Existing federal regulations generally prohibit the Federal Home Loan Mortgage Corporation and any affiliate thereof, the Federal National Mortgage Association and any affiliate thereof, and any Federal Home Loan Bank from purchasing, investing, or otherwise dealing in any mortgages on properties encumbered by private transfer fee covenants, as defined, securities backed by such mortgages, or securities backed by the income stream from such covenants, unless the private transfer fee covenant meets specified requirements, including that it provides a direct benefit, as defined, to the encumbered property or is otherwise exempted as provided.

Existing law defines a transfer fee with respect to real property and requires the receiver of the fee as a condition of the payment of the fee, on and after January 1, 2009, to record specified information in the chain of title. Existing law specifies that when a transfer fee is imposed upon real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, must record a separate document meeting specified requirements. Among other things, that document must contain the title Payment of Transfer Fee Required in at least 14-point boldface type and include names of all current owners of the real property subject to the fee, and the legal description and assessors parcel number for the affected property, and the fee amount.

This bill, unless a specified exception under federal regulations applies, would require that document, for private transfer fees created on or after February 8, 2011, to contain a notice in at least 14-point boldface type disclosing certain information, including that federal housing agencies are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a direct benefit to real property encumbered, and that if a person purchases such a property, that person may have difficulty obtaining financing.

Existing federal regulations generally prohibit the Federal Home Loan Mortgage Corporation and any affiliate thereof, the Federal National Mortgage Association and any affiliate thereof, and any Federal Home Loan Bank from purchasing, investing, or otherwise dealing in any mortgages on properties encumbered by private transfer fee covenants, as defined, securities backed by such mortgages, or securities backed by the income stream from such covenants, unless the private transfer fee covenant meets specified requirements, including that it provides a direct benefit, as defined, to the encumbered property or is otherwise exempted as provided.

Existing law defines a transfer fee with respect to real property and requires the receiver of the fee as a condition of the payment of the fee, on and after January 1, 2009, to record specified information in the chain of title. Existing law specifies that when a transfer fee is imposed upon real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, must record a separate document meeting specified requirements. Among other things, that document must contain the title Payment of Transfer Fee Required in at least 14-point boldface type and include names of all current owners of the real property subject to the fee, and the legal description and assessors parcel number for the affected property, and the fee amount.

This bill, unless a specified exception under federal regulations applies, would require that document, for private transfer fees created on or after February 8, 2011, to contain a notice in at least 14-point boldface type disclosing certain information, including that federal housing agencies are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a direct benefit to real property encumbered, and that if a person purchases such a property, that person may have difficulty obtaining financing.

Existing law federal regulations generally prohibit the Federal Home Loan Mortgage Corporation and any affiliate thereof, the Federal National Mortgage Association and any affiliate thereof, and any Federal Home Loan Bank from purchasing, investing, or otherwise dealing in any mortgages on properties encumbered by private transfer fee covenants, as defined, securities backed by such mortgages, or securities backed by the income stream from such covenants, unless the private transfer fee covenant meets specified requirements, including that it provides a direct benefit, as defined, to the encumbered property or is otherwise exempted as provided.

Existing law defines a transfer fee with respect to real property and requires the receiver of the fee as a condition of the payment of the fee, on and after January 1, 2009, to record specified information in the chain of title. Existing law specifies that when a transfer fee is imposed upon real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, must record a separate document meeting specified requirements. Among other things, that document must contain the title Payment of Transfer Fee Required in at least 14-point boldface type and include names of all current owners of the real property subject to the fee, and the legal description and assessors parcel number for the affected property, and the fee amount.

This bill also would bill, unless a specified exception under federal regulations applies, would require that document, for private transfer fees created on or after February 8, 2011, to contain a notice in at least 14-point boldface type disclosing certain information, including that federal housing agencies are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a direct benefit to real property encumbered, and that if a person purchases such a property, that person may have difficulty obtaining financing.

Existing law defines a transfer fee with respect to real property and requires the receiver of the fee as a condition of the payment of the fee, on and after January 1, 2009, to record specified information in the chain of title. Existing law provides that certain fees in a document recorded against the property on or before December 31, 2007, are not transfer fees if a prospective transferee is given notice that describes specified characteristics of the fee. Existing law requires that this information be set forth in a single document and prohibits incorporation by reference from any other document. Existing law specifies that when a transfer fee is imposed upon real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, must record a separate document meeting specified requirements. Among other things, that document must contain the title Payment of Transfer Fee Required in at least 14-point boldface type and include names of all current owners of the real property subject to the fee, and the legal description and assessors parcel number for the affected property, and the fee amount.

Existing law defines a transfer fee with respect to real property and requires the receiver of the fee as a condition of the payment of the fee, on and after January 1, 2009, to record specified information in the chain of title. Existing law provides that certain fees in a document recorded against the property on or before December 31, 2007, are not transfer fees if a prospective transferee is given notice that describes specified characteristics of the fee. Existing law requires that this information be set forth in a single document and prohibits incorporation by reference from any other document.

This bill would require the single document, described above, also to include a notice describing potential prohibitions on federal financing for property encumbered by a private transfer fee that does not provide a direct benefit to the property.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 1139

Author:(Reyes)

As Amended Ver:May 24, 2017

Majority vote

Original Committee Reference: JUD.

SUMMARY: Requires an advisory notice to potential homebuyers informing them of federal restrictions associated with private transfer fees that may make it more difficult to obtain home financing. Specifically, this bill:

1. Requires, for private transfer fees created on or after February 8, 2011, a specified advisory notice to be included with the statutory "Payment of Transfer Fee Required" notice required by Civil Code Section 1098.5, unless the exception in Section 1228.3 of Title 12 of the Code of Federal Regulations (CFR) applies.
2. Requires the advisory notice to appear in at least 14-point boldface type and state:

The Federal Housing Finance Agency and the Federal Housing Administration are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a "direct benefit" to the real property encumbered by the covenant. As a result, if you purchase such a property, you or individuals you want to sell the property to, may have difficulty obtaining financing.

The Senate amendments clarify that the advisory notice does not need to be provided if the Federal Housing Finance Agency (FHFA) and the Federal Housing Administration (FHA) are allowed to invest or deal with the mortgage at issue (despite being encumbered by a private transfer fee) pursuant to the exception provided by Section 1228.3 of Title 12 of the Code of Federal Regulations.

FISCAL EFFECT: None

COMMENTS: This bill, sponsored by the California Association of Realtors (CAR), seeks to require a specified advisory notice be given to potential homebuyers informing them of federal restrictions associated with private transfer fees (PTFs) that may make it more difficult to obtain home financing.

Background on Private Transfer Fees. Existing law allows various required fees to be included in the price of a residential real estate transfer. These include public fees such as transfer taxes and document recording fees as well as private fees, such as homeowner association processing fees. All of these required fees and payments must be disclosed on statutorily required forms. In addition, various types of voluntary fees, including escrow fees, title insurance premiums, and realtor commissions, as well as liens, including mechanics' liens, judgment liens, and lender liens, are all paid out of escrow.

PTFs are generally imposed by the developer and require the homebuyer – and any subsequent purchaser of the home – to pay a fee upon transfer based on some percentage of the sale price. The money generated by the imposition of the PTF is sometimes used for environmental mitigation or development of affordable housing, but in other cases may simply operate as a deferred profit for the developer or property owner imposing the fee.

Stated Need for the bill. While PTFs are not prohibited by state law, in practice their use has been severely tempered in recent years because, pursuant to FHFA regulations (12 CFR Part 1228), Freddie Mac and Fannie Mae-backed mortgages require any funds generated by a PTF to provide a direct benefit to the encumbered property. According to the author:

In recent years, the FHFA and FHA have adopted a rule or been prohibited by Congress from dealing in mortgages to which a PTF is attached. However, the current "Payment of Private Transfer Fee Required" notice – which alerts potential homebuyers that a PTF is attached to a home they are considering buying – does not inform potential buyers of these prohibitions. Consequently, potential homebuyers do not know that, if they purchase the home, they may not be able to obtain financing (for example, if they refinance for a reverse mortgage) or that subsequent purchasers of the home may not be able to obtain financing due to the FHFA and FHA requirements. AB 1139 will add an advisory to the current "Payment of Private of Transfer Fee Required" notice informing potential buyers of the FHFA and FHA prohibitions and that, as a result, they or others may have difficulty obtaining financing.

Federal "direct benefit" rule may make securing financing much more difficult for unsuspecting potential homeowners. In March 2012, the FHFA adopted a rule requiring that any funds generated by a PTF associated with a home must provide a "direct benefit" to the encumbered property in order for the property to be eligible to obtain a Fannie Mae or Freddie Mac-backed mortgage. In developing its final rule, the FHFA noted many concerns with private transfer fees generally, including the following:

1. 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 consequently, 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.
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.
4. 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. (77 Federal Register 15567.)

The FHFA noted that many of the above concerns are lessened when the PTF provides a direct benefit to the burdened properties. Accordingly, their final rule allowed Freddie Mac and Fannie Mae to back some mortgages having a PTF, as long as any funds generated by the PTF provided a direct benefit to the encumbered property. Later, in July 2016, President Obama signed HR 3700, which required the FHA to adopt the same rule adopted by the FHFA regarding financing and PTFs.

This bill promotes transparency by providing additional information to prospective buyers about possible financing limitations. Existing law requires a person or entity imposing a PTF, as a condition of payment of the fee, to concurrently record against the property a separate document entitled "Payment of Transfer Fee Required." This document must state, among other things, the following information: 1) The amount, if the fee is a flat amount, or the percentage of the home price constituting the amount of the fee; 2) Actual dollar-examples of the amount of the fee based on various home prices; 3) The date or circumstances under which the obligation to pay the fee will expire; and 4) The purposes for which the funds from the fee will be used. It does not, however, notify potential home buyers of the FHFA requirements (adopted in 2012) or the FHA requirements (adopted in 2016) that preclude, in many cases, any Freddie Mac or Fannie Mae-backed financing of the mortgage, unless the PTF provides a direct benefit, as discussed above.

Without this critical information, the author contends, the current disclosure statement does not put home buyers on notice regarding the implications of the FHFA/FHA requirements, and makes it difficult for buyers to assess their possible financing options. Accordingly, this bill seeks to increase the transparency of the home buying transaction and provide a specific advisory notice to alert prospective home buyers about the hidden consequences of any mortgage that is encumbered by a PTF, with respect to financing ability.

Under this bill, the additional advisory notice is required for PTFs created on or after February 8, 2011. This date is significant because the FHFA adopted the final rule regarding PTFs in March 2012 and sought to apply the rule prospectively to PTF covenants created after the publication of the proposed rule, which was February 8, 2011. Because this represents the date when the FHFA rule on financing, including the direct benefit condition, was deemed to have become effective, it is reasonable for this bill to require the advisory notice for PTFs created after the effective date of the rule, namely February 8, 2011. Recent amendments to the bill clarify that the advisory notice does not need to be provided if, pursuant to the above rule (Section 1228.3 of Title 12 of the Code of Federal Regulations), FHFA and FHA are allowed to invest or deal with the mortgage at issue, despite it being encumbered by a private transfer fee.

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334 FN: 0000953

 THIRD READING  

Bill No: AB 1139

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 6-0, 6/6/17

AYES: Jackson, Moorlach, Anderson, Hertzberg, Monning, Wieckowski

NO VOTE RECORDED: Stern

ASSEMBLY FLOOR: 78-0, 4/3/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: California Association of Realtors

DIGEST:

This bill requires anyone seeking payment of a property transfer fee to record notice that the existence of the fee may make it more difficult for the property owner or a prospective buyer to obtain financing unless the transfer fee provides a “direct benefit” to the property in question.

ANALYSIS:

Existing law:

1. Defines “transfer fee” to mean any fee payment requirement imposed within a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of, or any interest in, real property that requires a fee be paid as a result of transfer of the real property (Civ. Code Sec. 1098(a)), but not any of the following:
   1. Fees or taxes imposed by a governmental entity; (Civ. Code Sec. 1098(a)(1).)
   2. Fees pursuant to mechanics’ liens; (Civ. Code Sec. 1098(a)(2).)
   3. Fees pursuant to court-ordered transfers, payments, or judgments; (Civ. Code Sec. 1098(a)(3).)
   4. Fees pursuant to property agreements in connection with a legal separation or dissolution of marriage; (Civ. Code Sec. 1098(a)(4).)
   5. Fees, charges, or payments in connection with the administration of estates or trusts pursuant to certain sections of the Probate Code; (Civ. Code Sec. 1098(a)(5).)
   6. Fees, charges, or payments imposed by lenders or purchasers of loans; (Civ. Code Sec. 1098(a)(6).)
   7. Assessments, charges, penalties, or fees authorized under common interest development laws; (Civ. Code Sec. 1098(a)(7).)
   8. Fees, charges, or payments for failing to comply with, or for transferring the real property prior to satisfying, an obligation to construct residential improvements on the real property; (Civ. Code Sec. 1098(a)(8).)
   9. Any fee reflected in a single document recorded against the property on or before December 31, 2007, that is separate from any covenants, conditions, and restrictions, and that provides a prospective transferee notice of the following:
      1. Payment of a transfer fee is required;
      2. The amount or method of calculation of the fee;
      3. The date or circumstances under which the transfer fee payment requirement expires, if any;
      4. The entity to which the fee will be paid; and
      5. The general purposes for which the fee will be used. (Civ. Code Sec. 1098(a)(9)(A).)
2. Defines a fee reflected in a document recorded against the property on or before December 31, 2007, that is not separate from any covenants, conditions, and restrictions, or that incorporates by reference from another document, as a “transfer fee” for purposes of further notifications. (Civ. Code Sec 1098(a)(9)(A).)
3. Makes certain transfer fees recorded against the property on or before December 31, 2007, unenforceable unless recorded against the property on or before December 31, 2016, with notifications, as specified, about the nature and purpose of the transfer fee. (Civ. Code Sec. 1098(a)(9)(B).)
4. Provides that when a property transfer fee was imposed on real property prior to January 1, 2008, the receiver of the transfer fee, as a condition of payment of the fee on or after January 1, 2009, shall record, on or before December 31, 2008, against the property a separate document entitled “Payment of Transfer Fee Required” in at least 14 point bold face type that includes all of the following:
   1. The names of all current owners of the property subject to the transfer fee, a legal description and assessor’s parcel number of the property;
   2. The amount, if the fee is a flat amount, the percentage of the sale price constituting the fee, or the method for calculating the amount;
   3. For residential property, actual dollar-cost examples of the fee for specified prices;
   4. Date or circumstance under which the transfer fee payment requirement expires;
   5. Purpose for which the funds will be used;
   6. Entity which will receive funds from the fee, including contact information;
   7. The signature of the authorized representative of the entity receiving the funds. (Civ. Code Sec. 1099.5(a).)
5. Provides that when a property transfer fee is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, shall concurrently record against the property a separate document entitled “Payment of Transfer Fee Required” in at least 14 point bold face type that includes all of the following:
   1. The names of all current owners of the property subject to the transfer fee, a legal description and assessor’s parcel number of the property;
   2. The amount, if the fee is a flat amount, the percentage of the sale price constituting the fee, or the method for calculating the amount;
   3. For residential property, actual dollar-cost examples of the fee for specified prices;
   4. Date or circumstance under which the transfer fee payment requirement expires;
   5. Purpose for which the funds will be used;
   6. Entity which will receive funds from the fee, including contact information;
   7. The signature of the authorized representative of the entity receiving the funds. (Civ. Code Sec. 1098.5(b).)
6. Defines a “private transfer fee” as 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: (a) imposed by or payable to the federal government or a state or local government; or (b) that defray actual costs of the transfer of the property, including transfer of membership in the relevant covered association. (12 C.F.R. 1228.1.)
7. Defines an “excepted transfer fee covenant” as 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. (12 C.F.R. 1228.1.)
8. Defines a “direct benefit” as meaning 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: (a) are conducted in or protect the burdened community or adjacent or contiguous property; or (b) are conducted on other property that is used primarily by residents of the burdened community. (12 C.F.R. 1228.1.)
9. Prohibits Freddie Mac, Fannie Mae, and the Federal Home Loan Bank from investing or otherwise dealing 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, unless such covenants are excepted transfer fee covenants. (12 C.F.R. 1228.2.)
10. Allows Freddie Mac, Fannie Mae, and the Federal Home Loan Bank to invest or otherwise deal in 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. (12 C.F.R. 1228.3.)

This bill requires, for private transfer fees created on or after February 8, 2011, unless the exception in 12 C.F.R. 1228.3 applies, that the following notice, in at least 14 point font, be included in the documentation that must be recorded as a condition on payment of a transfer fee:

The Federal Housing Finance Agency and the Federal Housing Administration are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a “direct benefit” to the real property encumbered by the covenant. As a result, if you purchase such a property, you or individuals you want to sell the property to may have difficulty obtaining financing.

Background

A property transfer fee is a clause written into the conditions, covenants, and restrictions associated with a parcel of land or other real property which requires payment of a fee every time title is transferred. (Civ. Code Sec. 1098.) Proponents of these fees argue that they help to raise the funds necessary to cover communal expenses associated with the overall development, things like environmental mitigation and general upkeep. Critics of property transfer fees point out that transfer fees do not generate such fees equitably or efficiently, since they are based on transactions, rather than use. The strongest critics liken transfer fees to scams and assert that they are little more than hidden, delayed profits for the developer (or whoever is entitled to receive the payment).

Between 2010 and 2012, the Federal Housing Finance Agency (FHFA) developed new regulations covering when Fannie Mae, Freddie Mac, and the Federal Home Loan Bank may purchase mortgages on properties that are encumbered with a property transfer fee. The new regulations, which became effective February 8, 2011, prohibit Fannie Mae, Freddie Mac, and the Federal Home Loan Bank from acquiring such mortgages unless the property transfer fee conveys a “direct benefit” on the property subject to the fee. Direct benefits are defined as when transfer fees are used for the “acquisition, improvement, administration and maintenance” of property owned by the covered association. Additionally, “direct benefit” includes “cultural, educational, charitable, recreational, environmental, conservation, or other similar activities” that are “conducted in or protect the burdened community or adjacent or contiguous property or are conducted on other property that is used primarily by residents of the burdenedcommunity.” (12 C.F.R. 1228.1.)

Since around 60 percent of private mortgages are eventually sold to or backed by Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, the practical effect of the new regulation was to make it very difficult to obtain financing for a property subject to a property transfer fee that does not convey a direct benefit on the property.^[1]

California already has laws on the books requiring notification and clear recording of property transfer fees. In their current form, however, the required notifications do not alert property owners or prospective buyers about the fact that, because of the 2011 federal regulations, certain property transfer fees can impact their ability to obtain financing for the property.

This bill provides for such notification by requiring the entity seeking to collect the fee to record notice of the potential impact on access to financing in the chain of title on file with the county recorder.

Comments

Increasing consumer awareness

Property transfer fees may be an appropriate method for raising funds for some communal purpose in some circumstances. They can also act as hidden fees that detract from, rather than add to, the value of the property. California law, in the form of Civil Code Sections 1098 and 1098.5, attempts to make such fees more transparent without prohibiting them altogether. By forcing the entities receiving the payment on the property transfer fee to record notification of the nature, duration, amount, and purpose of the fees, California law tries to arm consumers with the information they need to make an informed choice about whether or not to purchase property subject to a property transfer fee.

The federal government’s February 2011 regulations also seek to discourage property transfer fees that do not add value to the property. The federal approach utilizes the market power of Freddie Mac, Fannie Mae, and the Federal Home Loan Bank. Because those entities are such major players in the home finance industry, residential developers know that prospective buyers will have trouble obtaining financing unless Freddie Mac, Fannie Mae, and the Federal Home Loan Bank are potential buyers of the mortgage. By prohibiting Freddie Mac, Fannie Mae, and the Federal Home Loan Bank from dealing in mortgages or securities that related to properties subject to property transfer fees that provide no direct benefit to the property, the federal government creates a strong disincentive against the imposition of such transfer fees without directly banning them.

The problem is that this impact on access to financing, like property transfer fees themselves, is not obvious and could easily catch home-buyers unaware. While far from guaranteeing that a prospective homebuyer will read and comprehend the warning, this bill’s notice requirement imposes greater transparency on the true nature of the bargain that a homebuyer is entering into when purchasing property subject to a transfer fee that creates no direct benefit to the property in question.

Related/Prior Legislation

AB 980 (Calderon, Chapter 689, Statutes of 2007) required anyone seeking payment of a property transfer fee to record among the property documents on file with the applicable county recorder a notification setting forth the nature, purpose, duration, and amount of the fee, as a precondition for receiving payment.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 6/6/17)

California Association of Realtors (source)

OPPOSITION: (Verified 6/6/17)

None received

ARGUMENTS IN SUPPORT: According to the author:

Private transfer fees (PTFs) require a homebuyer – and any subsequent purchaser of the home – to pay a fee upon transfer usually based on some percentage of the sale price.

In recent years, the FHFA and FHA have adopted a rule or been prohibited by Congress from dealing in mortgages to which a PTF is attached. However, the current “Payment of Private Transfer Fee Required” notice – which alerts potential homebuyers that a PTF is attached to a home they are considering buying – does not inform potential buyers of these prohibitions.

Consequently, potential homebuyers do not know that, if they purchase the home, they may not be able to obtain financing (for example, if they refinance for a reverse mortgage) or that subsequent purchasers of the home may not be able to obtain financing due to the FHFA/FHA requirements.

AB 1139 will add an advisory to the current “Payment of Private Transfer Fee Required” notice informing potential buyers of the FHFA and FHA prohibitions and that, as a result, they or others may have difficulty obtaining financing.

ASSEMBLY FLOOR: 78-0, 4/3/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Mullin, Ridley-Thomas

Prepared by:

6/9/17 10:17:06

**** END ****

1. McClean, Government-Backed Mortgage Lenders Are Awful — and Essential (Oct. 15, 2015) Washington Post <https://www.washingtonpost.com/opinions/government-backed-mortgage-lenders-are-the-definition-of-too-big-to-fail-too-bad-we-need-them-more-than-ever/2015/10/15/781d3926-72bb-11e5-8248-98e0f5a2e830_story.html?utm_term=.760ec5bc8c2a> (as of May 24, 2017). ↑

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: AB 1139 (Author:Reyes)

Version: May 24, 2017

Hearing Date: June 6, 2017

Fiscal: No

Urgency: No

Consultant: TSG

SUBJECT

Real property: transfer fees: notices

DESCRIPTION

This bill would require anyone seeking payment of a property transfer fee to record notice that the existence of the fee may make it more difficult for the property owner or a prospective buyer to obtain financing unless the transfer fee provides a “direct benefit” to the property in question.

BACKGROUND

A property transfer fee is a clause written into the conditions, covenants, and restrictions associated with a parcel of land or other real property which requires payment of a fee every time title is transferred. (Civ. Code Sec. 1098.) Proponents of these fees argue that they help to raise the funds necessary to cover communal expenses associated with the overall development, things like environmental mitigation and general upkeep. Critics of property transfer fees point out that transfer fees do not generate such fees equitably or efficiently, since they are based on transactions, rather than use. The strongest critics liken transfer fees to scams and assert that they are little more than hidden, delayed profits for the developer (or whoever is entitled to receive the payment).

Between 2010 and 2012, the Federal Housing Finance Agency (FHFA) developed new regulations covering when Fannie Mae, Freddie Mac, and the Federal Home Loan Bank may purchase mortgages on properties that are encumbered with a property transfer fee. The new regulations, which became effective February 8, 2011, prohibit Fannie Mae, Freddie Mac, and the Federal Home Loan Bank from acquiring such mortgages unless the property transfer fee conveys a “direct benefit” on the property subject to the fee. Direct benefits are defined as when transfer fees are used for the “acquisition, improvement, administration and maintenance” of property owned by the covered association. Additionally, “direct benefit” includes “cultural, educational, charitable, recreational, environmental, conservation, or other similar activities” that are “conducted in or protect the burdened community or adjacent or contiguous property or are conducted on other property that is used primarily by residents of the burdened

community.” (12 C.F.R. 1228.1.)

Since around 60 percent of private mortgages are eventually sold to or backed by Fannie Mae, Freddie Mac, and the federal Home Loan Bank, the practical effect of the new regulation was to make it very difficult to obtain financing for a property subject to a property transfer fee that does not convey a direct benefit on the property.^[1]

California already has laws on the books requiring notification and clear recording of property transfer fees. In their current form, however, the required notifications do not alert property owners or prospective buyers about the fact that, because of the 2011 federal regulations, certain property transfer fees can impact their ability to obtain financing for the property.

This bill would provide for such notification by requiring the entity seeking to collect the fee to record notice of the potential impact on access to financing in the chain of title on file with the county recorder.

CHANGES TO EXISTING LAW

Existing law defines “transfer fee” to mean any fee payment requirement imposed within a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of, or any interest in, real property that requires a fee be paid as a result of transfer of the real property (Civ. Code Sec. 1098(a)), but not any of the following:

• fees or taxes imposed by a governmental entity; (Civ. Code Sec. 1098(a)(1).)
• fees pursuant to mechanics’ liens; (Civ. Code Sec. 1098(a)(2).)
• fees pursuant to court-ordered transfers, payments, or judgments; (Civ. Code Sec. 1098(a)(3).)
• fees pursuant to property agreements in connection with a legal separation or dissolution of marriage; (Civ. Code Sec. 1098(a)(4).)
• fees, charges, or payments in connection with the administration of estates or trusts pursuant to certain sections of the Probate Code; (Civ. Code Sec. 1098(a)(5).)
• fees, charges, or payments imposed by lenders or purchasers of loans; (Civ. Code Sec. 1098(a)(6).)
• assessments, charges, penalties, or fees authorized under common interest development laws; (Civ. Code Sec. 1098(a)(7).)
• fees, charges, or payments for failing to comply with, or for transferring the real property prior to satisfying, an obligation to construct residential improvements on the real property; (Civ. Code Sec. 1098(a)(8).)
• any fee reflected in a single document recorded against the property on or before December 31, 2007, that is separate from any covenants, conditions, and restrictions, and that provides a prospective transferee notice of the following:

a) payment of a transfer fee is required;

b) the amount or method of calculation of the fee;

c) the date or circumstances under which the transfer fee payment requirement expires, if any;

d) the entity to which the fee will be paid; and

e) the general purposes for which the fee will be used. (Civ. Code Sec. 1098(a)(9)(A).)

Existing law also defines a fee reflected in a document recorded against the property on or before December 31, 2007, that is not separate from any covenants, conditions, and restrictions, or that incorporates by reference from another document, as a “transfer fee” for purposes of further notifications. (Civ. Code Sec 1098(a)(9)(A).)

Existing law makes certain transfer fees recorded against the property on or before December 31, 2007, unenforceable unless recorded against the property on or before December 31, 2016, with notifications, as specified, about the nature and purpose of the transfer fee. (Civ. Code Sec. 1098(a)(9)(B).)

Existing law provides that when a property transfer fee was imposed on real property prior to January 1, 2008, the receiver of the transfer fee, as a condition of payment of the fee on or after January 1, 2009, shall record, on or before December 31, 2008, against the property a separate document entitled “Payment of Transfer Fee Required” in at least 14 point bold face type that includes all of the following:

• the names of all current owners of the property subject to the transfer fee, a legal description and assessor’s parcel number of the property;
• the amount, if the fee is a flat amount, the percentage of the sale price constituting the fee, or the method for calculating the amount;
• for residential property, actual dollar-cost examples of the fee for specified prices;
• date or circumstance under which the transfer fee payment requirement expires;
• purpose for which the funds will be used;
• entity which will receive funds from the fee, including contact information;
• the signature of the authorized representative of the entity receiving the funds. (Civ. Code Sec. 1099.5(a).)

Existing law provides that when a property transfer fee is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, shall concurrently record against the property a separate document entitled “Payment of Transfer Fee Required” in at least 14 point bold face type that includes all of the following:

• the names of all current owners of the property subject to the transfer fee, a legal description and assessor’s parcel number of the property;
• the amount, if the fee is a flat amount, the percentage of the sale price constituting the fee, or the method for calculating the amount;
• for residential property, actual dollar-cost examples of the fee for specified prices;
• date or circumstance under which the transfer fee payment requirement expires;
• purpose for which the funds will be used;
• entity which will receive funds from the fee, including contact information;
• the signature of the authorized representative of the entity receiving the funds. (Civ. Code Sec. 1098.5(b).)

Existing law defines a “private transfer fee” as 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. (12 C.F.R. 1228.1.)

Existing law defines an “excepted transfer fee covenant” as 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. (12 C.F.R. 1228.1.)

Existing law defines a “direct benefit” as meaning 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. (12 C.F.R. 1228.1.)

Existing law prohibits Freddie Mac, Fannie Mae, and the Federal Home Loan Bank from investing or otherwise dealing 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, unless such covenants are excepted transfer fee covenants. (12 C.F.R. 1228.2.)

Existing law allows Freddie Mac, Fannie Mae, and the Federal Home Loan Bank to invest or otherwise deal in 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. (12 C.F.R. 1228.3.)

This bill would require, for private transfer fees created on or after February 8, 2011, unless the exception in 12 C.F.R. 1228.3 applies, that the following notice, in at least 14 point font, be included in the documentation that must be recorded as a condition on payment of a transfer fee:

The Federal Housing Finance Agency and the Federal Housing Administration are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a “direct benefit” to the real property encumbered by the covenant. As a result, if you purchase such a property, you or individuals you want to sell the property to may have difficulty obtaining financing.

COMMENT

1. Stated need for the bill

According to the author:

Private transfer fees (PTFs) require a homebuyer – and any subsequent purchaser of the home – to pay a fee upon transfer usually based on some percentage of the sale price.

In recent years, the FHFA and FHA have adopted a rule or been prohibited by Congress from dealing in mortgages to which a PTF is attached. However, the current “Payment of Private Transfer Fee Required” notice – which alerts potential homebuyers that a PTF is attached to a home they are considering buying – does not inform potential buyers of these prohibitions.

Consequently, potential homebuyers do not know that, if they purchase the home, they may not be able to obtain financing (for example, if they refinance for a reverse mortgage) or that subsequent purchasers of the home may not be able to obtain financing due to the FHFA/FHA requirements.

AB 1139 will add an advisory to the current “Payment of Private Transfer Fee Required” notice informing potential buyers of the FHFA and FHA prohibitions and that, as a result, they or others may have difficulty obtaining financing.

2. Increasing consumer awareness

Property transfer fees may be an appropriate method for raising funds for some communal purpose in some circumstances. They can also act as hidden fees that detract from, rather than add to, the value of the property. California law, in the form of Civil Code Sections 1098 and 1098.5, attempts to make such fees more transparent without prohibiting them altogether. By forcing the entities receiving the payment on the property transfer fee to record notification of the nature, duration, amount, and purpose of the fees, California law tries to arm consumers with the information they need to make an informed choice about whether or not to purchase property subject to a property transfer fee.

The federal government’s February 2011 regulations also seek to discourage property transfer fees that do not add value to the property. The federal approach utilizes the market power of Freddie Mac, Fannie Mae, and the Federal Home Loan Bank. Because those entities are such major players in the home finance industry, residential developers know that prospective buyers will have trouble obtaining financing unless Freddie Mac, Fannie Mae, and the Federal Home Loan Bank are potential buyers of the mortgage. By prohibiting Freddie Mac, Fannie Mae, and the Federal Home Loan Bank from dealing in mortgages or securities that related to properties subject to property transfer fees that provide no direct benefit to the property, the federal government creates a strong disincentive against the imposition of such transfer fees without directly banning them.

The problem is that this impact on access to financing, like property transfer fees themselves, is not obvious and could easily catch home-buyers unaware. While far from guaranteeing that a prospective homebuyer will read and comprehend the warning, this bill’s notice requirement imposes greater transparency on the true nature of the bargain that a homebuyer is entering into when purchasing property subject to a transfer fee that creates no direct benefit to the property in question.

Support: None known

Opposition: None known

HISTORY

Source: California Association of Realtors

Related Pending Legislation: None known

Prior Legislation: AB 980 (Calderon, Chapter 689, Statutes of 2007) required anyone seeking payment of a property transfer fee to record among the property documents on file with the applicable county recorder a notification setting forth the nature, purpose, duration, and amount of the fee, as a precondition for receiving payment.

Prior Vote:

Assembly Floor (Ayes 78, Noes 0)

Assembly Judiciary Committee (Ayes 11, Noes 0)

**************

1. McClean, Government-Backed Mortgage Lenders Are Awful — and Essential (Oct. 15, 2015) Washington Post <https://www.washingtonpost.com/opinions/government-backed-mortgage-lenders-are-the-definition-of-too-big-to-fail-too-bad-we-need-them-more-than-ever/2015/10/15/781d3926-72bb-11e5-8248-98e0f5a2e830_story.html?utm_term=.760ec5bc8c2a> (as of May 24, 2017). ↑

Date of Hearing: March 28, 2017

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 1139

Author:(Reyes) – As Amended Ver:March 23, 2017

PROPOSED CONSENT

SUBJECT: REAL PROPERTY: TRANSFER FEES: NOTICES

KEY ISSUE: should prospective home buyers be entitled to a specified notice, recorded against the property, advising them that federal restrictions associated with private transfer fees may make financing the property more difficult than expected?

SYNOPSIS

Private transfer fees (PTF) are generally imposed by a developer and require a homebuyer -- and any subsequent purchaser of a home -- to pay the fee every time a property is re-sold, in an amount typically based on a percentage of the sale price. The money generated by the PTF is sometimes used for environmental mitigation or development of affordable housing, but in other cases simply operates as a deferred profit for the developer or property owner who imposes the fee. While PTFs are not prohibited by state law, in practice their use has been severely curtailed in recent years, largely because of Federal Housing Finance Agency (FHFA) regulations that became effective on February 8, 2011. Under these FHFA rules, Freddie Mac and Fannie Mae mortgages require funds generated by a PTF to provide a direct benefit (as defined) to the encumbered property. In other words, if the PTF provides no direct benefit to the property (which is common in many cases), then the result is that the owner or prospective owner is effectively ineligible to obtain a Fannie or Freddie-backed mortgage—making it much more difficult to secure appropriate financing for the property.

Existing law provides that when a PTF is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee must, as a condition of payment of the fee, concurrently record against the property a separate document entitled "Payment of Transfer Fee Required." Although this separate document contains important information about the amount and purposes of the fee, it does not, notify potential home buyers of the FHFA regulations that effectively preclude, in many cases, any Freddie Mac or Fannie Mae backed financing of the property. Without this critical information, the author contends, the current disclosure statement does not put home buyers on notice about the implications of the FHFA requirements, and makes it difficult for them to assess their possible financing options.

Accordingly, this bill, sponsored by the California Association of Realtors, seeks to increase the transparency of the home-buying transaction and provide a specific advisory notice to alert prospective home buyers, with respect to financing ability, about the hidden consequences of any mortgage that is encumbered by a PTF. The advisory notice is simply added on to the existing disclosure statement, described above, that is recorded against the property and that, in order to ensure greater transparency, is required under existing law to be available as a separate document and not be incorporated by reference into other documents. This bill has no known opposition.

SUMMARY: Requires an advisory notice to potential homebuyers informing them of federal restrictions associated with private transfer fees that may make it more difficult to obtain home financing. Specifically, this bill:

1. Requires, for private transfer fees created on or after February 8, 2011, a specified advisory notice to be included with the statutory "Payment of Transfer Fee Required" notice required by Civil Code Section 1098.5.
2. Requires the advisory notice to appear in at least 14-point boldface type and state:

"The Federal Housing Finance Agency and the Federal Housing Administration are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a “direct benefit” to the real property encumbered by the covenant. As a result, if you purchase such a property, you or individuals you want to sell the property to, may have difficulty obtaining financing."

EXISTING LAW:

1. Defines “transfer fee” to mean any fee payment requirement imposed within a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of, or any interest in, real property that requires a fee be paid as a result of transfer of the real property. (Civil Code Section 1098 (a). All further references are to this code unless otherwise stated.)
2. Specifies several categories of fees that are not included in the above definition of a transfer fee, including, among others:
   1. Fees or taxes imposed by a governmental entity.
   2. Fees pursuant to mechanics’ liens.
   3. Fees pursuant to court-ordered transfers, payments, or judgments.
   4. Fees pursuant to property agreements in connection with a legal separation or dissolution of marriage. (Section 1098 (a).)
3. Also excludes from the definition of "transfer fee" any fee reflected in a document recorded against the property on or before December 31, 2007, that is separate from any covenants, conditions, and restrictions, and that substantially complies with subdivision (a) of Section 1098.5 by providing a prospective transferee notice of the following:
   1. Payment of a transfer fee is required.
   2. The amount or method of calculation of the fee.
   3. The date or circumstances under which the transfer fee payment requirement expires, if any.
   4. The entity to which the fee will be paid.
   5. The general purposes for which the fee will be used. (Section 1098 (a)(9)(A).)
4. Requires the information specified in 3) above shall be set forth in a single document and shall not be incorporated by reference from any other document. (Section 1098 (b).)
5. Provides that any fee reflected in a document recorded against the property on or before December 31, 2007, that is not separate from any covenants, conditions, and restrictions, or that incorporates by reference from another document, constitutes a "transfer fee," and that any such transfer fee is unenforceable unless recorded against the property on or before December 31, 2016, in a single document that complies with 6) below.
6. Provides that when a transfer fee, as defined, is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, shall concurrently record against the property a separate document entitled “Payment of Transfer Fee Required” in at least 14 point bold face type that includes all of the following:
   1. The names of all current owners of the property subject to the transfer fee, a legal description and assessor’s parcel number of the property.
   2. The amount, if the fee is a flat amount, the percentage of the sale price constituting the fee, or the method for calculating the amount.
   3. For residential property, actual dollar-cost examples of the fee for specified prices.
   4. Date or circumstance under which the transfer fee payment requirement expires.
   5. Purpose for which the funds will be used.
   6. Entity which will receive funds from the fee, including contact information.
   7. The signature of the authorized representative of the entity receiving the funds. (Section 1098.5 (b).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: This bill, sponsored by the California Association of Realtors (CAR), seeks to require a specified advisory notice be given to potential homebuyers informing them of federal restrictions associated with private transfer fees (PTFs) that may make it more difficult to obtain home financing.

Background on Private Transfer Fees. Existing law allows various required fees to be included in the price of a residential real estate transfer. These include public fees such as transfer taxes and document recording fees as well as private fees, such as homeowner association processing fees. All of these required fees and payments must be disclosed on statutorily required forms. In addition, various types of voluntary fees, including escrow fees, title insurance premiums, and realtor commissions, as well as liens, including mechanics' liens, judgment liens, and lender liens, are all paid out of escrow.

PTFs are generally imposed by the developer and require the homebuyer -- and any subsequent purchaser of the home -- to pay a fee upon transfer based on some percentage of the sale price. The money generated by the imposition of the PTF is sometimes used for environmental mitigation or development of affordable housing, but in other cases may simply operate as a deferred profit for the developer or property owner imposing the fee.

According to the sponsor, some of the first PTFs appeared in Roseville over ten years ago when a project developer and the city agreed to a legal settlement with environmentalists allowing for the development of 8,400 new homes on the city's last large expanse of vacant land while preserving nearly 6,000 acres of open space. The $85 million needed to purchase the agreed-upon open space was generated from a charge of a percentage of the sales price each time a home within the development is sold over the next 20 years. The fee goes to the private, non-profit Placer Land Trust for the purchase of the open space, and these fees are required as part of the covenants (CC&Rs) recorded against each parcel subject to the PTF.

In order to ensure transparency and proper notification of PTFs to prospective homebuyers, the Legislature passed and the Governor signed AB 980 (Ch. 689, Stats. 2007). This law provides that when a PTF is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, shall concurrently record against the property a separate document entitled "Payment of Transfer Fee Required." This document must state, among other things, the following information: (1) The amount, if the fee is a flat amount, or the percentage of the home price constituting the amount of the fee; (2) Actual dollar-examples of the amount of the fee based on various home prices; (3) The date or circumstances under which the obligation to pay the fee will expire; and (4) the purposes for which the funds from the fee will be used. More recently, AB 807 (Ch. 634, Stats. 2015) clarified that existing law requires disclosures about the PTF to appear in a single document and prohibits them from being incorporated by reference into other documents.

Stated Need for the bill. While PTFs are not prohibited by state law, in practice their use has been severely tempered in recent years because, pursuant to Federal Housing Finance Agency regulations (12 CFR Part 1228), Freddie Mac and Fannie Mae-backed mortgages require any funds generated by a PTF to provide a direct benefit to the encumbered property. According to the author:

In recent years, the FHFA and FHA (Federal Housing Administration) have adopted a rule or been prohibited by Congress from dealing in mortgages to which a PTF is attached. However, the current “Payment of Private Transfer Fee Required” notice – which alerts potential homebuyers that a PTF is attached to a home they are considering buying – does not inform potential buyers of these prohibitions. Consequently, potential homebuyers do not know that, if they purchase the home, they may not be able to obtain financing (for example, if they refinance for a reverse mortgage) or that subsequent purchasers of the home may not be able to obtain financing due to the FHFA and FHA requirements.

AB 1139 will add an advisory to the current “Payment of Private of Transfer Fee Required” notice informing potential buyers of the FHFA and FHA prohibitions and that, as a result, they or others may have difficulty obtaining financing.

Federal "direct benefit" rule may make securing financing much more difficult for unsuspecting potential homeowners. In March 2012, the FHFA adopted a rule requiring that any funds generated by a PTF associated with a home must provide a “direct benefit” to the encumbered property in order for the property to be eligible to obtain a Fannie Mae or Freddie Mac-backed mortgage. Specifically, under the new rule:

Direct benefit means that the proceeds of a private transfer are used exclusively to support maintenance and improvements to the encumbered properties, and acquisition, improvement, administration, and maintenance of the 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 – (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. (12 C.F.R. Part 1228.)

In developing its final rule, the FHFA noted many concerns with private transfer fees generally, including the following:

(1) 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 consequently, 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.

(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.

(4) 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.

(77 FR 15567.)

The FHFA noted that many of the above concerns are lessened when the PTF provides a direct benefit to the burdened properties. Accordingly, their final rule allowed Freddie Mac and Fannie Mae to back some mortgages having a PTF, as long as any funds generated by the PTF provided a direct benefit to the encumbered property. Later, in July 2016, President Obama signed HR 3700, which required the FHA to adopt the same rule adopted by the FHFA regarding financing and PTFs.

This bill promotes transparency by providing additional information to prospective buyers about possible financing limitations. Existing law requires a person or entity imposing a PTF, as a condition of payment of the fee, to concurrently record against the property a separate document entitled "Payment of Transfer Fee Required." This document must state, among other things, the following information: (1) The amount, if the fee is a flat amount, or the percentage of the home price constituting the amount of the fee; (2) Actual dollar-examples of the amount of the fee based on various home prices; (3) The date or circumstances under which the obligation to pay the fee will expire; and (4) the purposes for which the funds from the fee will be used. It does not, however, notify potential home buyers of the FHFA requirements (adopted in 2012) or the FHA requirements (adopted in 2016) that preclude, in many cases, any Freddie Mac or Fannie Mae-backed financing of the mortgage, unless the PTF provides a direct benefit, as discussed above.

Without this critical information, the author contends, the current disclosure statement does not put home buyers on notice regarding the implications of the FHFA/FHA requirements, and makes it difficult for buyers to assess their possible financing options. Accordingly, this bill seeks to increase the transparency of the home buying transaction and provide a specific advisory notice to alert prospective home buyers about the hidden consequences of any mortgage that is encumbered by a PTF, with respect to financing ability.

Under this bill, the additional advisory notice is required for PTFs created on or after February 8, 2011. This date is significant because the FHFA adopted the final rule regarding PTFs in March 2012 and sought to apply the rule prospectively to PTF covenants created after the publication of the proposed rule, which was February 8, 2011. Because this represents the date when the FHFA rule on financing, including the direct benefit condition, was deemed to have become effective, it is reasonable for this bill to require the advisory notice for PTFs created after the effective date of the rule, namely February 8, 2011.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Realtors

Opposition

None on file

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334