Concerns to Mortgage Lenders under U.S. Environmental Laws


United States federal and state environmental programs may give rise to four types of concerns to mortgage lenders, specifically: (1) impairment of the ability of a borrower to repay a loan; (2) diminution in value of the collateral; (3) subordination of the security interest to an environmental lien; and (4) potential for direct liability under environmental laws. Of these four, the potential for direct liability is of greatest concern, because , unlike the other three, that exposure is not limited to the value of the loan. To address lenders' fears regarding direct liability, Congress enacted legislation that established guidelines and safe harbors for lenders. This paper briefly addresses each of the four environmental concerns to lenders, and discusses the safe harbors Congress established to ease lenders' fears.
I. Environmental Concerns to Lenders

A. Impairment of Borrower
The financial viability of the borrower is affected by the costs it must incur to comply, and the costs it may incur if it fails to comply, arising from fines and penalties (both civil and criminal) and injunctive relief, e.g., a requirement to investigate and remediate property, or to cease operations. The borrower's viability also is affected by liabilities associated with onsite waste disposal, which may affect the collateral as well as the borrower, and with its offsite waste disposal. These liabilities include costs of investigation and remediation, natural resource damages, and damages to people ( toxic tort) and property.
B. Diminution in Value of Collateral
The value of real estate used as collateral may be affected by liabilities associated with onsite disposal and other onsite conditions and by land use restriction arising from environmental programs. The presence of contaminants may trigger cleanup obligations and regardless will affect value. Some environmental land use restrictions may be deed recorded, e.g., limitations under state cleanup programs because of the presence of residual contamination; others may not, e.g., limitations on the development of property because of the presence of endangered species or wetlands, or as a result of watershed protection ordinances.
C. Subordination of Security Interest to Superliens
The potential for a security interest to be subordinated to an environmental lien may be a significant concern to mortgage lenders, depending on the state in which the collateral is located. Under the federal Superfund statute and a number of state analogs, cleanup costs incurred by the government give rise to a lien on the property remediated. Under Superfund and the statutes of most states, this lien does not take priority over prior recorded liens. In some states, however, having "Superlien" statutes, the environmental lien takes precedence over all prior liens, with the possible exception of tax liens. In several of these states, an environmental lien may be imposed not only on the property remediated, but on other property, real or personal, owned by the person owning the remediated property. Those liens, however, are not Superliens, because they must have been recorded to be effective.
D. The Potential for Direct Liability under Superfund and Related Programs
Because the potential for direct liability creates exposure that is not limited to the value of the loan, this concern is the most significant to mortgage lenders. Although direct liability can arise under most of the environmental laws based on lender involvement, the primary focus of lender concern has been on Superfund and its state analogs. Under Superfund, so-called potentially responsible parties (PRPs) are strictly, generally jointly and severally, and retroactively liable for costs of investigation and remediation and for natural resource damages, exposure that easily can run into the millions of dollars.
Lender liability as a PRP under Superfund is generally predicated on the lender being considered an owner or operator, or possibly an arranger, three categories of PRPs under the statute. Superfund does include an exemption from liability for lenders who without participating in the management of a facility (from which there was a release or threat of release of hazardous substance) held indicia of ownership primarily to protect their security interest. Despite this "secured creditor exemption," mortgage lenders were held liable for both pre-foreclosure activities, based on their involvement in facility operations, and for post-closure ownership, for holding the property for reasons unrelated to protecting their security interest.

II. Safe Harbors for Lenders to Avoid Direct Liability Under Superfund
To address lenders' fears regarding direct liability, Congress enacted the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996. This act amended Superfund and the Resource Conservation and Recovery Act (regarding underground storage tanks), and established both general criteria, as well as specific pre-and post-foreclosure safe harbors for mortgage lenders to protect against PRP liability. The act also limited the liability of fiduciaries, establishing safe harbors for them too.

A. Pre-Foreclosure
For mortgage lenders, the act clarified that "participation in management," so as to void the exemption, referred to actual participation in the management or operational affairs of the facility, and not to the mere capacity, or right to control. Specified safe harbor, pre-foreclosure lender activities include: drafting provisions relating to environmental compliance; enforcing those provisions; performing inspections; requiring that releases of hazardous substances be addressed; providing advice to minimize the diminution in value; restructuring the loan; exercising remedies for breach; and conducting a response action, provided certain conditions are met.
B. Post-Foreclosure
For mortgage lenders that foreclose, the act clarified that Superfund liability did not attach as long as the lender seeks to sell, re-lease (for lease finance transactions), or otherwise divest itself of the property at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements. The exemption will not apply if the property is being held for investment purposes or if the lender engages in activities that would give rise to operator or arranger liability, e.g., it disposes of waste onsite.

III. Conclusion
In sum, environmental programs may impact both the value of the collateral and the ability of the borrower to repay the loan. They also may result in Superliens. The greatest environmental concern to mortgage lenders, however, is the potential for direct liability not limited to the value of the loan. This concern has been significantly ameliorated by Congress in establishing guidelines and safe harbor activities that enable mortgage lenders to plot a course that avoids Superfund liabilities.

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