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Insight EPA’s New Standard For Environmental Assessments and Applicability to Secured Lenders

By Sarah M. Reed,

CERCLA’s Applicability to Secured Lenders

Under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), liability is imposed for environmental cleanup on owners and operators of contaminated property, and imposes such liability even if that individual or entity had no involvement with causing the environmental contamination. Banks and lenders that hold mortgages on property as a security interest are exempt from liability under CERCLA, if certain criteria are met. CERCLA contains a secured creditor exemption that eliminates liability for lenders who hold ownership in a property primarily to protect their security interest in that property, provided they do not participate in the management of the property.

Generally, a secured lender participates in the management if the lender exercises decision-making control over a property’s environmental compliance, or exercises control at a level similar to that provided by a manager of the property. Participation in management does not include actions such as property inspections, requiring a response action to be taken to address contamination, providing financial advice, or renegotiating or restructuring the terms of the security interest. In addition, the secured creditor exemption provides that simply foreclosing on a property does not result in liability, provided the secured lender takes reasonable steps to divest itself of the property at the earliest practicable, commercially reasonable time and terms. Generally, this allows secured lenders to maintain business activities, so long as the property is listed for sale shortly after the foreclosure date, or at the earliest practicable, commercially reasonable time.

Thus, it is still possible for a secured lender to be liable for contamination at a property, if it is found to be acting as either an owner or operator of a contaminated property by participating in the property management. Also, even if a financial institution qualifies for the secured creditor exemption from CERCLA liability, it is still possible that a particular state may have stricter laws governing lender liability for contaminated properties.

EPA’s New Standard for Environmental Assessments

An “All Appropriate Inquiries” (AAI) is the process of evaluating a property’s environmental conditions and assessing potential liability for contamination. The AAI rule primarily applies to borrowers who want to claim protection from CERCLA liability. Although lenders are afforded protection from CERCLA liability through the secured creditor exemption, lenders may choose to further protect themselves from loss (due to decreases in the value of the property) by requiring that borrowers qualify for liability protections. Lenders therefore may want to encourage their borrowers to properly conduct an AAI prior to acquiring a property using the new standard discussed below.

On December 20, 2013, the EPA issued its final rule allowing the new ASTM E1527-13 be used to meet the AAI standard under CERCLA. This rule has an immediate effective date, so all assessments going forward may use the new standard. Additionally, the EPA recommended the ASTM E1527-13 be used rather than the previously accepted ASTM E1527-05.  In fact, the EPA indicated that it will propose another rule removing the ASTM E1527-05 standard as an acceptable approach for conducting an AAI.

One of the important issues raised with the new standard relates to the evaluation of vapor migration as part of the AAI process. Such evaluations have implications for buyers, sellers, and lenders since vapor issues have been difficult to rule out and time consuming to investigate and resolve. Vapor migration issues will need to be addressed as quickly as possible in order to allow buyers and lenders time to evaluate any risks and develop risk mitigation steps.

For more information, please contact our banking group  or call 208.344.6000.

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