Compounding interest, late fees, and processing fees can sometimes lead to claims that the association has violated state and federal usury laws. Usury laws apply only to loans, and homeowners association assessments are not considered loans. Generally, usury laws should not apply to homeowners association late fees. However, some courts have disagreed with this position and applied usury statutes against homeowner associations. Homeowners and their attorneys have occasionally attempted to argue that an association’s interest and late fees are usurious. In order to fully protect an association, in the event a homeowner becomes delinquent with assessments, penalties charged to the account should not exceed the usury limits.
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. Attorneys’ fees are not included in the calculation. For example, consider an association with monthly assessments of $200.00. Assume the homeowner has not made any payments since January 1. The association has monthly late fees of $40.00, monthly interest charged at ten percent per annum of the principle amount, and a monthly processing fee of $40.00. By June 30, 2012, the homeowner owes $1,200.00 in principal (assessments), plus $240.00 in late fees, $34.78 in interest, and $240.00 in processing fees. The total “penalties” on the account by June 30, are $514.78. $514.78 is 43% of $1,200.00. Any attorneys fees spent in attempting to collect this balance due are not considered in this calculation. Therefore, in this scenario, the penalties are not usurious.
However, if the assessments in this scenario were quarterly assessments, the total principle owed by June 30 would be $400.00. The penalties would still be $514.78. In this modified scenario, the penalties would be 128.7% of the principal balance due and could expose the association to liability under the usury laws.
Although usury laws should not generally apply to assessment payments, given the trends described above, associations should verify that any late fees, interest, processing fees, and tracking fees applied to a delinquent homeowner’s account would not exceed the 45% threshold. If you have any questions regarding your particular association, please contact your collections attorney at: 303.432.9999, who would be happy to determine if the current penalties are within usury limits.