Fining Authority & Foreclosure

Fining Authority and Foreclosure

Public Policy

Community Associations Institute (CAI) endorses legislation that provides a fair and equitable process for the foreclosure of association liens for common expense assessments that protects homeowners, property values, and the financial health of community associations by ensuring foreclosures by community associations are completed in a timely and reasonable manner. CAI believes that foreclosure should be a final resort after other reasonable attempts have been made to compel owners to fulfill their obligations to the association.

Due to the lack of adequate means by which to collect arrearages in common expense assessments, CAI supports the right of community associations to both judicially and non-judicially foreclose units and lots for the purpose of collecting delinquent assessments and minimizing future delinquent assessments that become a burden on all other owners in a community association, after owners have been given reasonable opportunities to resolve outstanding assessment or fine obligations. While CAI does not advocate for the use of foreclosure solely for fines, CAI does support the use of liens for fines, as this process ensures accountability and payment whenever a unit is sold. CAI opposes foreclosures in situations that are not appropriate such as for trivial debts.

CAI supports and advocates for a fair and equitable foreclosure process by community associations that: (1) encourages owners to meet with their community’s Board of Director prior to legal action, (2) provides timely and accurate notice to owners and gives owners a reasonable opportunity to cure or contest any default prior to referral of an account to third-party collectors or initiating foreclosure, (3) allows a reasonable amount of time for owners to cure a default as the foreclosure proceeds, (4) promotes collection of reasonable expenses and costs of the foreclosure process, (5) provides notice to all other lien holders of record (or required by law) who would be foreclosed so that lien holders have the right to either exercise their right to foreclose or participate in the process, and (6) encourages associations to adopt reasonable policies and procedures concerning when to initiate lien foreclosure for their community, and which treats all owners fairly and without discrimination, and also takes into account key factors such as association budget, length of delinquency, total assessments, the ability to meet the association’s financial obligations, and the amount owed to trigger foreclosure action by an association.

If legislation is introduced that proposes a minimum delinquency amount or timeline prior to initiation of foreclosure it should reasonably account for the needs of specific individual communities rather than a uniform approach that unduly harm some associations. Minimum delinquency, in this context, refers to the minimum amount of time or quantum of money an account is delinquent, the total amount of all assessments owed, the ability of an individual association to satisfy its financial obligations and other relevant factors excluding interest, relevant costs of collection (including late fees, or attorney’s fees) that must be met before an association may initiate foreclosure proceedings.

To ensure legal and timely foreclosure, governmental housing finance regulations should preserve lien priority for association assessments to protect the financial stability of both homeowners and associations. Mortgage servicing standards specific to housing in a community association must be improved so that a property in foreclosure by the community association is continually maintained by the owner of record or the mortgage holder/servicer, with association assessments being paid in a timely manner as well.

CAI believes that all states should adopt legislation that provides community associations with an assessment lien priority as defined in the Uniform Common Interest Ownership Act.

Background

Associations faced with past due assessments face similar financial challenges as lenders and taxing authorities holding delinquent accounts and all deserve a foreclosure option. The decision of a community association to foreclose on a homeowner must be considered thoughtfully and reserved as a decision of last resort. CAI supports the use of foreclosure after other reasonable attempts have been made to compel owners to fulfill their obligations to the association but recognizes a distinction between compliance (fines for deed restriction violations) and assessment obligations.

Unlike mortgage lenders, most community associations are not able to reject purchasers based on credit worthiness. They must accept owners that may become debtors notwithstanding the ability to pay. This, along with other factors, may lead to units and lots being sold to people who either cannot or choose not to pay assessments. CAI recognizes that fines for deed restriction violations are not part of an association’s recognized revenue streams and thus should not be factored into determining an association’s annual budget.

The failure of owners to pay assessments in community associations leads to a particularly unfair and inequitable result because the expenses of the association must be paid regardless of delinquencies. This effectively means that other owners in the community pay the delinquent owner’s share of the expenses while the delinquent owner (and any lien holder) continues to benefit from the maintenance of values realized as a result of those expenses. Moreover, numerous delinquencies may materially impact the financial condition of the community association and result in a reduction in the value of all homes in the community. In short, delinquencies must be addressed to minimize this unfairness and the potentially cumulative negative effects from nonpaying owners.

Associations need the discretion to determine the most effective collection technique for assessment delinquencies, which may include offering reasonable payment plans, judicial intervention, litigation, foreclosures, or other lawful collection methods. The manner and appropriate method for collections varies from state to state, and from community to community, based on their own unique circumstances and population. Notwithstanding various methods of collection, judicial and non-judicial foreclosures are necessary methods of compelling payment of delinquent assessments. CAI recognizes that associations or state lawmakers may restrict the use of foreclosure as a means for collecting fines or other non-assessment related charges.

Importantly, due to debtor rights laws in some states, foreclosures may be the only available tool to effectively recover delinquent assessments. This is particularly applicable to abandoned homes and homes occupied by owners who intend to stay as long as possible without paying any assessments which, in many cases, could extend past applicable statutes of limitation for collecting those debts. In addition, this problem is exacerbated when a lender fails for a protracted period of time to foreclose a mortgage in default and there is insufficient equity to satisfy the association’s lien.

For these reasons, CAI supports the right of community associations to initiate foreclosure proceedings to collect delinquent assessments and other incurred expenses, such as for self-help or legal costs. Foreclosure proceedings should only be initiated after providing timely, fair, and equitable notices, procedures and opportunities for the owner to cure delinquencies prior to accruing collection costs and for other lien holders to exercise their right or participate in the foreclosure process to the extent the law provides.