December 19, 2012 Articles

Fracking and NEPA's Categorical Exclusions

Should CEs apply to federal loans on rural homes with hydraulic-fracturing leases?

By Shell J. Bleiweiss and Jamie Davidson – December 19, 2012

Have you ever lit your kitchen tap water on fire? In the documentary Gasland, (HBO Documentary Films 2010), director Josh Fox displays landscapes riddled with earth-drilling equipment, millions of trucks chugging along millions of miles, and homeowners with mysterious illnesses and flammable tap water. The movie attributes these environmental maladies to hydraulic fracturing, or “fracking,” a method of extracting natural gas conducted by the booming domestic energy industry.

In Gasland, Fox explains how a natural-gas company offered him money for a lease to drill on his property. People across the United States are offered similar leases on their property, and they accept them, agreeing to natural-gas extraction from their land. What Gasland fails to discuss, however, are the economic pressures on these homeowners—particularly those who are located in rural areas and seeking financial assistance. The U.S. Department of Agriculture’s (USDA) Rural Housing Service (RHS) program provides financing to low-income homeowners in rural areas of the country, where much of the fracking occurs, to spur economic development. Many homes financed by RHS are encumbered by fracking leases.

Traditionally, most of the loans financed by RHS have not been subjected to the National Environmental Policy Act’s (NEPA) review requirements. Under NEPA, agencies may determine that certain categories of actions do not significantly affect the environment and, therefore, are exempt from review. The USDA has previously included RHS homeowner assistance under a categorical exclusion (CE). The CE applies whether or not homes are encumbered by fracking leases. But rising environmental concerns related to fracking are causing some people within the agency to consider changing this policy. Although the USDA recently reaffirmed that the CE still applies to these loans, the debate will continue as scientific uncertainties become resolved and other federal lending agencies make similar policy determinations.


NEPA and Categorical Exclusions
NEPA requires all federal agencies to determine and consider the environmental effects of their actions. NEPA applies when a federal agency proposes any action. If the action will have a negative effect on the environment, the agency must prepare an environmental impact statement (EIS). 42 U.S.C. § 4332(2)(c)(i). These statements help ensure that federal agencies make environmentally sound decisions. However, they are costly, time consuming, and may jeopardize whether the proposed agency action will ever even occur.

In certain circumstances, separate actions may be grouped together, or “tiered,” into a programmatic EIS (PEIS). A PEIS can be used by an agency to eliminate repetitive discussions of the same issues. 40 C.F.R. § 1502.20 (2012). Tiering involves a two-part analysis, whereby the broader issues are covered by the PEIS, and then actions must be reviewed for only their individual environmental impacts. 40. C.F.R. § 1508.28 (2012). PEISs can be appropriately used to analyze a program or a series of similar activities in an area. NEPA Task Force Report to the Council on Environmental Quality, at 37 (2003). Courts have considered PEISs adequate without site-specific analyses when the federal action does not contain a site-specific or critical decision. Id. at 38, citing N. Alaska Envtl. Ctr. v. Lujan, 961 F.2d 886, 891 (9th Cir. 1992).

NEPA does not require an EIS for every single federal-agency project proposal. Certain federal actions will fall under a CE and not trigger a NEPA review. According to NEPA regulations, agencies may exclude actions that “do not individually or cumulatively have a significant effect on the human environment . . . and for which, therefore, neither an environmental assessment nor an environmental impact statement is required.” 40 C.F.R. § 1508.4 (2012). Individual agencies are responsible for determining and articulating their own CEs. 40 C.F.R. § 1507.3(b)(2)(ii) (2012).

Fracking and Rural-Development Loans
Fracking is a geological means of natural-gas extraction. Millions of gallons of water, mixed with sand and chemicals, are injected into a drilled well. The pressure from the water fractures the shale-rock formation that contains natural gas, and props open fissures to enable the gas to flow and be collected. The resulting product, after refinement, is a growing energy source in the United States and is used in residential, commercial, and industrial settings. Electric power production is now the largest natural gas-consuming use according to the U.S. Energy Information Administration.

Frequently, the issue of fracking arises in rural areas seeking economic development. Natural-gas companies offer landowners hefty sums to lease their land so that the companies can conduct fracking on the property. Landowners located in rural, poverty-stricken areas accept these deals for their immediate economic benefits. In some cases, property owners may be unable to consider the long-term environmental and economic impacts these leases may have on their properties because the process is new and not fully understood. Furthermore, some are concerned that landowners may not be in a position to turn down the financial benefits that result from these leases.

RHS provides financial assistance to promote development in rural areas. The financial assistance, in the form of housing loans and loan guarantees, is provided to people of limited income and who are without adequate housing, that they may purchase a home in rural areas. RHS has spent much of this money in areas that have seen growth in fracking in recent years. Many of the properties purchased with these loans are encumbered by existing fracking leases.

The process of fracking raises contentious economic, environmental, and political issues. While obtaining natural gas will improve the economy and contribute to our country’s energy independence, some fear that the solution is only finite and has severe environmental repercussions. Many politicians support the development of the fracking industry. For example, Oklahoma Congressman Dan Boren (D) wrote a letter to the USDA, expressing support for financing loans for homes and businesses with oil-and-gas leases. Letter from Dan Boren, Member of Congress to Tom Vilsack, Secretary, United States Department of Agriculture (Mar. 19, 2012). Meanwhile, on March 17, 2012, Vermont became the first state to outlaw fracking. Vermont Governor Peter Shumlin cited environmental concerns and scientific uncertainty as the reasons for the ban. Vermont First State to Ban Fracking, CNN, May 17, 2012.

RHS’s CE for Home Loans
Rural Development (RD), the parent of RHS, has developed guidance to determine whether certain proposed projects will be eligible for a CE. Instruction 1940-G contains the major environmental-impact policies of Rural Development. USDA RHS Categorical Exclusions from NEPA Reviews, 40 C.F.R. § 1940.310 (2012). The section on CEs states that certain actions do not have a significant impact on the quality of the human environment, either individually or cumulatively, and are, therefore, not subject to environmental assessments or EIS requirements. Financial assistance for housing is specifically listed as a CE. However, the CE does not apply if the action could affect a wetland, a critical habitat, or another enumerated environmentally sensitive area. All actions are therefore subject to Form 1940-22, which checks for “extraordinary circumstances” related to environmental issues. USDA-Rural Development Form RD 1940-22, Environmental Checklist for Categorical Exclusions. Unless there is a particular identifiable threat to a sensitive land, RD home loans are categorically excluded from NEPA requirements.

Fracking is not specifically mentioned anywhere in the RD’s list. The crux of the question of whether to require NEPA review before providing RHS loans is whether the existence of a fracking lease on a property should be a consideration.

Discontent Within the USDA
On March 18, 2012, the issue of CEs for RHS loans on properties with fracking leases entered the spotlight by way of a New York Times article. Ian Urbina, Mortgages for Drilling Properties May Face Hurdle, N.Y. Times, Mar. 18, 2012, at A12. The article explained that RHS is becoming wary of loaning to property owners with fracking leases without first conducting a NEPA review. The connection between financial home assistance, fracking leases, and environmental degradation is uncertain. The article pointed to various internal emails as evidence that the agency was likely to change its previous reliance on the CE and begin to require a NEPA review for these rural loans. If the CE no longer applies to the loans, then homeowners could not obtain them without first being subjected to an expensive and lengthy review process. NEPA review would slow down the lending system and impede the goal of rural development.

The article cited an email by Kevin Bailey from the USDA Office of Congressional Relations. He stated that the use of a CE for RHS loans for properties with fracking leases may not be appropriate and that the loans likely require more detailed environmental documentation.Email from Kevin Bailey, Office of Congressional Relations, USDA (Apr. 2012). He argued that the environmental implications of fracking are as yet unknown, and that lending on properties with such leases would allow for potential environmental impacts to occur that would need to be analyzed under the framework of NEPA. According to Bailey’s memo, the agency was reviewing a draft administrative notice that would state that NEPA review would be required for RHS loans.

Possibly in reaction to the publicity, the USDA secretary, Tom Vilsack, released a statement indicating that the CE would continue to apply. Ian Urbina, U.S. Rejects Environmental Reviews on Mortgages Linked to Drilling, N.Y. Times, Mar. 23, 2012, at A21. Secretary Vilsack explained that the information sent in those internal emails was premature and did not reflect current USDA policy. A day later, Rural Development issued an administrative notice clarifying the application of NEPA under the RHS program. NEPA Compliance for Rural Development Single Family Housing Loan Programs, RD AN No. 4632 (1940-G) (Mar. 21, 2012). The notice, “. . . reaffirms the use of a CE under 1940.310(g) to provide financial assistance for the purchase of a single family dwelling on these properties. The presence of gas leases on a property alone does not constitute any of the special circumstances listed in that instruction. . . .” This administrative notice is set to expire in April 2013, however, and the considerations against the use of a CE for these mortgages may continue to influence the agency’s policy-making decisions.

Should the CE apply for RHS Loans with Fracking Leases?
There are many arguments in favor of continuing to apply the CE to RHS loans. NEPA review is extremely costly, and its requirement would inhibit RHS’s ability to provide timely financial assistance to those who need it. Other federal agencies that provide similar loans might likewise determine that NEPA applies to their lending actions. Such determinations would further stifle development assistance and unfairly affect people who rely on both federal housing assistance and fracking leases. As Congressman Boren pointed out in his letter, this action would keep loans out of some of the most economically disadvantaged regions of the country, suspend economic development, and punish homeowners and businesses. In terms of energy costs, the CE helps keep the price of oil drilling down and decreases the United States’ dependence on energy sources from foreign countries. The CE also allows for a uniform determination about NEPA requirements for RHS loans, rather than requiring a case-by-case determination.

Similarly, without the CE, only federally funded properties would be subject to environmental review, while other properties with fracking leases would be exempt if their lenders were not bound by NEPA. This disparity could create confusion, irregularity, and unfairness.

The arguments against continuing the application of the CE are largely championed by environmentalists who are opposed to fracking. While some people are concerned that rural development would be stymied if RHS removed fracking loans from the CE, environmentalists are pleased that it would set a precedent for other federal lending agencies to determine that fracking warrants NEPA review. Fracking may have significant environmental, aesthetic, and health effects. Many of the chemicals involved in the fracking process are known or possible carcinogens and are regulated under other federal environmental laws due to their risks to health. Fracking may create a possibility of chemically tainted water seeping into drinking water supplies and may contribute to air pollution. Fracking has also been blamed for potential responsibility in causing minor earthquakes. If these loans were not exempted from review by a CE, they would be subject to environmental review and force the agency to consider reasonable alternatives to these loans as well as mitigation strategies.

Reconciling the fracking issue with RHS loans need not necessarily depend on whether a CE exists for these home loans. A PEIS could be conducted to analyze the general and cumulative impact of financing loans on properties with fracking leases. The PEIS would require a high initial cost, but could save the program by having a uniform determination in these cases while also assuring NEPA compliance.

Although the USDA’s policy is to use CEs in the case of financing homes that are encumbered by fracking leases, the debate over the issue is likely to continue. Not only might the USDA decide to change its policy as it learns more information, but also other agencies, government entities, and mortgage financers may begin to reevaluate their policies to determine whether they are congruent with economic goals, environmental aspirations, and legal concerns within the framework of NEPA.

Keywords: environmental litigation, fracking lease, categorical exclusion, NEPA, EPA, rural housing service, environmental impact statement, U.S. Department of Agriculture


Shell J. Bleiweiss owns the Law Offices of Shell J. Bleiweiss, with offices in Chicago and Barrington, Illinois. Jamie Davidson is an assistant attorney general in the environmental enforcement bureau of the Illinois Attorney General's Office in Chicago, Illinois. Any opinions expressed in this article are the viewpoints of the authors and should not be attributed to the Illinois Attorney General's Office.


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