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Lending liability legislation.


When a mortgage lender originates a $50,000 loan on commercial or residential property, the most it can cost is $50,000. Right? Wrong. In the wake of several recent federal court decisions interpreting the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), better known as Superfund, lenders are discovering that if a $50,000 loan is secured by property contaminated with hazardous waste, they may be held liable for the multi-million dollar cleanup of that property even if they are unaware of the conditions. The result is that lenders are unwilling to originate loans using real estate as collateral, and potential borrowers cannot obtain financing. The impact on the small business community can be devastating.

Several years ago, federal courts began expanding the reach of Superfund liability so that a foreclosing lender could be held liable for the cost of a hazardous waste cleanup. In 1982, for example, Maryland Bank and Trust Company foreclosed on a farm that the Environmental Protection Agency (EPA) later discovered was contaminated with hazardous waste. EPA then cleaned up the site at a cost of half a million dollars and sued Maryland Bank and Trust for reimbursement. Even though the bank had no idea at the time of foreclosure that the property was contaminated and did nothing to create the problem, the federal district court of Maryland found that the bank was an "owner" within the meaning of CERCLA. Therefore, the bank was subject to Superfund's strict liability standard. EPA settled with Maryland Bank and Trust for more than half a million dollars.

Although U.S. vs. Maryland Bank & Trust is the most notable case of its kind, there have been others like it. In Guidice vs. BFG Electroplating, a 1989 federal case in Pennysylvania, a bank foreclosed on a defunct electroplating plant and held title for just eight months before reselling the property. The bank in no way contributed to the hazardous waste contamination and was merely acting to protect its security interest. Nevertheless, in September 1989, the U.S. District Court for the Western District of Pennsylvania held that the bank was an "owner" under the Superfund statute, and thus liable.

Cases like these are sending shock waves through the financial community. Suddenly, lenders foreclosing on their security interests are faced with the threat of potentially limitless liability. As the Mortgage Bankers Association (MBA) stated in their August 1989 testimony before the House Banking Committee:

"...a lender who had no involvement

in generating hazardous

waste or depositing hazardous

waste on a property...may be liable

for a remedial action several

times the value of the property. In

many instances, the cost of

cleanup can far exceed the value

of the land which is security for

the loan."

Hence, in many cases, lenders have stopped making real estate loans in those areas where there is even the smallest suspicion of hazardous waste contamination.

In 1986, Congress amended CERCLA to insulate a secured lender from liability if the lender can show that before it acquired a facility, it made appropriate inquiries - such as an environmental assessment - to determine whether or not the facility might be contaminated. This is the so-called "innocent landowner defense." The trouble with the innocent landowner defense, as pointed out by the MBA in their testimony, is that there is no clear guidance as to what actions constitute due diligence that would qualify a lender for this defense. And so lenders, not knowing what safeguards will protect them from liability, will stay away from any loan that might pose de minimis environmental risk. The result is a squeeze on credit, and it is the small borrower in need of financing that is hurt.

In addition, the innocent landowner defense raises the cost of borrowing to the point where many potential borrowers can no longer afford to borrow. An initial environmental assessment usually costs about $1,500 to $2,000. If that assessment indicates possible contamination, a more thorough property check can run from $3,000 to $150,000 per site. If lenders conduct such assessments before making secured loans, in order to meet the conditions of the innocent landowner defense, they will-pass along the cost of the assessment to the borrower. For a small borrower seeking a loan of $50,000, that increased cost may well be prohibitive.

Moreover, the recent court decisions clearly contradict congressional intent. In enacting Superfund in 1980, Congress created an express exemption for a lender that "holds indicia of ownership primarily to protect his security interest..."

Despite the clear legislative language, court - in their search for deep pockets to pay for hazardous waste cleanups - have held lenders liable when they exercise their rights by foreclosing on their security interest. Congress clearly did not create a right that it did not intend to be exercised.

In April 1990, I introduced legislation, H.R. 4494, to deal with the problem of lender liability. The bill is designed to clarify the original intent of Congress by saying that the exemption of lending institutions from inappropriate Superfund liability extends not only when they hold a security interest, but also when they exercise their rights in that securty interest. The bill would thus allow them to make loans without taking on potential Superfund liability.

H.R. 4494 is a revised verison of a bill I intorduced a year ago. The earlier version left out certain types of lenders and public lenders (e.g., the Small Business Administration). In drafting the latest version of the legislation, I worked closely with the MBA and others to ensure that it includes all types of lenders that might be subject to unfair liability under Superfund. H.R. 4494 accomplishes that goal.

Since I introduced this legislation, it has attracted the support of a wide coalition of business groups and financial institutions, including the National Federation of Independent Business, the National Association of Manufacturers, the American Bankers Association and MBA, to name a few. To date, the legislation has more than 100 co-sponsors in the House of Representatives.

I am working hard to enact this legislation. But we will need a substantial number of additional co-sponsors in order to get Congress to move this bill forward this year. Interestingly enough, public lenders, such as the Small Business Administration, may provide strong support for the bill because they also face the threat of Superfund liability. We hope that the combined support of government agencies, private lenders and small businesses will give this legislation the impetus that it deserves.

Congressman John J. LaFalce, (NY-D), is a member of the House Banking Committee.
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Title Annotation:effect of Superfund environmental liability law on real estate lenders
Author:LaFalce, John J.
Publication:Mortgage Banking
Article Type:column
Date:Jul 1, 1990
Previous Article:Fitting the pieces together.
Next Article:Secondary market.

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