HOA COLLECTION POLICY

Duty to Collect Assessments

Boards of directors have a duty to levy regular and special assessments sufficient to maintain the common areas. (Civ. Code § 5600(a).) To carry out their duties to the membership, boards must establish a collection policy and then properly implement it. When an owner defaults, the association may record a lien on the owner's interest for the amount of the fees. (Civ. Code § 5675).) If the default is not corrected, the association may pursue any remedy permitted by law, including judicial foreclosure or foreclosure by private power of sale. (Civ. Code § 5675.)

Negative Impact. Uncollected assessments are an asset belonging to the membership. Failure by the board to collect that asset puts a burden on paying members who must make up the difference in the association's budget. Uncollected assessments can result in higher dues, special assessments, and reduced services. Leaving delinquent assessments uncollected for too long can result in bad debt. High delinquency rates and poor collection efforts can also negatively impact the association's ability to obtain bank loans. Lenders look at an association's delinquency history to gauge its loan repayment ability.

Bad Debt. Assessments (regular and special) that are unlikely to be repaid, either because the debtor doesn't have any money or because the debtor cannot be found, are classified as "bad debt." Associations may eventually recoup delinquent assessments through their collection efforts. In some instances, the debt is uncollectable. Rather than carry the delinquent amounts on their books, associations should write off the receivable as "bad debt." During economic downturns, some associations include a line item in their annual budget for estimated bad debt. This increases the assessments on all owners but allows the association to pay its operating expenses without imposing special assessments. Bad debts appear as an expense on the association's income statement.

Protect Membership's Interest. To protect its membership against increased assessments and reduced services and to preserve the association's ability to borrow, boards must record liens on delinquent owners and initiate collection actions.

Compromise and Waiver. Boards can establish payment plans, waive fees, and compromise delinquent assessments owed by members to the association. However, boards need a reasonable basis for such actions and they must be in the association's best interests.

Collection Policy

Since HOAs are entirely dependent upon the regular and timely payment of assessments by all homeowners, California courts recognize the need to collect those assessments:

These statutory provisions reflect the Legislature's recognition of the importance of assessments to the proper functioning of condominiums in this state. Because homeowners associations would cease to exist without regular payment of assessment fees, the Legislature has created procedures for associations to quickly and efficiently seek relief against a nonpaying owner. (Park Place Estates Homeowners Association v. Naber (1994) 29 Cal.App.4th 427, 432.)

Collection Policy Required. The Davis-Stirling Act requires that associations adopt and then annually distribute their collection policies:

The statement of assessment collection policies required by Section 5730. A statement describing the association’s policies and practices in enforcing lien rights or other legal remedies for default in the payment of assessments. (Civ. Code § 5310(a)(6) & (7).)

Suspension of Privileges. Associations should consider suspending common area privileges for unpaid fees, fines, and assessments as one of their inducements for owners to pay the association's monies owed.

Failure to Adopt Policy. Although the statute requires a collection policy, it does not provide a penalty for failing to do so. However, if an association without a collection policy tried to collect late fees against delinquent members and foreclose on units, it would likely lose a legal challenge. In an unpublished decision involving the collection of delinquent assessments, the Court of Appeals noted that before an association can record a lien on a property to collect delinquent assessments it must, among other things, notify the owner in writing of the association's collection practices. In the Gurich case, the delinquent owner testified that she had not received the association's collection policy. The court found that the board could not provide sufficient evidence that it had sent her the policy. Accordingly, the lower court's award to the association of $41,818.29 plus fees and costs of $15,451.25 was reversed. In addition, the association had to pay the delinquent owner's costs on appeal. (T.D. Service v. Gurich.)

Necessary Elements. The policy must include the association's policy for payment plans, imposing late charges and interest, the owner's right to dispute the delinquency, their right to internal dispute resolution, and their right to request alternative dispute resolution. (Civ. Code § 5660.)

Fee Schedule Details. As part of an association's assessment collection policy, a detailed list of late fees, interest, collection, and management fees can be included in the collection policy but is not required. According to Civil Code § 5310(a)(6) and 5310(a)(7), associations must distribute information on collection policies and procedures to the membership. Section (a)(6) specifically requires distribution of the "Notice Assessments and Foreclosure" set forth in Civil Code § 5730. This notice requirement is somewhat general but does review many of the specific code sections controlling the collection of delinquent assessments. Section (a)(7) requires the distribution of "A statement describing the association's policies and practices in enforcing lien rights or other legal remedies for default in the payment of assessments." However, this latter section does not specify how detailed a description must be. Collection policies can vary from one page to ten pages or more. A specific listing of the exact amount of fees and costs is not required. Too much detail can make it difficult to comply 100% with the policy. These two sections are not to be confused with Civil Code § 5310(a)(8) and § 5850, which require the distribution of a specific schedule of monetary penalties (fines).

Methods of Assessment Collection
 

Confidentiality and Publishing Delinquent Owners' Names

There are two ways to inform the membership about delinquencies.

Parcel Number. The more conservative approach is not to identify delinquents by name. The association can publish a list of all the delinquencies by identifying each property using the assessor's parcel number. The amount owed by each can also be listed. The list should also contain the following disclaimer: "This information was last updated on . Payments made after are not reflected."

Delinquent Taxpayer Method. For those who want to publish names, look at how California handles delinquent taxpayers. According to the state's website, California mails each person on its list a certified letter providing them an opportunity to pay their taxes before the list is published. To avoid being published, taxpayers must do one of the following: (i) pay the liability in full, (ii) establish an installment agreement, (iii) enter into an offer in compromise, or (iv) substantiate a bankruptcy filing. With that in mind, associations could do the following:

• Amend the governing documents to include publishing names as one of its collection policies.
• Amend its collection policy to include sending a certified letter and return receipt requested to the owner, allowing the person to pay before the list is published.
• Distribute or mail the list to members only (not renters). Do not post it in the common areas where visitors can see it.
• Title the list "Delinquent Owners." Do not characterize owners as "Deadbeats of the Month" or any other pejorative term, and do not state whether foreclosure has commenced against their units (per Civ. Code § 5705(c)).
• Include a disclaimer such as: "This information was last updated on . Payments made after are not reflected."
• Be consistent in publishing names (perhaps quarterly) and even-handedly by publishing all names, including directors (unless the person has paid in full, worked out a payment plan, or declared bankruptcy).

Recommendation: Boards should seek legal counsel before publishing the names of delinquent owners.

Annual Notice Required

Associations must disclose their policies and practices in enforcing lien rights and other legal remedies for collecting delinquent assessments such as money judgments and suspending privileges. Their policy must be delivered annually to the members not less than 30 days nor more than 90 days immediately preceding the beginning of the association's fiscal year. (Civ. Code § 5310; § 5730.)

Statute of Limitations for Collecting Debt

There are different statutes of limitations when it comes to collecting debt.

• If money is borrowed and a promise made orally to repay the debt, the statute of limitations is two years. (Code Civ. Proc. § 339.)
• If parties enter a written agreement, the SOL is four years (Code Civ. Proc. § 337).
• When the obligation is the result of recorded restrictions, e.g., an obligation created by CC&Rs, the SOL is five years. (Code Civ. Proc. § 336(b), Pacific Hills HOA vs. Prun.)

Accordingly, an association has five years to initiate action to collect delinquent assessments. However, if a court views the obligation as a written contract, the statute of limitations is four years.

Start Date for SOL: When evaluating issues related to statutes of limitation, there are (at least) two important issues: (1) determining the time period after which an action is barred and (2) determining when that period starts running. Generally, the time period starts when there is an actionable wrong, such as a breach of contract or violation of the CC&Rs. However, in some cases, the time period can run from a later date, especially in cases of "delayed discovery" or in the case of certain types of billed accounts ("account stated"). Boards should consult with an attorney to determine if an actionable wrong is too old to pursue.

Recommendation: Uncollected debt is harder to collect the older it gets. Plus, it burdens the membership (who must make up the difference in the budget), and skews an association's financial statement. If it's bad debt, associations should write it off. If it's collectible, boards need to pick a collection method and pursue the debt in accordance with the association's collection policy. To fulfill their duties as directors, boards should diligently collect delinquent assessments.

HOA Fair Debt Collection Practices

The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from making false or misleading representations and from engaging in abusive and unfair practices in collecting consumer debt. Violations of the Act can result in fines and damages against the association, plus attorney fees.

FDCPA Applies to Assessments. Associations that hire third parties to collect delinquent assessments, such as lawyers, collection companies, and management companies, are governed by the FDCPA. In Thies v. Law Offices of William A. Wyman (SD Cal 1997) 969 F.Supp. 604, the court held that homeowner association assessments fall under the Fair Debt Collection Practices Act. The FDCPA requires that certain disclosures be made to homeowners. In addition, debt collectors are prohibited from making harassing telephone calls, making idle threats, directly contacting owners represented by counsel, etc.

Routine Collection Activities. Routine HOA assessment activities by associations do not require a license. The DFPI's website posted FAQs that:

• Routine HOA assessments do not constitute a consumer credit transaction under the Debt Collection Licensing Act (DCLA).
• Routine HOA assessments are not considered consumer debt.
• Collection of assessments does not turn an HOA into an entity engaged in the business of debt collection.

The Association is not a debt collector for the purposes of the Rosenthal Act because the definition of debt collector is premised upon the act of collecting consumer debt. In other words, because the Court finds that homeowner’s assessments are not a consumer credit transaction for the purposes of the Rosenthal Act, it necessarily follows that the Association cannot be a debt collector under that statute (i.e., the Association does not in the ordinary course of business, regularly, on behalf of that person or others, engage in the collection of consumer debt). (Dickson v. Century Park East)

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.