Collections: A Growing Challenge
Despite improvements in the economy, collecting past due assessments remains a challenge for condominium and HOA boards across the country. Stories of collections abuses, aggressive plaintiff’s lawyers and layers of state and federal laws make collecting assessments akin to navigating a legal minefield. Trends in state laws and pending federal regulations will further complicate the collections process in 2014.
Association assessment delinquencies are a critical underwriting factor for loans to buyers in community associations. Communities that do not pay attention to delinquencies risk finding themselves on the wrong side of mortgage rules. In fact, the thresholds for assessment delinquencies are fairly strict especially for condominiums. Fannie Mae, which buys mortgages from banks, is a standard setting entity in the mortgage markets. Fannie Mae lending criteria specify that no more than 15% of condominium units can be more than 30 days late in assessments. The Federal Housing Agency (FHA) has a more generous but still tough 15% of units 60 day standard. Delinquent assessments undermine association finances and are a red flag for lenders making loans to potential buyers. Thus having a sustainable collections effort is critical to your association’s long term viability.
Ironically, as the federal government has focused more attention on assessments, state legislators are creating a difficult collections environment. At the state level Texas, Nevada and North Carolina provide an overview of these challenges.
In the 2009 legislative session, Texas seriously considered removing the authority of an Association to collect for past due assessments. Legislation to amend the state’s constitution to prevent community associations from foreclosing on a property for past due assessments was actively considered, but ultimately did not pass. However, several high profile foreclosure actions, most notable the purported foreclosure on an active duty service member, trigger action to provide greater protections for delinquent residents. In 2011 the legislature passed a new series of homeowner protections against abusive collection practices that included a requirement to offer payment plans, a priority of payment requirement, limits to the use of 3rd party collection agents, and even provided association residents with the right, by a super majority vote, to remove the ability of the association to foreclose.
As the hardest hit housing market during the Great Recession, it should not be surprising that Nevada has seen epic political battles regarding collections. In 2009, Nevada passed a statutory priority lien which provided for 9 months of past due assessments for HOAs and up to 6 months assessments for condominiums. That process provided signification relief for associations struggling with the single worst state housing market in the country. Initially, collections costs were allowed in addition to the priority lien amount. The state’s Common Ownership Interest Board even issued and advisory opinion that allowed for collection costs to be obtained beyond the priority lien amount. As such costs are capped in Nevada, this did not generate much concern or controversy. That changed in 2012, as federal policies encouraged the bulk sale of foreclosed homes to investors and banks. Priority liens and collection costs added to the cost of obtaining foreclosed assets, so investors and bank purchasers sued to clarify the requirements of the statute.
For most association collection attorneys and clients, the issue of allowable collection costs was governed by both state statute and by an advisory opinion issued by the states Common Ownership Commission in December 2010. That opinion ruled that:
… the following amounts may be included as part of the super priority lien amount, to the extent the same relate to the unpaid 6 or 9 months of super priority assessments: (a) interest permitted by NRS 116.3115, (b) late fees or charges authorized by the declaration in accordance with NRS 116.3102(1)(k), (c) charges for preparing any statements of unpaid assessments pursuant to NRS 116.3102(1)(n) and (d) the "costs of collecting" authorized by NRS 116.310313.
As investors began purchasing foreclosed properties in Nevada, the issue of collection costs emerged as a political hot button for both regulators and the legislature. Almost two years to day later, the Nevada Real Estate Division issued a competing advisory opinion which concluded that collection costs are in fact, not allowed under the state’s priority lien law. The Division noted:
“The association’s lien does not include “costs of collecting” defined by NRS 116.310313, so the super priority portion of the lien may not include such costs. NRS 116.310313 does not say such charges are a lien on the unit, and NRS 116.3116 does not make such charges part of the association’s lien.
Attempts to clarify the competing opinions in the state’s 2013 legislative session were not successful. The issue of collection costs under the state’s priority lien statute will ultimately fall on the courts.
Finally, North Carolina, in response to a host of consumer complaints passed legislation in 2011 which mandated that a debt must be at least 90 days past due prior to the association taking any foreclosure action. A foreclosure action must also be authorized by an affirmative vote of the board against the specific lot. While reasonable, such requirements are at odds with federal condominium underwriting guidelines which set delinquency thresholds at 15% of units 60 days late in assessments.
Each attempt to refine the collection process at the state level, while perhaps reasonable on its face, creates added complexity and obstacles for community associations, their collection firms and attorneys. The complex overlap of federal consumer protection laws, mortgage regulations and state actions don’t always benefit from a common approach or understanding, making it difficult for qualified counsel and almost impossible for volunteer board members to navigate. It is critical that prior to undertaking any collections efforts, the board be fully aware of state and federal requirements and seek the advice of qualified counsel and or a professional collections company.
Andrew S. Fortin
Senior Vice President, External Affairs