Federal environmental law provides little clarity with respect to what
steps a lender can take to protect its security interest without, at
the same time, increasing its liability for cleanup costs. In response
to the confusing state of the law, many lenders have instituted envir
onmental policies that attempt to set forth the due diligence requirem
ents for commercial transactions where real estate is a significant pe
rcentage of the collateral. Ideally, these policies should emphasize-a
t each stage of a real property secured loan transaction (e.g., loan o
rigination, loan administration, workout, and foreclosure)-the environ
mental conditions that have the potential to affect the value of colla
teral and the borrower's ability to pay. To help lenders to draft an e
nvironmental policy document, this article discusses the current state
of federal environmental law, environmental guidelines promulgated by
the regulatory agencies, secured creditor surveys, the purposes serve
d by the environmental policy document, and current trends in environm
ental due diligence.