[Federal Register Volume 76, Number 26 (Tuesday, February 8, 2011)]
[Proposed Rules]
[Pages 6702-6708]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2565]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1228
RIN 2590-AA41
Private Transfer Fees
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking; request for comment.
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SUMMARY: This proposed rule would restrict the regulated entities--the
Federal National Mortgage Association (``Fannie Mae''), the Federal
Home Loan Mortgage Corporation (``Freddie Mac'') (collectively, the
``Enterprises''), and the Federal Home Loan Banks (``Banks'')--from
dealing in mortgages on properties encumbered by certain types of
private transfer fee covenants and in certain related securities. Such
covenants are adverse to the liquidity and stability of the housing
finance market, and to financial safety and soundness. This proposed
rule would except private transfer fees paid to homeowner associations,
condominiums, cooperatives, and certain tax-exempt organizations that
use the private transfer fees to provide a direct benefit to the owners
of the encumbered real property. With limited exceptions, the rule
would apply only prospectively to private transfer fee covenants
created on or after the date of publication of the proposed rule.
DATES: Written comments must be received on or before April 11, 2011.
ADDRESSES: You may submit your comments, identified by regulatory
identification number (RIN) 2590-AA41, by any of the following methods:
E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail to [email protected]. Please include ``RIN
2590-AA41'' in the subject line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at [email protected] to ensure timely receipt by FHFA.
Please include ``RIN 2590-AA41'' in the subject line of the message.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA41, Federal
Housing Finance Agency, 1700 G Street, NW., Washington, DC 20552.
Hand Delivered/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA41,
Federal Housing Finance Agency, 1700 G Street, NW., Washington, DC
20552. The package should be logged at the Guard's Desk, First Floor,
on business days between 9 a.m. to 5 p.m.
FOR FURTHER INFORMATION CONTACT: For issues regarding this proposed
rule, contact Christopher T. Curtis, Senior Deputy General Counsel,
(202) 414-8947, [email protected]; David Pearl, Executive
Advisor, Office of the Deputy Director for Enterprise Regulation, (202-
414-3821), [email protected]; Christina Muradian, Senior Financial
Analyst, Office of Examinations Policy and Strategic Planning, (202-
408-2584), [email protected]; or Prasant Sar, Policy Analyst,
Office of Policy Analysis & Research, (202-343-1327),
[email protected]. (None of these telephone numbers is a toll-free
number); Federal Housing Finance Agency, 1700 G Street, NW.,
Washington, DC 20552. The telephone number for the Telecommunications
Device for the Deaf is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comment on all aspects of the proposed rule and will
take all comments into consideration before issuing a final rule.
Copies of all comments will be posted without change, including any
personal information you provide, such as your name and address, on the
FHFA Internet Web site at http://www.fhfa.gov. In addition, copies of
all comments received will be available for examination by the public
on business days between the hours of 10 a.m. and 3 p.m. at the Federal
Housing Finance Agency, 1700 G Street, NW., Washington, DC 20552. To
make an appointment to inspect comments, please call the Office of
General Counsel at (202) 414-6924.
II. Background
Establishment of FHFA
FHFA is an independent agency of the Federal government and was
established by the Housing and Economic Recovery Act of 2008
(``HERA''), Public Law 110-289, 122 Stat. 2654, to regulate and oversee
the regulated entities.\1\ HERA amended the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.)
(``Safety and Soundness Act'') and the Federal Home Loan Bank Act (12
U.S.C. 1421 through 1449) (``Bank Act'') to enhance the authorities and
responsibilities of the new agency. FHFA's regulatory mission is to
ensure, among other things, that each of the regulated entities
``operates in a safe and sound manner'' and that their ``operations and
activities * * * foster liquid, efficient, competitive, and resilient
national housing finance markets.'' (12 U.S.C. 4513(a)(1)(B))
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\1\ See Division A, titled the ``Federal Housing Finance
Regulatory Reform Act of 2008,'' Title I, section 1101 of HERA.
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III. Discussion of the Federal Housing Finance Agency's Proposed
Guidance
FHFA issued a proposed guidance on private transfer fees for
comment on
[[Page 6703]]
August 16, 2010 (75 FR 49932) and requested public comments during a
60-day public comment period that ended on October 15, 2010. FHFA
received several thousand comments on the proposed guidance and has
decided to address the subject by regulation rather than through
guidance.
FHFA's proposed guidance stated that the Enterprises should not
purchase or invest in mortgages on properties encumbered by private
transfer fee covenants or securities backed by such mortgages, as such
investments would be unsafe and unsound and contrary to the public
missions of the Enterprises and the Banks. Likewise, the proposed
guidance stated that the Banks should not purchase or invest in such
mortgages or securities or hold them as collateral for advances.
As described in the guidance, private transfer fee covenants may be
attached to real property by the owner or another private party--
frequently, the property developer--and provide for a transfer fee to
be paid to an identified third party--such as the developer or its
trustee--upon each resale of the property. The fee typically is stated
as a fixed amount or as a percentage, such as one percent of the
property's sales price, and often exists for a period of ninety-nine
(99) years.
The proposed guidance noted that a number of States have either
enacted, or are in the process of enacting, legislation to regulate
private transfer fee covenants. In California, private transfer fee
covenants are permitted, provided that they are properly recorded and
contain certain disclosures.\2\ Other States, such as Minnesota,\3\
Delaware,\4\ North Carolina\5\ and Hawaii,\6\ prohibit private transfer
fee covenants that require payment to private third parties (e.g., for-
profit companies), but permit these covenants when the fees are paid to
homeowners' associations, condominiums, cooperatives, and similar
organizations that use the fees to directly benefit the properties
encumbered by the covenants.
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\2\ Cal. Civ. Code Sec. Sec. 1098 and 1098.5 (2010).
\3\ Minn. Stat. Sec. Sec. 513.73 to 513.76 (2010).
\4\ Del. Code Ann. Tit. 25, Sec. 319 (2010).
\5\ N.C. Gen. Stat. Sec. Sec. 39A-1 to 39A-3 (2010).
\6\ H.B. 2288, 25th Leg., 1st Sess. (Haw. 2010).
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Legislation was introduced in the 111th U.S. Congress--H.R. 6260,
``Homeowner Equity Protection Act of 2010'' and H.R. 6332, ``Homebuyer
Enhanced Fee Disclosure Act of 2010''--to address the issue of private
transfer fee covenants.
H.R. 6260 would have banned private transfer fees, with exceptions
such as those payable to homeowners' associations. H.R. 6332 would have
permitted them, subject to notice and recordation requirements.
In response to questions at congressional hearings, FHFA expressed
concerns that private transfer fees may be used to fund purely private
continuous streams of income for select market participants either
directly or through securitized investment vehicles, and may not
benefit homeowners or the properties involved.
FHFA also expressed concerns about the adequacy of disclosure of
these private transfer fee covenants which, in turn, may impede the
transferability of property and affect its overall marketability. This
can impact the valuation and marketability of the encumbered property.
Consumers may also be unaware that a fee applies even if the resale
price of their home drops below the original purchase price.
IV. Public Comments on the Proposed Guidance
A. Overview of Public Comments
FHFA received over 4,210 comment letters from a broad spectrum of
individuals and organizations, including the Community Associations
Institute; American Land Title Association (``ALTA''); National
Association of Realtors; Freehold Capital; American College of Real
Estate Lawyers; Institute of Real Estate Management; Coalition to Stop
Wall Street Home Resale Fees; Sierra Club; numerous State and regional
real estate agent associations; real estate companies; numerous
homeowners', cooperative, and condominium associations, and individuals
living within such associations; community associations and other
nonprofit organizations; conservation funds and land trusts and
foundations; housing and conservation boards; State housing and
community development agencies; State natural resources agencies;
developers; builders; appraisers; accountants; title companies; several
Banks; members of the U.S. House of Representatives; State Governors;
law firms (writing on their own behalf and on behalf of their clients);
and other individuals and organizations who wrote to express a wide
range of views on private transfer fee covenants.
Comments generally fell into five categories: (1) Commenters
advocating a complete ban on private transfer fees; (2) commenters
advocating for private transfer fees for condominiums, cooperatives,
and homeowners associations; (3) commenters advocating for private
transfer fees for section 501(c)(3) or (c)(4) nonprofit associations
that provide activities that directly benefit the encumbered property;
(4) commenters advocating for private transfer fees for general welfare
purposes, even if they do not directly benefit the encumbered property;
and (5) commenters who supported the payment of such fees to for-profit
entities and also supported the securitization and sale of transfer-fee
income streams to investors.
B. Discussion of Public Comments
1. Private Transfer Fees Are Adverse to the Market and Homeowners
Commenters supporting a complete ban on private transfer fee
covenants included many local real estate agent associations and
private citizens. The real estate agent associations generally argued
that the fees increase the cost of homeownership, generating revenue
for developers or investors while providing no benefits to homebuyers
over time.
Further, these commenters stated that there are few binding
requirements for fee disclosures to homebuyers and to homeowners and
that disclosure of fees at the time of closing adds undesirable
complexity to real estate transactions. The commenters argued that the
fees do not correlate with any tangible benefit received by the
homebuyer and place an inappropriate burden on the transfer of
property.
Several individuals submitted comment letters indicating private
transfer fees were a ``scam'' against homeowners, robbing them of their
equity. Many asserted that the U.S. Department of Housing and Urban
Development's (``HUD's'') General Counsel had opined that private
transfer fees violate HUD's regulations that prohibit legal
restrictions on conveyance and require lenders to convey clear and
marketable title.\7\
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\7\ See Letter from Margaret E. Burns, Director, Office of
Single Family Program Development, to Vicki Cox Golder, President,
National Association of Realtors, April 14, 2010: ``HUD agrees that
this fee unnecessarily increases the cost of homeownership, and in
most cases the homebuyer is unaware of its existence. Our General
Counsel has confirmed that private transfer fees would clearly
violate HUD's regulations at 24 CFR 203.41, which prohibit `legal
restrictions on conveyance,' defined to include limits on the amount
of sales proceeds retainable by the seller.''
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The American Land Title Association (ALTA) raised concerns about
private transfer fees, commenting that there is little uniform
regulation over their use, with some States prohibiting their use,
while others allow such fees with adequate notice and disclosure. ALTA
also noted that courts and State legislatures generally do not favor
restrictions on the ability of owners to
[[Page 6704]]
sell real property. The association stated that private transfer fees
could be viewed by courts and State legislatures as impairing the
marketability and transferability of real property, and as an
unreasonable restraint on alienation of property--regardless of the
duration of the covenants or the amount of the transfer fees.
2. Private Transfer Fees for Homeowners' Associations, Condominiums,
Cooperatives and Similar Associations Should Be Permitted
Many homeowners' associations, condominiums, and cooperatives with
properties subject to private transfer fee covenants commented that the
final guidance should be crafted to allow private transfer fees to
these associations.
These commenters maintained that private transfer fees fund the
capital reserves of their buildings or communities and help to fund
critical and necessary capital improvements, upgrades and major
repairs. They noted that these improvements increase property values,
result in lower regular association dues and create more desirable
communities. The commenters asserted that restrictions on these private
transfer fees would affect the overall affordability of units by
causing owners to raise building reserves through special assessments,
through higher monthly fees or by a reduction in services, or by a
combination of the alternatives.
Several of the Federal Home Loan Banks commenting agreed that
private transfer fee covenants can serve a beneficial purpose when
those fees are used for capital improvements and repairs. Several of
these commenters stated that buildings that have incorporated a private
transfer fee will benefit significantly over those that rely on
maintenance from tenant shareholders or rental from commercial units.
They also asserted that private transfer fees provide a stable reserve
fund by insulating owners from large and immediate costs associated
with longer term repair projects.
Other commenters argued that homeowner association private transfer
fees are fully disclosed and are at most two or three months of dues or
a flat fee from as low as $500.
3. Private Transfer Fees for Section 501(c)(3) and (c)(4) Nonprofits
Should Be Permitted
Many commenters proposed that FHFA except from the final guidance
transfer fees paid to nonprofit corporations with tax-exempt status
under Internal Revenue Code (``Code'') sections 501(c)(3), 501(c)(4) or
528 where the fees are targeted to social welfare purposes,
environmental purposes, civic betterment and social improvements or to
``sustain the real estate infrastructure.'' \8\ These commenters
asserted that certain not-for-profit organizations play important roles
by supporting the creation and maintenance of community enhancements
such as open space, environmental conservation and preservation,
affordable housing and transit improvements. Several individuals,
associations and nonprofit organizations described their own
experiences with private transfer fees and how these fees have provided
them with both direct and indirect benefits by improving their
communities and their quality-of-life.
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\8\ Section 501(c)(3) of the Code provides tax exemption for
charitable organizations. Section 501(c)(4) of the Code provides tax
exemption for civic leagues, social welfare organizations, and
homeowners' associations, among others. Section 528 of the Code
provides tax exemption for certain homeowner associations.
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For example, one nonprofit organization stated that the private
transfer fees it collects are disclosed on the good-faith estimate and
argued that the fees support ``land preservation, agriculture, energy
efficiency, green building, walkability, high density building, arts
and culture, and community living'' for the residents of the community
with which the organization is associated.
A number of commenters urged FHFA to except from the final guidance
government agencies and other government entities that partner with
nonprofits and collect private transfer fees to grow and maintain the
affordable housing stock. Other commenters not only shared these views,
but also supported the use of private transfer fees in city and State
redevelopment efforts, arguing that these efforts were adversely
affected by the economic downturn and the resulting reductions in
Federal, State and municipal funding.
Some commenters argued that private transfer fees should be allowed
for 501(c)(3) nonprofits that collect the fees and then acquire open-
space land in the immediate area of a project. Other commenters
extended this argument to environmental mitigation, the preservation of
sustainable building programs, the protection of wildlife habitats, and
the funding for workforce housing programs. These commenters uniformly
argued that private transfer fees in this context were a community
benefit.\9\
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\9\ Several commenters said that private transfer fees improve
the lifestyle of residents, and the surrounding community, by
funding yard sales, potluck dinners, concerts, baseball games
located at a stadium five miles away from the development and by
promoting land conservation and wildlife habitats.
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Some commenters supported uses for private transfer fees that fund
community organizations such as cultural centers or parks and community
centers. These commenters argued that private transfer fee arrangements
are sometimes created when developers build community centers and then
transfer ownership of the center to a 501(c)(3) organization that uses
the private transfer fees to fund its mission by providing and
maintaining community services to the homeowner and community. They
maintained that these practices make the homeowner's home more valuable
because of the services.
4. All Private Transfer Fees, Including the Securitization of the
Transfer Fees, Should Be Permitted
A number of commenters, including some developers and builders,
opposed FHFA's proposed guidance on private transfer fee covenants.
These commenters contended that private transfer fees confer the same
benefits, and raise the same objections, whether viewed in the context
of homeowner associations, apartment cooperatives, nonprofit entities
or private for-profit groups.
In addition, these commenters advocated for private transfer fees
benefitting developers and related parties. One promoter referred to
this type of private transfer fee as ``capital recovery fees,''
implying that the fees recover part of the developer's investment in a
given project--an amount in addition to the sales price of the houses
in the development.
Proponents of developer transfer fees argued that they lower the
cost of construction and development. Under this model, a security
would be created, backed by the future stream of transfer-fee payments
by future buyers of a house. The value of the security, which would
only be realized by the developer at the time of its original
investment if the security were sold, is argued to offset up-front
infrastructure costs, which would otherwise be captured in initial
house sale prices.
In this manner, proponents claim private transfer fees spread
development costs over all those who benefit; that is, for the next 99
years, subsequent purchasers of the developers' homes
[[Page 6705]]
would absorb these costs by paying transfer fees to the developer or
any other holder of the related security. On the premise that the
present value of the transfer-fee revenue stream supplements the sale
price of the developer's new houses, proponents claim that private
transfer fees can reduce the developer's negative equity in some
developments which have suffered declines in value, thereby assisting
in restarting failed development projects and creating jobs.
In response to FHFA's expressed concerns about lack of transparency
of private transfer fee covenants, transfer-fee advocates indicate that
they support State legislative and regulatory efforts, and private
initiatives, to ensure disclosure that is meaningful to future home
buyers.
5. Level of Fees
In the proposed guidance, FHFA expressed concern that the typical
private transfer fee of one percent was neither minimal nor reasonable,
and that the fees were likely not related to the value rendered by the
property owner or community. Further, there is an issue of whether the
fees are limited to one percent or may be raised by individual
developers or securitization firms. In response to this concern, FHFA
received a few comments stating that the marketplace does not consider
the proportion of the fee relative to the purpose for which it is
collected and, therefore, FHFA should not consider the level of the
fee. Some commenters also argued that asking the regulated entities to
ensure fees were proportional with rendered value would increase costs,
including accounting and legal costs.
6. Compliance
Each of the nine Banks that submitted comment letters expressed
concern about their ability to comply with the final guidance, which
would ask them to ensure that mortgage loans on properties with private
transfer fees, and securities backed by such mortgage loans, are not
purchased or accepted as collateral. The Banks expressed concerns about
their ability to access underlying loan documentation, especially in
cases in which they take a blanket lien on member assets, and about the
availability of information on the presence of private transfer fee
covenants.
Some of the Banks suggested that they could inform their members
that such loans may not be pledged as collateral, require enhanced
member certifications, and conduct reasonable assessments of loans
during on-site reviews.
7. Prospective Application
Several commenters raised concerns about retroactively applying the
final guidance to previously originated loans because, they argued,
attempts to discover the presence of private transfer fee covenants
would pose significant operational challenges. These commenters argued
that compliance under most circumstances would be, at best, difficult
and, at worst, impossible, because of the added operational complexity
it would require on real estate title searches.
Some commenters objected that a retroactive application of the
final guidance would effectively render current loans with private
transfer fees unmarketable, which would affect both current owners and
prospective homebuyers. These commenters argued that retroactivity of
the final guidance would impose economic hardship to consumers who
should not be subject to rules of which they were unaware at the time
of their original purchase.
Similarly, another commenter argued that the final guidance would
effectively prohibit sellers from selling their homes, because lending
institutions would not finance such purchases for fear these loans
would be ineligible for secondary market execution.
Other commenters recommended that the final guidance be applied
prospectively, with an effective date of 120 days from the date of
issuance. They argued that market participants would require some time
to make any necessary operational changes. One Bank requested that
members be allowed to pledge loans as collateral if those loans were
already acquired by its members prior to the issuance of the final
guidance. Another Bank proposed that member institutions be allowed to
provide an indemnification to the Bank for a breach, thus avoiding a
put-back of the asset.
Another Bank commented that, since the Enterprises could be
expected to comply with the final guidance prospectively, Enterprise
mortgage-backed securities (``MBS'') should be exempt from any
investment or collateral prohibitions contained in the final guidance.
C. FHFA Response to Public Comments in the Proposed Rule
After reviewing comments on the proposed guidance, FHFA has decided
to publish a proposed rule for comment, with a number of changes to the
substance of the former proposed guidance. While FHFA's proposed
guidance advised the Enterprises and the Banks not to purchase, or
accept as collateral for advances mortgages on property subject to any
private transfer fee covenants, FHFA has determined to propose a rule
with a narrower focus. FHFA's responses to the comments it received,
and the changes included in this proposed rule, are described below. In
summary, the principal differences between the proposed guidance and
the proposed rule are:
FHFA proposes to except from the rule private transfer
fees that are paid to homeowners' associations and similar
associations, and to tax-exempt non-profit organizations, where the
fees are used for the direct benefit of the encumbered properties.
FHFA proposes to make the rule prospective in effect, so
that it applies to private transfer fee covenants created after the
publication date of this proposed rule.
FHFA allows an implementation period of 120 days for the
regulated entities. The regulated entities may use reasonable means to
achieve compliance with this rule.
1. Definitions
FHFA is including a number of definitions in the proposed rule to
clarify terms, and to identify the scope of the proposed rule's
coverage. These definitions include, among others: ``adjacent or
contiguous property''; ``covered association''; ``direct benefit''; and
``private transfer fee covenant.'' FHFA requests comment on the content
of these definitions, because of the role they play in establishing the
scope of the rule's restrictions. For example, the rule would permit
the regulated entities to do business in encumbered mortgages when the
private transfer fees are paid to a ``covered association'' and provide
a ``direct benefit'' to the encumbered properties; definitions,
therefore, are of significance to market participants. In sum,
``covered associations'' are defined as homeowners' and similar
associations, and tax-exempt non-profit organizations; ``direct
benefit'' is generally defined to include maintenance, improvements,
and amenities benefiting the encumbered properties or adjacent
properties.
2. Private Transfer Fees Generally
In considering the scope of this proposed rule, FHFA took into
account the many public comments received on the August 16, 2010
proposed guidance. One set of commenters stated: ``Consumers are
essentially forced to pay for the right to sell their property.'' If
the fee is not paid, it results in a lien on the property impairing its
marketability. This implicates the public policy against restraints on
alienation as well
[[Page 6706]]
as the mission of government-sponsored enterprises to foster ``liquid,
efficient, competitive, and resilient national housing markets.'' \10\
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\10\ Safety and Soundness Act section 1313(a)(1)(B)(ii).
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Because it is difficult to value the burden of a private transfer
fee, it is also difficult to value the property that it encumbers and
hence the value of that property as collateral for the mortgage loans
that the Banks accept as collateral, and that the regulated entities
buy, or that back the mortgage-backed securities that the Enterprises
guarantee. This is a safety and soundness concern, and is a substantial
motivation for FHFA to take action in the form of this rulemaking. In
FHFA's view, the purposes for which private transfer fees are imposed
are unrelated to the transfer of the property. The transfer is simply
an opportunity for the beneficiary of the fee to collect it, imposing a
``toll gate'' that must be passed before the transfer may occur. While
the purposes asserted for these fees--construction of community
improvements, upkeep of community amenities, etc.--are more logically
built into the purchase price of the house (in the case of initial
construction) or regularly recurring fees (in the case of upkeep) and
using the property transfer as the vehicle for collecting the fee may
constitute a restraint on alienation, nevertheless, FHFA believes that
certain fees may benefit properties. Fees enhancing the value of
collateral backing loans would not be inconsistent with safety and
soundness goals.
3. Transfer Fees Paid to Homeowners' Associations and Similar
Organizations
FHFA proposes to exclude homeowners' and other similar
organizations from the proposed rule in certain instances. First, FHFA
acknowledges comments received on the proposed guidance from homeowner
associations and their members, as well as from residents of New York
co-operatives who feared that the ``flip taxes'' on their stock
interests--analogous to transfer fees on typical real-estate
transactions--would be adversely affected. These comments, mostly
favorable though not unanimously so, and the longstanding existence and
ubiquity of the transfer fees described, suggest that these fees are
expected by and are familiar to many homeowner association members and
are well understood in banking and mortgage markets.
Private transfer fees assessed by homeowners' and other covered
organizations may be viewed as a means by which members of the
organizations avoid paying the costs of their amenities out of current
income, instead paying those costs out of the equity in their houses
when they sell. While owners will then have less sales proceeds with
which to buy their next house or to use for other purposes, this has
been an accepted means of paying for the maintenance, infrastructure
and amenities at these associations.
Further, transfer fees paid to associations contribute to the value
of the burdened property through the amenities and maintenance that
they fund, and hence do not pose the same valuation risk as do fees
that fund other activities that do not provide a direct benefit to the
burdened property.
Also FHFA is excepting from the proposed rule private transfer fees
that are paid to nonprofit organizations that are tax-exempt under
section 501(c)(3) or (c)(4) of the Code and provide direct benefits to
the encumbered property. Private transfer fees paid to such nonprofits
are comparable to those paid to a homeowners' association and should be
similarly excepted from the proposed rule.
Accordingly, FHFA is excepting from the restrictions of the
proposed rule private transfer fees paid to homeowners', condominium,
cooperative and similar associations, and to certain tax-exempt
organizations under section 501(c)(3) or (c)(4).
4. Private Transfer Fees Paid to Non-profit Organizations That Do Not
Provide a Direct Benefit to the Encumbered Property
Some commenters described payments to non-profit organizations
whose relation to the burdened properties was difficult to
characterize, e.g., to grow and maintain the affordable housing stock,
to support city and State redevelopment efforts or for environmental
preservation.
These private transfer fees do not appear to provide exclusive
support of cultural, educational, recreational, maintenance or
environmental activities providing a ``direct benefit'' for the
encumbered real property. Although the activities themselves may be
meritorious, it appears that these private transfer fees provide a
benefit to the general community rather than specifically to the
community that is burdened by the private transfer fee covenants, and
hence are not dedicated to enhancing the value of the residential
housing collateral that is central to the underwriting of mortgage
loans purchased and accepted by the regulated entities. Because these
fees pose the valuation and other issues related to private transfer
fees, without providing benefits that are directly focused on the
burdened properties, FHFA declines to except them from the restrictions
of the proposed rule.
Traditional real-estate law requires that, to be binding, a
covenant running with the land must benefit the land that it burdens.
Whether these more general charitable uses meet that test is an open
question, which casts doubt on the validity of the covenants and hence
creates a possible source of challenge in sales transactions. This is
only one reason FHFA regards such private transfer fees, as well as
those paid to developers and to unrelated parties, discussed below, as
creating a safety and soundness risk for FHFA-regulated entities.\11\
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\11\ Several States have passed laws to restrict the use of
private transfer fees, often permitting the use of such fees only
where they are used for the benefit of the encumbered property. See
Ariz. Rev. Stat. Sec. 33-442 (Arizona); Cal. Civ. Code Sec. 1098.5
(California); Del. Code tit. 25, Sec. 319 (Delaware); Fla. Stat.
Ann. Sec. 689.28 (Florida); Haw. Rev. Stat. Sec. 501(Hawaii); 765
I.L.C.S. 155/10 (Illinois); Iowa Code Sec. 558.48 (Iowa); Kan.
Stat. Ann. Sec. 58-3822 (Kansas); La. Rev. Stat. Ann. Sec. 9:3131
to 3136 (Louisiana)); Md. Code, Real Prop. Law Sec. 10-708
(Maryland); Minn. Stat. Sec. 513.73 (Minnesota); Gen. Laws Miss.
2010 Ch. 348 (Mississippi); Mo. Rev. Stat. Sec. 442.558 (Missouri);
N.J. Stat. Ann. 46:3-28 to 46:3-33 (New Jersey); N.C. Gen. Stat.
Sec. 39A (North Carolina); Ohio Rev. Code Ann. Sec. 5301.057
(Ohio); 2009 Oregon Laws Ch. 298 (Oregon), Texas Prop. Code Ann.
Sec. 5.017(b) (Texas); Utah Code Sec. 57-1-46 (Utah).
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5. Developers, Builders, and Related Parties
Private transfer fees paid to developers or other third parties
also would be subject to the restrictions described in this proposed
rule. Though asserted to be collected for the purpose of funding
infrastructure investments, there is no assurance that they actually
are. They are simply another source of return to the developer: a way
for a developer to extract additional value from its real estate
portfolio. There is no relationship between the transfer fee and the
actual costs of the developer.
Proponents of private transfer fees payable to developers and their
related parties commented that the fees would enable developers to
proceed with developments that would otherwise be uneconomical. No
evidence has been presented that this would be the case. The argument
appears to depend on the proposition that the future income stream from
the fee covenants could be securitized and the securities sold to
realize immediate revenue for the developer. To FHFA's knowledge, no
such securities have ever been issued, so FHFA regards the argument as
speculative.
Further, the argument appears to be based on the assumption that
the sales
[[Page 6707]]
prices of the encumbered properties, when sold by the developer, would
be discounted by less than the value of the transfer-fee-backed
securities that would be sold. No evidence has been presented that this
would be the case. There has been no demonstration of how purchasers
should calculate the discount from the purchase price that would be
necessary to offset the effect of the covenant, or that if the
purchasers did make such a calculation accurately that there would be
any remaining benefit to the developer from this scheme.
FHFA invites comment on these issues.
6. Compliance
FHFA found persuasive the Banks' comments regarding the challenges
in identifying mortgages on properties with private transfer fee
covenants and securities backed by such mortgage loans. The issues of
inconsistent disclosure, and access to loan files for individual loans
covered by a blanket lien or for loans underlying securities, have
merit.
Acceptable compliance with the final rule may be achieved through
the Banks' quality control review process or through the Banks'
collateral review process, coupled with appropriate direction to their
members, as well as robust representations, warranties, or
certifications. The Enterprises would be expected to use similar
compliance tools such as appropriate provisions in seller-servicer
guides, representations and warranties, and quality-control processes.
FHFA does not expect that the Banks must use such compliance tools
with respect to Enterprise securities. Enterprise securities issued
prospectively--should comply with the provisions of the final rule.
7. Prospective Application
To avoid market uncertainties such as those suggested in the
comment letters, the final rule will apply only to transfer fees
created after the date of publication of the proposed rule, and to
securities issued after that date backed by revenue from private
transfer fees regardless of when the covenants were created. Regulated
entities are required to comply with the final rule within 120 days
after its publication.
8. Level of Fees
While FHFA expressed concern in the proposed guidance regarding the
level of private transfer fees, no specific request to consider or
evaluate the proportion of the private transfer fee relative to its
purpose was included in the proposed guidance. This proposed rule
remains consistent with the proposed guidance on that point. FHFA is
not requesting that the regulated entities consider or evaluate the
level of private transfer fees. Comments received on this issue during
the public comment period reinforced FHFA's concern about the relation
between the fees and the value provided to the homeowners. This, in
turn, reinforced FHFA's decision to issue the proposed rule to cover
all private transfer fees other than those paid to homeowners' and
similar associations, and to tax-exempt nonprofits under sections
501(c)(3) or (c)(4) of the Code, that provide a direct benefit to the
encumbered property. Comments on the appropriate level of fees are
welcome, but FHFA has not addressed that subject at this time.
9. State Laws
As noted above, a number of States have enacted legislation
restricting or otherwise regulating private transfer fees. FHFA has
included a section in the proposed rule to clarify that the rule does
not affect such legislation.
V. Paperwork Reduction Act
The proposed rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.). Therefore, FHFA has not submitted any information to the Office
of Management and Budget for review.
VI. Regulatory Flexibility Act
The proposed rule applies only to the regulated entities, which do
not come within the meaning of small entities as defined in the
Regulatory Flexibility Act (See 5 U.S.C. 601(6)). Therefore, in
accordance with section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 605(b)), FHFA certifies that this proposed rule, if promulgated
as a final rule, will not have a significant economic impact on a
substantial number of small entities.
List of Subjects in 12 CFR Part 1228
Asset-backed securities, Builders, Condominium associations,
Cooperative associations, Developers, Federal Home Loan Banks,
Government-sponsored enterprises, Homeowners' associations, Housing,
Mortgages, Mortgage-backed securities, Nonprofit organizations, Private
transfer fees.
Authority and Issuance
For the reasons stated in the preamble, and under the authority of
12 U.S.C. 4526, the Federal Housing Finance Agency proposes to amend
Chapter XII of Title 12 of the Code of Federal Regulations by adding a
new part 1228 to subchapter B to read as follows:
PART 1228--RESTRICTIONS ON THE ACQUISITION OF, OR TAKING SECURITY
INTERESTS IN, MORTGAGES ON PROPERTIES ENCUMBERED BY CERTAIN PRIVATE
TRANSFER FEE COVENANTS AND RELATED SECURITIES
Sec.
1228.1 Definitions.
1228.2 Restrictions.
1228.3 Prospective application and effective date.
1228.4 State restrictions unaffected.
Authority: 12 U.S.C. 4513(a)(1)(B) and 12 U.S.C. 4526(a).
Sec. 1228.1 Definitions.
As used in this part,
Adjacent or contiguous property means property that borders or lies
in close proximity to the property that is encumbered by a private
transfer fee covenant or to other similarly encumbered properties
located in the same community and owned by members of the same covered
association, provided that in no event shall a property greater than
one thousand (1000) yards from the encumbered property be considered
adjacent or contiguous.
Covered association means a nonprofit, mandatory membership
organization comprising owners of homes, condominiums, cooperatives,
manufactured homes or any interest in real property, created pursuant
to a declaration, covenant or other applicable law, or an organization
described in section 501(c)(3) or (c)(4) of the Internal Revenue Code.
Direct benefit means that the proceeds of a private transfer fee
are used exclusively to support maintenance and improvements to
encumbered properties as well as cultural, educational, charitable,
recreational, environmental, conservation or other similar activities
that benefit exclusively the real property encumbered by the private
transfer fee covenants. Such benefit must flow to the encumbered
property or the community comprising the encumbered properties and
their common areas or to adjacent or contiguous property. A private
transfer fee covenant will be deemed to provide a direct benefit when
members of the general public may use the facilities funded by the
transfer fees in the burdened community and adjacent or contiguous
property only upon payment of a fee, except that de minimis usage may
be provided free of charge for use by a charitable or other not-for-
profit group.
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Enterprises means, collectively, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Excepted transfer fee covenant means a covenant to pay a private
transfer fee to a covered association that is used exclusively for the
direct benefit of the real property encumbered by the private transfer
fee covenants.
Federal Home Loan Banks or Banks mean the Federal Home Loan Banks
established under section 12 of the Federal Home Loan Bank Act (12
U.S.C. 1432).
Private transfer fee means a transfer fee, including a charge or
payment, imposed by a covenant, restriction or other similar document
and required to be paid in connection with or as a result of a transfer
of title to real estate. A private transfer fee excludes fees, charges,
or payments, or other obligations--
(1) Imposed by a court judgment, order or decree;
(2) Imposed by or are payable to the Federal government or a State
or local government;
(3) Arising out of a mechanic's lien; or
(4) Arising from an option to purchase or for waiver of the right
to purchase the encumbered real property.
Private transfer fee covenant means a covenant that--
(1) Purports to run with the land or to bind current owners of, and
successors in title to, such real property; and
(2) Obligates a transferee or transferor of all or part of the
property to pay a private transfer fee upon transfer of an interest in
all or part of the property, or in consideration for permitting such
transfer.
Regulated entities means the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation, and the Federal Home Loan
Banks.
Transfer means with respect to real property, the sale, gift,
grant, conveyance, assignment, inheritance or other transfer of an
interest in the real property.
Sec. 1228.2 Restrictions.
The regulated entities shall not purchase or invest in any
mortgages on properties encumbered by private transfer fee covenants,
securities backed by such mortgages or securities backed by the income
stream from such covenants, unless such covenants are excepted transfer
fee covenants. The Banks shall not accept such mortgages or securities
as collateral, unless such covenants are excepted transfer fee
covenants.
Sec. 1228.3 Prospective application and effective date.
This part shall apply only to mortgages on properties encumbered by
private transfer fee covenants created on or after February 8, 2011,
and to securities backed by such mortgages, and to securities issued
after that date backed by revenue from private transfer fees regardless
of when the covenants were created. The regulated entities shall comply
with this part not later than 120 days following the date of
publication of the final rule in the Federal Register.
Sec. 1228.4 State restrictions unaffected.
This part does not affect State restrictions or requirements with
respect to private transfer fee covenants, such as with respect to
disclosures or duration.
Dated: January 28, 2011.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2011-2565 Filed 2-7-11; 8:45 am]
BILLING CODE 8070-01-P