15566 Federal Register / Vol. 77, No. 52 / Friday, March 16, 2012 / Rules and Regulations 

1See Division A, titled the Federal Housing 

Finance Regulatory Reform Act of 2008, Title I, 

section 1101 et seq. of HERA. 

2See 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. 

3E.g., Cal. Civ. Code §§ 1098 and 1098.5 (2010). 

4E.g., Del. Code Ann. Tit. 25, § 319 (2010); Minn. 

Stat. §§ 513.73 to 513.76 (2010); N.C. Gen. Stat. 

§§ 39A–1 to 39A–3 (2010). 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1228 

RIN 2590–AA41 

Private Transfer Fees 

AGENCY: Federal Housing Finance 

Agency. 

ACTION: Final rule. 

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. 

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-bycase adjudications.2

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

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 


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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 sellerservicer guides of the Enterprises; using 

representations and warranties; or, in 

the case of the Federal Home Loan 

Banks, perhaps requiring mortgages to 


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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 § 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 taxexempt 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 preforeclosure 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 


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Federal Register / Vol. 77, No. 52 / Friday, March 16, 2012 / Rules and Regulations 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 preexisting 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 


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15570 Federal Register / Vol. 77, No. 52 / Friday, March 16, 2012 / Rules and Regulations 

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 


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5Why 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 Naı ̈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. 

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. 

8See ‘‘Using Real Estate Transfer Fees to Deliver 

Community Projects,’’ in Conservation Frontiers: 

Reports from the California Council of Land Trusts 

Continued 

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. 

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. 

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 


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15572 Federal Register / Vol. 77, No. 52 / Friday, March 16, 2012 / Rules and Regulations 

(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). 

9See 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). 

10Perhaps 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. 

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. 

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. 


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11The 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. 

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. 

Several commenters noted that some 

planned communities include both 

master associations and subassociations, 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 § 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 


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15574 Federal Register / Vol. 77, No. 52 / Friday, March 16, 2012 / Rules and Regulations 

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. 

§ 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. 

§ 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, 


srobinson on DSK4SPTVN1PROD with RULES
Federal Register / Vol. 77, No. 52 / Friday, March 16, 2012 / Rules and Regulations 15575 

unless such covenants are excepted 

transfer fee covenants. 

§ 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. 

§ 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 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 71 

[Docket No. FAA–2011–1192; Airspace 

Docket No. 11–ANM–22] 

Modification of Class E Airspace; 

Sheridan, WY 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule. 

SUMMARY: This action amends Class E 

airspace at Sheridan County Airport, 

Sheridan, WY. Decommissioning of the 

Sheridan Tactical Air Navigation 

System (TACAN) has made this action 

necessary for the safety and 

management of Instrument Flight Rules 

(IFR) operations at the airport. 

DATES: Effective date, 0901 UTC, May 

31, 2012. The Director of the Federal 

Register approves this incorporation by 

reference action under 1 CFR part 51, 

subject to the annual revision of FAA 

Order 7400.9 and publication of 

conforming amendments. 

FOR FURTHER INFORMATION CONTACT: 

Eldon Taylor, Federal Aviation 

Administration, Operations Support 

Group, Western Service Center, 1601 

Lind Avenue SW., Renton, WA 98057; 

telephone (425) 203–4537. 

SUPPLEMENTARY INFORMATION: 

History 

On December 22, 2011, the FAA 

published in the Federal Register a 

notice of proposed rulemaking to amend 

controlled airspace at Sheridan, WY (76 

FR 79563). Interested parties were 

invited to participate in this rulemaking 

effort by submitting written comments 

on the proposal to the FAA. No 

comments were received. 

Class E airspace designations are 

published in paragraph 6002, of FAA 

Order 7400.9V dated August 9, 2011, 

and effective September 15, 2011, which 

is incorporated by reference in 14 CFR 

Part 71.1. The Class E airspace 

designations listed in this document 

will be published subsequently in that 

Order. 

The Rule 

This action amends Title 14 Code of 

Federal Regulations (14 CFR) Part 71 by 

amending Class E surface airspace at 

Sheridan County Airport, Sheridan, 

WY. Airspace reconfiguration is 

necessary due to the decommissioning 

of the Sheridan TACAN. This action is 

necessary for the safety and 

management of IFR operations. 

The FAA has determined this 

regulation only involves an established 

body of technical regulations for which 

frequent and routine amendments are 

necessary to keep them operationally 

current. Therefore, this regulation: (1) Is 

not a ‘‘significant regulatory action’’ 

under Executive Order 12866; (2) is not 

a ‘‘significant rule’’ under DOT 

Regulatory Policies and Procedures (44 

FR 11034; February 26, 1979); and (3) 

does not warrant preparation of a 

regulatory evaluation as the anticipated 

impact is so minimal. Since this is a 

routine matter that will only affect air 

traffic procedures and air navigation, it 

is certified this rule, when promulgated, 

will not have a significant economic 

impact on a substantial number of small 

entities under the criteria of the 

Regulatory Flexibility Act. The FAA’s 

authority to issue rules regarding 

aviation safety is found in Title 49 of the 

U.S. Code. Subtitle 1, Section 106 

discusses the authority of the FAA 

Administrator. Subtitle VII, Aviation 

Programs, describes in more detail the 

scope of the agency’s authority. This 

rulemaking is promulgated under the 

authority described in Subtitle VII, Part 

A, Subpart I, Section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This regulation is within the 

scope of that authority as it amends 

controlled airspace at Sheridan County 

Airport, Sheridan WY. 

List of Subjects in 14 CFR Part 71 

Airspace, Incorporation by reference, 

Navigation (air). 

Adoption of the Amendment 

In consideration of the foregoing, the 

Federal Aviation Administration 

amends 14 CFR part 71 as follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

■ 1. The authority citation for 14 CFR 

Part 71 continues to read as follows: 

Authority: 49 U.S.C. 106(g), 40103, 40113, 

40120; E. O. 10854, 24 FR 9565, 3 CFR, 1959– 

1963 Comp., p. 389. 

§ 71.1 [Amended] 

■ 2. The incorporation by reference in 

14 CFR Part 71.1 of the Federal Aviation 

Administration Order 7400.9V, Airspace 

Designations and Reporting Points, 

dated August 9, 2011, and effective 

September 15, 2011 is amended as 

follows: 

Paragraph 6002 Class E airspace 

designated as surface areas. 

* * * * * 

ANM WY E2 Sheridan WY [Amended] 

Sheridan County Airport, WY 

(Lat. 44°46′09′′ N., long. 106°58′49′′ W.) 

That airspace extending upward from the 

surface within a 4.5-mile radius of the 

Sheridan County Airport, and within 4.5 

miles each side of the 157° bearing of the 

airport, extending from the 4.5-mile radius to 

17.6 miles southeast of the airport, and 

within 3.5 miles each side of the Sheridan 

County Airport 316° bearing extending from 

the 4.5-mile radius to 15.5 miles northwest 

of the airport, and within 3.5 miles each side 

of the Sheridan County Airport 325° bearing 

extending from the 4.5-mile radius to 16 

miles northwest of the airport, and 4 miles 

each side of the 336° bearing of the Sheridan 

County Airport extending from the 4.5-mile 

radius to 15.4 miles northwest of the airport, 

and within 3.5 miles each side of the 

Sheridan County Airport 140° bearing 

extending from the 4.5-mile radius to 15.5 

miles southeast of the airport. 


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