REMODELING
RULES TARGET LEAD PAINT
The
Environmental Protection Agency (EPA) has proposed sweeping new
rules designed to reduce lead paint poisoning risks in the
renovation of older housing. The new rules, issued for
comment in January, would require that contractors renovating
buildings constructed before 1978 (after which the use of
lead-based paint was banned) be trained in the use of lead-safe
work practices. Additionally, the rules would require that
renovation contractors and their workers be certified, take
courses from accredited providers of renovation training, and
follow detailed lead-safe practices. The rules would apply
to all individuals who do renovation work for compensation,
including: “renovation contractors, maintenance workers in
multi-family hosing, painters, and other specialty trades.”
The rules will also apply to “most renovation, repair, or
painting activities where more than two square feet of
lead-based paint is disturbed,” according to the EPA.
The agency has
proposed to implement the new rules in two phases. The
first phase would take effect two years after the rules are
finalized and would apply to renovations in rental and
owner-occupied housing built before 1978 in which a child with
an elevated blood-lead level resides. The second phase,
which would begin a year later, would apply additionally to all
rental housing constructed between 1960 and 1978 and to
owner-occupied housing constructed during that period in which a
child under the age of six resides.
The deadline
for public comments is April 10, but the National Association of
Home Builders (NAHB) has already weighed in heavily against
them. While the dangers of lead poisoning are well known,
“there is no scientific research that shows remodeling causes
lead poisoning in children,” NAHB President Dave Wilson said in
a press statement. “We know that 90 percent of the homes
built between 1960 and 1978 do not contain lead paint and that
more than half the typical renovation and remodeling work is
done by homeowners, whom the EPA does not regulate,” he added.
“Forcing all remodeling firms to comply with onerous new rules
even when there is a low likelihood of exposure is a waste of
money and time that would be better spent on targeted prevention
and eradication efforts.”
CONGRESS
EYES TITLE INSURANCE
A blizzard of
state actions against title insurance companies has attracted
Congressional attention. Michael Oxley (R-OH), chairman of
the House Financial Services Committee, has asked the Government
Accountability Office to scrutinize the way title insurers price
and market their products. In a letter to the non-partisan
investigative arm of Congress, Oxley said he and other committee
members have become “concerned about recent investigations by
state regulators revealing that title companies have made
payments for referrals to developers, mortgage lenders, and real
estate agents in violation of the Real Estate Settlement
Procedures Act.”
Earlier this
year, four of the largest title companies agreed to refund $27.5
million to Michigan home buyers as part of an agreement
resolving a class action suit accusing the companies of
systematically overcharging more than 60,000 homebuyers over a
seven-year period. Last year, the Colorado Insurance
Division launched a widely publicized investigation of alleged
kickback schemes involving nine title companies in that state.
The Colorado action triggered similar probes by regulators in
dozens of states, including California, where two companies
(Fidelity National Financial and First American Title) agreed to
refund $22.7 million to consumers to settle alleged RESPA
violations there.
Oxley has asked
the GAO specifically to examine the relationships between title
insurers, real estate agents, mortgage lenders and home
builders, and to assess “potential barriers to entry” in the
market. “Other investigations have revealed abuses of
reinsurance agreements that have forced title companies to pay
millions of dollars in settlements and have uncovered
anti-competitive practices within the title industry,” Oxley
noted.
The American
Land Title Association (ALTA) said it welcomed the GAO
investigation as an “opportunity to help clear up confusion
[misinformation and misunderstanding] about the industry….We are
cooperating fully with the GAO to ensure a proper and informed
evaluation, and look forward to participating in this important
process,” an ALTA spokesman said.
TICS GAINING
MOMENTUM
Tenant-in-common investment funds, already well-established in
the commercial realty market, are becoming a major force in the
multi-family housing sector, too. “Four years after their
introduction, these players are gaining momentum and making
noise among investors,” according to Jeff Hawks, a principal in
Apartment Realty Advisors.
Writing in a
recent issue of MultiHousing News, Hawks notes that the
funds tend to find more appealing investments in recovering
markets, where lower purchase prices make it easier to recover
the up front fees of establishing the partnerships. “As
more REITs and pension fund advisors continue to focus on
primary markets,” he says, TICs have become ‘the only game in
town’ for many smaller markets.” As investors become more
familiar with TICs, Hawks predicts, “they could become one of
the most significant forces in the multifamily industry for
decades to come.”
MORE SOX
SNIPING
Grumbling about
the difficulty and cost of complying with the Sarbanes-Oxley
corporate governance law, which has been simmering steadily for
more than a year, has spilled over into multiple challenges,
spurring hopes among critics that Congress may be persuaded to
review at least some aspects of the law.
The challenges
include a law suit contesting the legality of the Public Company
Accounting Oversight Board (PCAOB), which sets audit standards
and oversees the practices of accounting firms. The suit,
filed in U.S District Court in Washington by a lobbying group
(the Free Enterprise Fund) and a small Nevada accounting firm,
contends that the board’s structure is both ill-advised and
unconstitutional, because it fails to ensure accountability for
the board’s actions. The problem, the suit argues, is that the
board sets policy and has enforcement authority, but the members
are appointed by the Securities and Exchange Commission, which
also approves the budget, with no oversight by the executive
branch.
“It’s very bad
to separate out significant government responsibility from
public accountability and that’s what the board does,” Michael
Carvin, an attorney with the Washington law firm Jones Day, who
represents the plaintiffs in the law suit, told The Wall
Street Journal. If the suit succeeds, Carvin said,
Congress will have to revisit the board’s structure, which could
lead to the broader review of Sarbanes-Oxley these plaintiffs
and other critics of the law, would like to see.
The law is
being challenged on other fronts as well. For example, a
federal appeals court in Washington is considering a suit
challenging a new SEC policy requiring hedge-fund advisers to
register with the agency. Separately, an SEC task force is
considering proposals to ease the SOX compliance costs for small
businesses. Republicans in the House (Mark Kirk of Illinois and
Tom Feeney of Florida) are reportedly drafting legislation with
a similar goal.
The Chamber of
Commerce is also pushing for changes in the law. The trade
group published a report recently urging Congress to add
clarifying language specifying that if SOX violations are found,
charges will be filed only against the executives responsible
and not against the company itself. “The mere threat of an
indictment is a prosecutorial club that can produce guilty pleas
and monetary settlements — without the need to prove any facts
in a court of law,” the report contends.
Additionally
the Chamber report recommends that Congress narrow the scope of
Section 404 of the law – mandating internal controls and
financial reporting procedures for corporations. The Chamber and
other critics contend that the existing language is overly broad
and the compliance requirements overly burdensome. A
recent study conducted by AMR Research estimates that the SOX
compliance bill for U.S. companies will total close to $6
billion this year, almost equaling the $6.1 billion they spent
in 2005.
COMMERCIAL
REALTY CONCERNS
Although
banking industry regulators and some banks are growing
increasingly concerned about credit quality and over-exposure in
their commercial real estate loan portfolios, investors and
analysts still have a positive view of commercial
mortgage-backed securities (CMBS). The issuance of CMBS
pools totaled a record $169.2 billion in 2005 and credit ratings
on those pools remained solid. In fact, Standard & Poor’s
upgraded 8 times as many pools as it downgraded, handing out
downgrades to only 1 percent of AAA-rated pools and 4.3 percent
of B-rated pools. In a recent report, the company predicts
fewer upgrades this year, but still expects upgrades will
outnumber downgrades “as long as the economy continues to grow
and real estate fundamentals continue to improve.”
Some
banking industry analysts are less sanguine about the outlook.
Commercial real estate lending “is probably the area for
investors to keep an eye on,” Gerald Cassidy, an analyst with
RBC Capital Markets, Inc., told American Banker
recently. “It is going to be the hot topic of conversation
if the economy slows sown.”
Moody’
Investors Services reports that commercial mortgages now
represent 15 percent of domestic product, equaling the level set
in 1988 at the peak of the last real estate cycle.
Separately, the Federal Reserve’s most recent survey of senior
loan officers found “considerable easing” in loan terms, with 30
percent of the banks surveyed reporting that they reduced
spreads on their commercial real estate loans last year, 25
percent reporting an increase in maximum loan amounts, and 20
percent saying they increased both their loan-to-value ratios
and their maximum maturities.
Citing concern
about those trends, banking industry regulators have proposed
new guidelines that would require banks with high concentrations
of commercial realty loans to tighten their underwriting and
risk management policies, and in some cases, increase their
reserves. Some analysts say those regulations, if adopted, could
produce a sharp reduction in bank commercial real estate lending
this year.
LEGAL BRIEFS
Association rules must be constitutional.
Because homeowner associations exercise government-like
authority, community residents are entitled to the
constitutional protections that governmental bodies must
respect, a New Jersey Appeals Court has ruled. That decision, in
Committee for a Better Twin Rivers v. Twin Rivers Home Owner
Association, upends the long-standing assumption that
associations have broad discretion to establish rules governing
behavior in their communalities by maintaining that those rules
must not only be reasonable (under the “business judgment rule”
applied to corporations), but must pass constitutional muster as
well.
The suit, filed by residents of Twin Rivers (a planned community
in East Windsor, NY with about 10,000 residents) and the
American Civil Liberties Union, challenged rules restricting the
right of homeowners to post political signs on their property
and to print opposing views in the association’s newsletters. A
trial court dismissed the suit, finding that twin Rivers was a
private corporation and thus not required to provide
constitutional protections to its residents. But a unanimous
three-judge appellate court disagreed.
“We reverse the general ruling…that TRHA was not subject to
limitations imposed by the New Jersey Constitution and that the
business judgment rule and contractual standards applied,” Judge
Howard Kelvin wrote in a 67-page decision. “Defendants miss an
essential point in invoking the business judgment rule as the
only standard available in reviewing a member’s challenge to the
action of a community association,” the court explained, noting
that “in a variety of circumstances, the business judgment rule
has been held to be subject to overriding requirements of
reasonableness, good faith, and fiduciary responsibility.
Determinations regarding the meaning and application of
constitutional standards often employ rules of reasonableness of
rule,” the court said. Considering the “broadly applicable right
to free speech” granted under the state constitution, the court
continued, “in balancing the interests of the parties, [we
conclude that the homeowners’] rights to engage in expressive
exercises, including those relating to public issues in their
own community…must take precedence over the TRHA’s private
property rights.”
The court did not reject the association’s rules; rather, it
remanded the case to the trial court for a determination of
whether the rules pass constitutional muster. But the
homeowners’ association has said it plans to appeal the ruling
to the New Jersey Supreme Court. The Community Associations
Institute (CAI), which filed an amicus brief on the
association’s behalf, is hoping the state’s high court will
reject or at least modify the appellate court’s reasoning.
“The main area of concern is the blanket imposition of
constitutional protection on the whole governance scheme of
community associations,” Ronald Perl, president-elect of CAI,
told reporters. “Imposing the same standards on community
associations that apply to government entities,” he said, “may
have gone too far.”
RI court tags lead paint manufacturers .
Manufacturers of lead-based paint created a “public nuisance” in
Rhode Island and should be responsible for clean-up costs and
possibly additional damages, a jury in that state has concluded.
While the companies involved will almost certainly appeal the
verdict in this Superior Court action, the case has attracted
nationwide attention because it is the first suit of its kind
filed by a state against lead paint manufacturers.
Federal
law has barred the sale of lead-based paint sine 1978, but
residential properties constructed before that date still
contain the substance, which is known to cause lead poisoning in
young children. Most lead-paint actions have involved suits
filed (often successfully) against the owners of rental property
by individual tenants, state regulators, and, more recently, the
Department of Housing and Urban Development.
But the Rhode Island Attorney General argued that thousands of
young children have suffered lead poisoning because of the
“public nuisance” created by the presence of lead paint, for
which the paint manufacturers were responsible. Although
lead-based paint wasn’t banned until 1978, the suit contended,
paint manufacturers were aware of the potential health risks
long before then but continued to sell the product anyway.
The companies named in the suit argued that lead paint risks
exist in only a small number of poorly maintained properties,
that lead paint is not the only potential source of lead
exposure for children, and that the state failed to establish a
link between the children who suffered from lead poisoning and
the paint these companies produced.
Federal law and the laws in many states, including Rhode Island
and Massachusetts, now impose deleading, remediation, and/or
maintenance requirements on the owners of properties containing
lead paint. The Environmental Protection Agency (EPA) has
recently proposed new rules requiring licensing, training, and
insurance coverage for contractors working on homes constructed
before 1878 (see related item, above).
In the Rhode Island suit, the judge has ordered the jurors to
consider whether the three companies – Sherwin-Williams, NL
Industries, Inc. and Millennium Holdings – should be required to
pay damages in addition to as yet unspecified costs for lead
removal or abatement, home inspections, and public education.
The jury found a fourth company named in the suit, Atlantic
Richfield CO., had no liability. Last year, the state dropped
DuPont Co. from the suit after that firm agreed to voluntarily
pay several million dollars to a nonprofit group to fund lead
remediation, education, and compliance programs in the state.
WORTH QUOTING
“When combined with other powers, such as the ability to act as
finders and to buy and sell bank and customer assets, the OCC
rulings have the potential to lead to significant erosion of the
separation between banking and commerce.” —Tom Stevens,
president of the National Association of Realtors, in a letter
to Comptroller of the Currency John Dugan, objecting strenuously
to the OCC’s approval of three recent banking applications that,
the association contends, “represent OCC’s continued efforts to
dramatically expand the real estate
powers of national banks.”
