A moldy loan: the anatomy of a lender put in jeopardy.

Despite the lack of scientific proof that mold in homes causes serious occupant illnesses, the steady growth of mold litigation has not slowed in the commercial and residential real estate industries. The threat of litigation in this expanding legal gray area has compelled lenders to protect their mortgage portfolios by working with insurers and environmental consultants on new risk mitigation programs.

The recently launched GREENGUARD Mold Protection Program is the first clear set of guidelines ensuring that builders involved in new construction loans will implement best practices for safeguarding against the damage and resulting losses caused by mold.

"Protecting your portfolio has never been more difficult," said Carl Smith, CEO/Executive Director of GREENGUARD Environmental Institute (GEI). "Lender liability concerns have now spread to other loan categories as state legislatures have stepped into the equation, making it possible for multiple lender exposures and potential losses from just one instance of mold contamination."

Laws like those in California, which target developers and contractors responsible for structural defects within the first ten years of occupancy, could mean millions in liability losses for each case of mold contamination. The new context of this law has paralyzed many California builders, sending ripples through the lending community.

"Instead of just worrying about mold's financial impact on the collateral supporting the mortgage industry, especially new construction, lenders now have to additionally guard against the weakening of their business loans to builders and contractors," said Smith. "If builders who borrow money for their business are hit with mold-related suits under the California law, they can be held liable for ten years post-construction, therefore affecting their own financial status and the relationship with their lender. And this is just the beginning--we've heard that seventeen other states are considering similar legislation."

If mold dramatically decreases property values, it could force these loans into a "non-performing" category. That classification causes a negative chain reaction from ratings agencies, regulatory authorities, and shareholders.

GEI's mold risk reduction program certifies the design, construction and ongoing operations of newly constructed multifamily and commercial properties.

The program fills a void for lenders and building owners that has grown increasingly serious over the last several years.

"Especially in light of the multiplying liability issues, should we not always attempt to prevent the presence of mold? Who would refute that?" said Smith. "As bad as the current problem is for lenders, it isn't as bad as what we could see if other states follow California's lead on mold liability for developers and builders."

The GEI program is based on a compilation of best practices that GEI has developed and proposed as an American National Standards Institute (ANSI) standard. The proposed standard has been preliminarily reviewed by the Environmental Protection Agency (EPA) and piloted with several building owners. Building consultancies review and assess properties based on the standard; once this is successfully completed, property owners can apply to GEI for certification under the GREENGUARD Mold Protection Program. Once a property is certified, it can be promoted to lenders, insurers and prospective tenants.

"Who is ultimately holding the financial bag for construction and permanent mortgages along with business loans to builders? The lender," said Smith. "The bank typically holds 80% or more of the risk in these loans (since 20% is typically invested by the borrower). Therefore, the smart lenders will work even faster to protect themselves."