Screening properties for environmental concerns as part of pre-closing due diligence has been a standard practice in commercial lending for years. But in the world of residential lending, the practice has largely been ignored. However, the risky practice of overlooking land contamination as part of residential lending is on the cusp of change.
Freddie Mac, Fannie Mae and even HUD recognize the importance of reporting environmental concerns, and numerous requirements in the appraisal process have existed for nearly two decades. With the Consumer Finance Protection Bureau (CFPB) now mandated with issuing rules governing real estate settlement–related functions, it is only a matter of time until the Bureau formalizes and enforces what HUD, the GSEs and appraisers have known for years: environmental conditions can affect property values and public health. These are two issues that would draw concern from any risk manager.
In an article in the June issue of the RMA Journal, several drivers are identified that are sure to enforce a shift to stricter environmental practices in residential lending:
- Environmental requirements of Fannie Mae, Freddie Mac, and HUD.
- Tougher consumer protection and informed consent in the post Dodd-frank era.
- Tightening of residential mortgage standards by Freddie and Fannie.
- Growing public concern and regulatory scrutiny over vapor intrusion.
- Technology advances that enable cost effect solutions for complying with existing requirements.
Residential lenders would be wise to get ahead of the CFPB in the area of environmental screening, and cost-effective solutions exist today that would help them manage this risk. (Read the entire RMA Journal article)