The Honorable Ben Carson Secretary U.S. Department of Housing and Urban Development th Street, SW Washington DC

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1 Gregory G. Smith, CMCA, AMS, PCAM 2017 President Associa Northern California-Stockton Stockton, CA Mr. Kelly G. Richardson, ESQ. Immediate Past President Richardson Harman Ober PC Pasadena, CA Peter Kristian, CMCA, LSM, PCAM Chairman Government & Public Affairs Committee Hilton Head Plantation General Manager Hilton Head Island, SC Ronald L. Perl, ESQ. Chairman Federal Legislative Action Committee Hill Wallack, LLP Princeton, NJ Thomas M. Skiba, CAE Chief Executive Officer Dawn M. Bauman, CAE Senior Vice President Government and Public Affairs June 14, 2017 The Honorable Ben Carson Secretary U.S. Department of Housing and Urban Development th Street, SW Washington DC RE: : Reducing Regulatory Burden; Enforcing the Regulatory Reform Agenda Under Executive Order Transmitted via Regulations.gov Dear Secretary Carson: On behalf of the Community Associations Institute (CAI), I am pleased to respond to the Department of Housing and Urban Development s (HUD or Department) request for information and comments on federal regulations. CAI members appreciate President Trump s order that federal departments and agencies review the federal regulatory burden on program stakeholders and American enterprise. CAI members have identified three areas of regulation that have increased costs for community associations, limited association homeowner access to Federal Housing Administration (FHA) programs, and increased legal liabilities. FHA Condominium Project Approval 24 CFR , Free Assumability; Exceptions (Legal Restrictions on Conveyance) Liability for Third Party Violations of the Fair Housing Act 6402 Arlington Blvd. Suite 500 Falls Church, VA About the Community Association Housing Model Community associations are commonly known as condominium associations, homeowner associations, and housing cooperatives. Generally organized as private non-profit organizations, community CAI is the only national organization dedicated to fostering competent, well-governed community associations that are home to approximately one in every five American households. For more than 40 years, CAI has been the leader in providing education and resources to the volunteer homeowners who govern community associations and the professionals who support them. CAI s more than 33,000 members include community association volunteer leaders, professional managers, community management firms and other professionals and companies that provide products and services to associations.

2 Page 2 associations operate pursuant to various state statutes and certain conventional real estate practices. Housing units and lots in the community are subject to a declaration of covenants (covenants, conditions, and restrictions or CC&Rs), that are enforced by a Board of Directors (Trustees or Managers in some states) comprised of homeowner volunteers elected by owners in the community. In purchasing a lot or unit in a community association, owners agree to be bound by the association s CC&Rs and bylaws. The Foundation for Community Association Research (FCAR) 1 has documented strong consumer demand for the community association housing model and projects this demand will continue to increase. In 2015, FCAR estimated the number of community associations nationwide at 338,000, accounting for more than 26 million housing units. There are more than 68 million community association residents, representing almost 1 in 5 households nationally. 2 The value of housing units in community associations is estimated at $5.28 trillion. In 2015, association homeowners paid $85 billion in association assessments to fund maintenance and operation of community infrastructure. To further support community infrastructure and services, homeowners have set aside $23 billion in reserves for the repair, replacement, and enhancement of association assets such as roofs, streets, and elevators as well as to ensure community compliance with state and federal land use and environmental requirements. 3 Condominium Project Approval CAI members urge the Department to promptly approve the pending regulation concerning condominium project approval. CAI has consistently called on HUD to update the rules underpinning FHA s condominium project approval process to stabilize the program and offer condominium associations a known regulatory environment. Absent a regulatory update, FHA is consigned to managing its condominium unit mortgage insurance program via temporary waivers and Mortgagee Letters that expire and must be renewed. This creates uncertainty for condominium association boards, who are the parties ultimately responsible for managing the affairs of the association to ensure the condominium meets and maintains FHA eligibility standards. Making the case for adoption of a new regulation may seem counter to the Trump Administration s goal of providing regulatory relief; however, in this specific instance, finalizing a condominium rule will provide the regulatory relief condominium associations have long sought from HUD. The condominium rule, as proposed, extends FHA certification from 2 to 3 years. The rule will allow single-unit approvals so consumers may have access to FHA-insured mortgages for units in condominium projects that have not undergone FHA s full project review process. The rule provides substantial flexibility for FHA to manage risk, allowing the agency to take a business-oriented approach to its condominium program. Finalizing a rule that provides 1 The Foundation for Community Association Research is the driving force for community association research, development, and scholarship, providing authoritative analysis on community association trends, issues, and operations. For more information on FCAR, visit 2 Foundation for Community Association Research: Statistical Review for 2015 (Summary). Note: 2016 statistical information under development. 3 Ibid

3 Page 3 condominium associations the flexibility that has been requested is critical to condominium homeowners and the data show why this is the case. FHA data concerning endorsements for condominium unit mortgages show significant fluctuation leading up to the housing crisis and the years following. In 2016, FHA endorsed for mortgage insurance approximately 34,000 condominium unit mortgages, representing only 2.7 percent of FHA s 2016 book of business. These data represent a dramatic decrease of FHA s presence in the condominium market. The chart below shows the annual volume of condominium endorsements and percentage of FHA s mortgage insurance portfolio attributable to condominium unit mortgages from 2001 through FHA Condominium Endorsements: Annual Volume and Percentage N u m b e r o f L o a n s P e r c e n t Condo Endorsements Percentage of Book Source: FHA Outlook Reports, ; FHA Production Reports, These data show that in the pre-crisis market FHA played an important role for consumers seeking to purchase a condominium unit. In the early 2000s, FHA routinely insured more than 80,000 condominium unit mortgages annually. In 2004, as predatory lending and weakened credit standards swept the mortgage market, FHA s market share plummeted as consumers were steered to high-risk mortgage products. As the housing crisis deepened, FHA played a key countercyclical role in the mortgage market that is well-documented, supporting condominium homeowners and communities. However, in 2009 FHA substantially modified the condominium project approval process, leading to the expiration of FHA approval for multiple thousands of condominium associations. As FHA s revised condominium project approval standards were absorbed by the market in 2010 and 2011 and a 2-year expiration of FHA certification was implemented, an immediate reduction in condominium unit mortgage endorsements is apparent. The reduction in FHA condominium mortgage volume shown in data from 2013 to 2014 matches the expiration of the last of the legacy condominiums grandfathered into the new 2-year certification system.

4 Page 4 While 2015 and 2016 data appear encouraging, the increase in condominium unit mortgages is likely due to a mortgage insurance premium reduction implemented by FHA in FHA s business volume increased substantially across all program areas, including condominiums. FHA also made some adjustments to condominium project approval standards in 2014 that likely had a positive impact. Notwithstanding this, the percentage of FHA s book of business attributable to condominium unit mortgages continues to fall and is well outside pre-crisis, non-stressed market levels. The need to reform FHA s condominium project approval process is further evidenced by the limited percentage of condominiums applying to obtain or renew FHA approval. As of May 31, 2017, FHA data indicate only 10,009 condominiums with an active FHA approval. According to FCAR data, there are more than 150,000 condominium associations nationwide. Fewer than 7 percent of condominiums have an active FHA approval. Also concerning is that FHA-approved condominiums tend to be concentrated in a handful of states. Almost 50 percent of approved condominiums are in 5 states: California (2,040); Virginia (728); Washington (642); Illinois (631); and Maryland (591). 25 states have fewer than 100 approved condominiums and of these states, 20 have 50 or fewer FHA-approved condominiums. 4 The data clearly show that FHA is not serving the condominium market on a nationwide basis, which impedes FHA s ability to fulfill its mission to first-time, low-to-moderate income, and underserved borrowers. CAI members strongly believe the FHA condominium project approval rule proposed by HUD will, in a safe and sound manner, expand the credit box for consumers who seek to purchase a condominium unit as their home. CAI respectfully urges the Department to move forward to completion the proposed condominium project approval rule. Legal Restrictions on Conveyance CAI members urge the Department to review regulations at 24 CFR , Free Assumability; Exceptions (Legal Restrictions on Conveyance), to determine how this regulation may be updated to reflect growth of the community association housing model. This regulation was last updated in 1993 when community association housing did not represent the percentage of housing units in the current market. An example of this regulatory mismatch may be found in FHA s determination that community transfer fees paid to community associations at closing violated 24 CFR This determination was reached despite the decades-long, common practice of states permitting community transfer fees that provide a direct benefit to the association. After the Federal Housing Finance Agency (FHFA) promulgated a rule protecting community transfer fees and 4 States with fewer than 100 FHA-approved condominiums as of 5/31/2017: AL, AR, DE, HI, ID, IN, IA, KS, KY, LA, ME, MS, MT, NE, NV, NM, NY, ND, OK, RI, SC, SD, VT, WV, WY. States with fewer than 50 FHA-approved condominiums as of 5/31/2017: AL, AR, DE, ID, IA, KS, LA, ME, MS, MT, NE, NV, NM, ND, OK, SC, SD, VT, WV, WY. Source: FHA Condominium Approval Search:

5 Page 5 prohibiting transfer fees paid to parties with no running interest in the community, FHA declined to align standards with FHFA and actively enforced its disparate community transfer fee policy. This decision, based on 24 CFR , prevented numerous condominium associations from applying for FHA approval. FHA s regulatory treatment of community transfer fees was overturned by Congress through the Housing Opportunity Through Modernization Act of 2016 (P.L ). CAI was a strong proponent of Title III of the Act, which among other things, directed FHA to adopt FHFA s treatment of community transfer fees. Congressional intervention should not have been required and CAI members believe a review of 24 CFR to determine if the regulation should be updated in other areas to reflect the current market is appropriate. CAI members believe the Department could usefully consider additional scrutiny of 24 CFR to ensure the regulation does not create friction with the community association housing model. In previous correspondence with the Department, CAI urged review of 24 CFR in the context of leasing restrictions and condominium project approval. Section of the FHA Condominium Processing and Approval Guide details the conditions under which a condominium association may restrict leasing of condominium units. CAI members appreciate the Department s recognition that condominium associations may seek to limit short-term leases to promote the residential use and character of a condominium project. In general, CAI members believe that requiring a significant percentage of units in a condominium project to be owner occupied is sound public policy, benefitting condominium association homeowners and taxpayers. If the percentage of owner occupants in a condominium is permitted to drop too low, the association will struggle to field a slate of candidates to serve on the association board. Further, long-distance or absentee landlords simply do not exercise the same level of care and attention to a community as do owners whose unit is their primary residence. This can impact long-term financial decisions of the association to set aside reserves and operate on a fully funded, reasonable budget. To this end, CAI members urge the Department to reconsider its blanket objection to association board review of leases. CAI members are cognizant of the Department s view that association approval of leases may limit or otherwise restrict a unit owner s ability to lease their unit. However, without prior notice or approval of an intent to lease, a condominium association board has no ability to enforce bylaws or rules that ensure the project continues to meet FHA owner occupancy requirements. Condominium boards have an ongoing interest in maintaining FHA-approval criteria for the benefit of all residents and homeowners. At present, FHA rules do not permit condominium associations to require that unit owners notify the board in advance of leasing a unit in the

6 Page 6 condominium project or to deny a lease if the lease will cause the project to lose FHA eligibility. FHA will not approve a condominium if the board has either direct or indirect approval authority of a lease. The basis for this prohibition is 24 CFR If a condominium association is to ensure the project s continued eligibility for FHA approval, it is reasonable to allow a board to use a well-defined and limited authority to deny a unit owner s request to lease a unit if doing so would cause the project to be ineligible for FHA approval. CAI also urges the Department to consider updating 24 CFR to align FHA policy concerning condominium units with an affordability designation that survives foreclosure with that of Fannie Mae and Freddie Mac. 5 The Department s regulations currently prohibit mortgage insurance if a mortgaged property is subject to an affordability covenant that survives foreclosure or certain foreclosure alternatives. 6 CAI members believe such a modification to be within the Department s mission and that such a change would not expose the Mutual Mortgage Insurance Fund to unnecessary risk. CAI has consistently encouraged that FHA provide flexibility for condominium projects with an affordability component. In 2009, CAI members reported that condominium projects were being denied FHA approval if certain units in the project were subject to an affordability requirement that survived foreclosure. After discussion, FHA permitted approval of such condominium projects, but excluded units with the affordability designation from approval and eligibility for FHA mortgage insurance. In sum, FHA declined to support affordable housing ownership if the property s affordable designation survived foreclosure. The nation is experiencing a growing housing affordability crisis, particularly in housing markets where condominium projects play a constructive role in providing access to affordable housing. The affordability crisis is leading many jurisdictions to require an affordability component in new condominium projects and multi-family rental housing developments, reserving units for sale or rent at affordable prices. In many instances, these projects have been developed by the private sector in partnership with a local housing authority with seed funds provided by the Department (e.g. HOPE VI and Choice Neighborhoods). It seems incongruous to have two major program areas the Office of Housing and the Office of Public and Indian Housing operating to such counter purposes. CAI members urge the Department to closely coordinate the work of program offices. FHA should work with local governments and developers to approve all units in condominium 5 Fannie Mae Selling Guide B : Loans with Resale Restrictions: Underwriting and Collateral Considerations (effective as of 2/23/2016); Freddie Mac Seller/Servicer Guide : Purchase Requirements for Mortgages secured by properties with resale restrictions (effective as of 06/27/2016) 6 24 CFR (c) reads, in pertinent part,...(1) The restrictions are part of an eligible governmental or nonprofit program and are permitted by paragraph (d) of this section; and (2) The restrictions will automatically terminate if title to the mortgaged property is transferred by foreclosure or deed-in-lieu of foreclosure, or if the mortgage is assigned to the Secretary.

7 Page 7 projects, including any unit subject to an affordable housing designation that survives foreclosure. Fannie Mae and Freddie Mac support access to affordable homeownership by accepting delivery of loans subject to an affordability covenant that survives foreclosure FHA should join this effort. Quid Pro Quo and Hostile Environment Rule In September 2016, the Department amended Fair Housing Act regulations to extend liability to community associations for the illegal, discriminatory acts of third parties. 7 CAI members believe the new 24 CFR 100.7(a)(1)(iii) ascribes to community associations a liability for the actions of non-agents individuals over whom an association has no authority to pursue fair housing investigations or require specific remedial actions. CAI members strongly believe this new illdefined, and expansive liability standard exposes community associations to unknowable and unmanageable risks. Further, CAI members do not believe the Department has provided sufficient justification or legal basis for this new regulatory burden. Finally, CAI members believe the resident victims of discrimination or harassment may be ill-served by misplacement of the responsibility to the association board of directors. Victims of discrimination and harassment deserve the most direct access to justice with the most qualified representation to expeditiously resolve the problem. 24 CFR 100.7(a)(1)(iii) imposes on community associations the duty to investigate, prevent, and halt violations of the Fair Housing Act that may arise...from an obligation to the aggrieved person created by contract or lease (including bylaws or other rules of a homeowners association, condominium or cooperative) 8 Regrettably, this standard does not offer any clarity for community associations as what the Department considers a duty to...take prompt action to correct and end a discriminatory housing practice by a third-party... 9 The Department has provided no guidance as to what language in community association covenants or bylaws could possibly impose such a duty of contract on the association. Association covenants and bylaws do not deputize association boards as Fair Housing Act enforcement agents, therefore it is unclear what provisions of an association s bylaws or other rules could possibly impose a duty on the association to police the community for Fair Housing Act violations by non-agents of the association. Further, community associations only possess the authorities granted by state statute. Courts have not looked favorably when associations have sought to assert authority not granted by statute. A community association seeking to investigate, make findings of fact, or impose sanctions on a third-party for alleged housing discrimination may not have statutory authority to do so, notwithstanding the Department s views of the association s rules and bylaws. If state 7 81 FR CFR 100.7(a)(1)(iii) 9 Ibid

8 Page 8 statue does not empower the association to take an action, the association lacks the authority to do so. In neither the preamble to the proposed rule nor the discussion of the final rule did the Department reference a single published case where a court of law found a community association to have a duty to enforce the Fair Housing Act in the manner imposed by the Department. This despite the Department s stated purpose of the rule as harmonizing disparate court rulings and standards of enforcement for Fair Housing Act violations. The case history cited by the Department covered cases concerning direct and vicarious liability of community associations for the actions of association board members or employees. CAI members agree that housing discrimination by association boards or agents must be grounds for liability under the Fair Housing Act. CAI members find no published jurisprudence on which an association may reasonably rely that establishes community associations have a contractual obligation to actively police alleged Fair Housing Act violations of non-agents. To CAI members, the lack of published opinions and case law establishing that community associations are contractually obligated to adjudicate Fair Housing Act violations of non-agents or risk legal jeopardy under the Act is telling. The absence of jurisprudence or a record of fact suggests the Department is seeking to expand the reach of the Fair Housing Act to community associations in a manner that goes beyond the intent of Congress or legal standards established by jurisprudence. The lack of an established, reviewable legal record only heightens uncertainty for community associations. There does not appear to be a reliable legal standard offering any clarity to associations on the actions the Department expects a community association to take under 24 CFR 100.7(a)(1)(iii). This lack of clarity has caused significant concern among CAI members as well as community associations across the nation. If an association board member, acting in their capacity as a board member, engages in discriminatory activities in violation of the Fair Housing Act and other members of the board knew of or should have known of such discriminatory activities and failed to take corrective action, the board members and the association are appropriately exposed to liability under the Fair Housing Act. CAI members believe the same applies if discriminatory actions are taken by an association employee or other agent, the association board knew of or should have known of the discriminatory activities, and failed to take corrective action. Importantly, established law and jurisprudence confirms these views of direct and vicarious liability. If the offending party is neither an officer or an agent of the association, it is unclear what duty, if any, an association board or agent would have to intervene in a dispute between residents where one resident alleges violations of the Fair Housing Act. As noted, community association boards or an association s agent generally lack statutory authority to investigate, make findings of fact, reach a determination that violations of federal law have occurred or are likely to occur,

9 Page 9 and impose penalties against a homeowner on the basis of such determinations. Yet the Department has imposed exactly this duty on associations without providing a vetted and validated legal rationale or defense for having done so that has been subjected to review by the courts and published for public consumption. CAI members believe it unwise to imply the existence of, or through regulation to impose, such a duty on community association boards or association agents. Most community association homeowners would rightfully question the authority of association board members, employees, or agents to intervene in the interpersonal relationships of homeowners and residents and to investigate these interactions and relationships for discriminatory elements or actual intent to discriminate. In Bloch v. Frischholz 10, the 7 th Circuit established a four-part test for determining a claim that a plaintiff s right to exercise or enjoy rights under the Fair Housing Act have been illegally constrained. The Court noted that to prevail on a claim a plaintiff must show (1) they are a member of a protected class under the Act, (2) they were engaged in the exercise or enjoyment of their rights under the Act, (3) defendant(s) coerced, threatened, intimidated, or interfered with the plaintiff s rights under the Act, and (4) defendant(s) were motivated by an intent to discriminate. CAI members question the wisdom of charging community association boards and association agents with investigating allegations of illegal housing practices of individual residents for potential claims under 3617 or other violations of the Act. In Bloch, the 7 th Circuit confirmed that interference in the exercise or enjoyment of rights under the Act is more than a dispute among residents and that an isolated incident of discrimination is insufficient for a claim to prevail. Rather, a plaintiff must show a pattern of harassment, invidiously motivated. 12 Multiple courts have opined that resident-to-resident disputes do not rise to the level of an illegal, discriminatory housing practice. 13 Association board meetings are not the venue to reach such determinations of law. CAI members urge the Department to consider removing (including bylaws or other rules of a homeowners association, condominium or cooperative) from 24 CFR 100.7(a)(1)(iii) as added in the 2016 rule. If the Department continues to believe a public good can be reasonably accomplished by retaining this language, CAI recommends the language be modified to clearly 10 Bloch v. Frischholz, 587 F. 3d 771, 787 (7 th Cir. 2009) USC Bloch, quoting Halprin v. Prairie Single Family Homes of Dearborn Park Ass n., 388 F. 3d (7 th Cir. 2004) 13 Sporn v. Ocean Colony Condominium Ass n, 173 F. Supp. at Simply put, 3617 does not require that neighbors smile, say hello or hold the door for each other. To hold otherwise would be to extend 3617 to conduct it was never intended to address and would have the effect of demeaning the aims of the Act and the legitimate claims of plaintiffs who have been subjected to invidious and hurtful discrimination and retaliation in the housing market. United States v. Weisz 914 F. Supp (S.D.N.Y. 1996), where the Court concluded that a defendant s behavior was not motivated by plaintiff s religion but by the defendant s own conduct. The Court found the defendant s behavior reflected...nothing more than the defendant s method of making life miserable for the Cronins... Halprin, 388 F. 3d (7 th Cir. 2004).

10 Page 10 state the Department s view as to the terms and conditions in association bylaws and regulations that constitute an actual duty on the part of an association or its agents to investigate and punish residents for illegal discriminatory housing practices. If the language is retained and the Department declines to take any action to revise the new 24 CFR 100.7(a)(1)(iii), CAI members believe the Department has a clear public duty to provide a case history that has been subjected to scrutiny by courts and delineates association liability for the illegal, discriminatory acts of third parties. The failure to adequately inform associations of the conditions that may lead to legal jeopardy under the Fair Housing Act is a significant oversight and cause of great concern to community associations across the country. If there is an insufficient or unreliable record to make available such guidance to associations, CAI members believe this is evidence the Department has expanded the reach of the Fair Housing Act beyond the intent of Congress and consistent interpretation of the courts. Thank you for your consideration of these comments and the concerns of CAI members. If the Commission requires any additional information, do not hesitate to contact me at (703) or dbauman@caionline.org. Sincerely, Dawn M. Bauman, CAE Senior Vice President, Government & Public Affairs Community Associations Institute