Late on Tuesday evening, May 26, Governor Culver vetoed section 23 of SF 467 (the Ag and DNR budget bill). This section would have postponed until July 1, 2010 the effective date of legislation signed into law during 2008 as SF 261. The delay was supported by the Iowa Bankers Association, Iowa State Bar Association, Iowa Association of Realtors and the Iowa Farm Bureau Federation in order to provide more time to get more inspectors certified, and to resolve several technical issues regarding the bill with the DNR. SF 261, which will now be effective as originally scheduled on July 1, 2009, will require septic inspections prior to any ownership transfer (including a contract for deed) of real property with a private sewage disposal system serving the buildings (including homes, businesses, livestock confinements, etc.). Twenty-one Iowa Counties already have ordinances in place where these inspections are currently required, but this provision, which is regulated by the Iowa Department of Natural Resources, will be effective statewide.

The law requires a certified inspectors report to be attached to the groundwater hazard statement documenting the condition of the private septic system and whether any modifications are required to conform the system to standards required by the DNR. The DNR rules for this legislation can be found at http://www.iowadnr.gov/water/npdes/files/final69.pdf. The legislation in its entirety can be found at http://coolice.legis.state.ia.us/Cool-ICE/default.asp?Category=BillInfo&Service=Billbook&ga=82&menu=text&hbill=SF261.

The DNR will maintain a list of certified inspectors on the Onsite Wastewater Training Center of Iowa website at www.wastewatertraining.com and at www.iowadnr.gov/tot.html. There are currently about 160 inspectors certified statewide, and the DNR is continually adding more inspectors to the list. The list will also be available from county sanitarians. Inspectors must follow the procedure outlined in the rules and the inspector training. The rules include a disciplinary procedure for inspectors who violate these procedures.

As stated above, a home or building with a septic system will require an inspection prior to finalizing the sale, transferring the deed in a traditional bank financed purchase, or recording a contract for deed. The Groundwater Hazard Statement has been modified to include a disclosure of septic systems on the property and whether an inspection has been completed. Provisions have been included in the rules for weather delayed inspections - where a binding acknowledgement between the buyer and the County Board of Health to conduct the inspection at the first possible opportunity must be attached to the Groundwater Hazard Statement (the buyer would be responsible for any required modifications noted in the inspection). A sample of a "binding acknowledgement" form can be found at: http://iowabankers.com/UserDocs/TimeofTransferBindingAcknowledgement_septic_inspection.pdf. This will likely require the parties to the transaction to "over" escrow funds for a new septic system - even though the funds would likely be released back to the seller in the spring if the system was in satisfactory working condition.

Septic systems DO NOT have to meet TODAY'S code standards to pass an inspection - they simply need to be in working condition with the contents pumped out and disposed of by the DNR rules. If the wastewater system is in working condition, properly treating wastewater and not creating an unsanitary condition, the system will not be required to meet current construction standards. For example, a system installed under permit with a 1000-gallon tank and 200 feet of absorption field will pass if it is properly working the day of the inspection even if current code requires a 1500 gallon tank and 400 feet of fields. The primary purpose of the new law is to eliminate systems with no secondary treatment; i.e. a tank discharging to the ditch. These systems are illegal and have been for many years - and they are not "grandfathered" in for compliance purposes. If the system is improperly functioning - it will be required to be renovated to meet current standards prior to closing under DNR rules.

The most immediate concern is the statutory provision stating these inspections are required prior to any nonexempt transfer of ownership of a building served by a private sewage disposal system. Therefore, the new July 1, 2009 effective date could impact sales contracts currently being executed. For example, a purchase agreement that is signed today, May 28, with a closing date of Thursday, July 2 - would require an inspection sometime in June, as this deed (if it is dated July 1 or after) will not be accepted for recording by the county recorder on July 2 without the inspection certificate attached to the groundwater hazard statement. As existing purchase agreements from groups such as the Iowa State Bar Association or the Iowa Association of Realtors are likely silent on the matter, lenders may need to make sure inspections are being completed prior to closing as we expect these transactions will be subject to the new law (and the deed will not be recorded without the inspectors report included).

For deeds in fulfillment of a contract, the groundwater hazard statement is required at the time of the recording of the contract, not the deed. Therefore, if an existing contract is paid off and refinanced by a financial institution, no inspection will be required with the filing of the deed.

There are also a series of transfers which are exempt from the new inspection requirement. Transfers pursuant to court orders; foreclosures; transactions by fiduciaries in the course of administration of an estate, guardianship, conservatorship or trust; between joint owners; spouses or lineal descendents; divorce agreements; between family business entities and any transfer where consideration is $500 or less are all exempt from the legislation. In addition, an inspection is also valid for two years for any ownership transfers during that period. Inspections under this new law will also be required to be part of the abstract and land title records for the property. The Iowa Bankers Association has requested clarification from the DNR on how exempt transfers are to be documented so county recorders can file the deeds for these exempt transactions.