As a board member or a property manager for an association, you might sometimes feel as if you are participating in a “Choose Your Own Adventure” book. You know the kind, where on every other page the reader gets to choose between two or three options, each eventually leading to one of about forty endings. Running a homeowner’s association, and specifically managing its delinquencies, can often feel like an adventure where a decision made today, can lead to an event tomorrow, which ultimately leads to (hopefully) a successful conclusion. But perhaps, it leads to an “adventure.” This article will address the “adventures” or common pitfalls that can occur in a collections case and will help you navigate through them to reach your adventure story’s happy ending.
Compounding Interest and Snowballing Late Fees
Compound interest occurs when interest is added to the principal earns interest on such amount. Associations subject to the Colorado Common Interest Ownership Act (“CCIOA”) are required to maintain “accurate and complete accounting records.” Associations could arguably run afoul of this statute by incorrectly calculating the interest on delinquent accounts (for example, calculating compound interest when only simple interest is allowed by the governing documents).
This is also commonly seen with adding late fees on top of late fees. Most collection policies state that a late charge can only be imposed if an owner fails to pay the monthly/quarterly/semi-annual installment of an annual assessment in a timely manner. However, many times, owners will have made timely assessment payments, but will have incurred a late fee simply because there was a prior running balance. This can be problematic and lead to an adventure as the courts consider this a snowball effect which prevents an owner from ever becoming current.
To avoid these two common problems, work with your association’s accounting team and attorney to determine whether you have authority to compound interest or snowball late fees and then figure out if you’re doing either of these without authority. Often, you can use the application of payments clause of your collection policy to combat this argument and continue your adventure down the right path.
Processing Fees
With the high number of delinquencies, the costs of collection in your community are also likely rising. Costs of collection include not only the legal fees and court costs, but also include costs and resources expended by the management company for monitoring the delinquent accounts.
How can you ensure a court will allow you to recoup these fees? The following are actions that your association can take to help you collect these fees:
- Amend your declaration to include a reimbursement assessment provision: A reimbursement assessment provision provides that any willful or negligent failure of a member of the association to comply with the association’s governing documents, can results in the imposition of a reimbursement assessment, which is equal to the cost incurred by the association.
- Your association can also amend its collection policy to state that on any delinquent accounts, after the first delinquency notice, will be charged this service fee for as long as the account remains delinquent.
- Additionally, delinquency notices should also contain a warning that this charge will be assessed to the account.
Usury
Compounding interest, snowballing late fees and processing fees can also lead to a possible “adventure” in the land of usury. Usury laws apply only to loans, and homeowners association assessments are not considered loans. However, some courts have held that assessments are subject to the usury laws. More and more homeowners and/or their attorneys are making the argument that an association’s interest and late fees are usurious.
Under usury laws, penalties for non-payment must not exceed 45% of the principal balance due. Penalties included in the 45% calculation are interest, late fees, processing fees, and tracking fees. Attorney fees are not included in the calculation. Again, working with your accounting team and attorney to ensure the association is not exposed to liability in the event usury restrictions are applied by a court can help you to avoid an adventure in the future.
For more information on fees and common pitfalls and solutions, please contact a Altitude Community Law attorney at 303.432.8999.