Lender Environmental
Protection
Hosted by UCPM, Inc.
Presented by:
Bart Jarman
John Farinacci
Discussion Topics
• Environmental Due Diligence
• Lender Environmental Protection
– Benefits
– Lender Coverage
– Portfolio Process
• Alternatives to LE Portfolio
• Q&A
Environmental Due Diligence
• Commercial Lenders Require
Environmental Due Diligence
• Needed to preserve certain immunities
granted by CERCLA
• Lenders create their own due diligence
protocol
• Attempt to Minimize Risk Through:
Environmental Due Diligence
– Loan Underwriting Guidelines
– Transaction Screens/Environmental Database
Reports
– Phase I ESAs
– Environmental Questionnaires
– Environmental Policy & Procedures
– Financial Collateral (Indemnification, Escrow
Funds)
Two Major Concerns Remain with
Traditional Environmental Due
Diligence:
1. Retention of Potential Liability
2. Compromise of Collateral
Historically Lenders Have Retained the Risk
of Environmental Loss
Lender Environmental Protection
Lender Environmental Liability
Developed as an Alternative and/or
Enhancement to Traditional Due
Diligence and to Address Previously
noted Concerns
Lender Environmental Protection
Lender policies are intended to provide
coverage to protect the collateral value in
the event of a loan default and a pollution
event that is first discovered on or at the
covered location during the policy period
Insurance Benefits
• Reduce or eliminate the Cost of
Traditional Due Diligence
• Streamline Loan Process
• Protect Bank Assets by Protecting
Against Loss of Collateral Value
Insurance Benefits
• Insure Lender Liability on Collateral
or REO Property
• Reduce Risk Associated with
Financing Commercial Real Estate
Insurance Benefits
• Provide Cash Flow Management in
the Event of a Claim
• Enhance Capital Market Deals
• Provide Competitive Advantage
Lender Coverage
• Structure
– Portfolio (New or Existing)
– Single Site
• Policy Payout Options
– Lesser Of
– Outstanding Loan Balance & Extra Expense
Lender Coverage
• Insuring Agreements
– Default: Pays Lesser of the Cost of Cleanup
or Loan Balance Depending on Policy Form
– Third Party Claim – Provides Legal Defense
and Indemnification
– Foreclosure – Pays Cost of Cleanup
Lender Coverage
• Underwritten to Financial & Environmental
Considerations
• Financial evaluations:
– Portfolio assesses Lender guidelines
– Single site assesses borrower strength for each
deal
• Environmental Evaluations done for each
Loan
Customer Profile
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Commercial Banks
Mortgage Bankers
Lenders & Loan Originators
Financial Institutions & Investors
Life Insurance Companies
Pension Funds
Lender Coverage - Portfolio
• Portfolio Policy
– Provides Pre-determined pricing
– For a group of loans that grows from
inception for a specific period of time
– Loans categorized as Non-Suspect or
Suspect
Portfolio Process
• Application
– Carrier Application
– Sample Loan Documents
– Lender Financials – 2 years
– Loan Underwriting Guidelines Including
Minimum DSCR & Maximum LTV
– Environmental Policy/Procedures
Portfolio Process
• Pricing Considerations:
– Number of Loans to be Included
– Make-up of Portfolio
– Limits (both per incident & aggregate)
– Term
– Deductible
Portfolio Process
• Quote/Binding
– Quote includes 2 premiums:
• Non-Suspect Loans
• Suspect Loans
– Premiums good for defined period
– Deposit Premium to bind
– Deposit Premium is a credit against
future premiums
Portfolio Process
• On-Going Processing
– The Lender enters loan specific information
electronically direct to the carrier
– Lender receives response from the carrier
generally within 24 hours
– Lender Collects Insurance Premium at Loan
Closing
– Monthly Reconciliation
Portfolio Process
• Monthly Reconciliation
– Carrier generated monthly agent report
– Prior month activity: loans approved
for coverage, loans declined
– Reconciliation with lender to determine
which approved loans have closed
– Closed loans reported to carrier
Portfolio Process
• Monthly Reconciliation
– Closed Loans Endorsed to Policy per
Monthly Reconciliation
– Invoice for Additional Premium After
Reconciliation
Other Options
• Lender Environmental Protection – Single
Site
• Environmental Site Liability with Borrower
as Named Insured & Lender as Additional
Insured
Lender Coverage – Single Site
• Process
– Application
– Copies of Environmental Reports
– Borrower Financials
– PSA
– Loan Documents
– DSCR Analysis
– Appraisal Confirming LTV
Lender Coverage – Single Site
• Pricing Considerations
• Limits
• Current & Historical Property Use
• Clean or Dirty
• Neighboring/Regional Issues
• Borrower Financial Strength/
Dynamics of Deal
• Term & Deductible
Borrower Coverage
• Environmental Site Liability with Borrower
as Named Insured
• Possible Alternative for Some Lenders for
Strong Borrowers
• Lender Included as Additional Insured
• Also Available When Borrower wants
Coverage in Addition to Lenders Coverage
Questions?
UCPM Follow-up
John Farinacci
(949)629-3850
jfarinacci@ucpm.com
Bart Jarman
(480) 682-1562
bjarman@ucpm.com