EBA TIP SHEET: SBA Lending & Liquidation 02/2018 (revised) Table of Contents

Transcription

1 EBA TIP SHEET: SBA Lending & Liquidation 02/2018 (revised) Table of Contents I. SBA Philosophy... 1 II. Relevant SBA SOPs... 1 III. SBA Lending: 504 v 7(a)... 2 IV. Due Diligence Determination... 2 V. Document Types... 3 VI. Special Use Facilities/Other Considerations... 5 VII. Lending on Contaminated Properties (SBA SOP (J) Subpart B, Section III, G.)... 5 VIII. Key Considerations... 7 IX. Liquidation & Servicing... 8 X. Disclaimers APPENDIX A: SBA Process Flow Charts APPENDIX B: Example Appeal Templates I. SBA Philosophy U.S. Small Business Administration (SBA) was created to aid, counsel, assist, and protect the interest of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation. The SBA helps Americans start, build and grow businesses. Since 1953, SBA has delivered millions of loans, loan guarantees, contracts, counseling sessions and other forms of assistance to small businesses. II. Relevant SBA SOPs 1. Lender & Developer Company Loan Programs SOP (J) The environmental risk management process for SBA Lending is outlined in: Subpart B and C, Section III Loan Servicing & Liquidation SOP The environmental risk management process for 504 Servicing & Liquidation is outlined in: Chapter (a) Loan Servicing & Liquidation SOP The environmental risk management process for 7(a) Servicing & Liquidation is outlined in: Chapter 5 1 of 11

2 III. SBA Lending: 504 v 7(a) Loans a) Provides financing for major fixed assets such as equipment or real estate. b) For each project, a commercial lender typically holds the 1st lien position, and SBA is typically in 2nd lien positon (the 504 loan); c) 504 Projects are typically structured as follows: 50% lender (no SBA guaranty); 40% SBA; 10% borrower injection; d) 504 loans are originated by a CDC (Certified Development Company). A CDC is a nonprofit corporation set up to contribute to the economic development of its community; e) 504 loans are backed by debentures, and SBA reviews and approves loans and debentures prior to sale; f) Debentures are pooled and sold to investors by a Central Servicing Agent; g) In the event of default, the federal government must repay the investors by repurchasing the debentures associated with the defaulted loan. 2. 7(a) Loans a) Provides funds to establish a new business or to assist in the acquisition, operation, or expansion of an existing business. b) Lender funds full amount but SBA guarantees typically 75% of any loss suffered by lender, provided the lender has adhered to SBA s loan origination, loan servicing and loan liquidation SOPs. c) Specific Lenders have PLP (Preferred Lenders Program) status with the SBA which delegates underwriting authority to the Lender in lieu of formally submitting loans to SBA for approval. IV. Due Diligence Determination Loan Amount NOT Environmentally Sensitive Industry by NAICS < $150M Environmental Questionnaire (EQ) > $150M EQ + Records Search with Risk Assessment (RSRA) Environmentally Sensitive Industry by NAICS Code Phase I Environmental Site Assessment (ESA) Phase I ESA NOTE: a) Special use facilities such as childcare centers, dry cleaners and gas stations may have additional Environmental Due Diligence requirements. Refer to SOP (J) b) Lender s due diligence may require more than the SBA. When this is the case, Lender should adhere to their internal guidelines for evaluating and managing environmental risk. c) NAICS Codes of Environmentally Sensitive Industries Appendix 4 of the SOP {REVISED} - Updated 316 Leather & Allied Product Manufacturing (not required if assembly only); 326 Plastics & Rubber Product manufacturing (not required if assembly only); 332 Fabricated Metal Product Manufacturing (not required if assembly only); Exterminating & Pest Control Services and 8122 Death Care Services (unless no embalming or cremation at the property) - Added 484 Trucking (if service bays, truck washing, or fuel tanks present) and Other Recreational Industries (indoor and outdoor shooting ranges only) 2 of 11

3 V. Document Types 1. Environmental Questionnaire (EQ) a) Scope Questionnaire used by Lender (questions outlined in Appendix 2 of the SOP or the questionnaire for Transaction Screens in ASTM ) to determine the likelihood that contamination may be present at Property. b) Special Requirements/Considerations Current owner or operator of the Property must complete and sign. If current owner or operator will not sign EQ, at minimum must obtain a Transaction Screen. c) Period of Validity EQ may be considered if it was completed up to one year prior to submission. 2. Record Search with Risk Assessment (RSRA) a) Scope i. EQ ii. Search of government databases identified in 40 CFR iii. Historical resources (including aerial photography, city directories, reverse directories and/or fire insurance maps) pertaining to the Property and Adjoining Properties. Must date back to 1940 or first developed use, whichever is earlier. b) Special Requirements/Considerations i. EP Risk Assessment Environmental Professional (EP) provides a risk assessment based on the results as to whether the Property is low risk of contamination elevated risk of contamination high risk of contamination ii. Reliance t Necessary Report does not need to be addressed to the SBA nor be accompanied by a Reliance Letter. c) Period of Validity RSRA may be considered if it was completed up to one year prior to submission. 3. Transaction Screen Assessment (TSA) a) Scope Environmental Investigation completed in accordance with ASTM E Transaction Screen includes: i. Interview with the owner or operator ii. Visit to the Property iii. Completion of an environmental questionnaire and iv. Review of government records and historical sources. b) Special Requirements/Considerations i. EP must supervise site reconnaissance and conclude one of the following: The risk is so minimal no further investigation is required; or There is risk sufficient to warrant additional investigation. ii. EP provides detailed description of recommendation. 3 of 11

4 iii. TSA must be accompanied by the following: SBA Reliance Letter (SBA SOP (J) - Appendix 3) Consultant s Certificate of Insurance showing Professional Liability or E&O coverage Project Manager's Credentials and Experience c) Period of Validity TSA may be considered if it was completed up to one year prior to submission. 4. Phase I Environmental Site Assessment (ESA) a) Scope n-intrusive investigation of site history and current condition for indications of potential environmental concerns. Phase I ESA conducted by an EP in accordance with ASTM E b) Special Requirements/Considerations i. Must be accompanied by the following: SBA Reliance Letter (SBA SOP (J) - Appendix 3) Consultant s Certificate of Insurance showing Professional Liability or E&O coverage Project Manager's Credentials and Experience ii. EP that performs the assessment concludes one of the following: The risk is so minimal no further investigation is required; or There is risk sufficient to warrant additional investigation. iii. If further investigation is warranted, the EP provides detailed description of the recommendation. c) Period of Validity A Phase I ESA may be relied upon within 1 year of the date of approval of its Environmental Investigation, as long as it an otherwise AAI compliant report. Parties still may wish to strictly comply with EPA s regulatory time frames to avoid jeopardizing legal and regulatory protections. te: above time frame does not apply to liquidation situations under SOP or SOP SBA Environmental Committee offered further clarification for delegated lenders. It is the date upon which the lender, using their delegated authority, makes their internal decisions on the adequacy of the environmental investigation. 5. Phase II Environmental Site Assessment (ESA) a) Scope i. Intrusive investigation of the property involving the collection of samples (soil, groundwater, air, building materials, etc.) for laboratory analysis. ii. Conducted in accordance with generally-accepted industry standard of practice and consisting of a scope of work that would be considered reasonable and sufficient to identify the presence, nature and extent of a Release. b) Special Requirements/Considerations i. Must be accompanied by the following: SBA Reliance Letter (SBA SOP (J) - Appendix 3) Consultant s Certificate of Insurance showing Professional Liability or E&O coverage Project Manager's Credentials and Experience 4 of 11

5 6. Lead Risk Assessment a) Scope The Lead Risk Assessment evaluates: i. The presence of lead based paint; and ii. Testing for lead in drinking water. VI. Special Use Facilities/Other Considerations 1. Child Care/Residential Care Center (SBA SOP (J), Subpart B and C, Section III, H) Property constructed prior to 1980 that will be used for daycare or child care center or nursery schools or residential care facility occupied by children requires a Lead Risk Assessment and testing for lead in drinking water. Disbursement will not be authorized unless the risk of lead exposure to infants and small children has been sufficiently minimized. 2. Dry cleaners (SBA SOP (J), Subpart B and C, Section III, H) In addition to Phase I ESA, SBA requires Phase II testing for on-site dry cleaners, whether currently in operation or operated historically, if chlorinated and/or petroleum-based solvents were likely used. Soil and groundwater contamination as well as vapor intrusion must be addressed. Phase II performed for on-site dry cleaning facility must be conducted by an independent Environmental Professional who holds a current Professional Engineer s or Professional Geologist s license and has the equivalent of three (3) years of full time relevant experience.) 3. Car Wash (SBA SOP (J) - Appendix 4) A Transaction Screen Assessment is an acceptable starting point for car wash only. 4. Gas Stations (SBA SOP (J) - Appendix 5) Environmental Investigation for all Gas Station Loans must: a) Begin with Phase I b) Include analysis of all relevant environmental records concerning the Property and Adjoining properties c) The EP must include a determination whether or not the gas station is in compliance with all regulatory requirements, pertaining to tank and equipment testing. Include documentation supporting the EP s determination of compliance. d) Include results of any further investigation, which may include a Phase II. Phase II for a Gas Station Loan must be conducted by an independent Environmental Professional who holds a current Professional Engineer s or Professional Geologist s license and has the equivalent of three (3) years of full time relevant experience.) e) If the property is contaminated, include a detailed description of and cost estimate for the recommended remediation. VII. Lending on Contaminated Properties (SBA SOP (J) Subpart B and C, Section III, G.) Lender or CDC seeking to proceed with a loan when contamination is present at the collateral property must document four (4) elements, including nature/extent of contamination, remediation, collateral value, and mitigating factors, as outlined in Section G. CDCs must submit a recommendation to SBA while PLPs must document their permanent loan file with the following elements: 5 of 11

6 1. Nature and Extent of the Contamination including copies of the following documents pertaining to the Property: a) All relevant Environmental Investigation Reports; b) All publicly available Governmental Entity correspondence; 2. Remediation a) Recommended method of Remediation; b) Status of on-going Remediation, if any; c) Environmental Professional s estimated cost of Remediation; d) Environmental Professional s estimated completion date; e) Governmental Entity s designation of responsible Person(s); f) Person(s) paying for on-going Remediation; 3. Collateral Value a) Proposed loan amount and proposed use of proceeds; b) Appraised or the estimated value of the Property; c) Institutional Controls and Engineering Controls, if any, and their impact on repayment ability, collateral value and marketability of the Property; and 4. Mitigating Factors a) Indemnification The SBA Environmental Indemnification Agreement i. Cannot be modified ii. Must be executed by the Borrower and if applicable Operating Company iii. Must have a copy of the Environmental Investigation Report attached to it; and iv. Must be properly recorded in the memo format in Exhibit C to Appendix 6. b) Completed Remediation If government Entity has affirmed in writing that active Remediation is complete but additional monitoring is required, approval may be considered after the following occurs i. Monitoring results for the first year are obtained ii. An EP concludes that the results show no unacceptable increase in contamination since remediation iii. EP concludes that the owner/operator is in compliance with any continuing obligations, including activity and use limitations, Engineering and Institutional Controls, and post- Remedial monitoring required by the Government Entity. c) Further Action If a no further action letter or closure letter is obtained from the Government Entity stating that no further remediation or monitoring of the contamination is required. d) Minimal Contamination If the extent of the contamination and cost of Remediation are de minimis in relation to the value of the property and is projected to be completed with one year. e) Clean-up Funds If evidence has been provided from a Government Entity that the borrower or Property has been approved by a fund to pay for or reimburse Remediation costs, and the amount allocated is sufficient to cover the costs. 6 of 11

7 f) Escrow Amount i. If an escrow account equal to 150 percent of the total estimated cost of required remediation and is controlled by 7a Lender or first mortgage holder in a 504 as trustee. ii. iii. The escrowed funds may be used for Remediation. Any remaining funds in the account may not be released until the appropriate closure letter or no further action letter is received. g) Groundwater Contamination Originating from Another Site If groundwater contamination on the property is shown to come from another property, disbursement can be considered if: i. Another person with sufficient resources is performing the Remediation as outlined by the Remediation action plan that has been approved by the appropriate Government Entity ii. The state has laws or regulations that provide that an owner/operator of property will not be responsible for contamination from another site iii. Governmental Entity provides satisfactory written assurance that it will not hold the Property owner liable for the contamination. h) Additional or Substitute Collateral If additional or substitute collateral is pledged or additional equity contribution is being made, sufficient to overcome the potential loss due to contamination. i) Other Factor(s) SBA may rely on factors other than or in addition to the eight previously referenced mitigating factors. For example, the existence of adequate environmental insurance, bonds, agreements not to sue present and future property owners from the Governmental Entity, Engineering and Institutional Controls, etc. Reliance solely upon Other Factors requires clearance from the SBA Environmental Committee. VIII. Key Considerations 1. RSRA Conclusions Elevated and High risk conclusions require a Phase I ESA as the next step. 2. EP Recommendations The SBA takes a general approach of following the EP s recommendations as stated in their reports (TSA, Phase I & Phase II ESAs). If EP concludes that further investigation is warranted, the lender must proceed as recommended. The SBA will require compliance with all of an EP s recommendations (including housekeeping measures, such as secondary containment, decommissioning monitoring wells, sealing floor drains, etc.). 3. When A Lender Is More Conservative than EP If the Lender s risk analysis results in an internal recommendation that is more stringent than the EP s recommendation, Lender should adhere to their internal guidelines for evaluating and managing environmental risk. 7 of 11

8 4. Appeal Process If Lender has a differing perspective than the EP and wishes to seek an exception to following the EP s recommendation, Lender must appeal to the SBA Environmental Committee. Lender must provide the rationale for not following the EP s recommendation and forward explanation to SBA Environmental Committee (EnvironmentalAppeals@sba.gov) for final decision. The Committee meets each Wednesday. 5. Due Diligence on Additional Collateral All property taken as collateral must be screened following the SOP s outlined procedures. Lien position is irrelevant. 6. Multi-Unit NAICS Codes On properties with multiple units and varying NAICS codes, all NAICS codes must be verified. Any environmentally-sensitive NAICS Codes require a Phase I ESA. IX. Liquidation & Servicing 1. Overview SBA s perspective is that an Environmental Investigation must be conducted before taking any Loan Action that could result in a loss, or increase the risk of loss, due to the actual or alleged presence of Contamination. The SOPs and provide guidance that an Environmental Investigation must be conducted before: a) Accepting Property as substitute collateral; b) Releasing a lien on collateral for substantially less than its estimated Recoverable Value based on unsubstantiated allegations of Contamination; c) Abandoning collateral, which would otherwise have Recoverable Value, based on unsubstantiated allegations of Contamination; d) Acquiring title to Property held as collateral, e.g., by purchasing it at a foreclosure sale or accepting a deed-in-lieu of foreclosure; e) Taking over the operation of a business that uses Hazardous Substances or is located on Contaminated Property regardless of whether the Borrower owns the Property; f) Selling REO or acquired personal property collateral for substantially less than its appraised value based on unsubstantiated allegations of Contamination; and g) Abandoning REO or acquired personal property collateral based on unsubstantiated allegations of Contamination. 2. Due Diligence Requirements a) General Requirements In general, the due diligence requirements are similar to guidance in SOP (J) and begin with identifying whether the site is environmentally sensitive by NAICS code. NOT Environmentally Sensitive Industry by NAICS EQ + RSRA Environmentally Sensitive Industry by NAICS Code Phase I ESA Post-default environmental investigation reports should be less than 180 calendar days. 8 of 11

9 b) Additional requirements for Special Use Properties In addition to a Phase I ESA, the following items are required for: I. Gas Stations Phase II ESA Equipment/System Functionality Testing (i.e. Line and Tank Tightness Testing) II. Dry Cleaners Phase II ESA Equipment/System Functionality Testing III. Properties Using Hazardous Substances ASTM E2107 Regulatory Compliance Audit c) Exceptions n-industrial condominiums in a non-industrial, multi-unit building may begin with a TSA or an EQ & RSRA. 3. Actions Required in Response to EP Conclusions and Recommendations If a property has significant Recoverable Value and lender is unable to make an informed decision based on the Environmental Investigation Report from the initial due diligence, SBA states that additional investigation is expected. For example: a) A Phase I ESA should be conducted if a Transaction Screen or EQ and RSRA shows a high or elevated risk of Contamination; b) Inquiries regarding environmental problems beyond the scope of a Phase I ESA (e.g. asbestos), should be conducted if the problem could have a material effect on the Recoverable Value of the Property; c) A Phase II ESA should be conducted if it is necessary to determine the nature and extent of Contamination identified by a Phase I ESA; d) EP concludes after Phase II that additional investigation is necessary; and e) A Remediation estimate should be obtained if Remediation is recommended in a Phase II ESA Report. 4. Remedial Action by a Secured Creditor The SOP very clearly advises to obtain a written Legal Opinion prior to conducting any actions that would qualify as Operational Control or can jeopardize Secured Creditor protection. 5. Taking Title to Contaminated Property or Control of a Business with Environmental Risks a) SBA written consent is required prior to: Taking title to contaminated property; or Taking over a business that uses hazardous substances or is located on contaminated property regardless of whether the Borrower owns the property. b) SBA approval must be submitted to the appropriate SBA Loan Center in a written request that includes all supporting documents and covers the following elements: i. Appraised Value of Collateral to be Acquired. ii. Liquidation Value of Collateral to be Acquired 9 of 11

10 iii. SBA Loan Balance iv. Amount Owed on Senior Liens v. Foreclosure Costs vi. Nature and Extent of the Contamination vii. Clean-up Costs and Liability viii. Secured Creditor Liability Exemptions ix. Mitigating Factors, including but not limited to: 1) SBA Environmental Indemnification Agreement 2) Escrow Account 3) Solvent Government Cleanup Fund 4) Lender Liability Environmental Insurance x. Tort Liability xi. Exceptions to Title that Impact Marketability xii. Alternative Methods of Recovery xiii. Acquired Collateral Divestiture Plan xiv. Other Relevant Facts or Expenses xv. Estimated Net Recovery 6. Key Considerations a) Document, Document, Document It is important for the Lender to document all environmental investigations and SBA correspondence from origination of the transaction. Decisions need to be well documented to support the Lender s decision to proceed with the original transaction. b) Contact the SBA When in doubt, Lender should contact the SBA to ensure proper adherence to the SBA SOPs. X. Disclaimers 1. EBA Disclaimer This document is provided solely to members of the Environmental Bankers Association, Inc. (EBA) for informational purposes only. EBA members are authorized to use this document for internal reference or training purposes, but are not authorized to disseminate or publish any portion of the document to non-eba members or the general public without prior written consent from EBA. n- EBA members are not authorized to use this document for any purpose without the prior written approval of the EBA. Neither the EBA, nor any of its directors, officers, employees or agents, makes any representations or warranties, express or implied, or assumes any legal liability for the completeness, reliability, timeliness, currency, accuracy or usefulness of the information provided herein, or for the applicability of the information provided herein to the facts and circumstances particular to any specific use, including but not limited to information found through any links or references to resources, case studies, projects and/or services referred to within this document. Any action taken based upon the information provided in or through this document is done so strictly at your own risk. The EBA is not liable for any damages of any nature incurred as a result of or in connection with the use of this information. This document and the information herein do not constitute legal or other professional advice or opinion. It is recommended that you seek appropriate legal or other professional advice to determine whether any advice, actions or practices referenced within this document are appropriate or legally correct in your jurisdiction. Some of the material provided herein has been published with permission of the copyright holder and is not the copyrighted content of the EBA. Where applicable, attribution to the copyright holder has 10 of 11

11 been given herein. permission is granted to republish any such content without seeking express permission of the copyright holder. 2. SunTrust and U.S. Small Business Administration (SBA) Disclaimer This Tip Sheet does not represent the opinion or position of SunTrust Bank or the U.S. Small Business Administration (SBA). SunTrust Bank nor the US Small Business Administration (SBA) make no representations or warranties, express or implied, or assumes any legal liability for the completeness, reliability, timeliness, currency, accuracy or usefulness of the information provided herein, or for the applicability of the information provided herein to the facts and circumstances particular to any specific use, including but not limited to information found through any links or references to resources, case studies, projects and/or services referred to within this document. Any action taken based upon the information provided in or through this document is done so strictly at your own risk. Neither SunTrust nor the U.S. Small Business Administration (SBA) is liable for any damages of any nature incurred as a result of or in connection with the use of this information. This document and the information herein do not constitute legal or other professional advice or opinion. It is recommended that you seek appropriate legal or other professional advice to determine whether any advice, actions or practices referenced within this document are appropriate or legally correct in your jurisdiction. References: 1. SBA SOP (J) 2. SBA SOP SBA SOP SBA Information tice {Issuance of SOP (J); 10/13/17} Authors: Sabrina C. Goodman Asst. Vice President, REVAL Environmental Risk Management SunTrust Bank 919 E. Main Street, 2 nd Floor Richmond, VA sabrina.goodman@suntrust.com Resources: Daria K. Milburn (Original Content 9/2015) Senior Vice President, LCS, Inc. SBA Environmental Committee Michael Cole Vice President, REVAL Environmental Risk Management SunTrust Bank 2323 Operations Drive Durham, NC michael.cole@suntrust.com 11 of 11

12 APPENDIX A: SBA Process Flow Charts

13 SBA Due Diligence Determination Environmentally Sensitive Industry by NAICS Code SOP (J) Appendix 4 Loan >$150M? Environmental Questionnaire Phase I ESA Required RSRA Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

14 Environmental Questionnaire Review Does the EQ contain the following elements? Site Visit Completed by Lender At minimum, ASTM Required Good Faith Interview with Owner/Operator? Signed by current owner or operator? EQ concludes contamination is unlikely/ no further investigation warranted? Lender must submit to SBA for concurrence. Less than one year old? Answers to Questions outlined in SOP (J) Appendix 2 or ASTM Questionnaire? At minimum, RSRA Required Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

15 RSRA & Transaction Screen Reviews Report concludes low risk for contamination/no further investigation warranted? Building constructed prior to 1980? Is the property used or proposed to be used as a child care facility? Lead Risk Assessment Required Phase I Required Lender must submit to SBA for concurrence Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

16 Phase I ESA Review Does the Phase I ESA contain the following elements? These items are required. Once obtained, proceed to next box SBA Reliance Letter SOP (J) Appendix 3 EP Credentials Dry Cleaner, current or historic, if chlorinated and/or petroleum based solvents were utilized Phase II testing Property considered Special Use Facility Refer to Refer to SOP (J) Subpart B, III, H Additional requirements apply Childcare, Nursery School or Residential Care Facility occupied by Children & constructed prior to 1980 Lead Risk Assessment (paint & water) Gas Stations Refer to Appendix 5 for Environmental Requirements EP s E&O Coverage $1MM per claim Report within one year of approval of environmental investigation SOP (J) Appendix 2 Report concludes further investigation warranted Lender s review concurs w/report findings that further investigation is warranted Additional Investigation Required per EP s Recommendation New report must be obtained from a vendor with adequate insurance coverage. New Phase I ESA Required Lender s review concurs w/report findings that no further investigation is warranted Lender May Submit to Environmental Appeals Committee for Consideration Lender must submit to SBA for concurrence Proceed In Accordance With Lender s Risk Tolerance Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

17 Phase II ESA Reviews Contamination Revealed Lender Must Submit To SBA For Concurrence Lender still considering transaction Proceed In Accordance With Lender s Rejection Procedures Step 1 EP must document the following: 1. Whether contamination exceeds reportable or actionable levels. 2. Whether remediation is necessary. 3. Estimate of remediation costs. 4. Projected completion date of remediation. Step 2 Refer to SOP (J) Subpart B, III, G Approval and Disbursement of Loans When There is Contamination or Remediation at the Property. Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

18 Liquidation & Servicing Due Diligence Is the loan in Servicing? Is the loan in Liquidation? Refer to requirements in SOP (J) Dry Cleaner, current or historic, if chlorinated and/or petroleum based solvents used Phase II & equipment tested for functionality Is the site special use? Phase I Required In Addition To Gas Station Phase II & equipment tested for functionality (i.e. Tank and line tightness tests) Use of Hazardous Substances ASTM E2107 Regulatory Compliance Audit Are USTs present onsite? Is the past or present site use a High Risk environmentallysensitive NAICS code? Does Lender s policy require a Phase I? Lender may begin with TSA or EQ & RSRA Phase I Required Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

19 Liquidation Phase I ESA Review Does the Phase I ESA contain the following elements? These items are required. Once obtained, proceed to next box SBA Reliance Letter SOP (J) Appendix 3 EP Credentials EP s E&O Coverage $1MM per claim Report is compliant with EPA AAI or ASTM Report completed < 180 days prior to acquisition date SOP (J) Appendix 2 Report concludes further investigation warranted Lender s review concurs w/report findings that further investigation is warranted Additional Investigation Required per EP s Recommendation New report must be obtained from a vendor with adequate insurance coverage. New Compliant Phase I ESA Required Site visit occurred < 1 year prior to acquisition date Lender s review concurs w/report findings that no further investigation is warranted Lender May Submit to Environmental Appeals Committee for Consideration Phase I ESA Update Required Document in liquidation package for SBA Proceed In Accordance With Lender s Risk Tolerance Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

20 Liquidation Phase II ESA Reviews Contamination Revealed Lender Must Submit To SBA For Concurrence Lender still considering Foreclosure Evaluate options and document for SBA Step 1 EP must document the following: 1. Whether contamination exceeds reportable or actionable levels. 2. Whether remediation is necessary. 3. Estimate of remediation costs. 4. Projected completion date of remediation. Step 2 SBA Approval required Lender must submit a comprehensive explanation in accordance with SOP and (both) Chapter 5, H Taking Title to Contaminated Property or Control of Business with Environmental Risks Abbreviations AAI All Appropriate Inquiries as defined by 40 CFR ASTM American Society for Testing and Materials E&O Errors and Omissions (aka Professional Liability) EP Environmental Professional EPA Environmental Protection Agency EQ Environmental Questionnaire ESA Environmental Site Assessment M Thousand MM Million RSRA Records Search with Risk Assessment

21 APPENDIX B: Example Appeal Templates

22 Contact Information of Party Submitting to Committee Name: Title: Lender: Address: Street, Unit, City, State, Zip Phone: Property Details Borrower Name Loan #/e504 # Collateral Address Street, Unit, City, State, Zip Nature and Extent of Contamination Reports/Documents List all relevant environmental reports reviewed. Copies must be provided to SBA. Publicly Available Documents List all relevant publicly available documents reviewed. Copies must be provided to SBA. Source/Nature of Contamination Discuss the source of the contamination, primary contaminants of concern, levels of contamination above or below regulatory standards. Media Affected Extent of Contamination Remediation Remedial Actions To Date Recommended method of Remediation Status of On-going Remediation EP s Estimated Cost of Remediation EP s Estimated Completion Date Governmental Entity s designation of responsible Person(s) Person(s) Paying for On-going Remediation Collateral Value Appraised/Estimated Property Value Proposed Loan Amount Proposed Use of Proceeds Institutional/Engineering Controls Soil, groundwater, air, etc. Describe the impacted area. Is it contained on-site, or has contamination migrated off site? How much material is impacted? Describe remedial actions taken to date. How much soil has been removed from the property, how many gallons of groundwater have been treated, etc. Discuss the recommended remediation plan. Continuous, Intermittent, Inactive, etc. List the named responsible party h ere. List the person(s) or entity paying for remediation if different than above. Discuss impact on repayment ability, collateral value and marketability of the Property. Mitigating Factors Identify the mitigating factor being used from SBA SOP (H), Subpart B, Section III, G. Describe the adequacy of the factor and additional details that help the SBA understand the applicability of the factor to the situation.

23 Contact Information of Party Submitting to Committee Name: Title: Lender: Address: Street, Unit, City, State, Zip Phone: Property Details Borrower Name Loan #/e504 # Collateral Address Street, Unit, City, State, Zip Documents Reports/Documents List all relevant environmental reports reviewed. Copies must be provided to Publicly Available Documents Collateral Value Appraised/Estimated Property Value Proposed Loan Amount Proposed Use of Proceeds Institutional/Engineering Controls SBA. List all relevant publicly available documents reviewed. Copies must be provided to SBA. Discuss impact on repayment ability, collateral value and marketability of the Property. Description of Appeal Discuss the reason for the appeal, recommendation being appealed, and relevant factors supporting the appeal. Recommendation/Request Describe your desired outcome here.