For SBA lenders
Short answer
If a Phase I ESA identifies RECs, the lender must determine if a Phase II ESA is warranted. If so, a Phase II must be completed. If contamination is confirmed, the lender must ensure an appropriate remediation plan is in place and funded, or that SBA accepts the risk.
RECs are potential indicators of contamination. The lender, using prudent environmental risk management, must assess the severity of the RECs. This often involves commissioning a Phase II ESA to sample and test for contaminants. If contamination is found, the property may require cleanup before the loan can close, or the lender may need to obtain an environmental indemnification from the borrower, and sometimes prior SBA concurrence is needed for high-risk sites.
A Phase I ESA for a property collateralizing a $1,200,000 7(a) loan identifies an abandoned underground storage tank (UST) on site, a REC. The lender then requires a Phase II ESA to test soil and groundwater around the UST. If the Phase II confirms contamination, the lender requires the borrower to obtain a quote for UST removal and soil remediation, and includes these costs in the project budget or requires prior cleanup.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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