[Federal Register Volume 77, Number 52 (Friday, March 16, 2012)]
[Rules and Regulations]
[Pages 15566-15575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-6414]
[[Page 15566]]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1228
RIN 2590-AA41
Private Transfer Fees
AGENCY: Federal Housing Finance Agency.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a final
rule to 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. This final rule is intended to protect the
regulated entities from exposure to mortgages with certain features
that may impair their value and increase risk to the financial safety
and soundness of the entities. FHFA intends that the regulated entities
develop reasonable means and appropriate methods to implement the rule
in consultation with FHFA.
DATES: This final rule is effective July 16, 2012.
FOR FURTHER INFORMATION CONTACT: Mark D. Laponsky, Deputy General
Counsel, (202) 649-3054 or Christopher T. Curtis, Senior Deputy General
Counsel, (202) 649-3051 (not toll-free numbers), Federal Housing
Finance Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC
20024. The telephone number for the Telecommunications Device for the
Hearing Impaired is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. 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.
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\1\ See Division A, titled the Federal Housing Finance
Regulatory Reform Act of 2008, Title I, section 1101 et seq. of
HERA.
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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)). HERA authorizes FHFA to ``issue
any regulations * * * necessary to carry out'' that mission and ``to
ensure that the purposes of this chapter and the authorizing statutes
are accomplished.'' (12 U.S.C. 4526(a)). This same grant of rulemaking
authority also enables FHFA to draw on its cease-and-desist powers (12
U.S.C. 4631) to prohibit by general rule the same types of unsafe and
unsound practices it would be empowered to address through case-by-case
adjudications.\2\
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\2\ See Lincoln Savings & Loan Ass'n v. Federal Home Loan Bank
Board, 856 F.2d 1558, 1562-63 (D.C. Cir. 1988) (upholding FHLBB
regulation prohibiting certain unsafe and unsound practices based on
cease-and-desist powers); Independent Bankers Ass'n of America v.
Heimann, 613 F.2d 1164, 1168-69 (D.C. Cir. 1980) (upholding OCC
regulation prohibiting certain unsafe and unsound practices based on
cease-and-desist powers). As further discussed below, FHFA has found
that it constitutes an unsafe and unsound practice to participate in
any market for mortgages on property encumbered by certain private
transfer fees. To allow full public participation and for the sake
of efficiency, FHFA has elected to require the regulated entities to
cease and desist from these practices by issuing a rule of general
applicability rather than by instituting individual proceedings.
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Private Transfer Fee Covenants and FHFA's Proposed Guidance
On August 16, 2010, FHFA published for comment a notice of proposed
guidance that would have 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. (75 FR 49932).
As described in the proposed 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
99 years.
Many states have enacted legislation to address private transfer
fee covenants. State legislative solutions are diverse and include
permitting the covenants subject to recordation and disclosure
requirements \3\ and prohibiting them when fees are paid to private
third parties, with exceptions for homeowners' associations,
condominiums, cooperatives, and similar organizations that use the fees
to directly benefit the properties encumbered by the covenants.\4\
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\3\ E.g., Cal. Civ. Code Sec. Sec. 1098 and 1098.5 (2010).
\4\ E.g., Del. Code Ann. Tit. 25, Sec. 319 (2010); Minn. Stat.
Sec. Sec. 513.73 to 513.76 (2010); N.C. Gen. Stat. Sec. Sec. 39A-1
to 39A-3 (2010).
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In the proposed guidance and the proposed rule that followed, 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, may not benefit homeowners or the properties involved, and,
therefore, could impair the safety and soundness of the regulated
entities that invest in or purchase mortgages secured by such
properties as collateral. Another concern expressed about private
transfer fees is the adequacy of disclosure of these covenants which,
in turn, may impede the marketability and valuation 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.
History of the Rule
FHFA's proposed rule grew out of its consideration of over 4,200
comments received on the proposed guidance. Commenters included the
Community Associations Institute (CAI), American Land Title Association
(ALTA), National Association of Realtors (NAR), Freehold Capital
Partners (Freehold), 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 Federal Home Loan 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. After receiving and reviewing
the comments, FHFA
[[Page 15567]]
determined to address the subject through regulation rather than
through guidance.
On February 8, 2011, FHFA published a Notice of Proposed Rulemaking
(76 FR 6702) inviting comments on a proposal that incorporated a number
of changes to the substance of the former proposed guidance. The
proposed rule reflected a narrower focus than the guidance and limited
the private transfer fees to which it would be applicable. Among other
things, the proposed rule sought comment on an approach to refine the
definition of transfer fees eligible for regulated entity investment to
include those that provided a direct benefit to the property of the
homeowner through maintenance or enhancement of common areas or the
structures of multifamily units or the property of the homeowner
through support, for instance, of homeowners' or community
associations. FHFA also proposed to make the rule prospective in
effect, and apply it only to private transfer fee covenants created
after the publication date of the proposed rule (February 8, 2011).
FHFA proposed further to allow an implementation period of 120 days for
the regulated entities within which they might use reasonable means to
achieve compliance. FHFA received over one thousand comments on the
proposed rule, discussed in more detail below.
In developing the final rule, FHFA reviewed the comments received
on the proposed rule as well as, again, the comments received on the
previously proposed guidance. In addition to making the intuitive
objection that it is wrong to impose a fee on homeowners for exercising
the right to sell their own homes, commenters criticized private
transfer fees for many reasons in both rounds of comment:
(1) That the impact of transfer fees on property values is
uncertain and potentially adverse because of uncertainty over how often
the property will be sold during the duration of the covenant; and
that, for that reason as well as because property values go up and
down, and therefore the fee as well (in the majority of cases in which
it is a percentage of property value), the fees paid are likely to not
be aligned with the value received in return, if any.
(2) That there is no price transparency because buyers are not
offered a choice between a property encumbered by the transfer fee
covenant and the same property at a different price without the
covenant, or between comparable properties with and without the
covenant.
(3) That in many cases the transfer fee is not assessed on the
first buyer, making the covenant less likely to be reflected in the
initial sale price but more likely to be a surprise upon attempted
resale. Similarly, that it is difficult for a buyer to predict the
effect of the covenant on the property's value upon resale to
subsequent buyers.
(4) That private transfer fees exploit the lack of transparency of
complex real estate transactions; further, that they are not normally
discoverable until well after the sale contract is executed, when a
title search is performed prior to closing, with unpredictable effects
on whether the sale will close or whether the price will be
renegotiated.
(5) That private transfer fee covenants present questions of legal
enforceability, especially if they are not associated with provision of
a direct benefit to the burdened property.
These criticisms contribute to FHFA's concerns about the
reliability with which properties subject to such encumbrances may be
valued, posing safety and soundness risk to FHFA's regulated entities.
Many of these concerns are lessened when the fees provide a direct
benefit to the burdened properties, and, as described in more detail
below, the final rule follows the approach of the proposed rule in
excepting defined classes of fee covenants that are associated with a
direct benefit.
This rule does not prohibit any private transfer fees. Rather,
pursuant to FHFA's safety and soundness authorities under the Safety
and Soundness Act and the Bank Act, as augmented with respect to the
Enterprises by its additional plenary powers as Conservator, it
prospectively instructs the regulated entities that participating in
any market for mortgages on property encumbered by certain private
transfer fees is an unsafe and unsound practice in which they shall not
engage. The rule also identifies the types of private transfer fee
covenants that will not disqualify a mortgage for investment.
II. Public Comments on the Proposed Rule
The public comment period on the proposed rule closed on April 11,
2011. FHFA received over 1,000 comments on all aspects of the proposed
rule. Many of the organizations and constituencies that commented on
the proposed guidance also commented on the proposed rule. However, the
comments differed from those received on the proposed guidance. A very
small minority of commenters preferred the more restrictive approach in
the proposed guidance. The majority of comments supported the proposed
rule because, unlike the guidance, it would not apply to existing
transfer fees and because those fees that directly benefit the property
on which they are assessed would not disqualify a mortgage for
regulated entity investment.
Most comments centered on refinements to the proposed rule to
assure it would not inadvertently disqualify certain fee arrangements
through omission from the definitions in the proposed rule; on changes
to expand parties and activities covered by the ``direct benefit''
test; and on objections to the proposed rule either because it deviated
from the original proposal to disqualify mortgages on property
encumbered by any private transfer fee covenant or because it continued
to make ineligible for investment mortgages encumbered by fees
affecting certain interest groups or business entities.
The comments can be generally characterized as falling into four
categories: (1) Comments endorsing the proposed rule; (2) comments
generally supporting the proposal, but suggesting specific changes; (3)
comments opposed to core elements of the proposed rule; and, (4)
comments asserting that the rule lacks prerequisites to proper
promulgation. FHFA has accepted suggestions from a number of commenters
and made adjustments to the rule to address these comments.
III. Discussion of Public Comments
Supporting the Rule as Proposed
Commenters such as ALTA, the Coalition to Stop Wall Street Home
Resale Fees, and the Conference of State Bank Supervisors (CSBS)
endorsed the proposed rule's ban on investing in mortgages encumbered
with private transfer fee covenants and FHFA's adoption of a ``direct
benefit'' test for permissible covenants. ALTA did note that how the
regulated entities would enforce the rule would be of interest, as the
title search and examination process would occur late in the home-
buying process and that transfer fees often are difficult to detect, if
not recorded.
With respect to implementation, ALTA's concern was echoed by other
commenters, including the Federal Home Loan Banks as regulated
entities. FHFA intends that the regulated entities develop reasonable
means for implementation of the regulation in consultation with FHFA.
Possible methods include incorporating appropriate restrictions in the
seller-servicer guides of the Enterprises; using representations and
warranties; or, in the case of the Federal Home Loan Banks, perhaps
requiring mortgages to
[[Page 15568]]
conform to Enterprise purchase standards. The regulated entities have a
great deal of experience in developing methods of segregating mortgages
in which investment is permissible and those in which investment is
not.
The CSBS supported the proposed rule as establishing a ``regulatory
floor'' for the regulated entities. CSBS stated that this ``floor''
will ensure that the states can continue to enact practical regulations
affecting private transfer fees; and that state level supervision of
these fees ensures that the regulators are accessible to those they
regulate, understand the applicable state laws and are in tune with the
local economy. The Joint Editorial Board for Uniform Real Property Acts
(JEBURPA) and CSBS were among the commenters urging FHFA to respect
state law and avoid preemption of state laws regulating these fees.
FHFA believes that Sec. 1228.4 of the final rule adequately addresses
this issue.
Support With Modifications
Many commenters expressed support for the proposed rule, but
requested modifications primarily to definitions that would clarify its
application.
One Thousand Yards
Hyatt & Stubblefield (H&S) and Sproul Trost (Sproul), two real
estate law firms, along with CAI, the National Association of
Homebuilders (NAHB), the Mortgage Bankers' Association (MBA), JEBURPA,
and others criticized the proposal's ``adjacent or contiguous
property'' requirement as ambiguous when considered with other
definitions, unworkable, and too restrictive, particularly the
requirement that property be located within 1,000 yards of the burdened
community in order to be considered ``adjacent or contiguous.'' As
described below, FHFA has decided to delete the 1,000-yard limitation.
The rule does address the issue of properties that may not be adjacent
or contiguous, but with a test of direct benefit rather than location.
Breadth of ``Direct Benefit,'' ``Private Transfer Fees,'' and
Exceptions
A significant number of commenters, including NAHB, echoed the CAI
comment to broaden the definition of ``direct benefit'' to embrace all
duties and responsibilities that residents ordinarily expect, or choose
to require, community or homeowner associations to fulfill. FHFA
intends to encompass routine functions of property management and
ordinary obligations of governing associations. However, to
automatically include any activity that such associations may engage in
as a ``direct benefit'' may not meet the prudential need that the
financial burden of such fees be balanced by value actually added to
the encumbered property.
Similarly, JEBURPA, noting that the proposed definition of
``private transfer fee'' contains only four exclusions (fees imposed by
court decree; fees payable to the Federal government or a State or
local government; fees arising out of a mechanic's lien; and fees
arising from an option to purchase land), suggested that the definition
should be expanded to exclude loan assumption fees; loan prepayment
fees; and deferred purchase price payments or appreciation sharing
contracts. Other comments also sought various expansions to the
definition, and FHFA has reviewed these comments and state laws with
diverse exceptions. CAI recommended using the term ``community transfer
fee covenant'' rather than ``excepted transfer fee covenant.'' CAI
stated that this would more clearly define the fees that FHFA seeks to
disqualify by specifically outlining fees FHFA does not seek to
restrict.
Patton Boggs, a law firm writing on behalf of its client,
Associations, Inc. (Associa), explained that Associa's members support
property owners by providing various services, including closing
services, to homeowners' associations. While Associa believed these
services fall outside the scope of the proposed rule, Patton Boggs
suggested adding a fifth exclusion to the private transfer fee
definition to codify its understanding. The H&S law firm stated its
general support for the proposed rule as an improvement over the
proposed guidance, but also objected to the definition of ``direct
benefit.'' H&S argued alternatively that the definition should be
expanded to include a number of additional qualifying uses or deleted
in favor of revising the definition of ``excepted transfer fee
covenant'' to be more inclusive.
FHFA has made changes in the proposed rule, described below, in
response to these comments.
Internal Revenue Code and Sections 501(c)(3) and 501(c)(4) Charitable
Status
Among others, the Natural Resources Defense Council (NRDC),
Coalition to Save Community Benefits (CSCB), the Sierra Club, H&S,
Sproul, Endangered Habitats League (EHL), and Shute, Mihaly &
Weinberger, LLP, a law firm writing on behalf of several environmental
groups, objected to the requirement for covenants to directly and
exclusively benefit encumbered property, and the reference to usage fee
charges in the event of general public use, as well as the limited
definition of ``covered association.'' The principal theme common to
these objections is an assertion that the definitions taken together,
and particularly in view of requirements for exclusivity of benefits
and possible charges for public use, are too restrictive to benefit
charitable organizations. These commenters urge a broader exception for
not-for-profit organizations that allows their covenants special
treatment, asserting that FHFA's proposal is inconsistent with
charitable purposes, which require non-exclusivity of benefits in order
to meet the public purposes requirement for tax exempt status under
sections 501(c)(3) and 501(c)(4) of the Internal Revenue Code (IRC).
The California Building Industry Association (CBIA) proposed a
revision that embraced the concept of a ``community benefits covenant''
approach to accommodate nonprofit organizations that administer
transfer fees. According to CBIA, this approach would allow non-profits
to meet the Internal Revenue Service requirements for nonprofit
organizations to engage in charitable and public purposes.
In response to the comments questioning the consistency between the
direct benefit requirement and requirements for certain types of tax-
exempt status under the IRC, FHFA has made certain changes to the
section of the rule on direct benefit that may address some concerns
expressed in the comments. FHFA takes no position, however, with
respect to potential tax consequences for a nonprofit organization that
may result from the administration of transfer fees or that otherwise
may be associated with the encumbrance of a property with a private
transfer fee covenant.
Recording, Disclosures, and Implementation
Recording and pre-purchase and pre-foreclosure disclosure
requirements were among significant suggestions offered by many
commenters including MBA, EHL, CSCB, and the Consumer Mortgage
Coalition. Commenters recommended recording and disclosure of private
transfer fee covenants as additional measures to protect homebuyers and
consumers; as ameliorating implementation difficulties for the
regulated entities; and a complete alternative to the rule's method of
identifying fees that disqualify mortgages for investment. FHFA views
recording and disclosure as valuable adjuncts to consumer and lender
awareness of fees and perhaps a ``best practice'' that might be
considered
[[Page 15569]]
by appropriate state or federal authorities. However, adopting such
requirements for real estate transactions potentially injects FHFA into
issues of state policy and matters of consumer protection. FHFA's core
role is as prudential and mission supervisor of its regulated entities,
not as a general regulator of real estate markets and practices. The
provisions of the rule focus on those aspects of private transfer fee
practice that may affect the value of property underlying mortgages
held by the regulated entities. FHFA recognizes that future action
might be required to revise the rule. FHFA will assess the
effectiveness of this rule, deferring consideration of specific
transaction requirements to allow state or other federal policymakers
to address these issues in the first instance.
With respect to implementation, although recording and disclosure
may make it easier for the regulated entities, FHFA does not intend to
establish by rule detailed instructions for how regulated entities will
implement the rule. However, all regulated entities have experience in
establishing controls to segregate mortgages in which they can invest
from those which are disqualified. As stated by FHFA when publishing
the proposed rule, acceptable compliance with the final rule may be
achieved through a Federal Home Loan Bank's 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 Federal
Home Loan Banks must use such compliance tools with respect to
Enterprise securities, because Enterprise securities issued
prospectively should comply with the provisions of the final rule. FHFA
will work with the regulated entities to develop appropriate methods to
implement the rule.
The suggestion offered by some commenters that recording and
disclosure are an alternative to the rule's description of covenants
that qualify for investment is misplaced. The rule is not directed at
controlling private transfer fee covenants. It is instead directed at
limiting the risk to regulated entities when investing in property with
values that may be compromised by such covenants. Recording and
disclosure requirements do not distinguish among levels of risk, but
only make identification of an existing covenant easier. Those details,
as noted above, are matters best left to state law or other appropriate
federal consumer-focused regulation.
Prospective Application
A variety of commenters, including Federal Home Loan Banks, law
firms, and non-profit organizations, expressed concerns over the date
on which the rule would apply. The proposed rule provided that
regulated entity compliance was not required until after publication of
the final rule. To comply with the rule, regulated entities cannot
trade in disqualified ``mortgages on properties encumbered by private
transfer fee covenants created on or after'' February 8, 2011. The
obligation on the regulated entities is unequivocally prospective--
``The regulated entities shall comply with this part not later than 120
days'' after publication of the final rule. The date--February 8,
2011--identifies the private transfer fee covenants to which the
regulated entities are to apply the rule's qualification and
disqualification tests.
The structure of the proposed rule is clear that the language
``created on or after'' refers to the date on which the covenant that
encumbers the land was created. Covenants that encumbered land before
February 8, 2011 do not disqualify mortgages. It is FHFA's intention
that the date of creation is the date on which the covenant became
legally enforceable with respect to the specific encumbered property
that is the subject of a mortgage, whether under state law that is the
date of recording or some other date.
The only obligations that the proposed rule would impose are
forward looking, and they apply only to the regulated entities. The
rule regulates neither private transfer fee covenants nor market
participants who create or use them.
National Cable & Telecommunications Association v. Federal
Communications Commission, 567 F.3d 659 (D.C. Cir. 2009), is
instructive with respect to applying retroactivity principles to this
rule. In that case, the Federal Communications Commission (FCC)
promulgated a rule that prohibited the enforcement of pre-existing
exclusivity contracts between cable operators and multi-unit
developments, like apartment buildings. The court upheld the rule and
determined that it was not an impermissibly retroactive regulation. Id.
at 671-72.
In National Cable, the petitioners asserted that applying the rule
to existing contracts violated the presumption against retroactivity
contained in the Administrative Procedure Act's ``future effect''
requirement and was impermissible because of the rule's so-called
``secondary retroactivity''; that is, secondary effects of the rule
that the FCC failed to consider. The court first emphasized that ``[w]e
have thus repeatedly made clear that an agency order that only `upsets
expectations based on prior law is not retroactive,' Mobile Relay
Associates v. FCC, 457 F.3d [1, 11 (D.C. Cir. 2006)].'' 567 F.3d at
670.
Even if the proposed rule affects the value of private transfer fee
covenants entered between February 8, 2011 and the date of the
regulation, it has ``not rendered [those covenants] illegal or
otherwise sanctionable. `It is often the case that a business will
undertake a certain course of conduct based on the current law, and
will then find its expectations frustrated when the law changes.'
Chemical Waste Management, Inc. v. U.S. Environmental Protection Agency
(EPA), 869 F.2d 1526, 1536 (D.C. Cir. 1989). Such expectations, however
legitimate, cannot furnish a sufficient basis for identifying
impermissibly retroactive rules.'' 567 F.3d at 670. See also, Landgraf
v. USI Film Products, 511 U.S. 244, 269 (1994); Arkema, Inc. v. EPA,
618 F.3d 1, 7 (D.C. Cir. 2010) (``A rule operates retroactively if it
takes away or impairs vested rights.''). A retroactive rule ``alter[s]
the past legal consequences of past actions.'' Bowen v. Georgetown
University Hospital, 488 U.S. 204, 219 (Scalia, J., concurring)
(emphasis in original). If a vested right is not impaired, the rule is
not retroactive. See Arkema, 518 F.3d at 7.
This rule might frustrate an assumption that an encumbered mortgage
would be eligible for purchase by a regulated entity, but it does not
extinguish any third-party right to have a regulated entity trade in
that mortgage, because there is no such right. At any time in the past,
regulated entities could refuse to make such purchases; no one
possessed a right to require them to be purchased and no regulated
entity had any obligation to purchase, invest or otherwise trade in
them. Since the rule does not impair a vested right, the rule is not
retroactive.
``Secondary retroactivity'' exists where a rule ``affects a
regulated entity's investment made in reliance on the regulatory status
quo before the rule's promulgation.'' Mobile Relay, 457 F.3d at 11. It
invalidates a rule only if the rule is arbitrary or capricious. See
Bowen, 488 U.S. at 219 (Scalia, J. concurring); Mobile Relay, 457 F.3d
at 11. An assessment and balancing of
[[Page 15570]]
benefits and burdens is required if a rule creates such secondary
effects. National Cable, 567 F.3d at 671-72.
Through this rule, FHFA is protecting regulated entities from
investments with certain features that impair their value and pose
unacceptable levels of risk to the financial safety and soundness of
the entities. The regulation is supported by the proliferating use of
private transfer fees for purposes unrelated to the encumbered property
and proposals to securitize streams of income from them that will never
be returned to the property or property owner. By strengthening the
safety and soundness of the regulated entities, the rule furthers the
central mission of FHFA. It is abundantly clear that FHFA has
considered secondary effects. Despite the fact that the rule does not
prohibit covenants, it contains a grandfathering provision to allow the
regulated entities to trade in mortgages encumbered by otherwise
disqualifying covenants if the covenants were created before a date
certain. The date certain of February 8, 2011, is the date on which the
rule was proposed. It was chosen as a rational date at which markets
and market participants could adjust their behavior in case a rule
unfavorable to them was eventually adopted and as a means to avoid
market disruption that would occur if developers and others attempted
to anticipate the forthcoming rule by placing disqualifying covenants
on large numbers of previously unencumbered properties during the time
that a final rule was being considered. This is an acceptable practice
among regulatory agencies.
In National Cable the court upheld the rule despite the fact that
``by significantly altering the bargained-for benefits of now
unenforceable exclusivity agreements, the Commission has undoubtedly
created the kinds of secondary retroactive effects that require agency
attention and balancing'' because the FCC in fact conducted the
balancing analysis and concluded that ``banning enforcement of existing
contracts was essential.'' 567 F.3d at 671. Like FHFA, the FCC
concluded that the public interest required it to ``prevent the harms
from existing contracts `to continue for years,' or `to continue
indefinitely in the cases of exclusivity clauses that last in
perpetuity.'' Id. The court noted that, as FHFA has done here, the FCC
considered legitimate expectations and felt they were relatively
undisturbed because states and the FCC had been scrutinizing the
prohibited arrangements for some time. Id.
FHFA has fully considered the benefits and burdens and primary and
secondary effects of the rule. FHFA concludes that this rule is not
impermissibly retroactive and that this conclusion is supported by
applicable precedent.
Opposition to Core Elements of the Rule
Some comments opposed elements so fundamental to the proposed rule
that changing or eliminating them as requested would vitiate the
purpose of the regulation itself. FHFA considered all comments and
assessed whether to issue this rule as a regulation, guidance, or not
at all. FHFA determined that the concerns, risks, and issues leading it
to propose guidance in the first place have not abated and the comments
to the proposed rule reinforce that the housing finance system and its
participants are better served by the certainty of a rule on this
subject. Consequently, FHFA has not accepted suggestions that would
serve to make the rule ineffective and undermine its core principles.
One of the principal objectors to the fundamental underpinnings of
the proposed rule is Freehold, joined by law firms, developers, and
some builders. These commenters claim that private, profit-motivated
entities can use private transfer fees (characterized by them as
``capital recovery fees,'' although the fees are not tied to any
particular capital investment) to provide financial benefits to
homeowners and communities by distributing development and
infrastructure costs to ``future'' homeowners, rather than embedding
all of these costs in the sales price to the initial homebuyer. They
generally liken these benefits to those provided by homeowner
associations and similar entities that provide ongoing support to
encumbered properties. This view is far from universal, as many
builders and the NAHB oppose private transfer fee covenants of this
sort.
Freehold and other proponents of private transfer fees contend that
creating a right for the developer to receive a future stream of
transfer fee payments from successive homebuyers allows the developer
to recover investment costs more quickly, enabling more capital
investment in new development. This is to be accomplished by
securitizing that revenue stream, and selling the security to investors
who have no connection to the encumbered property. The developer
receives the sale proceeds of the security irrespective of the
subsequent market value of the developed property. If the stream of
income is not securitized and sold to investors, or otherwise assigned,
the developer receives it over the life of the covenant, usually 99
years. Advocates for this model argue that the fees allow developers to
pursue or complete projects not otherwise viable due to a housing
market downturn. As new developments are completed, they assert, jobs
are created and the economy in general benefits. Additionally,
proponents claim that by spreading costs into the future, each
homebuyer benefits from a price that is lower than if the full costs of
the development were recovered from the initial purchaser. However,
another commenter, the Center for Regulatory Effectiveness (CRE),
challenged Freehold's analysis, finding that private transfer fees paid
to developers or to unrelated third parties (as opposed to those
directly benefiting owners of burdened property) produce negligible
benefits for homeowners, while imposing additional costs and burdens,
such as increased difficulty of selling a home encumbered by a private
transfer fee. FHFA has carefully considered both analyses and finds
CRE's comments more persuasive.
Freehold argues that the purpose of the private transfer fee
revenue stream is to fund infrastructure investments. However, FHFA has
determined that these arrangements do not require that the revenue
stream be spent on infrastructure improvements. To the contrary,
Freehold's marketing literature to developers, available on its Web
site and cited in CRE's comment on the proposed rule, describes private
transfer fees as a means to ``extract more value from your real estate
projects.'' See http://freeholdcapitalpartners.com/forms/freehold_brochure.pdf. That ``value'' is not used to fund any part of the
development, precisely because it is a future revenue stream and not
cash in hand to the developer. To FHFA's knowledge, no securities based
on these revenue streams have ever been sold, so the asserted benefits
of this arrangement to developers as a means of funding projects are
speculative.
Even as a matter of principle, the arrangement that Freehold
markets to developers cannot work to the benefit of both developers and
homebuyers as Freehold argues. In a fully informed, freely functioning
marketplace, the initial sale price of a property subject to the
covenants should be reduced by the present value of the expected future
stream of transfer fee payments with which the property is burdened.
The price of the security that the developer sells should also reflect
the present value of the expected future stream of transfer fee
payments, so there is no net creation of value to the developer. In
fact, because the financial intermediaries who would manage the
transaction would extract a fee, and
[[Page 15571]]
because Freehold also would extract a fee, the amount received by the
developer would actually be less than the amount the developer loses
because of the reduction in the sale price of the burdened properties.
The developer gains a benefit only if the home buyers do not reduce the
price they are willing to pay by the present value of the future
transfer fee burden or even close to it.\5\ The arrangement does not
work to the benefit of both developers and homebuyers.
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\5\ Why might developers and Freehold expect this to be the
case? There are at least two possible explanations. First,
behavioral economists argue that consumers discount future negative
outcomes at excessively high rates, a phenomenon that they call
``hyperbolic discounting.'' See Bar-Gill, Seduction by Plastic, 98
Nw. U. L. Rev. 1373, 1396-99 (2004); Heidhues & Koszegi,
``Exploiting Na[iuml]vete About Self-Control in the Credit Market''
(Institute for Behavioral Economics, Sept. 2009). Second, a
substantial number of commenters argue that transfer fees are
inadequately disclosed, both as a matter of clarity and as a matter
of timing in the real estate purchase transaction, and urge FHFA to
establish disclosure standards. This phenomenon could be reinforced
by the fact that Freehold's fees--as well as most of those
supporting environmental and conservation projects, discussed
below--are not charged to the initial buyer of the burdened
property, but only to subsequent buyers. That is, the arrangement is
structured to ensure that the fees are paid only by parties who are
remote from the creation of the covenants and least likely to be
aware of them or appreciative of their impact. As explained above,
FHFA does not believe that it is its role to fashion or to mandate
appropriate disclosures, nor does FHFA take a position on behavioral
economics or any of its theories. It is enough for FHFA to recognize
that the effect of transfer fee covenants on property values is
uncertain, and that the Freehold arrangement extracts value from
property that is not returned to it.
---------------------------------------------------------------------------
FHFA has carefully reviewed and considered Freehold's analysis and
has concluded that Freehold's assertion that private transfer fees are
economically beneficial to homebuyers and to the economy is based on
assumptions that are not verifiable and lack empirical data. In
particular, Freehold's present value assertions rest on assumptions
about cash flow streams and appropriate discount rates that are
unidentified, unexplained, and lack validation.
FHFA does not agree that private transfer fees appropriately and
equitably spread initial developer costs across future homeowners.
Development costs ostensibly recovered by these fees do not have a
value that extends to the typical 99-year life of the covenant. Initial
improvements by a developer depreciate in value over a much shorter
period of time. In a traditional development, the initial home price
captures the value of the developer's investment. Resale prices capture
remaining value of the improvement. This method of capital recovery is
more equitable and less disruptive to home resale markets than charging
future generations of homeowners for capital investments and residual
values of the improvements funded by those investments. Instead, FHFA
finds that the core purpose behind the Freehold model is reflected in
Freehold's own marketing material heralding the returns to developers
and remote investors from generations-long extraction of value from
land at the expense of successive homebuyers. Nothing in the Freehold
model demonstrates that any benefit is ever returned to the property
burdened by private transfer fee covenants in exchange for repeated and
potentially escalating charges.
A variety of non-profit environmental groups asserted that private
transfer fee covenants can be used to promote environmental protections
and resource conservation, which they claim inures to the benefit of
encumbered property and to society at large. The benefits are argued to
transcend the property and property owners and therefore, the
commenters assert, the covenants have indirect and non-exclusive
benefits that should not cause a mortgage to be ineligible for
investment. Commenters opposed to such use of private transfer fees
argue that developers are willing to impose private transfer fee
covenants on properties in settlement of environmental and similar
litigation, because the resulting fees are not paid by the developer
but shifted to the homeowners; a phenomenon exacerbated by the fact
that the initial sale from developer to first buyer is typically exempt
from the fee.
FHFA does not take a position on the merits of the environmental,
conservation, or similar projects that are funded by private transfer
fees. Instead, in its capacity as the safety and soundness regulator of
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and as the
Conservator of the Enterprises, FHFA addresses the subject from the
perspective of the valuation issues that such use of private transfer
fees may cause for the reasons enumerated above: Unpredictability of
future sales and, therefore, the magnitude of the financial burden on
the encumbered properties; \6\ lack of transparency to sellers and
purchasers; and the practice of shifting the payment obligation to
future buyers who are not privy to the settlement with environmental
groups or to the initial transaction with the developer.\7\ As a
result, FHFA declines to recognize such private transfer fee covenants
as excepted from disqualification unless the activities they fund
provide a direct benefit to the burdened properties, as defined in the
rule and discussed further below. The environmental commenters'
reliance on the National Environmental Policy Act of 1969, as amended
(NEPA), (42 U.S.C. 4321 et seq.), is also discussed below.
---------------------------------------------------------------------------
\6\ ``If the fee has a 20-year term, for example, one house may
be sold three times and assessed three fees while another house is
not sold and, consequently, has no fee.'' ``Using Real Estate
Transfer Fees to Deliver Community Projects,'' in Conservation
Frontiers: Reports from the California Council of Land Trusts (Feb.
2008), p. 3, at http://www.calandtrusts.org/download.cfm?ID=24427.
\7\ ``[T]he original sale of a house has not been assessed in
most cases, but the fee does apply to all subsequent sales.'' Id.
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Regulatory Prerequisites
A number of commenters asserted that FHFA failed to satisfy
prerequisites for rulemaking. Through counsel, a variety of
environmental groups, including the NRDC, claimed that FHFA is required
to prepare either an Environmental Impact Statement (EIS) or an
Environmental Assessment (EA) under NEPA before proceeding with the
rule. Freehold contended that FHFA is not complying with the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601through 612, because the regulation
impacts small business entities and the RFA requires FHFA to undertake
a detailed analysis and to adopt the least restrictive means for
accomplishing the agency's objectives while minimizing the economic
impact on small entities.
For reasons explained below, FHFA disagrees with both of these
comments. Neither an EIS nor an EA is required for this rule. The RFA
was satisfied by the certification contained in the proposed rule and
repeated in this final rule.
National Environmental Policy Act
Before addressing the commenters' legal arguments, it is useful to
review the background in which their private transfer fee practices
have arisen. As described above, certain private transfer fees have
been put in place to resolve claims of adverse environmental or other
impacts that are asserted to result from proposed real estate
developments--claims that would otherwise be resolved in court, or
before government permitting bodies. Specifically, particular
arrangements that commenters have held up as examples of how they would
like to continue using private transfer fees have resulted from
settlement of litigation or as a negotiated means to obtain government
approval.\8\ In response to
[[Page 15572]]
those environmental and other concerns, various possible tools and
outcomes are possible in such cases: a development may be blocked;
restricted in other ways; or mitigating measures may be funded using
means other than private transfer fees, such as by regular assessments
that are more transparent and more readily translatable into property
valuation than private transfer fees,\9\ or by a lump sum from sale of
part of the subject property. Other tools may be available as well and,
in some cases, the deciding authority would conclude that the
development does not pose the concerns that are claimed and can proceed
without restriction. Not one of the letters FHFA received raising
environmental concerns about the proposed rule has explained why, or
even asserted that, private transfer fees are the only or even a
specially valuable tool for dealing with the concerns that have been
asserted in comparison with other tools, or why they are the tool of
preference, if they are.\10\ In each case, the environmental and other
impacts that are asserted do not result from FHFA's proposed rule on
private transfer fees, but from the real estate development to which
the commenters object. That federal regulations may make one or another
financing tool that the commenters might wish to use less attractive
does not mean that those regulations cause environmental impacts.
---------------------------------------------------------------------------
\8\ See ``Using Real Estate Transfer Fees to Deliver Community
Projects,'' in Conservation Frontiers: Reports from the California
Council of Land Trusts (Feb. 2008), describing the litigation origin
of the Roseville and Martis Valley private transfer fee arrangements
in Placer County, California. Both of those arrangements are
discussed in the comment letters FHFA has received. One comment
letter described the Plum Creek development in Maine, in which
private transfer fees feature prominently in an arrangement arrived
at after five years of negotiations and hearings and approved by
Maine's Land Use Regulation Commission. That arrangement, however,
appears to be currently on hold as a result of subsequent litigation
by a subset of the environmental groups, see ``Plum Creek's Maine
Development Set Aside by Judge'' (Associated Press, April 7, 2011).
\9\ See Quang Do & Sirmans, ``Residential Property Tax
Capitalization: Discount Rate Evidence from California,'' 47 Nat'l
Tax J. 341 (1994) (analyzing a data-set from a tax district in San
Diego to argue that homebuyers capitalize real property taxes into
purchase prices, discounting the future tax payments at a rate of
about 4 percent).
\10\ Perhaps developers show less resistance to private transfer
fees than to other types of restrictions or funding mechanisms. See
supra n. 5. That certainly is the perspective of the commenters who
are adverse to this use of private transfer fees.
---------------------------------------------------------------------------
Even focusing only on private transfer fees, contrary to a
commenter's assertion that FHFA ``proposed [the] elimination of private
transfer fees,'' the rule does not restrict or ban them, but restricts
its regulated entities from buying mortgages backed by real estate
subject to certain types of covenants. Mortgages held in portfolio or
securitized in private secondary markets are not affected by the rule.
For these reasons, for purposes of the NEPA, FHFA's rule is
financial and economic; it is not ``a major Federal action[]
significantly affecting the quality of the human environment.'' 42
U.S.C. 4332. NEPA does not require the analysis commenters assert
without an ``injury to the environment; an economic injury will not
suffice.'' Ranchers Cattlemen Action Legal Fund United Stockgrowers of
America, ICA v. United States Department of Agriculture, 415 F.3d 1078,
1103 (9th Cir. 2005) (emphasis added). There must be some causal
connection between the rule and the environmental injury. The
environmental injury the commenters appear to assert is not caused by
FHFA's rule; at best it has a tenuous and speculative nexus to the
rule.
The commenters assume that without unrestricted access to a
federally supported secondary mortgage market for private transfer fee
encumbered mortgages, their environmental protection activities will
not just be inconvenienced, but subverted and permanently stopped. The
agency recognized that some private transfer fees are used to fund
desirable ends, some of which are environmental, social, or cultural.
They still can be used for those purposes, but mortgages on property
encumbered by them may not qualify for the federally supported
secondary mortgage market unless they contain the features required by
the rule. Considering all private transfer fee covenants, the rule
allows regulated entity investment when property is encumbered by a
grandfathered covenant, and also when the covenant creates a direct
benefit to the encumbered property. In these circumstances, the
regulated entities may invest in encumbered property. That leaves, as
the asserted environmental injury, the inability to trade in the
secondary mortgage market mortgages on property encumbered by those
private transfer fees that do not return a benefit to the encumbered
property, and that are not grandfathered as related to a pre-existing
litigation settlement or government-approved agreement. No explanation
has been offered why regulation of the mortgage market will result in
developments with detrimental environmental impacts or that cannot be
remedied by other means that do not pose risks to the safety and
soundness of the regulated entities.
FHFA is fundamentally responsible for the safety and soundness of
the regulated entities. Its statutory command is to ensure their
financial safety and soundness. FHFA cannot allow speculative
considerations such as those offered by the commenters to interrupt or
subordinate its statutory obligation to prohibit the regulated entities
from engaging in unsafe and unsound practices. Congress did not
condition FHFA's safety and soundness determinations on assessments of
their environmental impact. Like the Federal Energy Regulatory
Commission in Grand Council of the Crees v. Federal Energy Regulatory
Commission (FERC), even if the proposed rule had an environmental
impact, when acting to fulfill its independent statutory command to
ensure safety and soundness, FHFA would not be required to conduct an
EIS or an EA. 198 F.3d 950, 953-54, 956 (D.C. Cir. 2000) (when setting
``just and reasonable rates'' as commanded by statute, FERC was not
required to conduct an EIS or EA, despite the environmental
consequences of the action).
Regulatory Flexibility Act
Both the proposed rule and this final rule comply with the RFA, 5
U.S.C. 601 through 612, because they contain FHFA's certification that
the rule will not have a significant economic impact on a substantial
number of small entities. This certification obviates the need for the
detailed analysis commenters seek. See 5 U.S.C. 605(b).
The only impacts that require an RFA analysis are the direct
impacts of the rule on small entities that are subject to the rule.
See, e.g., Cement Kiln Recycling Coalition v. EPA, 255 F.3d 855, 869
(D.C. Cir. 2001) (citing cases ``consistently reject[ing] the
contention that the [RFA] applies to small businesses indirectly
affected by the regulation of other entities''); Mid-Tex Electric
Cooperative, Inc. v. FERC, 773 F.2d 327, 343 (D.C. Cir. 1985) (where
rule directly regulated utilities, agency did not have to analyze
economic impact on wholesale customers of utilities); National Women,
Infants, and Children Grocers Association v. Food and Nutrition
Service, 416 F. Supp. 2d 92, 108-10 (D.D.C. 2006) (where rule regulated
state agencies, agency did not have to analyze impact on vendors that
did business with state agencies). The only entities subject to this
rule, and the only entities on which the rule will have direct impact,
are the FHFA regulated entities--Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks--none of which is small. Therefore, an analysis
under the RFA is not required. FHFA's certification is sufficient.
[[Page 15573]]
IV. FHFA Response to Public Comments in the Proposed Rule
FHFA has decided to adopt the rule largely as proposed. However, in
response to comments received, FHFA is making a number of changes to
the text of the regulation.
Section 1228.2 is changed to ensure no doubt that any activity
dealing in mortgages on property encumbered by private transfer fee
covenants, including guaranteeing them as well as purchasing or
investing in them, is restricted. The new language broadens the
proposed phrase ``purchase or invest in'' to ``purchase invest, or
otherwise deal in.'' The remainder of that section remains unchanged.
A number of commenters criticized the definition of ``adjacent or
contiguous property,'' and particularly the requirement that it be
located within 1,000 yards of the burdened community, arguing that some
commonly held facilities, such as marinas, beach access, or golf
courses, often cannot feasibly be located within that distance, but yet
are for the common benefit of the members of the community and
contribute to the value of their property to the same extent as if they
were closer. In response to that concern, FHFA has removed the proposed
1,000-yard requirement from the regulation.
At the same time, some commenters pointed out that the restrictions
on public access that the proposed regulation contemplated as part of
the definition of ``direct benefit'' would be problematic in situations
where the covered association uses transfer fees to fund parks or
trails that interconnect with a larger municipal park or trail system
which is open to the public. In that situation, although the covered
association makes the adjacent property open to the public, the
community members (and hence their property) receive fair value in
exchange, in the form of convenient access to the larger trail or park
system. To address this situation, as well as that described above of
common facilities located some distance from the burdened community,
FHFA is adopting a two-part approach to the use of transfer fees to
fund activities or property outside the burdened community. First, the
fees may fund property that is open to the public that is actually
adjacent, meaning that it borders the burdened community.\11\ Second,
transfer fees may fund amenities that are more distant, if the
amenities are primarily for the benefit of the covered association's
members. In light of these revisions, FHFA has deleted the proposed
provisions regarding public access for a fee or de minimis use, as
adding unnecessary complexity.
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\11\ The rule allows the properties to be separated by a public
right of way, because a public right of way is not inconsistent with
public access across the properties.
---------------------------------------------------------------------------
Several commenters noted that some planned communities include both
master associations and sub-associations, such that all residents are
members of both a master association and a sub-association, but not of
the same sub-association. The final regulation specifically recognizes
that possibility.
Some commenters observed that some payments or charges are secured
by a covenant to pay upon the next transfer, but do not impose a
continuing obligation to pay whenever the property is transferred. FHFA
does not regard such obligations as posing the same valuation problem
as continuing transfer fee covenants, and has clarified the regulation
to define a private transfer fee as one that is payable on a continuing
basis whenever the property is transferred. This clarification makes it
unnecessary to except from the definition of ``private transfer fee''
payments arising from an option to purchase or waiver of the right to
purchase the encumbered real property (an exception in the proposed
definition which FHFA has removed from the final rule) and other
exception items suggested by commenters, such as deferred purchase
price payments. Other suggested exceptions are unnecessary; for
example, loan prepayment fees need not be excepted because they are not
paid ``in connection with or as a result of transfer of title to real
estate,'' but rather because of prepayment of the loan and, therefore,
are not covered by the definition of ``private transfer fee'' as
proposed.
In response to some comments and a review of state private transfer
fee legislation, FHFA has added to the final rule an exception to the
definition of ``private transfer fee'' for fees and payments that
defray actual costs of the transfer, such as new keys, mailboxes, and
other features that benefit the new owner.
Some commenters urged that private transfer fees should be used to
support local services such as schools, libraries, and fire
departments. FHFA has not added an exception for such uses, which
normally would fall within the proposed exception for fees paid to
government entities. FHFA retains that exception in the final rule. If
a particular use of transfer fee covenants would not fall within that
exception, FHFA is reluctant to specifically sanction it in the final
rule, because such a rule is likely to raise the concern about property
valuation in the absence of a direct benefit, which motivates the rule
as a whole.
The proposed rule's definition of ``private transfer fee'' included
an exception for fees that are imposed by court judgment, order, or
decree. FHFA removes that exception in the final rule. A survey of
existing state laws on private transfer fees reveals that most do not
contain that exception. Further, review of the many comments discussing
the use of private transfer fees to fund preservation or environmental
projects that, though they may be meritorious from the perspective of
society as a whole, do not contribute directly to the value of the
burdened property, raising the valuation concerns that underlie this
regulation when funded by private transfer fees, shows that such
arrangements often result from settlement of litigation or threatened
litigation, and therefore could be structured to escape the effect of
this rule by moving to have them embodied in a court decree.
A review of those state statutes on private transfer fees also
shows that most of them do not contain the proposed rule's exception
for mechanic's liens, plausibly because those liens do not secure an
obligation to pay specifically upon transfer (though as a practical
matter that obligation, and any other secured obligation, may have to
be satisfied in order to clear the title and make the transfer) and are
not private transfer fee covenants to begin with. Therefore, FHFA has
removed that exception.
Many commenters reacted favorably to FHFA's proposal that the
regulation have prospective effect and not apply to private transfer
fee covenants created before a date certain. A number of commenters,
however, described projects currently underway that are funded by
private transfer fees, which could be disrupted to the extent that
covenants have not yet been attached to particular parcels that are
part of the overall plan. FHFA has clarified the prospective scope of
the rule, so that it will not apply to private transfer fee covenants
if they are imposed pursuant to a litigation settlement agreement or an
agreement approved by a government body before the date certain
specified in the rule, February 8, 2011.
Some commenters suggested that the proposed Sec. 1228.4, ``State
restrictions unaffected,'' be revised to state that such state
restrictions might include restrictions on validity and enforceability
as well as with respect to disclosures or duration, the two
[[Page 15574]]
examples given in the proposed rule. In cases where a state law
restricts the validity or enforceability of private transfer fees, it
was not the intention of FHFA to override those restrictions, but
rather to provide a framework to protect the regulated entities in the
event that private transfer fees could be imposed consistently with
state law. For example, one commenter stated that California law does
not permit community associations to fund themselves using private
transfer fees. That result is not affected by FHFA's rule permitting
the regulated entities to buy mortgages that are secured by properties
encumbered by such association transfer fees.
And finally, various commenters suggested technical revisions to
the proposed regulation in the interest of clarity, and FHFA adopts a
number of those suggestions in the final rule.
V. Paperwork Reduction Act
The 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 rule applies only to the regulated entities, which do not come
within the meaning of small entities as defined in section 601(6) of
the RFA. In accordance with section 605(b) of the RFA, FHFA certifies
that this 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.
For the reasons stated in the Supplementary Information, and under
the authority of 12 U.S.C. 4526, the Federal Housing Finance Agency
amends Chapter XII of Title 12 of the Code of Federal Regulations by
adding 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. 4511, 4513, 4526, 4616, 4617, 4631.
Sec. 1228.1 Definitions.
For the purposes of this part, the following definitions apply:
Adjacent or contiguous property means property that borders the
burdened community, provided that such adjacent or contiguous property
may be separated from the burdened community by public right of way.
Burdened community means a community comprising all of the parcels
or interests in real property encumbered by a single private transfer
fee covenant or a series of separate private transfer fee covenants
that require payment of private transfer fees to the same entity to be
used for the same purposes.
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 section 501(c)(4) of the Internal
Revenue Code. A covered association may include master and sub-
associations, each of which is also a covered association.
Direct benefit means that the proceeds of a private transfer fee
are used exclusively to support maintenance and improvements to
encumbered properties, and acquisition, improvement, administration,
and maintenance of property owned by the covered association of which
the owners of the burdened property are members and used primarily for
their benefit. Direct benefit also includes cultural, educational,
charitable, recreational, environmental, conservation or other similar
activities that--
(1) Are conducted in or protect the burdened community or adjacent
or contiguous property, or
(2) Are conducted on other property that is used primarily by
residents of the burdened community.
Enterprises means, collectively, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Excepted transfer fee covenant means a private transfer fee
covenant that requires payment of a private transfer fee to a covered
association and limits the use of such transfer fees exclusively to
purposes which provide a direct benefit to 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, and payable on a continuing basis each time a
property is transferred (except for transfers specifically excepted)
for a period of time or indefinitely. A private transfer fee does not
include fees, charges, payments, or other obligations--
(1) Imposed by or payable to the Federal government or a State or
local government; or
(2) That defray actual costs of the transfer of the property,
including transfer of membership in the relevant covered association.
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, invest or otherwise deal
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 Federal Home Loan Banks shall not
accept such mortgages or securities as collateral,
[[Page 15575]]
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 if those covenants are created on or
after February 8, 2011. This part shall not apply to mortgages on
properties encumbered by private transfer fee covenants if those
covenants are created pursuant to an agreement entered into before
February 8, 2011, applicable to land that is identified in the
agreement, and the agreement was in settlement of litigation or
approved by a government agency or body. This part also applies to
securities backed by mortgages to which this part applies, and to
securities issued after February 8, 2011, backed by revenue from
private transfer fees regardless of when the covenants were created.
The regulated entities shall comply with this part not later July 16,
2012.
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
validity, enforceability, disclosures, or duration.
Dated: March 12, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2012-6414 Filed 3-15-12; 8:45 am]
BILLING CODE 8070-01-P