The document discusses guidelines for developing an effective environmental risk management policy. It recommends that banks assess their risk appetite and the types of lending and collateral typically involved to determine what the policy should include. The key elements of an effective policy are roles and responsibilities, personnel training, types of properties covered, a tiered approach to environmental due diligence based on risk levels, ongoing monitoring, and qualifications for approved environmental professionals. Developing thresholds for different levels of environmental due diligence based on risk factors like loan size, property type and location is an important but complex part of the policy. The policy should be reviewed annually and updated as needed to ensure it continues meeting the bank's needs.

1. March 2009 The RMA Journal
Environmental Risk
Torian/Shutterstock
••It’s time for bankers to assess and manage environmental risk
in a consistent and effective way. The best approach is to develop and
implement an environmental risk policy.
62
Developing and Updating
an Environmental
Risk Management Policy

2. The RMA Journal March 2009 63
While the process of creating a complex document like
an environmental policy may seem daunting, the job is
quite manageable once you know what to include. The
following guidelines for writing an environmental policy
have been collected from the trial-and-error experiences
of many banks. Take advantage of their efforts, and you’ll
soon be on your way to having a clear, effective environ-
mental policy of your own.
Environmental Risk
To manage environmental risk, you need an environmental
policy. Contaminated property securing a loan transaction
can expose the lending institution to direct liability for
cleanup costs as well as probable litigation. It can cause
buyers to default if they are forced to divert cash flow to
pay for cleanup and, in the case of foreclosure, leave the
bank with a property that may be difficult to sell. In addi-
tion to the credit risk, environmental issues can damage a
bank’s reputation, brand, and image.
Consequently, regulators like the Federal Deposit In-
surance Corporation (FDIC), the U.S. Small Business Ad-
ministration (SBA), and the Office of the Comptroller of
the Currency (OCC) require banks to screen properties
for environmental risk as part of the underwriting due
diligence and the bank’s core credit risk management pro-
cess. Most importantly, a formal environmental risk man-
agement policy protects your bank and its customers.
Getting Started
Now that you know why you need an environmental pol-
icy, the next step is to decide what to put in it. Begin by
reviewing your bank’s business objectives and appetite for
risk, especially the environmental risk associated with a
given transaction.
Look at the types of lending practiced by your bank’s
business units and the markets served by your lines of
business. Any transaction secured by real estate is prone
to environmental risk, and certain types of business activi-
ties are environmentally riskier than others. Your bank’s
appetite for risk will influence its willingness to lend to
environmentally sensitive businesses and give you an idea
of its preference for real estate collateral. Some lenders
tend to be risk averse while others are willing to accept
some risk in order to build market share or delve into new
markets. The distinction should be accounted for in the
environmental policy.
John Rybak, environmental risk manager of $132 bil-
lion BB&T, based in Charlotte, North Carolina, says a
lender can determine a bank’s risk tolerance by asking
management how much money they consider material
in the event of a loss or write-off and whether they are
willing to take contaminated collateral. “If your bank de-
cides to lend on contaminated properties or to high-risk
Just as nature abhors a vacuum, risk managers despise
unmitigated risks. Unfortunately, our urbanized, industri-
alized, and mechanized lifestyle is rife with risk—poten-
tial hazards are built into our factories and homes, parks
and farms.
Environmental risk is now an element of credit risk; a
borrower’s cash flow and resources are vulnerable to the
liabilities of environmental pollution and degradation. It’s
time for bankers to assess and manage environmental risk
and ensure that they do so consistently and effectively.
They can accomplish this by developing and implement-
ing an environmental risk policy.
by Derek P. Pollard and Jamie Haberlen

3. March 2009 The RMA Journal
industries, you’ll need a trained internal staff or a strong
relationship with an outside vendor, such as an environ-
mental professional or lawyer,” he warns. “These profes-
sionals can help solve the issues that come up in lending,
foreclosure, or both by helping you evaluate and manage
the risks or remediate as necessary.”
Another approach is to review defaulted assets with
environmental issues and consider what you could have
done at origination to avoid the risk. The answer will
likely confirm that some basic investigative tools, such as
a site visit or a government records search, might have un-
covered enough risk to decline some of these loans or to
require some remediation effort to clean up the real estate
collateral. Yet another
finding might have
been that gas stations,
dry cleaning stores, and
other operations with
environmentally risky
activities should have
triggered some level of
64
environmental due diligence prior to making the loans.
Once you have evaluated your bank’s risk appetite, an-
swer the following questions to help shape the scope and
content of your environmental policy.
■
What type of real estate property do we typically take as col-
lateral? Commercial and industrial sites have a higher like-
lihood of contamination than residential properties, but
environmental issues can affect all real estate, regardless
of use. Factor into your environmental policy the typical
collateral you take on. Do factories, office buildings, or
personal residences dominate the bank’s real estate collat-
eral? As a rule, industrial sites require more scrutiny than
residential homes.
■
Where are our lending activities concentrated? The char-
acteristics of a region can influence environmental risk.
For example, Florida’s high water table presents different
environmental risks than tall grass prairie in western Kan-
sas. Factor into the policy the region’s regulatory climate,
geologic sensitivity, groundwater use, and development
trends. National and international banks can tailor their
policies to account for regional differences.
■
How old are the properties we typically lend
on? The longer a property has been in use,
the greater the chance that on-site activi-
ties have led to contamination. Consider
the risks associated with converting an old
Detroit auto plant into an office warehouse
complex. Even virgin land is not immune
from environmental problems; contamina-
tion can migrate under certain conditions.
■
How big are we? While the risks stemming
from contamination are comparable for
both small and large banks, small banks
have relatively more exposure. A $100 bil-
lion bank can handle a $1 million loss, but
that same loss might devastate a small com-
munity bank. For this reason, and because
they can afford to keep experts on staff who
can interpret environmental data, larger
lenders can operate with higher limits of
environmental risk. “The underlying con-
cepts and tools [to mitigate environmen-
tal risk] are the same for large and small
banks, but when and how you apply them
is lender-specific and based on the talent
available to mitigate the risk you take on.
Small banks must ask how much risk is ac-
ceptable for them to make loans,” confirms
Rybak.
Essential Ingredients
Now that you have a general idea of the
shape and content of your environmental
Florida’s high water
table presents different
environmental risks
than tall grass prairie
in western Kansas.
Weather map during hurricane season.
CarolinaK.SmithM.D./Shutterstock

4. The RMA Journal March 2009 65
■
Other considerations: Determine what levels of environ-
mental due diligence and review are required for renewals,
restructures, and other
subsequent transactions.
Critical considerations
include amount of new
money, age of prior due
diligence reports, and
any material change in
collateral condition or
use. Determine what lev-
els of environmental due
diligence and file review
are required at the pre-foreclosure stage and assign respon-
sibility for review prior to taking title. Be sure to educate
staff about CERCLA’s (Comprehensive Environmental Re-
sponse, Compensation, and Liability Act) secured creditor
exemptions.
■
Updating: Set a schedule for periodic review of the envi-
ronmental policy. Most banks review the policy annually
to ensure that it remains in line with the bank’s business
model and goals. Review the policy sooner if regulatory,
competitive, or other issues warrant it.
Setting Thresholds
Developing a tiered environmental due diligence ap-
proach is arguably the most complex portion of writing
the environmental policy. It is not practical to require ex-
haustive environmental due diligence for every transac-
tion, so many banks increase the diligence as the risk rises
by employing an approach that progresses from a quick,
inexpensive database report to a more thorough tool such
as a transaction screen assessment, finally culminating in
a full-scale, Phase I ESA that complies with the Environ-
mental Protection Agency’s (EPA) All Appropriate Inquiry
(AAI) rule or its equivalent, ASTM’s E1527–05 standard.
In cases where contamination is known or suspected, due
diligence may even go beyond a Phase I ESA and include
additional investigation or sampling to characterize the
extent of the problem.
Each of these five commonly used environmental risk
management tools1
has a place in a sound risk manage-
ment program:
1. Phase I ESA.
2. Transaction screen assessment.
3. Desktop review/collateral screen.
4. Environmental questionnaire.
5. Environmental indemnification agreement.
Lenders should note that the SBA has added a new level
of environmental due diligence, “Records Search with Risk
Assessment,” to its most recent policy update, SOP 50–10
(5), which took effect August 1, 2008. The new tool in-
cludes a search of all databases required under the EPA’s
policy, the next step is to begin formalizing it and tailoring
it to your bank’s objectives and risk appetite. Be sure to
include the following:
■
An objective: Explain the purpose of your environmen-
tal policy. Include the business units or groups within the
bank that are required to adhere to the policy.
■
Roles and responsibilities: Clarify who the policy governs,
who will enforce it, who can approve changes, and who,
if anyone, has the right to waive it and under what cir-
cumstances. In some banks, the task of enforcement falls
to the commercial credit administration department; in
others, the environmental risk department, the approval
department, or senior management, such as a credit risk
officer, is responsible. Spell out whose responsibility it
is to review environmental due diligence reports. This
may vary, depending on whether the report recommends
further action and is prepared for a borrower or a third
party, or if a state or federal agency is involved. Take extra
care here: The review of reports by qualified professionals
who understand both banking and environmental issues
is one of the most critical elements to an effective envi-
ronmental policy.
■
Personnel training: Spell out the terms and issues relat-
ing to the value of real estate and the creditworthiness of
the borrower. Consider training the loan documentation
department on the policy’s features so its members can
evaluate whether closed loans evidence the appropriate
level of environmental due diligence.
■
Types of properties subject to the policy: Give underwriters
clear guidelines on when properties are subject to envi-
ronmental due diligence. All commercial real estate, in-
cluding bank-owned real estate, commercial real estate
lending, acquisition and development lending, commer-
cial real estate whole loan purchase, and commercial and
industrial lending should be addressed in the policy. Con-
sider including residential property suspected of having
risks such as mold growth or vapor intrusion.
■
Risk analysis: Identify which specific transactions require
scrutiny.
■
Tiered approach: Define which environmental due dili-
gence tools should be used for a given scenario. Consider
funding source, property type, property location, loan
amount, etc.
■
Ongoing monitoring: Spell out how often you wish to ob-
tain updated information about environmental risks, in-
demnities, and conduct in nonperforming or other trou-
bled loans, and define what bank employees should or
shouldn’t do to ensure secured creditor protection.
■
Policy regarding vendors/environmental professionals: Clarify
your vendor approval process. Specify mandatory qualifica-
tions required of outside environmental consultants. Con-
sider setting up an account with a database vendor that can
provide environmental records search reports.
Developing a tiered
environmental due
diligence approach is
arguably the most complex
portion of writing the
environmental policy.

5. March 2009 The RMA Journal
AAI rule, historical use records for the property and any
adjoining properties, and a risk assessment (high or low)
provided by an environmental professional. This new level
of due diligence might be worth adding to your toolbox be-
cause banks are expected
to adopt it for non-SBA
loans as well.
Putting these tools
into a table makes it
easier for underwriters
to make due diligence
decisions.
You can include con-
siderations such as the size of the transaction, its perceived
risk, the historical environmental problems on the subject
or adjacent properties, whether the transaction will later
be sold in the secondary market, the bank’s risk tolerance,
the level of environmental expertise available at the bank,
whether the SBA guarantees the loan, and other criteria per-
tinent to your business model, such as the borrower’s rela-
tionship with the bank. Remember that environmental risk
is a function of a site’s current and past use and may not be
reflected in its current value, so avoid basing the degree of
environmental due diligence on loan value alone.
Your due diligence thresholds can evolve over time,
once you see what works and what doesn’t. “Our trig-
gers are a result of benchmarking the competition,” says
Brian Walker, corporate environmental and engineering
manager with Washington Mutual, based in Seattle. “Our
dollar thresholds have been updated to recognize that the
66
value of a dollar deteriorates over time with inflation and
a general rise in real estate values.” [Can you still claim
“a general rise in real estate values”?]
If liability protection for the borrower under CERCLA
is important to the bank, only an AAI- or E 1527–05-com-
pliant Phase I ESA will suffice. Put another way, if a prop-
erty purchaser wishes to take advantage of any of the three
liability defenses to CERCLA—the innocent landowner,
bona fide prospective purchaser, or contiguous property
owner—he or she has no choice but to have an AAI- or E
1527–05-compliant Phase I ESA prepared by a qualified
environmental professional for the property in question.
An AAI-complaint Phase I ESA is the new standard of
care in environmental risk management, and many lenders
require one. But while there are many circumstances where
a Phase I is standard practice, it’s not always practical. For-
tunately, database reports are effective screens that provide
a low-cost, quick alternative when time is short and bud-
gets are tight. They can be used when CERCLA liability
protection isn’t a concern and the user has no reason to
suspect that an environmental problem will arise. If suspi-
cions are raised or problems are discovered, the lender can
always move to the next level of due diligence.
Approving Environmental Professionals
Developing an approved list of environmental profession-
als presents another challenge. First, you must decide
what qualifications you will accept; for example, only
those meeting the definition of “environmental profes-
sional” under EPA’s AAI rule can conduct AAI- or ASTM
environmental risk is
a function of a site’s
current and past use
and may not be reflected
in its current value.
Table 1
Typical Use Typical Cost Average Turnaround Performing Party Standards
Phase 1 ESA
Loans over $1M and
inherently higher-risk property
types of any loan amount
$2,700 average, with varia-
tions depending on scope,
location, and property type
and size
2 - 5 weeks
Qualified environmental
professional
ASTM E 1527-05, AAI
Transaction Screen
Loans under $1M or
inherently low risk
property types
$800 - $1,200
1 - 2 weeks Environmental professional or
bank officer
ASTM E 1528 or internally
created bank scope
Records Search with Risk
Assessment
SBA loans $400 - $500 5 - 7 business days
Risk assessment portion must
be completed by a qualified
environmental professional
Defined in SBA’s
SOP 50-10 (5)
Desktop Records Review
Any loan; typically used as a
screening tool
$150 - $500
1 - 7 days
Obtain from data provider or
Internet/library, or third-party
consultant obtains and per-
forms research/interpretation
ASTM E 1527-05 and/or
transactionspecific criteria
Environmental
Questionnaire
All loans $0 N/A
Borrower and bank staff;
becomes part of the applica-
tion or loan documents
Usually a standard template
prepared by the bank’s
attorney
Environmental Indemnity
Agreement
All loans $0 N/A
Borrower and bank staff;
becomes part of the applica-
tion or loan documents
Usually a standard template
prepared by the bank’s
attorney

6. The RMA Journal March 2009 67
defense under CERCLA. Many bank’s environmental poli-
cies don’t address this issue directly, but the bank moni-
tors properties by conducting regular site inspections and
collateral assessments over the life of the loan. Consider
whether this is sufficient for your bank.
The Finishing Touches
When you’re ready to publish your new environmental
policy, run it by an environmental attorney or environ-
mental professional who
can help ensure that the
due diligence guidelines
you’ve set are in line
with the bank’s overall
risk management goals.
An attorney also can
help draft an agreement
for hiring environmental
professionals. Finally, en-
sure that bank personnel
read and understand the
environmental policy, and make sure senior management,
including the senior credit risk officer, will enforce it. After
all, a policy that nobody enforces is useless.
As you develop, implement, and maintain your envi-
ronmental policy, you can draw upon additional resources
and peer organizations and publications, such as the Envi-
ronmental Bankers Association (www.envirobank.org) and
BNA’s Environmental Due Diligence Guide. Trade organiza-
tions and networking opportunities, such as those found
at industry conferences, also can help you when drafting
or updating your policy and risk tolerances. Environmen-
tal Data Resources (www.edrnet.com) has sample environ-
mental policies and questionnaires that it makes available
to lenders. Large banks with in-house environmental risk
managers also can offer invaluable information.
Will Rogers once said that everybody is ignorant, only
on different subjects. That’s all the more reason to build a
network of contacts who can help you find the answers to
your environmental questions. v
••
Derek P. Pollard is first vice president and commercial real estate credit policy
officer, Credit Risk Management, SunTrust Banks, Atlanta, Georgia. Contact him
by e-mail at derek.p.pollard@suntrust.com. Jamie Haberlen is national account
manager, Lender Services, Environmental Data Resources. Contact him by e-mail
at jhaberlen@edrnet.com.
For related articles by Pollard and Haberlen on environmental due diligence, see
The RMA Journal May 2008, pp. 24–30, and September 2008, pp. 69–73.
Note
1. For a more in-depth look at these tools, consult “Environmental
Due Diligence Tools: Phase I and Beyond,” The RMA Journal, Sep-
tember 2008.
E 1527–05-compliant Phase I ESAs—vital if CERCLA li-
ability protection is a concern. You also must decide who
will approve individual vendors and who will review and
maintain the list.
Rybak recommends keeping the list short. “It should
be big enough to serve your needs but small enough to
manage, because if you don’t have some controls, the list
will become unmanageable, and the number of new re-
quests to be added to the list can dominate your time.
I find a small list of highly competent and experienced
firms works best and allows us to focus our time on due
diligence, not list management.”
Another aspect of the policy build is determining who
should order the Phase I report. Banks that maintain lists
of preapproved environmental professionals often prefer
to control the quality of the ESA by ordering the report
themselves. In the real world, however, borrowers often
prefer to order the ESA because they generally shop their
transactions to several banks. (In order to shop the trans-
action, the borrower orders the ESA and sends it to several
financial institutions for review.) If the borrower orders
the report, the financial institution should request a reli-
ance letter so that it also can rely on the results of the ESA.
SunTrust Bank, for example, strongly prefers to order the
Phase I ESA. If the borrower orders the report, however,
SunTrust will accept it only if it is ASTM E 1527–05-com-
pliant and accompanied by a reliance letter signed by the
environmental consultant.
You’ll also need to decide whether to accept reports
from nonapproved consultants and under what circum-
stances. And you’ll need to determine if you will accept
existing reports and under what criteria—seller-prepared
reports versus bank- or client-prepared, reports on sus-
pect properties, outdated reports, incomplete reports, and
so on.
Additional Considerations
Once you have tackled the policy components outlined
above, consider fine-tuning the document by address-
ing other issues, such as whether to differentiate between
high-risk properties such as manufacturers and low-risk
properties such as apartments, whether you will lend on
contaminated properties or gas stations, how you will
handle waivers—at the credit level or environmental
department [not clear]—and what pre-foreclosure due
diligence you’ll require.
You should also address “continuing obligations.” In its
most recent environmental policy revision, the FDIC rec-
ommends that the lender’s environmental risk assessment
extend over the life of the loan. This ties in with EPA’s AAI
rule requirement that property owners comply with so-
called continuing obligations over the course of property
ownership, which preserves their ability to raise a liability
Ensure that bank personnel
read and understand the
environmental policy,
and make sure senior
management, including
the senior credit risk
officer, will enforce it.