Consider this scenario:
- A small lender hires a Chief Appraiser.
- RHIP (rank has its privileges) – Someone has to manage Environmental Risk, but “boss” is disinclined to accept the task.
- The new Chief Appraiser finds out he/she will be adding Environmental Risk Management to his/her job description despite no prior knowledge or experience, but “it is closer to real estate valuation than [credit, operations, risk, or compliance] management, so it’s now your job.” New responsibilities include:
- Writing/editing environmental risk policies, procedures;
- Keeping up with environmental trends & regulatory compliance;
- Seeking/Managing environmental risk vendors;
- Engaging/Reviewing environmental reports; and
- Advising the lender’s management team.
How is a new Chief Appraiser going to learn how to manage Environmental Risk? Bank regulators are requiring financial institutions to manage their risks, but how do smaller and newer banks develop policies, lending functions, and find competent vendors for the first time?
EDR Insight is pleased to offer readers this timely exploration, authored by Mitch Kreeger, which serves as a “how-to” from a former Chief Appraiser who was told he would be adding Environmental Risk Management (ERM) to his plate — ready or not. Kreeger’s article discusses how to effectively create the lender’s environmental risk function, including the need to manage outsourced vendor relationships.
HOW TO EDUCATE A CHIEF APPRAISER ON ENVIRONMENTAL RISK MANAGEMENT
by Mitch Kreeger, MAI SRA MBA
No Prior Knowledge: How/Where do I (Chief Appraiser) Get Started?
First, learn as much as you can from your “boss” what the institution currently has in place. What is lender’s risk tolerance level? What policies, procedures are currently in place? When were policies, procedures last updated? Who are current approved, and favored, vendors? Has environmental risk or vendors been a past concern or trouble area – how and why? Hopefully there is at least a minimum “road map” in place that just needs someone new to manage an effective ongoing process. (Not likely, but it could happen!)
Next, amidst your regular daily duties – I know, you have oodles of time for this new functional area you are now responsible for – it is important to reach out to subject matter experts (SMEs) for advice, direction, and knowledge. Recommendations:
- peers – other Chief Appraisers who are also ERMs;
- environmental appraisal specialists;
- environmental professionals/vendors (EPs);
- environmental risk trade groups; and/or
- book/internet research.
All of these have their pros and cons.
I did not know who of my peers also managed environmental risk and I did not know any environmental appraisal specialists or EPs; now there is the Appraisal Institute’s “Find an Appraiser” site and Google. I tried to immerse myself in environmental risk related articles in appraisal periodicals and other news sources, but I knew that was a slow process and would not sufficiently address regulatory compliance or risk management issues. I started to collect and read published regulatory compliance guidelines related to environmental risk management – there is VERY LITTLE information or regulatory guidance even as environmentally conscientious as we are in 2015.
Best suggestion: Find a “friendly” environmental risk trade group, preferably one suited to environmental lenders or environmental risk officers. I discovered that mid-sized and large lenders tend to have environmental risk officers that often report to the Chief Appraiser or Chief Risk/Compliance Officer. I was pointed toward RMA and Environmental Bankers Association (EBA) as two likely trade groups that might be able to provide just what the Chief Appraiser/ERM needs to know.
Find a way to get invited to RMA, EBA, or other conferences or training, preferably in-person as the networking is more advantageous than the knowledge. Meet as many environmental professionals as possible, ask a lot of questions (you may feel woefully dumb, but ERMs and EPs usually appreciate the opportunity to share or mentor), and try to barter your appraisal knowledge for their environmental knowledge. Volunteer and get involved within the organizations and EPs.
Seek out both environmental bankers as well as environmental vendors – both have a lot to offer from differing perspectives. It is a gradual learning process, initially seeming way too slow and overwhelming, but the more you give it the quicker you will grasp the sometimes highly technical concepts, best practices, areas of greatest lender concern, and who are the most capable vendors in your area.
Writing/Editing Environmental Policies, Procedures
Several environmental vendors may accept your request – free or for fee – to help develop basic policies and procedures, but you will have to write them yourself. If you currently have PPs in place but they need updating, environmental vendors may offer – free or for fee – to help audit/edit and make overview or pointed recommendations depending on your lender’s risk tolerance level. Over time with greater environmental risk exposure, the Chief Appraiser/ERM should become competent and capable of maintaining and updating the lender’s environmental PPs.
It is highly unlikely that other environmental bankers will offer you a copy of their bank policies or procedures (usually considered proprietary), but they may share some “best practice” tips or pitfalls to avoid. There are lender subscription services that offer regulatory compliance policy boilerplate samples you may edit to your bank’s risk tolerances and preferences.
Although regulatory guidelines are currently vague and of limited guidance, it is very important to know that several lender actions – backed by US EPA, courts, and banking regulators – require certain minimum levels of due diligence procedures (typically based on ASTM standards) to protect lender losses and liability.
The following matrix is a generic guideline I personally created several years ago (in an effort to solidify what I was learning, as well as set up a tool for my bank’s environmental risk policy) that is more or less still current subject to ASTM updates. It is endorsed by EBA (a published resource on their website) and other environmental professionals as a basic model for smaller banks.
Keeping Up with Environmental Trends and Regulatory Compliance
Regular networking with newly introduced ERM peers and EPs, along with training and interaction at trade group functions, will greatly enhance your environmental IQ. These valuable contacts, plus keeping up with regulatory guidance and related news articles, will adequately provide sufficient bases for staying current with trends and regulatory compliance concerns.
Seeking/Managing Environmental Risk Vendors
Where can I find environmental risk vendors in my lending territory? How do I know what environmental fields they specialize in (e.g., structural, civil, geological, hydrological, petrochemical, seismic, etc.), or if they offer general expertise in a range of fields? How do I know if they are experts (vast experience and follow established procedures with modern equipment) or less capable which might increase lender risk?
Good questions! Active participation at environmental banker trade groups will provide contact with many varied EPs and their banking clients. Get referrals from bank ERMs. Interview several environmental vendors to find a few who are well versed in “best practices”, operate in your lending footprint, demonstrate knowledge and education required of an Environmental Professional (as defined by US EPA and ASTM E-1527 “All Appropriate Inquiry”), and appear to want to serve your needs. It may be prudent to consider both large national/regional firms for larger projects and smaller boutique shops for lower risk assignments.
Engaging/Reviewing Environmental Risk Assignments and Advising Lender’s Management Team
This may be the toughest part of the job as environmental risk manager.
“But I don’t know enough about all the due diligence rules, environmental risk protections afforded to lenders, who is the best vendor for the job, which level of environmental study I need to order, or what to tell my boss once the environmental study arrives – what do I do?”
Rely on your environmental vendor networking contacts to walk you through this process, but let them know – to protect your independence and control – you appreciate their help but are also speaking to a few other vendors. It may be a prudent caveat to inform them you seek their expertise without a promise of any work, but if they fit your bank’s desired profile of an EP and the assignment needs you will likely engage them now and/or in the future. I personally found good rapport with vendors when I empowered them to teach me something, yet earnestly showed I was learning what they were teaching so I could become a “good client” in their book of business. At the same time I was cautious not to over-rely on any one favored vendor as that might put the bank at risk from lack of independence.
This can be a delicate balance. I find the best results arise when the vendor is treated with high respect and cordiality, concerns are broached as items meriting further consideration based on learned observations, and I empower the vendor to come up with options and recommendations. Recognize that not all jobs are the same, not all jobs have the same risk, not all jobs involve the same environmental conditions, and not all vendors or lenders are prepared to consider a wide range of solution options. Fit the vendor to the individual assignment based on their qualifications and willingness to offer recommendations and out-of-the-box solutions if needed, weighing environmental conditions with the lender’s and owner/borrower’s interests.
Within a patient lending atmosphere, your “boss” should give you sufficient time and funding to adequately gain the knowledge and networking contacts to provide valuable environmental risk management services to your institution.
For more information and related advisory services, Kreeger Consulting is one of several SME firms that offers free initial consultation on appraisal, environmental, and seismic risk management.
ABOUT THE AUTHOR
Since 1980, Mitch Kreeger provides real estate appraisal and review services on residential and commercial valuation assignments, environmental and seismic risk management services for lenders, plus consulting services related to policies and procedures, regulatory compliance, and appraisal / environmental risk in-house or outsource function design. Professional services also have included apartment acquisition investment DCFs, budget analysis, construction lending inspections and analysis, and real estate market trend analysis. Mitch’s client base ranges from very small to very large lending institutions, corporate and individual property owners, investors and syndicates, municipalities and redevelopment agencies, and legal services; however, most of his career has been as internal appraisal management or staff with various institutional lenders. Mitch is considered a Subject Matter Expert (SME) on various valuation, environmental and seismic risk, and regulatory compliance topics by peers nationwide, and volunteers or is sponsored as guest speaker, panelist, author, and network blogger. Mitch is currently Chief Appraiser and Principal Consultant at Kreeger Consulting, a private appraisal / environmental / seismic risk consulting services firm that offers commercial appraisal reviews, outsourced Chief Appraiser duties, and advisory services to lenders on regulatory compliance, efficient appraisal / environmental risk functions, and effective policy updates.
Mitch Kreeger, MAl SRA MBA
Principal Consultant, Kreeger Consulting: Appraisal Review, Environmental & Seismic Risk Policy Manager
Mitch’s LinkedIn Profile
“Appraisal Leader for Tomorrow’s Environment”