With the SOP 50 57 3 and the SOP 50 10 7 that both went into effect on August 1, 2023, lenders should be mindful of how updates to the sections covering environmental requirements may impact their environmental policies and procedures moving forward. SOP 50 10 7 contained more sweeping changes for loan closings, with SBA now only requiring environmental investigations when the loan proceeds will be used for the purchase, refinance, and/or improvement of real estate. SOP 50 57 3, which discusses environmental risk management in servicing and liquidation remains substantially similar to the prior SOP 50 57 2. How these two approaches will impact a compliance review in guaranty purchase or in an audit, and whether they are compatible, still remains to be seen.
Under the SOP 50 57 3, SBA requires that a lender service and/or liquidate collateral and manage environmental risk by:
- Conducting adequate due diligence before taking any Loan Action (any loan servicing or liquidation action) that could result in a loss, or increase the risk of loss, due to actual or alleged presence of contamination.
- Monitoring the SBA loan for compliance with environmental covenants in the loan documents, and requiring appropriate corrective action, if necessary.
- Compliance with environmental laws that allow secured creditors to avoid or significantly limit potential liability.
Item 1 above raises some questions. Under the SOP 50 57 3, SBA Lenders must conduct an environmental investigation prior to taking a loan action such as: (i) accepting property as substitute collateral, (ii) releasing collateral for less than its recoverable value or abandoning collateral due to unsubstantiated allegations of contamination; or (iii) acquiring title to real estate in foreclosure. If a post-default environmental investigation discloses contamination that substantially impacts the recoverable value, can the loss impact the guaranty? What if knowledge of its presence prior to closing would have led a prudent lender to change its actions pre-closing? For example, if a lender knew that the property was contaminated and would have required additional collateral or additional life insurance to account for the collateral shortfall, but they didn’t, could that also impact the guaranty?
It is important to note, while the SBA has created more narrow environmental procedure requirements for loans being used to purchase, refinance, or improve real estate with SBA loan proceeds in the SOP 50 10 7, all SBA lenders are still required to be prudent in their decision-making. And while the environmental section of the SOP 50 10 7 doesn’t reference treatment of property that is not being purchased, refinanced, or improved, if a lender’s conventional policies state that environmental investigations should be conducted on these types of properties, lenders should remember that SOP standards are a minimum. Lenders are not permitted to apply less stringent due diligence standards to their SBA loans than they would to their conventional loans. Therefore, lenders should carefully consider when environmental investigations are being performed and what the lender’s policies and procedures state (or should state) for all real property securing SBA loans.
For more information regarding these changes and any questions on the new SOP 50 57 3, Environmental Policies and Procedures, contact the attorneys at Starfield & Smith, PC at 215-542-7070.