HOA's Authority to Collect Late Charges & Interest
The authority to collect late charges and interest does not need to be in the governing documents; it is granted by Civil Code § 5650(b). If an assessment is delinquent, associations may recover all of the following:
- A late charge not to exceed 10% of the delinquent assessment or $10.00, whichever is greater (unless the CC&Rs specify a smaller amount).
- Interest on delinquent assessments, reasonable fees and costs of collection, and reasonable attorney's fees, at an annual interest rate not to exceed 12%, commencing 30 days after the assessment becomes due unless the CC&Rs specify a lower interest rate, in which case the lesser rate applies.
- Reasonable attorneys' fees and costs incurred in collecting the delinquent assessment.
One Late Charge Per Assessment. Associations cannot levy late charges month after month on the same unpaid assessment. A late charge is a one-time penalty of 10% or $10 (whichever is greater) to encourage timely payment of assessments. (Civ. Code § 5650) After that, the association can charge interest at 12% until the assessment is paid (unless the governing documents set a lesser amount). (Civ. Code § 5650)
When to Apply Late Charges. While some associations use the postmark for imposing charges, it is a minority position and seems limited to associations and management companies that handle funds without using lockbox services. Most HOAs and management companies use lockbox services and do not track the postmark--they impose late charges based on the date payment is received (as do credit card companies). Online banking has also become a factor. In online banking, payment is counted when received by the bank, not when transmitted by the owner. Accordingly, if payment is due on the first of the month, the assessment is delinquent 15 days after it becomes due, i.e., the 16th of the month, at which point late charges can be levied.
Reversal of Late Fee. Some associations have a policy of waiving one late fee per year per account when requested by a delinquent owner. If an owner wants more than one late fee reversed, they are asked to write a letter to the board requesting the waiver. If there is good cause, the board may allow a second waiver.
Collecting Fees
Fees may include rent paid on storage units, golf course use fees, transfer fees, clubhouse reservation fees, etc. Because fees are not assessments, associations have limitations in collecting those fees. An association's authority for nonjudicial foreclosure is limited to assessments and related collection costs. (Civ. Code § 5650(a).) This limitation does not apply to judicial foreclosures. Although Civil Code § 5600(b) prohibits associations from charging a fee over their costs, this restriction applies to associations, not their managing agents. Management companies are allowed to profit from the collection of delinquent assessments. As a result, management companies may charge more than their actual costs when generating pre-lien letters, lien letters, etc. (Brown v. PCM). A similar ruling was made about escrow fees.
Collecting Unpaid Fines
No Interest on Fines. Associations cannot charge interest on unpaid fines. Civil Code § 5725 prohibits an association from characterizing or treating a monetary penalty “imposed by the association as a disciplinary measure for the failure of a member to comply with the governing instruments, except for the late payments” as an assessment. As provided for in Civil Code § 5650(b)(3): "Interest on all sums imposed by this section, including the delinquent assessments, reasonable fees and costs of collection, and reasonable attorney's fees, at an annual interest rate not to exceed 12 percent ..." Since a monetary penalty does not fall into any of the categories described above, associations cannot charge interest on fines.
No Late Charges on Unpaid Fines. When delinquent, homeowners sometimes pay the delinquent assessment but refuse to pay late charges. If they received fines for rules violations, they may refuse to pay those as well. When that occurs, are associations allowed to charge late fees and interest on unpaid late fees and fines? No. The Davis-Stirling Act provides for a late fee of 10% or ten dollars, whichever is greater (unless the CC&Rs specify a lesser amount), against delinquent assessments. (Civ. Code § 5650) That means late charges cannot be charged against unpaid late charges or fines.
No Foreclosure. Fines cannot be collected through nonjudicial foreclosures (trustee sales) despite any authorizing language contained in an association's governing documents. (Civ. Code § 5725(b).) Monetary penalties cannot be treated as assessments or included in delinquent assessment liens that are foreclosed nonjudicially. Fines can be included in liens that are foreclosed judicially. Because the prohibition on fines in liens only applies to trustee sales, associations may include monetary penalties (fines) in actions for judicial foreclosures.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.