Do your associations have the ability to foreclose, and even if they do, should they?

We recognize that many of our clients are currently facing or will face this question soon. It is ultimately the decision of the board whether to proceed on these actions when legally permitted. Those decisions often require a case-by-case analysis rather than a blanket policy, and it is important to have the insights required to make the best choice.

Below we will provide both easy access to the current applicable statutory restrictions for your state, as well as additional important factors to consider.

While the decision if and when to initiate legal action is nuanced, we believe strongly that up-front proactive communication prior to this decision point is unquestionably important.

There are several ways communities, through their collection partners, can begin their collections through compassionate outreach opportunities, including not simply just written communication, but also phone calls, emails, or other methods. Communicating with a past due owner in way that is most convenient to them not only resolves accounts more quickly, it provides the homeowner a better experience and promotes the type of goodwill and partnership that helps your communities thrive.

If you are able to reach the past due owner prior to beginning legal action you can evaluate any hardships they may be facing, as well as their ability and willingness to repay their balance through a payment plan.

If an account remains past due after their proactive measures have been completed, the board must then decide whether to continue reaching out, or to move the account to legal action. In the past several months local, state, and federal statutes have impeded an association’s ability to complete a foreclosure action.

National Foreclosure Sentiment

The national sentiment against foreclosure action has been, and remains, significant.

United States Federal Government

• The government halted all foreclosure and eviction action on federally backed loans through the cares act and again through executive order. An updated order extended this through the end of the year in most circumstances.

Department of Housing and Urban Development

• The Department of Housing and Urban Development will extend a ban on evictions and foreclosures for homes backed by the Federal Housing Administration (FHA) through the end of the year.

CAI (Community Association Institute)

• The CAI recommended halting foreclosure to match the Federal Government’s Policy
• Only recommends liens in cases where there is exposure to the Association in not placing a lien

Texas Foreclosure Rules, Regulations, and Guidance

Each state also has their own set of rules, regulations, and guidance that can vary throughout the state even on a county and local level.

Some examples to consider in your market are:

• Some counties do not have e-recording established in a way that allows filing liens in compliance with Davis-Stirling, so that a copy is obtained immediately to be sent to the owner within (10) days or recordation.
• Courts have stayed most legal actions and tolled the statute of limitations, pursuant to Emergency Rules of the California Rules of Court.
• While actual sales can be conducted in many counties, if the account was not already at the point of sale prior to the pandemic, individual service of process may still be a challenge given the emergency orders in place.
• Localities have the power to make decisions on restricting any evictions.

Additionally, a significant question for many is the ability for debtors to appear in court to defend themselves. The current recommendation, due to the pandemic, is to avoid public spaces and limit the number of people in one place. Those facing foreclosure might feel that they are facing a decision whether to compromise their health and safety to challenge the association foreclosure action.

As your partner and trusted advisor, we will pursue legal action at the direction of the board. It is our job to ensure we let our clients know about risks we are aware of, so that they can make an educated decision for their communities.

We recognize that many of our clients are currently facing or will face this question soon. It is ultimately the decision of the board whether to proceed on these actions when legally permitted. Those decisions often require a case-by-case analysis rather than a blanket policy, and it is important to have the insights required to make the best choice.

Below we will provide both easy access to the current applicable statutory restrictions for your state, as well as additional important factors to consider.

While the decision if and when to initiate legal action is nuanced, we believe strongly that up-front proactive communication prior to this decision point is unquestionably important.

There are several ways communities, through their collection partners, can begin their collections through compassionate outreach opportunities, including not simply just written communication, but also phone calls, emails, or other methods. Communicating with a past due owner in way that is most convenient to them not only resolves accounts more quickly, it provides the homeowner a better experience and promotes the type of goodwill and partnership that helps your communities thrive.

If you are able to reach the past due owner prior to beginning legal action you can evaluate any hardships they may be facing, as well as their ability and willingness to repay their balance through a payment plan.

If an account remains past due after their proactive measures have been completed, the board must then decide whether to continue reaching out, or to move the account to legal action. In the past several months local, state, and federal statutes have impeded an association’s ability to complete a foreclosure action.

National Foreclosure Sentiment

The national sentiment against foreclosure action has been, and remains, significant.

United States Federal Government

• The government halted all foreclosure and eviction action on federally backed loans through the cares act and again through executive order. An updated order extended this through the end of the year in most circumstances.

Department of Housing and Urban Development

• The Department of Housing and Urban Development will extend a ban on evictions and foreclosures for homes backed by the Federal Housing Administration (FHA) through the end of the year.

CAI (Community Association Institute)

• The CAI recommended halting foreclosure to match the Federal Government’s Policy
• Only recommends liens in cases where there is exposure to the Association in not placing a lien

California Foreclosure Rules, Regulations, And Guidance​

Each state also has their own set of rules, regulations, and guidance that can vary throughout the state even on a county and local level.

Some examples to consider in your market are:

• Some counties do not have e-recording established in a way that allows filing liens in compliance with Davis-Stirling, so that a copy is obtained immediately to be sent to the owner within (10) days or recordation.
• Courts have stayed most legal actions and tolled the statute of limitations, pursuant to Emergency Rules of the California Rules of Court.
• While actual sales can be conducted in many counties, if the account was not already at the point of sale prior to the pandemic, individual service of process may still be a challenge given the emergency orders in place.
• Localities have the power to make decisions on restricting any evictions.

Additionally, a significant question for many is the ability for debtors to appear in court to defend themselves. The current recommendation, due to the pandemic, is to avoid public spaces and limit the number of people in one place. Those facing foreclosure might feel that they are facing a decision whether to compromise their health and safety to challenge the association foreclosure action.

As your partner and trusted advisor, we will pursue legal action at the direction of the board. It is our job to ensure we let our clients know about risks we are aware of, so that they can make an educated decision for their communities.

A jury recently found in favor of Equity Experts in a case regarding the reasonableness of our collection fees.

Facts of the Case

The Plaintiff is a homeowner who is a member of two homeowners’ associations (both a Master Association and a Sub-Association). At some point, accounts for both associations became past due and Equity Experts was hired separately by each association to collect on the debts owed. Plaintiff brought suit against Equity Experts based on that collection action, alleging violations of the Fair Debt Collections Practices Act and the Michigan Occupational Code.

Plaintiff alleged that the collection fees charged were disproportionate to their assessments and therefore, improper and unreasonable, creating liability under the statutes listed above. Equity Experts argued that their actions followed their agreements with each association, that the fees and costs were reasonable for the actions taken, and that these costs were communicated to the plaintiff several times throughout the collection process.

When questioned on the reasonableness of Equity Experts’ fees in court, Defendants, through their testimony, addressed some of the common misconceptions about their collection charges. For example, if a letter is sent indicating the fee for services rendered is $100, that fee does not only cover the cost of sending that letter. The fee actually represents all the work Equity Experts perform on the file during that time period, which can include phone calls, processing payments, client reports, research, balance reconciliations, and general overhead. Furthermore, the cost for most of these actions does not vary based on the amount of assessments owed. So when even a modest assessment balance remains unpaid for a long period of time, the balance will naturally escalate as more work must be performed to bring the account current.

Opinion of the Court

After both sides presented their arguments and evidence, the jury ruled that the fees Equity Experts charges were reasonable, even in the light of a low association balance owed. The fact that the jury did not award the Plaintiff any money for statutory damages under the FDCPA clearly shows that they believed Equity Experts acted reasonably and appropriately.

Equity Experts’ business model was also upheld through a ruling in the 6^th Circuit Court of Appeals last year. You can read more about that case here.

*Please be advised that this memo is not legal advice and should not be relied upon or constructed as such. Equity Experts, nor any of their employees, are acting in the capacity of an attorney on behalf of any management agent or association.

Can collection companies charge collection costs to delinquent homeowners? Is deferring collection costs FDCPA compliant?

Last month, the United States Sixth Circuit Court of Appeals affirmed a decision— assessing collection fees to debtors if authorized in an agreement is FDCPA compliant.

A homeowner sued Equity Experts during April 2017, arguing authorization was not expressed to assess collection fees directly to them, an FDCPA violation. During collection efforts, Equity Experts sought the fees for collection services from the homeowner.

The appeal turns on whether the agreement creating the debt – the association’s declaration – expressly authorizes the collection of these fees.

 

 

The Opinion of the Court

The association’s by-laws expressly authorize the collection of the association’s costs. The association’s declaration states that “each such assessment, together, with interest, costs, and reasonable attorney’s fees shall be a charge on the land, shall be continuing lien upon the property, and shall also be the personal obligation of the property owner.”

A plain reading of costs from the association’s declaration under statutory law allows the assessment of collection costs to the homeowner.

The reading of costs the homeowners’ pushed for would mean the association could only collect on charges after they had been assessed to the association. This would mean Equity Experts would send the association a bill for the cost of collections, the association would then send those costs to be collected from the homeowner by Equity Experts, entering a seemingly never-ending cycle of collections.

“In short,” Circuit Court Judge Roberts writes, “the declaration expressly authorizes the association to collect its costs. Equity Experts’ fees make up the association’s costs. Thus, the declaration expressly authorizes the collection of Equity Experts’ fees.”

August 26, 2019– The Bankruptcy Appellate Panel of the 9^th Circuit issued an important ruling in the case of Highland Greens Homeowners Association v. De Guillen. The court ruled that, for purposes of determining secured amounts in bankruptcy proceedings, a Notice of Delinquent Assessment is not a continuing lien.

A delinquent homeowner filed for Chapter 13 bankruptcy, listing their homeowners’ association as holding debts secured by the property. Years prior, the homeowner fell behind on their association dues. The association filed a lien against the property soon after, amending the notice two years later, and eventually taking the homeowner to court to enforce the lien.

After the homeowner filed for bankruptcy, the association was asked to provide proof of claim, which they attached eight pages of CC&Rs. The homeowner filed abjection arguing the claim should be reclassified as unsecured because the association did not comply with the Davis-Stirling Act to find an equitable lien.

Impact to your association

A lien would not continue to accrue delinquent amounts beyond what was filed and any amount that came due after the lien recording are unsecured. Associations have the option to record multiple liens to match the amount accruing, however, liens can be costly and time-consuming to file.

This has the most significant impact for Chapter 7 cases where the owner would have a complete discharge of their personal obligation for unsecured debts. In cases where the owner then also surrenders their home to the mortgage company, this will be less significant, as the secured nature of the debt becomes virtually irrelevant once a senior lienholder forecloses.

In situations where a debtor files Chapter 7 but is able to keep their home is where the largest impact will be felt. In those situations, the association would be limited to enforcing only the amounts listed on a recorded lien. Unless there is another owner of the property who was not included in the bankruptcy, the association would have no choice but to write off the remainder of the pre-bankruptcy assessments.

Communities could also benefit from amending their governing documents to expressly state that all future amounts in addition to that those listed on the lien be secured before future legislature or legal initiatives can develop.

HOA advocates should consider ways to reduce the costs of lien filings through legislative initiatives. The legislature should also consider amendments to the Davis-Stirling Act that would make it clear that liens secure any future assessments.

*Please be advised that this memo is not legal advice and should not be relied upon or constructed as such. Equity Experts, nor any of their employees, are acting in the capacity of an attorney on behalf of any management agent or association.