Waste Not, Lend Not

Financial reporters complain that tight monetary policy may stifle any recovery from the current recession. But another impediment may dwarf the credit crunch for lenders and borrowers: liability for environmental cleanups.

Federal regulations require property owners to clean up land contaminated with hazardous wastes. To avoid liability for toxic cleanups, a bank must also test the soil and ground water on a parcel of land before it offers a mortgage on it. But regulators increasingly force banks holding foreclosed properties to pay for waste disposal—even if the banks didn't do the dumping. Banks, fearing liability for cleanups, now hesitate to lend money to businesses that handle dangerous materials.

The Wall Street Journal cites as an example Miner's Bank of Butte, Montana, which foreclosed on a piece of property after it discovered the business there contaminated the site with hazardous materials. Environmental regulators say a cleanup will cost $10 million—and Miner's Bank (with only $2.5 million in working capital) has to help pay for it.

While lenders can't be held liable for cleanup costs if they simply hold a mortgage on a piece of property, they can be responsible if they foreclose the mortgage. In May 1990, the 11th Circuit Court of Appeals stated that as long as a lender holds a mortgage it has the opportunity to influence what a borrower does with his property. The Court said ensuring proper waste disposal is part of this responsibility.

Bankers from Indiana and Massachusetts have testified before Congress that they may stop lending money to businesses that handle potentially hazardous materials, such as dry cleaners, electric platers, wood finishers, and furniture manufacturers.

Government lending agencies aren't exempt from liability. The Small Business Administration holds leases or mortgages on 150 properties in 35 states with toxic cleanup problems.

And Kent Jeffreys, environmental policy analyst at the Competitive Enterprise Institute in Washington, D.C., notes that the Resolution Trust Corp. faces liability problems with foreclosed property from failed savings-and-loans. Jeffreys says taxpayers, through the RTC, will have to pay for Superfund cleanups or asbestos removal on foreclosures.

Rep. John LaFalce (D–N.Y.), chairman of the House Small Business Committee, plans to introduce a bill that would relieve lenders of the responsibility to clean up foreclosed property. But the Natural Resources Defense Council and other environmental groups want any legislation to force private lenders and government agencies to retain some liability on foreclosures.