This document summarizes the findings of a survey of 819 lenders on their environmental risk management practices. The top challenges lenders face are: (1) lack of expertise to understand environmental reports and make risk-based decisions, (2) need for internal education and training on how environmental due diligence fits into the lending process, and (3) turnaround time constraints. While lender policies have evolved since the real estate downturn, many - especially smaller banks - still lack formal policies or training. As lending slowly increases, lenders need assistance justifying due diligence costs, basic training, and help balancing regulatory compliance with maintaining competitiveness.

1. INSIDE WORD FROM THE
LENDING SECTOR:
The Top Environmental Challenges
Lenders Face
EDR Webinar
Tuesday, May 31, 2011
Dianne P. Crocker, Principal Analyst
EDR Market Research Group
© 2010 Environmental Data Resources, Inc.

2. Today’s Event
• Part 1.
• What the latest survey of lenders tells us
• Part 2.
• How you can leverage these findings to help
lender clients meet their top environmental
challenges
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3. EDR’s 13th Annual Benchmarking Survey
of Financial Institutions
• Closed December 1, 2010
• 819 respondents:
• Lending/loan officers
• Commercial lending managers
• Credit officers
• Risk managers
• VPs/RVPs
• All 50 states represented
• Smaller banks accounted for majority of sample…

4. View into Community Banks, In Particular…
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5. Part 1.
Key Survey Benchmarks
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6. Top 10 Survey Findings
1. Pressure from regulators is intense.
2. Sophistication of environmental policies correlates with bank size.
3. Collateral devaluation, liability are key concerns.
4. SBA’s SOP has been widely adopted.
5. More properties being filtered through lens of environmental risk.
6. Property use is now a key Phase I trigger.
7. Foreclosures a key driver of Phase Is today.
8. Vapor intrusion awareness is growing.
9. Banks extremely sensitive to price and turnaround time.
10. Reliance on EPs is increasing.

7. (1) Regulator Pressure Intense, Broad‐Based
• Virtually no bank was immune to some sort of regulatory examination
in past two years
• Environmental risk management was a component of more than half of
examinations
Did examiners specifically ask about
Examined by regulatory agency?
environmental risk management?
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8. (2) Environmental Policies Prevalent…
• 82% of respondents at institutions with a formal environmental
policy
• Policies most commonly address:
• new loan originations (88%)
• prior to facility/property purchase (76%)
• prior to foreclosure (58%)
• loan extensions or refis (49%)
• Less prevalent:
• monitoring over the course of the loan (33%, and typically on
renewal only)
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9. …But Policies Not Created Equal
• Policies requiring due diligence on:
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10. (3) Loss of Value, Liability Key Drivers
• Rank the environmental risk exposures most pertinent to your
institution (5=highest importance):
• Collateral devaluation 3.42
• Direct liability 3.39
• Cash flow impairment 3.09
• Ability to market/sell property 2.91
• Reputational risk 2.35
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11. (4) SBA SOP: Widely Adopted…
• 80% of respondents participate in SBA lending programs.
• The SBA SOP was the 3rd most common driver that led banks to
develop a formal policy (40% vs. only 10% in ‘08).
• 54% have also adopted
SOP 50 10 5(C)
for other types
of lending:
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12. …But SBA SOP Not Widely Understood
• Two‐thirds of respondents from institutions that do no internal
training on SOP 50 10 5(C).
• Implementation issues in the market regarding:
• Reliance letters
• RSRA requirements
• Use of EPs that do not meet AAI’s professional qualifications
• Lack of awareness about dry cleaner/gas station requirements
• When an RSRA is needed vs. Transaction Screens
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13. (5) More Loans Being Viewed Through Lens of
Environmental Risk
Bank
M&As
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Environmental Due Diligence by Lenders

14. More Loans Being Viewed Through Lens of
Environmental Risk
• 57% have updated policies to add more tiers of due diligence in
past two years.
• RSRAs with “high risk” determinations proceed to proceed to AAI‐
compliant Phase Is (65%) or to Phase IIs (21%).
• 73% conduct environmental due diligence on a greater percentage
of commercial real estate loans than in the past.
• 13% of Phase Is proceed to Phase IIs:
• 22% indicated this was an increase over two years ago.
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15. (6) It’s Not Just About Loan Size
Does your institution
currently have a
specific mandate not to
loan on certain types of
sites perceived as “high
risk”?
• 54% said YES
•Varied by bank
size:
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16. It’s Not Just About Loan Size (cont’d)
Which is the most
common determinant
of the level of
environmental due
diligence required for a
new loan origination?
• Property use has
supplanted loan size
as EDD determinant
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17. (7) Foreclosures: A Focus of Due Diligence
• 47% saw increase in foreclosure‐related due diligence over past few
years (esp. between ‘09 and ’10).
• 56% have different SOW for foreclosure‐related due diligence.
• On average, approx. 10% of overall lender due diligence is for
foreclosures.
• Expectation of more foreclosure‐related due diligence in 2011 vs.
2010:
• nat’l/int’l banks: 29%
• regional banks: 14%
• community banks: 11%
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18. (8) Increasing Awareness of VI
• 36% have required EPs to follow E 2600‐10 (only 19% for community
banks)
• 40% work at banks with VI policies (only 22% for community banks)
• more than double 2008 levels
Does your bank’s policy
require borrowers to
address VI risk?
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19. (9) Downward Pressure on Pricing Continues
• Phase I ESA price is highly correlated with bank size
• Smaller banks—higher sensitivity to price
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20. …and Downward Pressure on Turn‐around
Time
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21. Are Banks Lending on Real Estate?
• Regulators are publicly saying they want banks to lend, but
privately telling them
they need to increase reserves
and improve their underwriting
(esp. community banks).
• Debt for commercial real estate
purchases is rebuilding from a
very low base as some banks lend
—but very cautiously.
• Other banks have lending on hold while they sell off real
estate assets.
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22. Are Banks Lending on Real Estate?
How would you
characterize the
level of your
institution’s CRE
loan
originations?
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23. (10) Reliance on Environmental Professionals
on the Rise
Compared to 2 years ago, is your Over the next 2 years, does your
institution relying more or less on institution expect to rely more or
the use of outside environmental less on the use of outside
consultants? environmental consultants?
• Minimal differentiation by bank size
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24. Reliance on EPs on the Rise
How do you expect the percentage of CRE loans that undergo Phase I ESAs
to change in ‘11 vs. ‘10?
Expectation of more loans going through Phase I ESA process
Source: EDR's Benchmarking Surveys of Financial Institutions; presented at EBA's meeting in Ft. Myers, FL, Jan. 18, 2011
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25. Reliance on EPs on the Rise
How do you expect the percentage of CRE loans that undergo
Phase I ESAs to change in ‘11 vs. ‘10?
Expectation of more loans going through Phase I ESA process
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26. How important do you think EDD is in context
of other types of underwriting?
44% answered “Environmental issues can kill a deal.”
“highly important”
or “very important” “Very important given stresses in the real
estate market and the likelihood that we may
Most ranked it: become the property owner.”
- A close 2nd to
creditworthiness/ “It’s been less—but becoming much
borrower’s ability to more important.”
repay loan
- equal in importance “The bank has great liability if EDD is not
to appraisals properly addressed.”
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27. The Flip Side of the Coin:
What EPs Say About Lenders’ Due Diligence
“Lender clients are tough these days. The i’s must be dotted and t’s
crossed.”
“Lenders are more conservative on commercial and industrial deals
over the last year.”
“Lenders’ interpretations of their own rules are stricter. Lenders are
requesting/demanding more detail and questioning executive
summaries and conclusions.”
“Lenders are finally expecting clear opinions regarding RECs.”
“Banks will do Phase IIs, particularly when foreclosing.”
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(Source: EDR’s 1Q11 State of the ESA Market Survey)

28. Summary of Key Findings
• The real estate downturn highlighted need to strengthen due
diligence—particularly at the community bank level—where
there was low‐level EDD (or nothing) being done before.
• Lenders are:
• doing more different types of due diligence on more
properties.
• requiring Phase I ESAs on a greater percentage of their
loans.
• Lender due diligence is extremely competitive (price‐ and time‐
sensitive).
• Reliance on the outside expertise of consultants is critical.

29. Part 2.
Meeting Lenders’ Greatest
Environmental Due Diligence
Challenges
29

30. While Banks’ Policies Have Evolved, Still Have
Far to Go…
• “While no formal policy exists, we routinely have borrowers fill out
an environmental questionnaire.”
• “We have no expertise on environmental issues in the bank.”
• $600 Phase Is at CA community bank
• Two in three respondents work at banks that do not provide any
type of formal environmental risk training…
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31. Smaller Banks, Less Likely to Train
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32. What are the greatest challenges
your lender clients face?
5. TIE:
• Competitive issues
• Making environmental due diligence decisions
4. Compliance with changing regulations, policies and
procedures
3. Turnaround time constraints
2. Internal education/training bank staff on importance of EDD
in context of overall lending process
1. Lack of expertise to understand reports, make risk‐based
decisions
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33. Banks’ Engagement in Environmental Due
Diligence (EDD) Function by Bank Size
Large banks
Mid-sized banks “I value EDD.”
“I understand EDD.”
Community banks:
“I have to do EDD.”
• Understand the differences.
• Tailor your messaging to their needs.
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34. As Lending Slowly Ramps Back Up,
What Do Lenders Need?
• Lenders know they need to address environmental risk, but lack the
expertise to interpret results…or plan next steps.
• They need to balance:
• keeping regulators off their backs vs.
• maintaining a competitive edge.
• Assistance justifying environmental due diligence
costs internally…and externally to borrowers.
• Training on basic EDD fundamentals.
• Insight into making due diligence decisions.
• Assurances that environmental risk can be managed while allowing the
bank to focus on its business of extending capital.
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35. Q&A
Dianne P. Crocker
Principal Analyst
EDR’s Market Research Group
Email: dcrocker@edrnet.com
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