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COLLECTION POLICY

DUTY TO COLLECT
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 that policy. When an owner defaults, the association may file 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 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 ability to repay a loan.

Protect Membership's Interest. To protect its membership against increased assessments, 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 have the power to establish payment plans, waive fees, and compromise delinquent assessments owed by members to the association. However, boards need to have good basis for such actions and they need to be in the best interests of the association.

  Judicial Foreclosure Non-Judicial Foreclosure Money Judgment Suspend Privileges
Remedy HOA forces sale of a unit/lot via the courts. Judicial foreclosure is useful when the amount owed is significant and the association wants to replace a nonpaying owner with a paying one. HOA sells property via trustee sale. Like Judicial foreclosure, nonjudicial foreclosure is useful when the amount owed is significant and the association wants to replace a nonpaying owner with a paying one. HOA receives a money judgment. As a general rule, small claims and superior court actions are successful when used early in the process with owners who can afford to pay. Owner voluntarily pays delinquent assessment
Benefits If there is insufficient equity in the property, a deficiency judgment is awarded allowing the HOA to collect by sale of personal property, wage garnishment, rent levy, bank levy, etc. Timeline and costs are greatly reduced if owner fails to respond and HOA obtains a default judgment. Less expensive than judicial foreclosure. If no bidders, HOA acquires property (subject to 90-day right of redemption) and can rent or sell the property. Although HOA is not required to pay senior loans and property taxes, if lien holders go unpaid, they may foreclose on the property and terminate the HOA's ownership. Can include fines and penalties. Judgment can be obtained fairly quickly but debt is unsecured until an abstract of judgment is recorded. Collectible through wage garnishment, bank levy, etc. There is no cost to the association.
1st Step Record a lien ($300-$500) to secure the debt. Record a lien to secure the debt. Record a lien to secure the debt.  Record a lien to secure the debt then hold hearing with the delinquent owner.
Action A lawsuit is filed in superior court. The process takes place without court or attorney involvement. HOA sues owner in small claims or superior court. Common area privileges are suspended.
Potential
Problems
Owner must be personally served. Can be more expensive, especially if no equity in property and deficiency judgment turns out to be noncollectable. Recovery is limited to sale of property. Buyers take subject to right of redemption. Collection efforts on the judgment require additional legal expenses and are often uncollectable. They are avoidable if the owner declares bankruptcy. Owner may try to violate the suspension. 
Average
Timeline
200-400 days (unless owner defaults, then ~90 days) 9 months-1 year  90-180 days (unless vigorously opposed) 10-day notice of hearing then notice of suspension within 15 days of hearing.
 


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 including suspension of common area privileges for unpaid fees, fines, and assessments as one of its inducements for owners to pay monies owed to the association.  

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).

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 suspension of privileges. Their policy must be annually delivered 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
There are different statutes of limitations when it comes to collecting debt.

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 time 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 it 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 be diligent in the collection of delinquent assessments.

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 the collection of consumer debt. Violations of the Act can result in fines and damages against the association plus attorneys' 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 purpose 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 purpose 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 issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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