The purpose of an Environmental Risk Management (ERM) program is to identify environmental issues that could result in losses and/or liability to the Bank. Appropriate environmental due diligence minimizes financial loss attributable to diminished collateral value, impairment of the Borrower’s cash flow due to environmental costs, and inability to foreclose.
The Federal Deposit Insurance Corporation (FDIC) published an article titled “Guidelines for an Environmental Risk Program” which states, “…institutions should maintain an environmental risk program in order to evaluate the potential adverse effect of environmental contamination on the value of real property and the potential environmental liability associated with the real property.” For a more detailed look at FDIC requirements, read the “Guidelines for an Environmental Risk Program.”
In 2013, the Office of the Comptroller of the Currency (OCC) published the Comptroller’s Handbook, Commercial Real Estate Lending, which also addresses environmental risk management. Specifically, the OCC states,“…the bank’s loan policy should establish a program for assessing the potential adverse effect of environmental contamination and ensure appropriate controls to limit the bank’s exposure to environmental liability associated with the real estate taken as collateral.” The OCC’s eighteen bullet points detailing the components of an effective ERM program can be found here beginning on page 69.
Do you need assistance creating or updating your financial institution’s environmental policy?
ERI can create or amend an environmental policy in order to meet your Bank’s real estate lending practices and risk tolerance.
Please stay tuned, as ERI will be developing articles related to the key elements of an effective ERM program. Representative topics include responsibilities of key bank officers, loan documentation, levels of environmental due diligence, risk mitigation and loan monitoring, among others.