(FORTUNE Magazine) – AMERICA'S commercial banks are joining the front ranks of ecological warriors. No, they haven't been overwhelmed by conscience or idealism. Federal regulation has drawn them and other lenders such as insurance companies into the fray. Ending years of immunity, recent court rulings on the Superfund Act of 1980 have held banks liable when their customers pollute. The result is just what you could have predicted: The potential liability is enough to stay the already arthritic hand of bankers in lending to any business that might be a polluter. Known formally as the Comprehensive Environmental Response, Compensation, and Liability Act (or Cercla), the superfund law shifts the burden of paying for environmental cleanups from the government to the owners, past and present, of polluted property. As secured lenders, banks were specifically exempted from bearing any cleanup costs until 1986 when a Maryland district court ruled that if a lender forecloses on a contaminated site, it should be treated like an owner. Then, in 1990, the definition of ownership was considerably expanded. In a case pitting the nation's 14th-largest bank, Fleet Financial Group of Providence, against a small Georgia paint company, a panel of federal judges ruled that if a bank, or any other secured lender, could ''influence'' management, it ought also be treated like an owner. Thus, the courts effectively conscripted banks and other lenders to start paying for the $750 billion in cleanup charges necessitated by the superfund law. Borrowers with pockets deep enough to pay for decontaminating sites have no trouble getting loans. But in what could be called greenlining, banks are cutting off small- and medium-size businesses in industries that handle dangerous chemicals or produce contaminated waste. Among them: dry cleaners, gas stations, and auto repair shops that work with pollutants or store them; waste removal and chemical companies; scrap yards that dispose of hazardous materials; and farming operations that use pesticides. Many of these borrowers have been sitting unknowingly on ecological time bombs. John Byrne, environmental specialist at the American Bankers Association, tells of a Midwestern bank that foreclosed on a boat repair shop when it went bankrupt a few years ago and couldn't repay a $20,000 loan. The bank then discovered that 60 years earlier the site had been a gas station, something the customer never knew, and found itself on the hook for cleanup costs of $14,000. Says Terrence Murray, the straight-talking chief executive of Fleet Financial: ''These are loans that were booked seven, eight, ten years ago, when we lacked the consciousness of environmental issues. The chickens have come home to roost. We find we may have a $200,000 loan and a $500,000 liability for cleanup.'' Banks big and small are growing wary of their customers, and the cost of doing business is rising for both lender and debtor. Borrowers must now pay for environmental audits, which can run as high as $20,000, if they use real estate as security. And banks are becoming eco-police, routinely running full- scale audits to protect themselves before they foreclose on property. If the audit turns up contamination, the banks write off their loans and move on. Says a senior officer at a New York bank: ''This is the biggest change in the way we have done lending in the past ten years.'' Fleet Financial requires customers borrowing to buy or develop commercial real estate to get environmental insurance. The policies, which cost 0.3% to 0.4% of the loan amount, or $300 to $400 on a $100,000 loan, are provided by ERIC Group, an Englewood, Colorado, insurer, and protect the borrower and the bank for up to $2 million in damages per incident of contamination. BankAmerica Corp. employs nine people who review potential environmental problems on all new business and commercial real estate loans. Wells Fargo and others have trained their credit specialists to spot potential hazards and to be sure they are cleaned up before the bank lends any money. Lenders are shunning corporate borrowers who have a poor environmental record at any subsidiary anywhere in the world. Murray best expresses the new philosophy: ''If we ever thought somebody was deliberately end-running the rules for environmental protection, we would, by definition, consider him irresponsible, and we would not want to deal with him.'' THE ECONOMICS for banks are such that few can afford getting stuck for a cleanup. On a typical $100,000 loan at the prime rate, now 6%, a bank will earn about $2,000 a year after paying interest on deposits. But if the borrower -- say, a gas station -- goes belly up (perhaps because he can't pay for an environmental cleanup), the loan's value can dip to 30 cents on the dollar, a $70,000 loss for the bank. Assume that the bank as ''owner'' must pay for the cleanup -- and $60,000 would be about average for replacing underground storage tanks at a gas station. Now the bank is out $130,000 plus legal expenses, an amount equal to the loan principal plus 15 years of earnings. That's a hypothetical case; the reality can be even more grizzly. In 1980 the Bank of Montana-Butte lent $275,000 to a local company that coated telephone poles with PCP and other chemicals to protect them against rot and bugs. The company failed in 1984, leaving behind a heavily contaminated site. Regulators pursued previous owners of the land, including Atlantic Richfield, but they also went after the Bank of Montana-Butte. Projected cost of the cleanup: $10 million to $15 million, or several times the bank's total capital of $2.4 million. So far, the bank has spent more than the amount of the loan defending itself against state and federal regulators. Wellman Industries, a Longview, Texas, maker of industrial valves, filed for bankruptcy in 1986. Its two lenders, Signal Capital Corp. and Life Investors Insurance of America, foreclosed. Signal took control of Wellman's equipment. Life Investors, due $1.1 million, got the land on which the plant sat. Among Wellman's furnishings were big vats filled with chromium and other chemicals that Signal ordered dismantled for sale. Witnesses to the dismantling say that contaminating sludge was spilled at the site, on neighboring property, and on the road leading out of the plant. Signal denies this. One worker described watching a truck leave the yard, dripping dark red liquid as it pulled away. Life Investors spent $120,000 cleaning up after the workers only to have the Texas Water Commission, which has jurisdiction, seek further improvements. Now Life Investors is suing Signal for help. With fees and legal costs included, the insurer reckons its outlay tops $200,000. The Bank of Dayton in Dayton, Texas, passed through the environmental looking glass in the mid-1980s. It lent $65,000 to a local company that mixed drilling mud for the oil industry. When the company failed in 1983, Dayton ) took possession of the plant. The Environmental Protection Agency received an anonymous tip five years later that the company had buried toxic chemicals, including chromium, on the site. So far, the bank has spent more than $65,000 trying to find out whether the land is contaminated. Says J. R. Jamison, the indignant chairman: ''We've dug three water wells, three trenches, and there is no proof that there is any significant pollution, just a few tiny spots where chromium exceeds acceptable levels. We can't do anything with the property. We can't advertise it for sale. We can't even walk on it.'' APPARENTLY, federal regulators are beginning to realize they may have gone too far. In April the EPA issued 166 pages of regulations easing the burden on banks. They clarify a bank's right to conduct environmental audits and the circumstances under which it can foreclose on contaminated property or lend money to finance a cleanup without incurring the penalties of ownership. Senator Jake Garn (R-Utah) has introduced legislation that would further reduce the environmental risks for lenders by making them responsible only for the pollution they cause. Thanks to the EPA, loan windows are opening a crack. Banks have been turning down requests for funds to help decontaminate sites, but recently Charles Waterman, president of South Holland Trust & Savings Bank in South Holland, Illinois, approved a $160,000 loan to remove the underground gas storage tanks from a local service station. The borrowers were good customers, they had substantial assets in addition to the station, and they proffered a stack of environmental compliance papers four inches high. Says Waterman: ''If we didn't know our customer, we'd probably decline the loan. Even as it is, we're not getting fully compensated for our risk.'' Most bankers doubt the new regulations will end the loan freeze that in some small towns is beginning to resemble an ice age. Dayton, Texas, has a population of 5,151, and banker Jamison says, ''This community is in trouble. Bankers can't support progress and growth. We are skeptical of any real property lending that could have any contamination of any kind. No gas stations. No area that has ever had a paint gun on it. No areas with industrial activity.'' Unfortunately, everyone wants a cleaner environment -- as long as someone else foots the bill.