particularly with respect to the storage, use or disposal of petroleum or
petroleum products) and has not caused/contributed to the discharge, although the lender may compel the
borrower to comply with environmental regulations and may act to prevent or abate a discharge; and (3) a
lender which has foreclosed and seeks to divest the asset at the earliest possible time, provided the lender
has not undertaken management activities beyond those necessary to protect its financial interests, to
effectuate compliance with environmental regulations, or to prevent or abate a discharge.
GEORGIA
The Georgia Hazardous Site Response Act excludes from the definition of owner or operator any person
who holds indicia of ownership primarily to protect a security interest in a facility or who acts in good faith
solely in a fiduciary capacity provided such persons did not actively participate in the management,
disposal or release of hazardous wastes, hazardous constituents or hazardous substances from the facility.
Ga. Code Ann. §12-8-92(7) There is no definition of what constitutes “actively participating in
management” nor are there any rules for foreclosing on property.
ILLINOIS
Under the Illinois Environmental Protection Act (Illinois Act). 415 ILCS 5/22.2, et seq. liability is generally
more limited because only the state, and not private parties, can bring cost recovery claims. the Illinois Act
provides protection for lenders through its definition of “owner or operator.” Rather than a secured creditor
exemption, the Illinois Act provides that a “financial institution” is liable only under a limited set of
circumstances. Additionally, qualifying lenders under the Illinois Act will be exempt from Illinois Act liability
if they qualify for the Asset Conservation Act’s exemption from CERCLA.
MISSOURI
Missouri’s Debtor-Creditor Relation law includes liability protections similar to CERCLA for secured
creditors. Prior to foreclosure, lender can generally work to protect the security interest, but not as a
manager of the property. Mo. Rev. STAT. § 427.021 (2)(d) (1994). Participating in management does not
include taking title to the property through foreclosure or monitoring the business. Mo. Rev. STAT. §
427.021 (3) (1994). After taking title, the lender or representative does not take on responsibility for clean-
up costs, response costs, or third-party liability arising from contamination caused prior to title vesting in
the lender or after so long as the lender does not “knowingly or recklessly” cause further contamination or
allow another party to further contamination knowingly or recklessly. Mo. Rev. STAT. § 427.031 (2) (1991).
Finally, the lender must make “reasonable efforts to resell” the property. Id. at 427.031 (3).
WISCONSIN
Lenders and representatives that meet the conditions established in Section 292.21, Wisconsin Statutes are
not responsible for the remediation of a hazardous substance discharge per s. 292.11, Wis. Stats.,
Hazardous Substance Discharge Law commonly known as the "Spill Law." Lenders can obtain an
exemption from the Spill Law, and potentially other environmental laws, if they comply with the terms and
conditions listed in Wis. Stat. § 292.21.
Note that state equivalents to RCRA, CWA and other liability schemes may not contain secured creditor
exemptions.
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STATE PROPERTY TRANSFER STATUTES
Lenders need to be aware that a number of states have enacted statutes that affect the transfer of
industrial transactions. These statutes generally require the disclosure of environmental conditions or
activities when the property is transferred. These statutes may also require certain actions to be taken
such as investigation of property conditions, a Phase I and submission of reports to the state
environmental agency. For example, under Massachusetts law, a foreclosing lender is expressly
required to take certain actions if it obtains knowledge of a release of hazardous substances after it
takes title to real property. Other states with property transfer statutes include: New Jersey,
Connecticut, Indiana, Illinois, Michigan. These statutes can be very complex so lenders should consult
with legal counsel to ensure compliance and consider the requirements for a future buyer of the
property, even if the lender is exempt from such requirements.
LOCAL AUTHORITIES
Lenders should also be aware that some states delegate authority to local agencies. When evaluating
environmental risk, lenders should have a clear understanding of which agency has jurisdiction and the
applicable systems and requirements.
C. COMMON LAW
In addition to statutory liability, lenders should consider the risk of common law causes of action
including private nuisance, trespass, and negligence. Private nuisance is essentially an unreasonable
interference with another’s use and enjoyment of land. Similarly, trespass is a physical, intentional, and
voluntary unauthorized entry onto plaintiff’s property. Nuisance and trespass claims do not require the
defendant to be at fault. Negligence requires that the defendant owed a duty of care to the plaintiff,
defendant breached the duty, and the breach caused plaintiff to suffer injury. A classic example of a
common law environmental claim arises from a property causing contamination to migrate onto a
neighboring property, or a tenant claiming personal injury due to elevated contamination at a leased
property. Many poly- and perfluoroalkyl substances cases are being brought under common law
theories where states have not developed statutes. By its nature, common law liability can be less
predictable and harder to quantify than statutory liability. Lender may consult litigation counsel to
better evaluate common law liability.
I. Defenses and Protections
A. CERCLA Defenses
In addition to the secured creditor exemption available to lenders set forth above, most state and
federal environmental statutes contain narrowly drawn defenses to environmental liability that are
generally limited to (1) an act of God; (2) an act of war; (3) an act or omission of a third party under
certain circumstances. The third party defense is the most common defense. To establish this defense,
the defendant claiming the defense must provide evidence that the release was caused by an unrelated
third party; the defendant exercised due care with respect to the hazardous substance concerned; and
the defendant took precautions against foreseeable acts or omissions of any such third party and the
consequences that could foreseeably result from such acts or omissions.
In addition, the bona fide prospective purchaser (“BFPP”) defense may be available to a person
acquiring property that knows or has reason to know of contamination if they complete all appropriate
inquiry (a Phase I ESA) prior to acquiring the property and satisfy continuing obligations which includes
exercising appropriate care with respect to hazardous substances found at the property by taking
reasonable steps to stop any continuing release and prevent any threatened future release. See
https://www.epa.gov/enforcement/common-elements-and-other-landowner-liability-guidance.
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18continued: Legal Risks Related to Foreclosure EBA Journal – Winter 2022 Edition
B. Common Law Defenses
With regard to common law claims, a defendant can both show that plaintiff failed to satisfy the element
of the cause of action and assert various defense. Defenses to common law claims include, among
others, statute of limitations, preemption, and for negligence, contributory negligence. Statutes of
limitations generally range from two to five years; however, the limitations period may not begin until the
nuisance or trespass cease. A defendant may claim that the plaintiff’s claim is preempted by the
defendant’s compliance with a federal statute. However, many federal laws include language that the
statute is not intended to preempt state laws, so in the absence of a direct conflict the federal law can
likely not be used as a shield to liability. The defense of contributory negligence bars recovery for a
plaintiff to the extent the plaintiff is responsible for the injury suffered. This defense may be available
for a claim made by a plaintiff that is also at fault to some degree, such as a tenant.
C. Cleanup Funds
In addition to considering defenses to direct liability as owner of property, lenders should identify and
evaluate resources to address the impact to the value of the property caused by contamination,
including cleanup funds. Insurance could include state-run programs for leaking petroleum USTs or dry
cleaners, or private insurance.
State cleanup funds vary widely. Some states have well-funded programs, while others are non-
existent. According to EPA, 36 states currently have active funds to pay for new and past petroleum
UST releases. https://www.epa.gov/ust/state-financial-assurance-funds Generally, claimants for funds
must be a current or past owner or operator of a UST. Many programs apply to tanks in use during a
certain period of time. Some funds do not cover releases that occurred before the UST was covered by
the state fund. Programs have limited funds and most rank cleanup priority such that it may be years
before a case that is eligible and accepted into the fund is actually cleaned up. The fund will generally
pay for corrective action costs including investigation, remediation, and monitoring. Available funds for a
cleanup are capped and a deductible is generally applicable.
Similar to petroleum USTs, many states have funds to cleanup contamination from dry cleaners.
According to a 2016 Environmental Bankers Association presentation, 13 states have dedicated dry
cleaning funds. The dry cleaner fund may require that the dry cleaner has been registered with the state
regulator, or it may only be available to active dry cleaners. Some programs provide reimbursement for
work performed; other have state-led cleanup. Like petroleum UST funds, funding is limited and
receiving funds or cleanup happening may take years. Needless to say, a fund may be theoretically
available, however, unless a site is already accepted into a fund with cleanup underway, a lender may
not want to rely upon the fund to take action in the near future.
D. Insurance
In addition to protections through state cleanup funds, environmental insurance may be in place to pay
for cleanup. Since “you cannot insure a burning building” the policy will generally be one placed at
origination or as part of the borrower or a tenant’s risk management policy. In other words, it is too late
to insure the risk once a problem is confirmed. Two main types of policies may be available – a policy in
which lender is the first named insured (and borrower has no coverage) (“lender” policy) and a policy in
which borrower is the first named insured and lender is an additional named insured (pollution legal
liability or “PLL” policy).
A lender environmental insurance policy will generally pay for cleanup if there is a loan default and
contamination at the property. There is also generally coverage for direct third party bodily injury and
property damages claims, attorney fees and defense costs, as well as ancillary coverages. Some
policies pay the lesser of the cleanup costs or the outstanding loan balance (up to the policy limits).
Some carriers will agree to assign the policy to a purchaser of the note if the lender is doing a note sale
rather than foreclosing; the coverage may facilitate the note sale without requiring lender to foreclose.
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19continued: Legal Risks Related to Foreclosure EBA Journal – Winter 2022 Edition
A PLL policy is typically triggered merely by contamination (no loan default is required), however some policies are
modified by endorsement to require additional triggers for coverage. For instance, a “government mandate trigger”
requires a directive to cleanup contamination rather than only the presence of contamination. These polices also
provide coverage for third party bodily injury and property damages claims, attorney fees, defense costs, and
ancillary coverages. Since the borrower is generally the first named insured on the policy, the borrower must make
the claim. However, many policies placed with lenders in mind include an endorsement assigning the policy to lender
upon default, so that lender is not at the mercy of the disgruntled borrower and lender can control the claim
All policies have exclusions, deductibles, and limits. Therefore, lenders should make a claim on the policy and ensure
it is accepted by the carrier and that the likely cleanup costs have been evaluated in light of the limits prior to taking
the step of foreclosing.
E. Receiver and SPE
When borrowers default on loans, lenders are often concerned about risks associated with the property resulting
from the mismanagement of the property, loss in value of the collateral property and potential environmental liability.
Many lenders are reluctant to foreclose on properties with environmental issues out of concern for becoming a
responsible party and becoming liable as an owner or operator. It is common early in the foreclosure process for
lenders to seek a solution for avoiding potential environmental liability by requesting a court to appoint a receiver to
take control of the property away from the borrower. A receiver will manage, control, protect and preserve
collateral for the benefit of both the borrower and the lender. A receiver typically has authority to conduct
inspections of the property, to assess the environmental conditions and to implement remedies. For example, a
receiver can remediate the property to make it marketable prior to foreclosure and/or to have the receiver sell the
collateral in order to avoid the lender being on the chain of title and becoming a party liable under environmental
law. Receivers act as an officer of the court and are not subject to liability as an owner or operator. Additionally, the
lender is not liable because it is also not an owner or operator of the property.
One lender advised that their Asset Resolution Group has used receiverships in the past, albeit on rare occasions for
numerous reasons which include maintaining and protecting its public image, logistics, and/or liability. There may be
situations where taking title to a property could hurt the lenders reputation or the lender is a high-profile civic
organization, and active in the community, and therefore a receiver is put in place to manage and liquidate the asset.
There are also situations where the property is significantly contaminated, and the lender does not want to be in the
chain of title and/or have concerns about direct liability. A receiver can be effectively used to manage the risks,
work with regulatory agencies, and dispose of the asset. One lender advised of a construction loan default about
ten years ago that resulted in numerous issues that a receiver would have been a great approach for the lender.
The lender took title to a 400 plus acre subdivision construction project, with almost 200-acres clear cut. The
borrower abandoned the property, leaving the land scared from the shutdown of the construction project. There
were over 40 storm water catch basins onsite, and very little vegetation to hold the soils in place. A local
motorcycle shop posted a trail map to this construction project, and every time the lender toured the property there
were fresh tracks from nearby kids using the catch. This site needed to be secured, access restricted, and security
hired to patrol in ATVs to properly manage the site. The bank owned this site for approximately a year, and
fortunately gained control of the property, the erosion issues, and brought the site into compliance with regulators.
But this would have been a great situation to have a receiver assigned to further protect the bank, if we only knew
what we really had before taking title.
Another option to avoid liability is for a lender to foreclose and transfer title to a special purpose entity which is a
lender affiliated entity. The lender will typically continue to hold the security instrument. Unless the loan was also
transferred to the special purpose entity, it may not qualify for the CERCLA lender protections since it does not meet
the definition of a lender under CERCLA.
F. Other Protections
Lender should be sure to review the loan documents to determine what contractual provisions and recourse are
available such as environmental indemnities, personal guarantors, and insurance requirements.
II. Conclusion
When facing foreclosure, navigating environmental risk can seem daunting to the lender. Risk cannot be eliminated,
however, most loan document and many statutes provide strong protection to lender from direct liability. Evaluating
the impact of contamination on the value of the collateral is often as much of a challenge as evaluating direct
liability. Lenders should be prepared to engage a strong legal and environmental consulting team to systematically
evaluate both the environmental legal and business risks. Accordingly, in part III of this three-part series on
foreclosure, environmental consultants will provide guidance on pre-foreclosure diligence.
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