Q&A and Video on Collections for HOAs and Condos During the COVID-19 Pandemic

Last week we hosted a webinar to discuss how to handle the collection of dues and assessments and the increasing risk of delinquency during these unprecedented times.  Joining me was a Community Association Attorney as well as a National Collection Agency that specializes in the Condo and HOA industry.

Below are the the attendee questions and our answers as well as the webinar recording for “Collections for HOAs and Condos during the COVID-19 Pandemic”.

Webinar Attendee Questions (4/29/20 Collections during COVID-19)

Q: Due to the current prospective delinquencies situation I presume a plan should be made beforehand.  Should that be an overall plan for all or handled individually? And how long should the Association allow the situation to go on?

A:  These are the questions that all associations are grappling with now.  First you will want to make sure you have your standard collection policy.  If you don’t have one you can see a sample collection policy here.  Here is a blog post I wrote a year ago on preparing before the next recession that may be helpful.  Additionally, here is information on how to handle delinquencies during the crisis.

A: It’s a good practice to have an overall plan, and have individual requests/proposals handled within the parameters of that plan.  Some associations are implementing plans that state that the plan will be reviewed from time to time buy the board to determine if it’s still applicable and should be extended.

Q: If we have a Homeowner who is delinquent in their HOA monthly assessment and they provide evidence of unemployment due to the pandemic, can the board waive late fees for those homeowners?

A: Yes, the board may waive late fees. However, there will be objections and if you are going to waive late fees for one person you should waive them for the entire association. The issue will be that there may be somebody who feels that they were entitled to a removal of late fees and late interest and they may protest and cause problems in the future citing “favoritism.”  The late fees are usually small amounts and waiving those causes an operational mess and there is really no good purpose to waive late fees and late interest. What purpose does it serve?

A:  In the current environment, it’s difficult to waive late fees for one person who lost their job, and not waive late fees for another person who lost their job.  Some associations are taking the approach of not proactively waiving late fees, but then waiving late fees for persons who request such a waiver.  And, any such approach is often for a limited period of time (i.e., through April or May this year).

Q: How far can the board go in requesting supporting documents that show a true hardship?

A: I do not suggest that the board look at any documents proving a hardship. The reasons are really irrelevant. It is very binary, either a person pays or does not pay. Showing the board that you are having a rough time of it does not empower them to give you any special allowances and discounts. If you cannot pay in full then get on a payment plan. If you cannot afford a payment plan then an owner has to make drastic life decisions that are none of the board’s business. It’s a slippery slope when you are sitting in judgment of people based on documentation that they provide. Who sets the criteria? Again, this is just asking for a lawsuit.

A: What a board asks for will depend to some extent on whether that information is verifiable from an objective standard.  For example, if someone claims they lost their job, the board can verify that information through documentation provided by the owner without overreaching.  On the other hand, if someone says they still have their job, but business is terrible right now, and therefore they can’t pay, that gets into more of the subjective territory that boards should avoid.  The bottom line is that if they can’t pay right now, it’s best to try to find some way to work out payment arrangements without overreaching for documentation requests.

Q:  Assume that delinquencies increase significantly because of the virus. If the association has an owner that was delinquent prior to the virus, and the Board believes no payments will be received, is the association required by law to budget for this and distribute the costs without including the delinquent unit?

A: This is a good question. The answer is absolutely yes and you don’t even need a national crisis for this to happen. When you make a budget every year there should be a line item for anticipated bad debt. This line item should be there in good times and bad times. This way assessments to owners can be fair and spot on. Anticipate bad debt and budget for it.

A: It may not be “required by law”, but, it’s a good business practice to budget for bad debt as close to the data on hand as possible.  Associations should try, to the extent possible, to avoid situations where the bad debt in a given year “blows up” the budget.  There will be other factors that play into when the appropriate time is to qualify an account as bad debt, such as how long before the crisis the delinquency began.

Q: When a homeowner stops paying assessments they still get cable tv n/c and all amenities of the community.

A: Yes, and do not even think about turning off anybody’s cable tv/Internet. If they have their own private satellite dish or cable service then that is their problem. If cable tv/internet is part of the association utilities then do not touch them. Consider this: The board decides to cut off Mr. Smith’s cable/tv/internet service which also bundles his telephone because he is delinquent. Mr. Smith has a heart attack and reaches for the phone to call 911 but the board has cut off his cable/TV/Telephone access and no help arrives and he passes away. Do you want to be on the Board when Mrs. Smith sues the community association? I would even say that the D & O insurance would not cover the board. So please do not even think about cutting off anybody’s utilities.  If permitted by the state and the governing documents you may cut a person off from amenities Pool, Gym, Club Room but not utilities.

A:  Suspending use of amenities, such as pool, fitness club, club room, is often a more reasonable first step.  Suspension of utilities is more often an option for much further down the road of the delinquency, when the account has been delinquent for an unbearably unreasonable length of time.  We’re still in the infancy of this crisis.  Taking a draconian approach right out of the gate will likely be unpopular.

Q: If services are reduced and the budget is reduced, shouldn’t Members expect a reduction of their assessment?  Our HOA has one annual assessment.

A: Sure, if the budget is reduced and that reduction is not eaten up by delinquencies then there is a savings to all the unit members.

A: It will be unlikely for associations to have a windfall this year if the delinquency predictions turn out to be true.  Even if services are reduced, there might be a corresponding increasing in delinquencies that could offset that surplus.

Q: How should a Board respond to Member inquiries asking the Board to issue a “credit” on Qtrly Assessments due to Member’s lack of access to amenities (Club House) while its closed caused by state (COVID-19) mandated closure?

A: If the amenities are closed and there is a savings that is realized by the end of the year then the board could issue back refunds to the membership. However, what we are talking about here is delinquencies and if there is a savings in closing anything those savings will be eaten up by the shortfall in receivables which has a net effect of NO savings and possibly even a deficit.

A: In some cases, the governing documents address what can be done with a surplus of funds.  Sometimes, a credit can be issued, though the anticipated wave of delinquencies this year may offset that surplus.  Also, some governing documents allow a surplus to be put toward reserves.  So, check the governing documents first to see what they say about the board’s options.

Q: What do you think about allowing a deferment of paying their dues IF the sign a payment agreement.  We have offered this to our 326 members and have so far received 9 requests and of these 6 have agreed to the terms of the agreement.

A: That is a great way to manage the situation. Work with the owners but make sure they are committed to a realistic payment arrangement. You should go out no more than 12-18 months maximum. The payment plan should take into consideration ongoing assessments so that after the payment plan finishes the owner owes zero dollars.

A: Generally, deferment of paying any assessments is not an advisable approach and should be avoided if possible.  At a minimum, there should be at least partial payments being made on an ongoing basis, with a “catch up” payment schedule later on, under a payment plan.

Q: How does the board handle payment arrangements for delinquent owners?

ASSUMPTIONS: Monthly assessments $500.00; Late Interest $25.00 per month; Late Interest 12% per anum; Owner is late three months and owes $1,500.00; The payment plan anticipated is for 12 months

• Take the amount owed today (let’s say $1,500.00).
• Determine the length of the payment plan (Let’s go for 12 months for this example).
• If in the next 12 months the assessments are $500.00 a month add $6,000 that to what is owed today.
• Add 15 months of late fees (I will assume $25.00 a month). So for this case that would be another $375.00.
• If your association’s documents require late interest in addition to late fees add that in too. For this example let’s say interest is 12% per annum. Let’s also assume interest is calculated on principal and not late fees or any fines or violations. So the first month the interest is $5.00, and the second month it will be $10.00 and so on. Calculate that amount for a year and one month of delinquency. That comes to a total of $605.00.
• Now, let us assume that there will be no special assessments or fines and violations.
• Add it all up and you come to a sum total of $8,480.00 with interest and late fees or $7,500.00 (which is assessments alone delinquent and going forward for 12 months.

Now the board can take either $7,500 and divide that by 12 and come to a monthly payment of $625.00. Or they can take into account the late interest and late fees and that comes to a monthly payment of $706.00. It is up to the board to make that decision if someone goes on a payment plan but this has to be offered to everybody who is delinquent.

The next step is to put this arrangement in writing as if it were a contract and have it signed. There should be some provisions.

• If the owner fails to pay on time every month then the payment plan is considered null and void and late fees and late interest will be added back to the ledger.
• If the owner fails to remit payment as per the plan they understand that they will be sent either to a collection agency for collections or an attorney for lien and foreclosure.

And that is how you do a payment plan. At the end of 12 months a person who owed $1,500.00 will be at a zero balance.

Q: Is there a concern for “selective enforcement” claims if a Board previously did not allow a payment plan and therefore is in an active collection matter against someone who lost their job 6 months ago – and now are going to be doing payment plans for members impacted by Covid-19 job loss

A: Great question, but for my part as a CAM it is a legal question that I decline to answer. Please consult your community attorney.

A: It’s a tough question.  But, the factors surrounding both decisions are quite different and arguably justify different outcomes during different time periods.  The two decisions shouldn’t be viewed in a vacuum.

Q: Can the HOA Board be in any way responsible if the management company is not handling collections accurately? For example, an owner is sent an Intent-to-Lien, but he doesn’t really owes money, maybe because his payment was credited to another account.

A:  By Federal law (FDCPA) before anybody can be sent an intent to lien letter they must be sent an initial demand notice giving them 30 days to dispute the debt or make arrangements to pay the debt.  In some states like Colorado before any legal action can be taken a delinquent owner must be given an opportunity to work out a 6 month payment plan.  So if you are working with a management company and they send out a notice of intent to lien and they are not licensed to be collection agents they can be in a heap of trouble. Even if they are not a collection agency they can be in violation of the FDCPA and held accountable for unlicensed activity. It should never get to the point where a management company is sending out notices of intent to lien as that should be part of a collections or legal process. You asked if the board can be held responsible I would answer…Yes. If I were treated like that I would sue the association, the management company, and each individual board member. There is a cottage industry of lawyers who fight for people’s rights when it comes to the violation of the FDCPA and they usually work on a contingency basis. These lawyers will file a complaint in court and name everybody they can.  Once would think that the management company has an Errors and Omissions policy and if the plaintiff wins the case their insurance company would pay. I cannot tell you if a judge would consider the board complicit and liable. This is why after two courtesy letters the management company must send the matter to professionals (Collection Agency or Attorney).

A: An association can be held responsible for the acts of its agents.  So, the earlier an account can be turned over to a professional, the better.  If the association’s management is making errors that could be deemed negligent, the problems are compounded.

Q: How do you collect from a delinquent HOA member who has the property in an LLC – South Carolina specifically? Property is leveraged.

A: You have two choices. One, send them to a collection agency or two send them to an attorney for lien and foreclosure.  Be careful that a first mortgage holder or even a second mortgage holder is not pursuing a legal complaint to foreclose because if you send this matter to a lawyer and the lender gets a judgment the association not only loses the assessments that is owed but the cost of the legal fees.

A: Without getting into state-specific law, if an LLC owns a property, recordation of a lien against the property is often a way of protecting the association’s interests without having to chase down or “pierce the corporate veil”.  However, a suit may be appropriate as well, depending on the circumstances involved and the assets of the LLC.

Q: We have an owner that has informed us that they live in the UK.  They said they are unable to exchange money to send us during this COVID-19.  They say they have the funds, but won’t be able to pay until current complications are over.  How would you handle the late payments until this is over?

A: This is a case where I have to say, “I’m not buying that story.” The worldwide monetary system is not broken down and functioning quite well. I would also suggest that this owner pay by credit card on the association’s payment portal. If you do not have a payment portal that accepts credit cards, ACH, eCheck, and debit cards well now you should consider it. Credit card payments are still being accepted. I call “Shenanigans” on this owner from the U.K.

A: Agreed.  The inability to exchange currency, particularly in the U.K., does not seem like a credible statement.

Q: We have a unit owner that lives in France. He is behind on his dues. How do we go about collecting the money from him?

A: If an owner lives in France and has a house in the United States I would most likely say that they also have a property manager (I’m not talking about a community association manager) but a person who regularly watches the property, pays the bills, and manages the rentals (if they have the place rented). Find that property manager and advise them that if the unit is delinquent that the association will be forced to send the matter to a collection agency or attorney. If there is no property manager then see if you have any contact information (email, phone, or address) and let them know that the association will not stand by and let units continue to be delinquent.

A: Recording a lien against the property could be an effective step early in the process if payments are not made in response to late notices and a demand letter.  Also, if the unit is occupied by tenants, and the association has authority to suspend privileges of occupants to use certain amenities, that could be effective as well.

Q: What do you do with individuals that go out on disability and you can’t touch their income?

A: If a person cannot pay then they cannot stay. It’s cold, it’s harsh, but this is the way of the world. I’m very sorry to bring this bad news to you but this is a case where the association must move forward with collections. If there is equity in the unit then the owner should sell their property and downsize. Not sending them to collections is a disservice to the association and the owner as well. By letting them slide you are letting them lose their equity and fall into a hole they cannot get out of. If there is no equity in the unit and the owner continues not to pay then you have no other choice then to foreclose on them. It is very sad but this is a business.

A: The obligation to pay assessments applies to all owners, regardless of any physical or mental disability.  Payment plan arrangements could be an option, particularly if the owner’s income is reduced to disability benefits.

Q: Do you think people have misinterpreted the government’s message about paying their mortgages, i.e., they don’t have to pay their mortgage plus they don’t have to pay their assessments?  If yes, then we could be headed for a mortgage banking problem in addition to severe delinquencies in Associations.  Agree?

A: Another good question. Yes, I believe that most people suffer from a condition called “selective perception” which means they hear what they want to hear. I believe that when the government said that there will be no foreclosures or evictions people heard that they do not have to pay their assessments or rents.  There will be severe delinquencies in community associations for the next two years even if the people heard and understood that the ban on foreclosure is only temporary and they know that they owe their assessments to the association.

A: This is a good example of when communication from the board to the membership is important.  If a board is concerned that some members will mistakenly believe that they don’t have to pay assessments due to the crisis, the board may want to consider sending a courtesy letter to the community reminding all members of the ongoing obligation to pay assessments, despite what they are seeing on the news about mortgages and rent payments.

Q: Are homeowners required to provide the mortgage holder info?

A:  They don’t have to as it is a matter of public record. Tell me your name and your address and I can pull a copy of your mortgage and deed in five minutes.  Are they required is another question but it is a matter of public record and very easily found on the internet.

A:  The answer may depend on the governing documents, some of which put this burden on the owner to provide their mortgagee information.  Some governing documents have provisions regarding mortgagee approval requirements, such as for amendments of the governing documents, and those provisions sometimes mandate an owner to provide the board with information regarding the identity of the mortgagee.

Q: What are the means by which the Board can determine who holds mortgages? Can the $ amount of mortgages also be accessed? If so, how?

A:  Mortgages are a matter of public record so it is easy to pull a mortgage and see how much a person borrowed to buy the house and just as important when. It’s all in the county court records or property appraiser’s site. I believe you are asking if it can be determined if the balance on the mortgage can be calculated. The answer is if the owner is current with the bank it is a very easy calculation to do. To take this even further you should get a valuation on the house and using that see how much equity is in the property.

A:  Identifying the mortgagee and the original principal amount of the loan can typically be done by a search of land records.  However, finding out the current balance owed on the mortgage is more difficult.  That information might be obtained if the association has commenced foreclosure proceedings.  Outside of that circumstance, however, a mortgagee is not likely to divulge the remaining balance owed on a mortgage.

Q: Wouldn’t it be better to continue assessing late fees, interest, and fines till the late assessments are paid in full, then work with the member about waiving the fees?

A: Brilliant and very astute question and comment. What good is it to waive off the late fees on the front end. What does the association gain? I can tell you that they lose leverage with the delinquent owner. However, if the board does as you suggest then you have a carrot and a stick. Great observation and comment.

A: Some associations do take that approach, and it can often be effective.  Simply put, the association offers to waive the late fees, interest, etc. at the end of the payment plan period IF the owner otherwise complies with the terms of the payment plan.

Q: When a member fulfills a delinquency, the oldest debt should always be liquidated first, correct?  FIFO vs LIFO or base amounts vs variable additional charges.

A: Not correct.  This depends on your association’s collection policy which will spell out how payments are to be applied.  You should discuss as a board and also with your collection agent or collection attorney.  See # 10 on our sample collection policy here as an example.

A: The first thing to look at is the payment application in your state statutes or governing documents. That is how the money should be applied. Also, from an accounting perspective I believe that if somebody owes $100.00 dollars today and then adds to it $100 dollars tomorrow and they pay me I consider the oldest debt settled before the new debt is settled. I would think that this is the generally accepted accounting practices.

A: Be sure to check the governing documents and applicable law in the jurisdiction to see if there are any restrictions on how payments may be applied.

Q: How can you encourage homeowners who pay monthly assessments but not fines and late fees, and homeowners who let the assessment build up and pay most but not all every two to three months?

A:  The best method is to have a collection policy for the association that outlines your collection process.  Then you’ll want to use late fee, late letters and then follow through with a collection agency or lawyer to finish the process.  Then the Board will confer with their collection agency or attorney and discuss what fees to waive.  Remember the late fees and interest are penalties so that you receive the assessment that is the primary objective.  For people that let balances build up and then pay maybe you want to ask if it is easier to pay in a lump sum at the beginning of the fiscal year than paying monthly or find out what their personal reasons are for doing this and explain that it creates more work for the volunteer board, etc.

A: Some accounts are more difficult than others to collect payment in full.  Unfortunately, there are some owners who try to “game” the system by paying just often enough to avoid collection.  Having a clear collection policy in place, and moving promptly to enforce that policy, can be effective tools to avoid this type of scenario.

Q: Is there a federal program for HOAs like the PPP act where HOAs can get low interest loans to pay for expenses?

A: Yes, there is and if your community association did not apply for one by now you may be too late.  Fisher Island the wealthiest zip code in the United States was approved for a two million-dollar PPP but to their credit the owners did not want to take it. The average price for a property there is 2.3million. Your association was entitled but most likely missed the bus.

A: The associations that applied for PPP loans had mixed results.  For the most part, a PPP loan has proven difficult for many community associations to obtain.  Many do not have employees and their “workers” are actually volunteers, making it even more difficult to qualify for a PPP loan.  That said, before the anticipated “wave” of delinquencies arrives, now is a good time to check with banks/lenders about obtaining a loan to ward off the potential impact of delinquencies.

Q: What is your estimate of the potential delinquencies in winter properties, principally in Florida, used as second homes, typically by older people at or near retirement?

A: Usually older people who are retired in Florida have planned out their finances and receive social security. They are not working already so they did not lose their jobs. Hopefully they have saved well. However, during the last real estate crisis I personally saw many senior citizens who could not pay their bills. The issue is if other people do not pay these unfortunate people may be hit with a special assessment or a severe raise in their regular assessments to make up for other people’s shortfalls.

Q: We are a 55+ year old association.  Our members are mostly retired.  I am expecting that our membership might face fewer problems than working age associations.  What do you think we should expect in the near future?  Beacon Square HOA, Lehigh Acres, FL.

A: Usually older people who are retired in Florida have planned out their finances and receive social security. They are not working already so they did not lose their jobs. Hopefully they have saved well. If your association is exclusively retirees you may be certain that you will not be ravaged by this crisis.

Q: Under the CARES Act, should we apply for a PPP loan?

A: I’m not sure it depends who’s asking.  If you are a management company you may want to consider this if your business is being impacted. If you are a Homeowner Association with employees you not be able to qualify based on the type of entity you are organized as and therefore not currently covered by the PPP.

Yes, there is and if your community association did not apply for one by now you may be too late.  Fisher Island the wealthiest zip code in the United States was approved for a two million-dollar PPP but to their credit the owners did not want to take it. The average price for a property there is 2.3million. Your association was entitled but most likely missed the bus.

Management companies have been getting these loans as well.

A: The associations that applied for PPP loans had mixed results.  For the most part, a PPP loan has proven difficult for many community associations to obtain.  Many do not have employees and their “workers” are actually volunteers, making it even more difficult to qualify for a PPP loan.  That said, before the anticipated “wave” of delinquencies arrives, now is a good time to check with banks/lenders about obtaining a loan to ward off the potential impact of delinquencies.

Q: What operations do you anticipate changing after all this is over? If any, how so?

A: I think that people will be more comfortable using technology to aid in the operation of their community.  Whether it is for doing video conference board meetings that allow for out of the area members to join, services to help with elections by mail, online and by smart phone and also remote based financial services like ours at Community Financials.

A: After this crisis subsides, we will find ourselves in a new world just like the world changed after 9/11. After 9/11 we willingly gave up our civil rights in exchange for security. We allow ourselves to be searched and must pass through all manner of check points. We accept that security cameras watch us when we leave our houses. Well, most people came to accept that. After this crisis subsides, we will be seeing a new round of rules and regulations regarding our health and hygiene. Before this it was common to see people in Asia walk around with hospital masks. This will be the new style in the United States. There will be health check points throughout the land and Americans will be conscience of the spread of disease. It will be another hit on our civil liberties and some of us will be glad to allow that to happen for the public good and then there will be some who will be unhappy about it. Don’t expect the world to go back to what it was in January 2020.

A: In the near term, whether, and how, an association operates its swimming pool and fitness center will be impacted.  In the long term, it would not surprise me if there are efforts at the legislative level to give community associations more power to impose restrictions and rules in the midst of a pandemic or governmental emergency.