Press Releases

EFFECTIVE COLLECTIONS FOR A DOWN ECONOMY
Recently Published in Summer 2009 issue of “The Law Journal” of California Association of Community Managers

By: Howard J. Silldorf, Esq.

Recent changes to the economy have drastically impacted the business of managing a common interest development. Section 1366(a) of the Davis-Stirling Common Interest Development Act provides, in part, that a homeowners association must levy regular and special assessments “sufficient to perform its obligations under the governing documents'” Boards, in meeting their statutory obligations, levy assessments accordingly. However, because of the state of our economy, many homeowners are unable to make their assessment payments on time, if at all. This has resulted in associations continuing to make payments to vendors to maintain and repair association property, but receiving less money than anticipated in assessment income. How does the Association survive? By the implementation of a stringent collection policy which is followed without exception. The existing policy should be reviewed with the board. Can the language be tightened up? Should the timelines be shortened? Streamlining the policy should improve its effectiveness.

Association boards should also try to implement a collections program that strikes a workable balance between aggressive and sensible. An association's collection policy is a useful way to ensure uniformity, by treating all delinquent owners equally, without any disparate treatment. For example, provisions leaving the choice to record a lien against a delinquent owner to the discretion of the board may lead to inconsistencies, whereas a policy detailing a strict timeline for recording a lien will consistently produce the same results. By treating homeowners equally, the association cannot be accused of “playing favorites” or discriminating against someone in the community by allowing some homeowners to “slide” on their assessment payments while aggressively enforcing against other homeowners. This is not to suggest that the Board does not have some discretion regarding payback or payment plans; it does.

In addition to tightening up the language in collection policies, there are a number of creative alternatives available to association boards. One is the implementation of an automatic payment system for the payment of assessments, which is seen as a cost-effective and environmentally friendly way to collect monthly assessments. Going “paperless” is a proactive option that saves money and may result in fewer homeowner defaults. Additionally, treating the nonpayment of assessments as a violation of the association’s CC&Rs allows a board, after notice and an opportunity to be heard, to suspend the owner’s, and the owner’s tenants, if any, privileges to common area components. That said, if there is any question whether something is an essential health and safety issue, electricity and water for example, do not take any suspension action unless directed to do so by the association's legal counsel, if at all.

If a homeowner becomes delinquent in the payments of assessments, the next step, after meeting the statutory requirements, is recordation of a Notice of Delinquent Assessment, which is a recorded lien against the delinquent homeowner’s property. The recordation of a lien is subject to statutory regulations as well as the provisions of the collection policy itself. A lien may be recorded as early as provided in the collection policy, assuming the assessment policy is consistent with state statute and the association’s governing documents. For liens recorded after January 1, 2006, associations may not initiate a judicial or nonjudicial foreclosure to enforce the lien if the amount of the assessment is, in and of itself, less than $1,800.00 or more than 12 months delinquent (Civil Code § 1365.1). Recording a lien as soon as possible is critical to a good collection policy, as it secures payment of a homeowner's debt, which ultimately should lead to a higher assessment collection rate for the association. Research has shown that the longer a debt is outstanding, the more difficult it is to collect.

Directors are encouraged to explore alternatives to traditional legal options like foreclosure or filing a small claims action. These routes can take time, energy and money, and ultimately may cost more than they are worth. Before choosing these options, an association could, for example, try to enter into a forbearance agreement or a payment plan with the homeowner. These alternatives are beneficial as it staves off foreclosure and allows homeowners a chance to pay their assessments on terms they can meet. In addition, it creates a hospitable and collaborative environment. These are just examples of a variety of useful tools to have in your arsenal. The first step in creating a plan for your association is realistically evaluating the costs associated with the avenue you choose.

Experienced legal counsel will help associations navigate the intricacies of federal and state laws governing debt collection. An association’s collection practices must not infringe on the statutory rights afforded homeowners, including the right to certain disclosures, by the federal Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.) and California’s equivalent (Civil Code §§ 1788, et seq.). Violations of these acts can be expensive and time-consuming.

These economic downturns are cyclical. Therefore, an association’s health depends on its directors’ prudence in researching, implementing and following through with an effective policy for collecting assessments. Although instances of delinquent assessments have increased, making the day-to-day management of a homeowners association exponentially more difficult, it is important to take a close look at your budget and project what, if any, increase in assessments is required in the approaching year to cover any anticipated shortfalls. In this economy, it is essential that an association tighten its belt, budget for bad debt and act diligently in finding the most cost-efficient solutions to its cash flow woes.

Howard J. Silldorf, Esq., is a partner with Silldorf & Levine, LLP

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