The purpose of the tiered approach is to factor risk into the level of review.
The results of the Questionnaires and Screening Process are designed to allow the Bank to assess risks associated with historical and current use to conclude either (a) that no further inquiry is needed to assess the potential for identifying any recognized environmental conditions or (b) that further inquiry is required to assess the environmental condition of the property.
No matter what tiered approach is used, the Bank should require borrowers to provide information on historical and current property uses, the existence, storage and/or maintenance of hazardous materials and waste, environmental hazards on adjacent properties, and their environmental policies and procedures.
If the borrower’s information discloses business activities (historical or current) of a type which could give rise to environmental exposure, the Bank must decide whether the inquiry should be limited to those specific outstanding issues or should proceed to a full Phase I. The Bank should also review the borrower’s business plans and management systems to ensure compliance with applicable legal and regulatory requirements.
If circumstances warrant, the Bank should also require a professional audit or assessment to help the Bank evaluate its environmental credit risk.
SBA. If the loan amount is less than the prescribed amount requiring a Phase I, the Small Business Administration Tiered Approach can be used. A sample Environmental Questionnaire and Disclosure form used by the Small Business Administration is located at the end of this Chapter. It can be located on their website www.sba.gov.
If the loan is secured with commercial real estate, some level of environmental due diligence is required.
•If the commercial real estate’s current or past use is listed on the identified “environmentally sensitive industries” the Bank must begin with a Phase I environmental study. For SBA loans the report must be submitted to and approved by the SBA prior to loan disbursement.
•If the loan is less than $150,000, and the real estate is not identified as environmentally sensitive, the Bank may begin with an Environmental Questionnaire.
•If the loan is over $150,000 and not identified on the list of sensitive industries, the Bank should begin with a Records Search with Risk Assessment (RSRA). The Bank should still have the current property owner complete an Environmental Questionnaire on the subject property. Upon completion and review of the RSRA, the Bank should follow the recommendation of the provider. For SBA loans if the report indicates “No further action required”, send a copy of the report to the SBA underwriting for concurrence. If the report recommends further investigation, the Bank must follow the guidance provided, usually a step to a Phase I environmental review.
It is important for lenders to follow the required steps in due diligence with regards to environmental concerns. The Bank will avoid potential costs and risks that often stem from financing a property with unforeseen environmental contamination. For a Bank working with its borrower on a purchase money deal it is important to explain to your borrower that this effort also protects their investment in the asset.
ASTM. Another process that can be used under a tiered approach is the ASTM Transaction Screening Practice. When the practice was originally approved in 1993, it was a tool used to help property owners qualify for the innocent land owner defense under CERCLA. Following the enactment of the Small Business Liability Relief and Brownfield’s Revitalization Act (Brownfield Act) in 2002, ASTM E 1528 was no longer relevant to that defense. In order to qualify for the defenses under the Brownfield Act, a property owner must conduct “all appropriate inquiries” (AAI) for historical and current uses. EPA expressly stated that ASTM E 1528 does not meet AAI. To meet the AAI standard, a Phase I must be conducted in accordance with ASTM E 1527-13.
The ASTM Transaction Screening Process requires the Bank to complete the ASTM Transaction Screening Questionnaire and requires limited database research of certain readily available government records and historical sources. It is designed to identify recognized environmental conditions in connection with real estate and does not require the judgment of an environmental professional. To complete the questionnaire, a series of questions are answered by (a) the borrower, (b) an individual knowledgeable about the property, and (c) the loan officer or other Bank representative conducting the site inspection and database review. The ASTM E 1528 Form and Process may be purchased from ASTM International on their website at www.astm.org.
Fannie Mae. A similar Form 4340 Environmental Questionnaire is used by Fannie Mae. A sample of the Fannie Mae Form 4340 is located at the end of this Chapter.