Why lenders require a Phase I

Neither ASTM E1527-21 nor the federal All Appropriate Inquiries rule requires a lender to obtain a Phase I. The standard says its practice is also meant for users who seek no CERCLA protection and want to look into a property's condition (E1527-21, 4.2.1). The rule applies to persons seeking one of three CERCLA liability protections and to site assessments under certain brownfields grants (40 CFR 312.1). The standard says that a lender can be its user (E1527-21, 3.2.94.1). Its nonmandatory legal appendix describes the CERCLA secured creditor exemption, and a footnote there calls it imperative for a secured lender to check site conditions closely before foreclosing (E1527-21, X1.1.6). Where a loan does call for a Phase I, the requirement in the handbook's sources comes from the loan program's own rules, such as those of SBA and HUD.

A lender as the user

Who the user is. The user is the party using the practice to complete an assessment of the subject property, and the standard names a lender among those who may be one (E1527-21, 3.2.94, 3.2.94.1).
A loan is a covered transaction. The standard's commercial real estate transaction includes receiving a security interest in real property, though not in an individual dwelling or a building of fewer than five dwelling units (E1527-21, 3.2.13).
Not every loan. The standard says it does not imply that an assessment is customary practice for many loans where the lender has several remedies. Anyone who chooses to assess a property may use the practice (E1527-21, 4.2.2).
The clocks. For a transaction with no acquisition, such as a refinance, the 180-day and one-year periods run to the date of the intended transaction (E1527-21, 4.6.1, 4.6.2). A different user drawing on the assessment within that period must also carry out the user's tasks (E1527-21, 4.6.4).
The reason. The user tells the environmental professional why the assessment is being done; if it does not, the environmental professional shall take the purpose to be qualifying for a landowner liability protection and say so in the report (E1527-21, 6.8). The optional user questionnaire, in a nonmandatory appendix, also asks whether any party to the transaction requires a set scope of services and who will rely on the report (E1527-21, X3.1.4, X3.1.5).
Contracts are outside it. What the environmental professional, the user and any other party owe one another under contract or law is not governed by the practice (E1527-21, 4.9).

The secured creditor exemption

The legal appendix is background only, and the practice governs wherever the two disagree (E1527-21, Appendix X1 introduction). It describes the exemption this way:

What it covers. A person that holds indicia of ownership mainly to protect a security interest is left out of the CERCLA definition of owner or operator, as long as it does not participate in managing the facility. The appendix says this can shield a secured creditor while a loan is administered, workouts included (E1527-21, X1.1.6.1). A security interest includes rights under a mortgage or deed of trust, a lease, a pledge or assignment, a judgment lien, or a security or factoring agreement (E1527-21, X1.1.6.2).
Participating in management. That means actually taking part in running the facility, not merely having the power to influence it, so a loan clause giving the lender rights, such as to respond to violations or releases, does not by itself expose the lender (E1527-21, X1.1.6.3). The appendix lists nine actions a lender may take without participating, among them monitoring or enforcing loan terms, inspecting the collateral, requiring the borrower to respond to releases, restructuring the loan and exercising remedies for breach (E1527-21, X1.1.6.3). It says a lender may be considered to participate if, while the borrower holds the property, it both controls the borrower's environmental compliance decisions so far as to take on responsibility for how hazardous substances are handled or disposed of, and takes on a manager's level of responsibility for day-to-day environmental compliance or for all or nearly all of the operations (E1527-21, X1.1.6.3).
Workouts and foreclosure. A lender that did not participate in management before foreclosure, forecloses, and then meets certain requirements is not treated as an owner or operator. After foreclosure it may keep the business going, wind it up, take response actions under the National Contingency Plan or at an on-scene coordinator's direction, and preserve the property for sale, provided it tries to sell or otherwise divest as soon as a commercially reasonable sale is practicable, on commercially reasonable terms, taking market conditions and legal and regulatory requirements into account (E1527-21, X1.1.6.4).
The footnote. A footnote to that passage says the exemption gives lenders little guidance on which steps keep its protection; it is the footnote that calls a close look at site conditions before foreclosing imperative (E1527-21, X1.1.6.4).

Loan programs that call for one

The handbook's requirements pages carry two federal programs' rules, each from its own source:

SBA. According to SBA environmental investigation steps, SBA's SOP 50 10 8.1 requires an Environmental Investigation of every commercial Property pledged to secure a 7(a) or 504 loan. Except for a unit in a Multi-Unit Building, a match between the Property's current or known prior uses and SBA's list of environmentally sensitive industries means a Phase I first, whatever the loan amount, though a car wash only site may start with a transaction screen. A records search rated other than low risk also leads to a Phase I, and so does a transaction screen that warrants more investigation. If the Environmental Professional recommends going from a screen straight to a Phase II and the lender agrees, the lender must first get an exception from SBA's Environmental Committee. SBA Phase I requirements says SBA takes a Phase I that complies with All Appropriate Inquiries and is conducted by an environmental professional under ASTM's latest Phase I standard, currently E1527-21. Each report must be dated within one year of the issuance of the SBA loan number, and every Phase I must come with SBA's reliance letter.
HUD. According to HUD Phase I requirements for an FHA multifamily loan, Chapter 9 of HUD's MAP Guide has the lender applying for FHA multifamily mortgage insurance submit a complete, final Phase I with the pre-application, or with the application for Firm Commitment where there is no pre-application. The report must make clear that HUD is an authorized user. The guide counts the one-year and 180-day periods back from submission to HUD; the standard counts them back from acquisition or the intended transaction (E1527-21, 4.6.1, 4.6.2).

This page is general reference. It does not assess any property. ASTM E1527-21 is the standard and is not reproduced here.

Why lenders require a Phase I

A lender as the user

The secured creditor exemption

Loan programs that call for one

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