Which of the following would not be a way that lenders can reduce their environmental risk?

• A. Diversify the loan portfolio
• B. Conduct environmental due diligence
• C. Only loan on properties less than 10 years old
• D. Obtain environmental liability insurance

Answer: (C)

Reducing environmental risk in lending comes from strategies that improve risk identification and allocation. Diversifying the loan portfolio lowers the impact if one property turns out to have contamination or regulatory issues, because risk is spread across different borrowers, locations, and property types. Conducting environmental due diligence, such as a Phase I Environmental Site Assessment, helps uncover potential contamination or regulatory concerns before money changes hands, allowing the lender to adjust terms, require remediation, or price in risk. Obtaining environmental liability insurance moves some of the financial exposure to an insurer, providing coverage for cleanup costs and third-party claims if contamination occurs during the life of the loan. In contrast, restricting lending only to properties under 10 years old does not guarantee lower environmental risk. A newer property can still have contamination from prior uses, construction-related issues, or nearby sites with environmental impacts. Therefore, this approach does not address the underlying risk and would not reliably reduce potential losses.