MBL 1800 Environmental Procedures

Transcription

1 MBL 1800 Procedures Effective: October 13, 2013 Departments Impacted Business Services Introduction The following guidelines have been designed to minimize the credit unions exposure to environmental risk. It is impossible to envision every scenario, so a certain amount of common sense, within the context of the credit exposure, will be employed in implementing these procedures. Procedure 1801 BACKGROUND Prior to 1980, federal and state legislation governing environmental issues were predominately in nature and merely provided guidelines for the management of hazardous waste. During the 1980's the legislative climate changed dramatically and legislation enacted focused upon the private sector being held responsible for the cleanup and/or the liability associated with the cleanup of the nation's land. Under the Federal Comprehensive Response, Compensation and Liability Act (CERCLA, commonly referred to as "Superfund"), and related California legislation, an owner or user of real property is strictly liable for the hazardous waste problem existing on that property. Similarly, the Protection Agency is continuing to develop regulations concerning the discovery, removal and abatement of asbestos in buildings as a result of the Asbestos Hazard Emergency Response Act (AHERA) of and health dangers, as well as potential for liability and impairment of collateral value from hazardous waste and asbestos contamination, require lenders to take appropriate steps to identify potential problem sites and buildings. Neither statutes nor court decisions are conclusive as to whether a lender with real property security is liable for cleanup prior to foreclosure. However, any entity that "controls" operations involving creation of toxic hazards may have cleanup exposure. The most obvious way a Credit Union might exercise a degree of control of a borrower's operations is by either becoming a close operating partner, (i.e., placing someone on the Board of Directors) or making day-to-day management decisions. Even an ordinary, non-controlling lender must be wary of toxic substance risk before taking title prior to foreclosure. To overcome potential liability associated with foreclosure, it may be necessary for the Credit Union to prove an innocent landowner status showing that it had made thorough investigations of the property when the loan was made which revealed no environmental risks. Page 1 of 10

2 1802 LOAN UNDERWRITING STANDARDS risk awareness must begin prior to any loan transaction being established. Consideration must be given to the potential risk present with collateral whether it be risks associated with real estate or risks of cleanup/disposal should collateral such as chemicals be taken or included as collateral. Furthermore, environmental hazards may impact our borrower and our loan accommodations regardless of collateral held in that the borrower's ability to repay our loan could be impaired, if not eliminated, should the borrower be found in violation of environmental legislation and liable for the cleanup of their facilities or the surrounding area. In assessing the borrower's operating, financial, and managerial attributes, care should also be taken to evaluate any environmental risks associated with the borrower's operations or facilities. Such an evaluation may include an interview of the borrower regarding their operations, previous uses of the facility, procedures for handling any hazardous wastes, and the possible existence of any insurance coverage extending to environmental damage. A visual inspection of the facility should also be conducted to determine the presence or appearance of any hazardous substances or environmental problems. The following chart should be consulted to determine the appropriate environmental due diligence action to follow on various real estate related loan types: An will be required documentation on all loans on which the Credit Union takes trust deed on real property. In addition, depending on the location of the property, additional due diligence may be indicated. s, LoanCheck Reports and/or Phase I or II reports give a fairly close indication of the current environmental issues; however, these reports do not provide any protection for the Credit Union in the event of future contaminations. To fully protect the Credit Union against potential loss of collateral value due to environmental issues Loan Officers should consider Insurance. Even when no environmental issues are evident, for purchase transactions Loan Officers should strongly advise the member to obtain a Phase One Report that is fully compliant with current AAI Protocol, including an All Appropriate Inquiry format, so that in a worst case scenario both the member and the credit union can enjoy the protections provided by the Innocent Landowners Defense. In the event a hazard is discovered, the cost of cleanup can be covered by the Super Fund, provided it can be shown that the member obtained a compliant report at the time of purchase. The following chart is for new loans. For renewals and modifications the file was already adequately documented at origination so concern is limited to new risk exposure that may have occurred in the interim. Typically a current internet report ( Screen and/or Geo ) will suffice. Page 2 of 10

3 Neighborhood <$500,000 $500,000 to $1,000,000 $1,000,000+ Properties in rural, all residential or new communities LoanCheck Report Insurance/ Phase One Properties apparently in safe older neighborhoods, but with unknown histories LoanCheck Report Insurance/ Phase One Insurance/ Phase One The current use of the property or the known historic uses of properties in the area that presents reason for concern. Insurance/ Phase One Insurance/ Phase One Insurance/ Phase One 1803 RISK ASSESSMENT INTERNET RESEARCH For each new loan application and periodically as part of the Annual Review process the Loan Officer or Underwriter will obtain a report either through a paid subscription service such as EDR Collateral Screen (or similar product) or through a government database such as GEO. Page 3 of 10

4 ENVIRONMENTAL QUESTIONNAIRE To further aid in the identification and documentation of environmental risk, the Credit Union uses an (refer to sample at end of this section). The "EQ" makes pertinent inquiries into the history of the property, the presence of any hazardous or toxic substances on the property, and the management of such substances. While this form is intended to be completed by a real property owner, it should still be utilized (when appropriate) by an operator of a business when the business utilizes leased real property. Those questions that cannot be accurately answered by the lessee/operator should be designated N/A. In certain circumstances it may be necessary to delve further into the environmental standing of a borrower. To do so, the Credit Union should avail itself of the services of LoanCheck. or a similar environmental reporting company. These companies provide reporting that focuses on reported environmental hazards identified by various governmental agencies charged with the responsibility of the management of local, state, and federal environmental issues such as the Protection Agency. These reports, ordered through the Business Services Department, cover the property's (or the owner/operator of the property) history of environmental compliance, reported spills, violations, etc. This information, while not conclusive, provides valuable confirmation of environmental a risk and helps the Credit Union to minimize or avoid exposure to this risk and the inherent liability. The cost of each report should be passed along to the borrower as a part of the loan's fee structure. Non-Real Estate Related Transaction, Guidelines for Use In the event the Credit Union enters into a credit accommodation and does not take real property as collateral, it remains necessary to keep environmental problems and potential liability well in mind in the evaluation of the borrower. The ("EQ") should be utilized with some discretion; however, it is suggested to be used in conjunction with any borrower, if the visual inspection/interview of the borrower reveals possible environmental concerns. Should the "EQ" support the presence of environmental problems or liability, the LoanCheck Report should be obtained and evaluated relative to the loan under consideration, the collateral position, and risks to the borrower and the Credit Union. Proper disclosure of the "EQ" and the LoanCheck Reports should be included in all loan memorandums and a decision should be established as to the Credit Union's position regarding any environmental issues identified. The "EQ" and the LoanCheck Reports should be retained in the miscellaneous section of the credit file. Updates to the reports should be obtained as needed. Real Estate Related Transactions, Guidelines for Use All loans with commercial, multi-family, industrial, or undeveloped real estate property being utilized as collateral are to be documented with an ("EQ") completed and signed by the owner (under a refinance or development loan) or buyer and seller (under a purchase) of the property. Loans collateralized by 1-4 unit real property do not require the "EQ" as the environmental issues are believed adequately addressed in the appraisal report obtained. On all commercial real property secured credit requests or on any size or type loan when responses to the "EQ," the Loan Officer s inspection, any comments received from the Page 4 of 10

5 appraiser, or a common sense review of the past and present uses of the property reveal any potential environmental concerns, a Public Records Search (LoanCheck) Report is required. The "EQ" is to be obtained by the Loan Officer at the beginning of the loan process and submitted with the appraisal request. As a general rule, the appraisal process should not begin until the "EQ" has been completed and any concerns identified resolved. Review of the "EQ" and Public Records Search Report (if applicable) is to be conducted by the Loan Officer or Underwritter and should be made a subject to condition of loan approval. Any adverse findings should be communicated to the endorsing Loan Committee for approval before the loan is funded. The loan memorandum should be amended to discuss the Credit Union's decision regarding any environmental issues identified. If, at a latter date, the appraisal identifies an environmental concern, then a LoanCheck Report should be ordered immediately before proceeding with any further processing of the loan request. (See Chart) The "EQ" and the LoanCheck Report should be filed along with the appraisal completed on the property and updated as needed HAZARDOUS WASTE REPORT AND/OR ASBESTOS SURVEY OR ENVIRONMENTAL INSURANCE If the EQ, the Loan Officer s inspection, the appraiser s inspection, or the Public Records Search Report clearly identify environmental problem areas, and the decision is made to proceed with the loan request or the real property collateral in question, the Loan Officer, at the applicant's expense, should initiate the placement of either Insurance, Phase I or Phase II Hazardous Waste Report and/or Asbestos Survey from a qualified engineer acceptable to the Credit Union prior to loan commitment. Waiver of the Insurance or Hazardous Waste Report and/or Asbestos Survey requirement can be made only with escalated loan authority, in other words the approval must come from one tier higher than the authority that was used to approve the loan Phase I Hazardous Waste Report The scope of a Phase I Hazardous Waste Report and/or Asbestos Survey is primarily one of reconnaissance and research and typically involves the following: 1. Site reconnaissance for the purpose of observation and photographic documentation. 2. Review of available County Department of Health Services and Regional Water Quality Control Board Records respective of the site. 3. A complete chain of title search prepared by a reputable title company is recommended and is generally obtained by the client. Page 5 of 10

6 4. Topographic map evaluation to identify previous surface storage containers or other evidence of stored or impounded materials. 5. Aerial photographic interpretation of previously existing structures or impoundments. 6. Subsurface radar and magnetometer surveys are utilized to locate buried tanks and utilities. 7. Asbestos investigations are subcontracted out to independent contractors and can be included as part of the Phase I site assessment. 8. Preparation of report including the evaluation of the potential for hazardous waste present on site. 9. The member is responsible for selecting and contracting for reports; however, it must be with a reputable firm that is acceptable to the credit union. Phase II Hazardous Waste Report In the event the Phase I reconnaissance and research investigation uncovers potential sources of contamination, a Phase II subsurface investigation is required. The scope of the Phase II investigation typically involves the following: 1. Subsurface exploration and sampling of a minimum of soil borings. 2. Groundwater sampling, dependent on site conditions. 3. Monitoring of well installation and selected pourings; quantity is dependent on field conditions. 4. Determination of extent of contamination, if any. 5. Soil gas monitoring. 6. Hydrogeological and environmental evaluation. 7. Preparation of report with conceptual recommendation for remediation, if required. 8. The member is responsible for selecting and contracting for reports; however, it must be with a reputable firm that is acceptable to the credit union. Page 6 of 10

7 Insurance If available, Insurance can be obtained in lieu of Hazardous Waste Report, except on SBA Guaranteed Loans CONTAMINATED SITES Should it be determined from a Hazardous Waste Assessment Report that a site is contaminated and therefore subject to regulatory action, the Credit Union will not make a loan or a line of credit using that site for collateral until the contamination is cleaned, and so certified by a qualified engineer acceptable to the Credit Union or the liability for said clean up has been accepted by a financially capable third party. This last scenario would normally apply if a seller of a property indemnifies the purchaser against the costs and potential liability involved with the clean up of hazardous materials on the site. The responsibility of the third party should also be acknowledged by the appropriate Enforcement Agency. Further, no loan, nor line of credit will be made on a building containing asbestos until the asbestos is either; 1) removed, or 2) certified "safe" by a qualified engineer acceptable to Credit Union and determined at Credit Union's sole discretion to not impair the acceptability of the collateral. In determining the acceptability of the collateral, full consideration is to be given to the potential future cost of removal and replacement of the asbestos BUSINESS LOAN AGREEMENT Appropriate precautionary measures can also be considered in loan documentation including provisions within business loan agreements calling for immediate notification to the Credit Union of hazardous/toxic waste problems or violations with local, state, or federal legislation concerning hazardous/toxic waste. Further, the borrower and guarantors should sign an Hazardous Waste Certification that certifies that the property is not contaminated and accepts responsibility for the clean up of any subsequently discovered hazardous materials APPRAISALS All Credit Union appraisals reviewing commercial, multi-family, industrial, residential and undeveloped real estate are to give attention to warning signs of potential hazardous waste and asbestos containing building materials. Should the appraisal identify the possible presence of hazardous waste on the subject or an adjoining property, or asbestos-containing materials on the subject property, the appraisal is to be made subject to the findings of the Hazardous Waste Report or Asbestos Survey. Page 7 of 10

8 1808 GUARANTEES The presence of hazardous waste or asbestos requires the Credit Union to place greater reliance upon guarantees. If property given as security proves to be impaired, the lender may not be able to foreclose (see below). The Credit Union must then rely on its ability to proceed directly on the guarantee(s). Each guaranteed real estate secured loan shall include each guarantor's acknowledgement of receipt of reports, material land documentation as to hazardous waste and/or asbestos presence on the property taken at time of underwriting, and his/her certification of having read and understood the same PARTICIPATIONS Certificates or warranties to participating lenders as to hazardous waste and/or asbestos contamination, if given at all, are to be specifically limited "to the best of our knowledge." The participating lender should be given copies of all reports, material or documentation as they apply to hazardous waste and/or asbestos contamination discovery efforts. Each participated loan file should include each participant's acknowledgement of receipt and certification that it has read and understands all of the material. As a participant, the Credit Union cannot necessarily rely upon the lead lender's due diligence to discover information that may lead to the identification of a hazardous waste or asbestos problem. Accordingly, on all purchased participations, the loan officer is to review the fully completed and executed "EQ", provided by the Lead Credit Union, if substantially similar to our own, and render the appropriate decision. The Phase I & Phase II Hazardous Waste Report and Asbestos Survey are still required in the event the "EQ" uncovers potential sources of contamination. If an EQ is not provided by the Lead Credit Union, the loan officer should make the appropriate inquiries of the Lead Credit Union to alleviate any and all environmental concerns, before proceeding with the participation request ASSUMPTIONS All assumptions are subject to completion of an "EQ" by the prospective buyer. If at loan origination an "EQ" was not obtained, a Loan Officer or other appropriate staff member is to make an on-site inspection paying particular attention to potential hazardous waste or asbestos contamination. The Loan Officer is to review the "EQ" and render the appropriate decision. Page 8 of 10

9 1811 MODIFICATIONS If at loan origination an "EQ" was not obtained, the Loan Officer or Appraiser is to require that one be completed before a commitment for modification can be made. Further, regardless of any loan size, the Loan Officer or other appropriate staff member is to make a drive-by inspection of the site, paying particular attention to potential hazardous waste or asbestos contamination. The Loan Officer should review any new "EQ" and render the appropriate decision FORECLOSURE A Lender becomes more at risk for environmental liability when it accepts a deed in lieu of foreclosures on its collateral security. It is imperative that a thorough assessment of any environmental hazards be obtained prior to accepting title by either means. Additionally, a standard procedure for reviewing collateral security is to be implemented before any enforcement of remedies is considered and should include but not be limited to the following: 1. A review of the existing file (including site inspection, hazardous waste reports, and the "EQ"). 2. A review of the loan documents and any subsequent modifications. 3. A determination if any guarantees and/or indemnities were obtained at closing. 4. A determination if any environmental impairment insurance was obtained. 5. A review of the current tenants and uses. 6. A Hazardous Waste or Public Records Search Report; and if the building was built or remodeled between 1940 and 1980, an Asbestos Survey is required if the Appraiser deems it appropriate. 7. Physical inspection by officer. 8. A review of a preliminary title report to identify preexisting liens, including environmental liens. If any evidence of contamination from hazardous waste or asbestos is found, consideration is to be given to the potential liability a foreclosure or acceptance of a Deed in Lieu may entail versus the estimated collateral value. The Officers Loan Committee is to be consulted before any action is undertaken. It may be better to simply abandon the collateral and pursue alternative means of recovery. Page 9 of 10

10 Controls N/A. Reference Documents N/A Revision History REVISION DATE DESCRIPTION AUTHOR 10/2013 Updated R Reck Approvals NAME TITLE DATE R. Reck First Vice President 10/2013 Page 10 of 10