Transfer Fee Bans

On March 8, the Idaho Senate sent an act restricting deed-based transfer fees to the House. To those of us following association law, this looked a lot like the contested federal lending restrictions that the FHFA is currently considering for fees found in declarations. (http://www.caionline.org/govt/news/Pages/FHFA,TransferFeeRegResourcePage.aspx) Is this new act a rematch of the federal fight in a state-based setting?

Fortunately, it appears that the victories won at the federal level by CAI (a non-profit, pro-association group) and other groups have resulted in accommodations to associations at the state level, even here in Idaho. As a result, Idaho associations will not have to repeat the same fight. They will be excluded from application of the rule, and—with a little careful review of their documents—can be sure they will not be affected. A brief summary follows of 1) The FHFA proposed federal lending rule; 2) Idaho’s proposed law; and 3) Five practical tips for Idaho associations and managers in light of Idaho’s new law.

Transfer fees can represent important income for associations. They help defray administrative costs involved with enrolling new members to the association, make important contributions to reserve accounts, pay management companies for their services, or otherwise help stabilize a budget. Associations have just right to be concerned by threats to this income.

The Federal Housing Finance Agency, or FHFA, regulates all federal funding of mortgages by determining which mortgages may be purchased by entities like Fannie Mae, and those that may be bundled into securities. In so doing, the FHFA can determine which properties are marketable, and which are not. If a property cannot be mortgaged by federal funds, its value drops, because few people buy homes without federal loans. Last year, the FHFA proposed a regulation that would have prohibited the purchase of a mortgage of any property with a deed-based transfer fee.

The intent of the FHFA regulation was to discourage third-party transfer fees. For example, a developer could encumber each parcel of her property with an obligation to pay a fee to herself or to some third party any time the property sold in the future. These obligations could then be packaged and securitized, much like the notorious high-risk mortgages that caused the U.S. housing crash. This would create a stream of revenue for the developer or security-holder unrelated in any way to ongoing benefits to the property. In some cases, these obligations were not recorded or otherwise disclosed to potential purchasers, causing unforeseen problems for real estate and financial professionals at closing. This practice, in the view of the FHFA, is unsound.

Unfortunately, one way to create these disfavored third-party obligations is through an obligation recorded on a deed. At first glance, this obligation may look very much like the declaration creating an association; the original proposed FHFA rule did not distinguish between the two. Although the intent and impact of association transfer fees are not at all like the investment schemes targeted by these laws, associations can be equally affected by any broad prohibition on deed-based transfer fees.

CAI and some four thousand other individuals or entities commented on the proposed FHFA rule. In response, during January of this year, the FHFA clarified that properties subject only to association transfer fees would not be impacted by their proposed rule. The FHFA recognized that association transfer fees increase property values, result in lower regular association dues, create a more desirable community, and can serve a beneficial purpose when used for capital improvements and repairs. The revised FHFA proposal specifically defines an “excepted transfer fee covenant” to mean “a covenant to pay a private transfer fee to a covered association that is used exclusively for the direct benefit of the real property [so]encumbered…” [Proposed 12 U.S.C. §1228.1]http://www.fhfa.gov/webfiles/19667/PrivTransFeeNPR020111.pdf FHFA also recognized that many states have already implemented private transfer fee prohibitions, and left room for these laws to operate.

Idaho law champions the importance of the free use and transfer of property, at times to the detriment of declaration-based associations. So, it was no surprise that only months after the revised FHFA notice was released, the Idaho Senate passed a bill to create Idaho’s first private transfer fee prohibition. The new Idaho legislation begins by emphasizing that, “the public policy of this state favors the transferability of interest in real property free from unreasonable restraints…” Idaho does not have a common-interest ownership law for homeowner associations, or protections found in other states so, a reader of the Idaho legislation would be justified to worry that the Legislature might not recognize the value provided by associations.

However, Idaho’s new law would clearly exempt most association-imposed transfer fees from regulation. The law recognizes the existence of “associations” created pursuant to a declaration. It explicitly excludes from the law:

“Any provision of a document requiring payment of a fee or charge to an association or any entity that operates for the benefit of the association, its members or property of the association or its members to be used exclusively for purposes authorized in the document, so long as no portion of the fee is required to be passed through to a third-party designated or identifiable by description in the document or another document referenced therein.” I.C. 55-3102(f) (S.B. 1123)

Obviously, while not following the exact model of the FHFA’s rule, Idaho’s legislature was also concerned about the same third parties benefitting from transfer fees. Fortunately, Idaho’s legislature was also savvy enough to adopt the post-comment period approach that the FHFA took to association-based fees. Clearly, the legislature did not intend to prohibit the enforcement of association transfer fees, but felt some need to prevent associations from being used as pass-through mechanisms for third-party investors.

Lastly, it should also be noted that the Idaho law would only prohibit transfer fees from being recorded after the enactment date of the law. In addition, it appears that no new liens may be filed on pre-enactment covenants for transfer fees. Therefore, any attempt to enforce older transfer fee covenants that are covered by the law would result in civil liability. To avoid liability, these transfer fee covenants must fit within the exception included in the law. This suggests a number of prudent steps for associations in Idaho to consider at this time:

1. Review governing documents to verify there is no language in them that might be considered a banned “transfer fee” under the legislation. A litigious owner may be able to take advantage of that language to make collection efforts difficult or impossible.

2. Review contracts with third parties. Verify that contracts reflect the specific language of governing documents, and that they do not unintentionally create a “third-party” beneficiary to the transfer fee covenant.

3. Managers are especially aware of transfer fees. Review manager’s contracts to verify that transfer fees are used only for “purposes authorized in the document [meaning Declaration].” Update contracts if needed.

4. Also, if needed, amend governing documents before the enactment of this new law [if possible] to avoid any “near miss” situations where careless provisions create unnecessary litigation.

5. Keep an eye on legislative developments, whether it is through our informational VF Law Blog at https://vf-law.blogspot.com/, Community Association’s Institute (CAI)’s website at http://www.caionline.org/, or the Legislature’s online “Bill Center” at http://legislature.idaho.gov/legislation/2011/legIndex.htm. While associations have some favor with legislators and rule makers right now, a minor amendment to these laws or rules could inadvertently limit association access to an important source of funding.

Also, should you decide your association needs help, our Boise attorneys at VF Law are ready to assist you with the action best suited to the wellbeing of your community.