delinquency

*Asked & Answered

Asked – Our common area recreational facilities have been shut-down as a result of the pandemic. With this, and with the economic impact of COVID-19, should our HOA be excusing homeowners from having to pay assessments? What about reducing our assessments or changing our policy to not charge any late fees or interest on delinquent homeowners?

Answered – It is important to recognize that an HOA is a nonprofit corporation with a fixed budget. The amount of assessments it levies is based upon the budgeted gross expenses the HOA will incur to satisfy its contractual obligations. Those obligations include, among others, payment of insurance premiums, maintenance expenses, management expenses, etc. The HOA must continue to fulfill these obligations despite the pandemic.

When a homeowner takes title to a home within the HOA’s development, the homeowner automatically assumes the mandatory responsibility to pay assessments levied by the HOA. This remains the responsibility of the homeowner regardless of the degree to which the homeowner utilizes HOA’s common area facilities. Whether as a result of a pandemic, remodeling project or other circumstance, there may be situations where the common area facilities are not available for use by a homeowner. These situations do not relieve the homeowner of his or her responsibility to pay assessments. This is why the often-used term of “dues” is not accurate in the context of homeowners associations. “Dues” refer to ongoing payments made in connection with a voluntary membership—such as membership dues to a health club or social club. “Assessments,” by contrast, are mandatory payments that must be made for so long as the homeowner retains ownership of a property within the HOA.

We understand the impulse to assist those who have been financially injured as a result of the pandemic. However, an HOA is not the type of entity to render such financial assistance. It is not a for-profit lender, financial institution or government agency, nor does it receive government subsidies or guarantees to serve as a source of credit. If an HOA were to forbear from collecting assessments during this time, or to relax the penalties associated with assessment delinquencies, it will create disincentives for homeowners to pay assessments in a timely fashion. This will inevitably frustrate the HOA’s ability to satisfy its obligations to the financial detriment of the entire membership.

HOAs should continue to collect assessments and to utilize their assessment collection policies to address assessment delinquencies. Homeowners who fail to pay assessments in a timely fashion should remain subject to late charges and interest, in addition to the other collection remedies the HOA has under its governing documents and California law (e.g., the recording of assessment liens). Situations where accommodations may be made for a delinquent homeowner should only be evaluated by the Board on a case-by-case basis after consideration of the facts and circumstances underlying the delinquent homeowner’s assessment debt. However, such accommodations, if granted, should be structured through a formal payment plan that ensures the HOA—and by extension, its entire membership—will not subsidize any amount of the assessment debt or the collection fees and costs incurred by the HOA in connection therewith.

hoa-assessment-collection-house The collection practices of HOA collection vendors have come under increased scrutiny over recent years. For example, we have written about how California courts have struck down a vendor’s ability to reject partial payments. Those actions resonated throughout the HOA industry and resulted in significant changes to the approaches taken by collection vendors when pursuing the debt owed to their HOA clients. The most significant changes however have come in response to attacks made against collection vendors that operate under a “no cost” collection model. We have also written about this issue and how the “no cost” collection model results in liability exposure for violations of the California Civil Code as well as applicable state and federal fair debt collection laws. To our surprise, despite the actions that collection vendors have wisely taken to shift away from the “no cost” model, we are still seeing instances where a HOA has opted to utilize the services of a “no cost” collection vendor without understanding the substantial risks of doing so.

As nonprofit corporations with fixed budgets, the idea of a “no cost” collection model is certainly attractive to HOAs. Under a “no cost” model, the collection vendor does not charge the HOA any upfront fees or costs for the collection services it performs, but rather collects those amounts directly from the delinquent homeowner. However, in doing so, the United States Bankruptcy Court in California first noted how this approach violates applicable provisions of the Civil Code, and further “opens the door to all sorts of mischief, as an HOA has no incentive whatsoever to question costs for which it is not liable and no incentive to search for services charging more reasonable costs.” (In re Cisneros, (Bankr. N.D. Cal. 2012), (“Cisneros”).) That rationale was underscored in the most recent attack on “no cost” collection models put forth in the case of Hanson v. JQD, LLC d/b/a Pro Solutions, (N.D. Cal., 2014) (“Hanson v. Pro Solutions”).

In Hanson v. Pro Solutions, a HOA hired a collection vendor (“Pro Solutions”) operating under a “no cost” model. California Civil Code § 5650 allows for a HOA to recover reasonable costs and attorney’s fees “incurred” by the HOA in collecting delinquent assessments. However, Pro Solutions’ “no cost” model did not result in the HOA incurring any fees or costs for Pro Solutions’ services. Rather, the fees and costs charged for Pro Solutions’ services were never billed to the HOA but were instead billed directly to the delinquent homeowner. The plaintiff homeowner alleged that this practice violated the Civil Code and federal and state fair debt collection laws, relying in part on the rationale underlying the Court’s decision in Cisneros.

The Court in Hanson v. Pro Solutions agreed with the homeowner and waived an even bigger red flag to collection vendors operating under a “no cost” model:

“Although no California appellate court has directly addressed whether, as here, a third-party vendor acting on behalf of a HOA can lawfully charge a delinquent homeowner fees not incurred by the HOA, the aforementioned authorities prompt a conclusion that Pro Solutions’ right to impose debt collection fees against Hanson extends no further than the [HOA’s] right to do the same…Pro Solutions’ fees apparently are neither incurred nor paid by the HOAs that contract for the company’s “no cost” services. If California law nonetheless entitled Pro Solutions to impose the fees of its choosing against homeowners like Hanson, the company would wield unchecked power to extract a cascade of fees and costs from a HOA’s delinquent members.”

Hanson v. Pro Solutions was settled and therefore did not result in any precedential court decision on the issue of “no cost” collection models. However, the Court’s language was strikingly clear, as was the warning it sent to HOAs and collection vendors. Even though the HOA was not named as a defendant in Hanson v. Pro Solutions, there is nothing to prevent a HOA utilizing a “no cost” collection vendor from being named as a defendant in a similar suit and thus exposed to significant liability.

HOA Boards and management professionals must recognize that, regardless of what type of entity a HOA uses to collect delinquent assessments (an attorney, third party collection agency, etc.), there will be fees and costs associated with their collection services, and that the HOA must pay for those services in order for them to be incorporated into the debt that is recovered from the homeowner. This incentivizes collection vendors to provide services that are not only effective, but cost-efficient, and in doing so helps protect the financial interests of HOAs as well as homeowners who may fall behind on their assessment payments.

Articles Tagged with delinquency

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