[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

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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 
seller-servicer 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 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

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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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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