I. INTRODUCTION
Pursuant to the Residential Lead-Based Hazard Reduction Act of 1992 (hereinafter referred to as the “act”), beginning October 28, 1995, each home built prior to 1978 must be allowed the opportunity to have a risk assessment or inspection for the presence of lead-based paint or paint hazard before it may be sold, rented or refinanced. When the regulations became effective, lenders should have copies of lead-based paint or paint hazard documentation prior to closing a loan in order to protect the bank from the possible loss of collateral or potential liability under the act. For example, one practical effect of the regulation is that a prudent lender would not allow a covered loan transaction to proceed unless proper information and disclosures were appropriately given by the seller, received and acknowledged by the purchaser, and until the 10-day (or otherwise agreed upon) period given to the purchaser to conduct a risk assessment or inspection has lapsed. It is also possible, under a number of legal theories, that a bank could be held liable for civil damages if a child developed lead poisoning in a home upon which a bank holds a security interest and it was shown that the regulation was ignored or otherwise not complied with by third parties.
Bankers should be aware of certain key provisions contained in the act and its implementing regulations. The act was effective for “federally-owned homes” since October 28, 1994. The Department of Housing and Urban Development (HUD) and the Environmental Protection Agency (EPA) issued identical joint regulations, effective March 6, 1996. The regulations address both the sale and leasing or rental of residential dwellings. For owners of more than four residential dwellings, the regulatory requirements are applicable on September 6, 1996. For owners of one to four residential dwellings, the regulatory requirements are applicable on December 6, 1996. The regulatory requirements apply to “target housing” built before 1978 and call for (1) particular disclosures of the presence of any known lead-based paint or lead-based paint hazards, (2) lead-hazard information pamphlets, (3) purchaser and lessee inspection periods, and (4) a “Lead Warning Statement and Acknowledgment,” signed by the purchaser or lessee, within or attached to the sales or lease contract. The purpose of this article is to provide an overview of these key provisions.
II. REGULATORY REQUIREMENTS
The regulations implementing the act apply to all persons involved in the sale, leasing or rental of residential dwellings that meets the definition of “target housing,” whether they be individuals, corporations, partnerships, trusteeships, government agencies, Indian tribes or nonprofit organizations. The term “residential dwelling” is defined in the regulation to mean either a single-family dwelling (including attached structures such as porches and stoops) or a single-family dwelling unit in a structure that contains more than one separate residential dwelling unit, and in which each such unit is used or occupied, or intended to be used or occupied, in whole or in part, as the residence of one or more persons. Another key term used in the regulations is “target housing” which means any housing constructed prior to 1978, with the exception of housing for the elderly or persons with disabilities, or zero-bedroom dwellings. The housing for the elderly or persons with disabilities exceptions are eliminated if any child less than six years of age resides or is expected to reside in such housing. “Housing for the elderly” means retirement communities or similar types of housing reserved for households composed on one or more persons 62 years of age or more at the time of initial occupancy. A “zero-bedroom dwelling” means any residential dwelling in which the living area is not separated from the sleeping area (including efficiencies, studio apartments, dormitory housing, military barracks, and rentals of individual rooms in residential dwellings).
NOTE: The regulations do not establish any responsibilities or requirements on banks for implementation of the law so long as banks are not acting as sellers, lessors or agents of residential dwellings. Banks have no direct regulatory responsibility for ensuring regulatory compliance by third parties nor do banks have any liability for third party noncompliance. Furthermore, the regulation states that it “does not apply to the sale of properties at foreclosure. . .” However, the substance of the rules provides that when a bank purchases the property under foreclosure, the subsequent resale of the residential dwelling to another party will trigger the regulation. In addition, the regulations do not cover the purchase, sale, or servicing of mortgages.
There are three areas addressed in the act and regulations that merit the attention of bankers.
A. Federally-Owned Housing
The first item of interest is a provision of the act that targets federally-owned housing. This provision has an indirect impact on lenders. Federally-owned housing means residential dwellings owned or managed by federal agencies or for which a federal agency is the trustee or conservator (e.g., RTC, FDIC, VA and HUD). Commencing January 1, 1995, the act requires both inspection and abatement of lead-based paint hazards in all federally-owned target housing constructed between 1960 and 1978. Abatement will be required unless the inspection shows no lead-based paint hazards. The RTC and FDIC are required to perform these activities only if Congress appropriates funds to do so. For banks providing financing for the acquisition of such federally-owned target housing, they should be aware that such transactions will carry increased costs for inspection and possible abatement. It is likely that ongoing abatement costs may be shifted to prospective borrowers, impacting the anticipated cash flow of such properties.
B. Acquisition or Rental of Target Housing
The second item of concern has more direct impact on bankers who provide financing for the acquisition of target housing. The act and regulations require disclosure of information regarding lead-based paint hazards on the transfer of residential property.
Bankers, as participants in transfers of real property and prior to funding such loans, should make certain that proper information pamphlets have been provided, applicable disclosures, records, reports, and warning statements have been given and acknowledged. More specifically, the regulations require that:
If any of the above-mentioned disclosure activities occurs after the purchaser or lessor has provided an offer to purchase or lease the housing, the seller or lessor must complete the required disclosures before accepting the offer and allow the purchaser or lessee an opportunity to review the information and possibly amend the offer.
Before a purchaser or is obligated under any contract to purchase target housing, the seller must allow the purchaser a 10-day period (unless the parties mutually agree, in writing, upon a different period of time) to conduct a risk assessment or inspection for the presence of lead-base paint or paint hazards and to terminate the contact or lease based upon the inspection.
The rule provides that an attachment to any contract for the purchase of any target housing must contain a “Lead Warning Statement,” a statement by the seller disclosing the presence of known lead-based paint or paint hazards or indicating no knowledge of the presence of such, any additional information available concerning the known lead-based paint or paint hazards, a list of any records or reports available to the seller pertaining to lead-based paint or pain hazards that have been provided to the purchaser or indicating no such records or reports are available, and a statement by the purchaser affirming receipt of the information and the lead hazard information pamphlet, as well as a statement by the purchaser affirming the opportunity to conduct a risk assessment or inspection or waiving such opportunity. When an agent is involved in the transaction to sell target housing on behalf of the seller, a statement must be completed which discloses that the agent has informed the seller of the seller’s obligations and that the agent is aware of the duty to comply with the regulations. The statements must be signed by the seller, the seller’s agent, and purchaser, certifying to the accuracy of the statements, to the best of their knowledge, along with the dates of signature. For every contract to lease target housing, a similar Lead Warning Statement, along with similar information described above for housing being purchased, must also be given as an attachment to or within the lease contract itself. Similar agency information and certification and signature requirements apply to such lease transactions. Sample disclosure and certification forms for sellers, lessors and real estate agents, with acknowledgments of receipt of such disclosures, and sample contract contingency language are contained in the preamble of the regulation (See, sample forms following this article). Note that anyone who knowingly violates the disclosure provisions of the act may be liable for treble damages incurred by the purchaser or tenant, including attorneys’ fees and expert witness fees. The rule allows for either HUD or the EPA to seek a penalty of no greater than $10,000 for each violation of the act.
Therefore, a lender providing financing for the acquisition of residential property built before 1978 should be sure that adequate disclosures have been made and that the purchaser has acknowledged receipt of such disclosures. Although § 1018(c) of the act states that a lender’s loan agreement, mortgage or lien made or arising in connection with a mortgage loan will not be affected by the act as to validity or enforceability, the practical effect is that loan transactions should not proceed until the 10-day (or otherwise agreed upon) period given to the purchaser to conduct a risk assessment or inspection has lapsed. Note once more that sales of property at foreclosure are excluded from the disclosure and evaluation requirements, unless, for example, the lender was the purchaser at foreclosure and then attempts to recover on its investment by the sale of the property to a third party. In other words, the foreclosure sale exclusion does not apply to the sale of housing originally acquired through a foreclosure sale and subsequently resold.
C. Certification Requirements for Inspections and Abatements
The third area of the act that will potentially affect lenders is a separate regulation requiring the issuance of certification requirements for contractors and workers doing abatement projects as well as education and certification requirements for inspectors. Once federal and state regulations are finalized in this regard, lender concerns, regarding whether or not an inspection or abatement project on its collateral will be conducted by appropriate personnel, should be eased.
One common question raised by several bankers is the costs involved in inspections. Although costs will surely vary, it has been related to us that the lead content test may cost approximately $350. The test consists of shooting a radiation beam through the home’s walls to determine if there is lead in the paint, and if lead is found, whether the concentration of lead will trigger the regulation’s application. There is also a test for lead-based paint hazards. Since lead poisoning may occur from the simple breathing of lead paint dust, conditions may exist that would result in adverse human health effects as established by the appropriate federal agency.
III. CONCLUSION
The bank’s role as lender for residential mortgages or as provider of credit for residential rental dwellings may not directly trigger coverage under the regulation, but there remain several concerns regarding the compliance efforts of seller, lessors, or their agents. Any lender financing the acquisition of residential property should be fluent with the terms of the regulation, particularly the definition of target housing, the foreclosure exemption, and the 10-day (or as otherwise agreed to) inspection and test period.
SAMPLE DISCLOSURE FORMAT FOR TARGET HOUSING SALES
Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards
Lead Warning Statement
Every purchaser of any interest in residential real property on which a residential dwelling was built prior to 1978 is notified that such property may present exposure to lead from lead-based paint that may place young children at risk of developing lead poisoning. Lead poisoning in young children may produce permanent neurological damage, including learning disabilities, reduced intelligence quotient, behavioral problems, and impaired memory. Lead poisoning also poses a particular risk to pregnant women. The seller of any interest in residential real property is required to provide the buyer with any information on lead-based paint hazards from risk assessments or inspections in the seller’s possession and notify the buyer of any known lead-based paint hazards. A risk assessment or inspection for possible lead-based paint hazards is recommended prior to purchase.
Seller’s Disclosure
(a) Presence of lead-based paint and/or lead-based paint hazards (check (i) or (ii) below):
(i)_______Known lead-based paint and/or lead-based paint hazards are present in the housing (explain).
(ii)_______Seller has no knowledge of lead-based paint and/or lead-based paint hazards in the housing.
(b) Records and reports available to the seller (check (i) or (ii) below):
(i)_______Seller has provided the purchaser with all available records and reports pertaining to lead-based paint and/or lead-based paint hazards in the housing (list documents below).
(ii)_______Seller has no reports or records pertaining to lead-based paint and/or lead-based paint hazards in the housing.
Purchaser’s Acknowledgment (initial)
(c)_____Purchaser has received copies of all information listed above.
(d)_____Purchaser has received the pamphlet Protect Your Family from Lead in Your Home.
(e)_____Purchaser has (check (i) or (ii) below):
(i)_______received a 10-day opportunity (or mutually agreed upon period) to conduct a risk assessment or inspection for the presence of lead-based paint and/or lead-based paint hazards; or
(ii)_______waived the opportunity to conduct a risk assessment or inspection for the presence of lead-based paint and/or lead-based paint hazards.
Agent’s Acknowledgment (initial)
(f)_____Agent has informed the seller of the seller’s obligations under 42 U.S.C. 4852d and is aware of his/her responsibility to ensure compliance.
Certification of Accuracy
The following parties have reviewed the information above and certify, to the best of their knowledge, that the information they have provided is true and accurate.
Seller Date Seller Date
Purchaser Date Purchaser Date
Agent Date Agent Date
SAMPLE DISCLOSURE FORMAT
FOR TARGET HOUSING RENTALS AND LEASES
Housing built before 1978 may contain lead-based paint. Lead from paint, paint chips, and dust can pose health hazards if not managed properly. Lead exposure is especially harmful to young children and pregnant women. Before renting pre-1978 housing, lessors must disclose the presence of known lead-based paint and/or lead-based paint hazards in the dwelling. Lessees must also receive a federally approved pamphlet on lead poisoning prevention.
Lessor’s Disclosure
(i) _____Known lead-based paint and/or lead-based paint hazards are present in the housing (explain).
(ii) _____Lessor has no knowledge of lead-based paint and/or lead-based paint hazards in the housing.
(b) Records and reports available to the lessor (check (i) or (ii) below):
(i)_____ Lessor has provided the lessee with all available records and reports pertaining to lead-based paint and/or lead-based paint hazards in the housing (list documents below).
(iii)_____Lessor has no reports or records pertaining to lead-based paint and/or lead-based paint hazards in the housing.
Lessee’s Acknowledgment (initial)
(c)_____Lessee has received copies of all information listed above.
(d)_____Lessee has received the pamphlet Protect Your Family from Lead in Your Home.
(e)_____Agent has informed the lessor of the lessor’s obligations under 42 U.S.C. 4852d and is aware of his/her responsibility to ensure compliance.
Lessor Date Lessor Date
Lessee Date Lessee Date
Sample Contract Contingency Language
This contract is contingent upon a risk assessment or inspection of the property for the presence of lead-based paint and/or lead-based paint hazards at the Purchaser’s expense until 9 p.m. on the tenth calendar-day after ratification [Insert date 10 days after contract ratification or a date mutually agreed upon]. (Intact lead-based paint that is in good condition is not necessarily a hazard. See the EPA pamphlet Protect Your Family From Lead in Your Home for more information.) This contingency will terminate at the above predetermined deadline unless the Purchaser (or Purchaser’s agent) delivers to the Seller (or Seller’s agent) a written contract addendum listing the specific existing deficiencies and corrections needed, together with a copy of the inspection and/or risk assessment report. The Seller may, at the Seller’s option, within ______ days after Delivery of the addendum, elect in writing whether to correct the condition(s) prior to settlement. If the Seller will correct the condition, the Seller shall furnish the Purchaser with certification from a risk assessor or inspector demonstrating that the condition has been remedied before the date of the settlement. If the Seller does not elect to make the repairs, or if the Seller makes a counter-offer, the Purchaser shall have ______days to respond to the counter-offer or remove this contingency and take the property in “as is” condition or this contract shall become void. The Purchaser may remove this contingency at any time without cause.