FHFA this week sent a proposed rule to the Federal Register to begin formal rulemaking on private transfer fees.

Image by Laurence Mouton/PhotoAlto/Corbis

This rulemaking, which addresses comments received on a previously proposed guidance, would limit Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from dealing in mortgages on properties encumbered by certain types of private transfer fee covenants and in certain related securities. Transfer fees are contractual arrangements where an owner pays a fixed amount or a percentage of the sales price at the time of transferring the property.

“As the leading advocate for homeownership, we commend FHFA for the proposed rule to ban private transfer fees, which we believe often decrease affordability, negatively impact equity and provide little benefit to property purchasers,” says National Association of Realtors president Ron Phipps, broker-president of Phipps Realty in Warwick, R.I. “FHFA is taking the necessary steps to ensure that these fees are no longer used to simply generate revenue for investors and private developers.”

Since there is virtually no oversight on where or how private transfer fee proceeds can be spent, on how long a private transfer fee may be imposed, or on how the fees should be disclosed to home buyers, as many as 19 states have banned or restricted private transfer fees. The Federal Housing Administration has also restricted private transfer fees through its home loan programs.

The proposed rule would exclude private transfer fees paid to homeowner associations, condominiums, cooperatives, and certain tax-exempt organizations that use private transfer fee proceeds to benefit the property. Fees that do not directly benefit the property would be barred.

“We understand that FHFA believes that some private transfer fees have a legitimate place in real estate markets, and support their decision to exempt certain organizations from the proposed ruling where there may be a direct benefit to the home owner; however, FHFA must ensure that the fees paid are reasonable and fully disclosed to home buyers well in advance of closing,” says Phipps.

With limited exceptions, the rule would apply only prospectively to private transfer fee covenants created on or after the date of publication of the proposed rule. With this formal rulemaking, comments are again being solicited and are due 60 days from publication in the Federal Register. Regulated entities are required to comply with the final rule within 120 days after its publication.