Pub. 15 2018 Issue 4

Issue 4 • 2018-2019 15 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S regulation of Underground Storage Tanks (USTs). USTs are most often used to store gasoline and diesel at filling stations, and are frequent sources of environmental contamination. Al- though established by federal law, state agencies regulate UST activity, including the cleanup of environmental contamina- tion. RCRA contains no liability protections, so when making loans on UST sites, banks often require indemnification from sellers for any past environmental contamination discovered onsite after the transaction. Pronounced “SIR-kla” (CERCLA), the Comprehensive En- vironmental Response, Compensation and Liability Act, au- thorizes actions in response to environmental contamination. In CERCLA terms, contamination includes things like paints, pesticides, and chemicals. Generally, the businesses most like- ly to be CERCLA concerns are dry cleaners, auto repair shops and manufacturers. Luckily for banks and borrowers, CERC- LA contains liability protections provided that the borrower conducted “all appropriate inquiries.” “All appropriate inquiries,” is an EPA standard used to eval- uate a property’s environmental condition and assessing po- tential liability for any contamination. The standards by which environmental assessments are conducted are published by ASTM International, and a borrower generally conducts “all appropriate inquiries” by having an ASTM E1527 Phase I En- vironmental Site Assessment conducted on their property. For most banks, this is where having a structured environ- mental policy fits in, because Phase I ESAs are expensive and are not required by federal regulation or state law. In 2006 the FDIC indicated in an Institutional Letter that banks should maintain an environmental risk program in order to screen potential collateral properties for environmental contami- nation, but this is to protect the safety and soundness of the bank’s collateral. The FDIC guidance addresses environmental risk management in very general terms and leaves it up to banks to come up with specific policy requirements based on each bank’s own appetite for risk. For many loans, particularly those of a lower dollar amount or on certain property types, banks do not require Phase I ESAs and evaluate environmen- tal risk onsite using other methods. A good first step in evaluating environmental risk is com- pleting first portion of the ASTM E1528 Transaction Screen Questionnaire (TSQ). The instructions on the TSQ indicate in several places that the E1528 does not comply with “all appropriate inquiries,” so this is not used for protection from CERCLA liability, it is used to determine if the risk onsite for environmental concerns is low enough to proceed with the loan without conducting more due diligence onsite. The first portion of the TSQ is generally filled out by the borrower and the lender while visiting the property being Issue 2 • 8 n Environmental Risk continued on page 16 The Advisors’ Trust Company ® Zia Trust, Inc. 505.881.3338 www.ziatrust.com 6301 Indian School Rd. NE Suite 800, Albuquerque, NM 87110 We work alongside your customers’ investment advisor Certificate of insurance available upon request • Retain your relationship with your customer • No retail services, just trust administration • Serving trust clients throughout the entire state of New Mexico Partnering with Community Banks to Serve Trust Clients