BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2011-2012 Regular Session


          SB 561 (Corbett)
          As Introduced
          Hearing Date: April 5, 2011
          Fiscal: No
          Urgency: No
          BCP:rm
                    

                                        SUBJECT
                                           
                Common Interest Developments: Delinquent Assessments

                                      DESCRIPTION  

          Existing law, the Davis-Stirling Common Interest Development Act 
          authorizes an association to collect assessments and requires 
          any payments towards assessment debt to be applied first to the 
          assessments owed.

          This bill would clarify that a debt collector shall be subject 
          to specified provisions of the Act, including the above 
          requirement regarding application of payments, and state that 
          any waiver by a homeowner of his or her rights is void as 
          contrary to public policy.

          This bill would provide that an association shall not assign, 
          sell, or pledge its right to collect payment or assessments 
          unless the third party agrees to collect those assessments in 
          the manner set forth in the Act, as specified.  This bill would 
          also prohibit a third party that has contracted to collect those 
          assessments, fees, or payments from acting as a trustee in 
          foreclosure proceedings.

                                      BACKGROUND  

          The Davis-Stirling Common Interest Development Act regulates the 
          functioning of common interest developments, including the 
          ability of an association to collect assessments and to 
          foreclose when those assessments remain unpaid.  The Act also 
          provides several protections to delinquent homeowners that may 
          aid them in becoming current on their assessments, thus avoiding 
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          foreclosure.  Those protections include an itemized statement of 
          charges, right to dispute the debt, and a right to meet with the 
          board to discuss a payment plan.  

          For homeowners facing potential foreclosure, one of the most 
          important protections is the requirement that any payments must 
          be first applied towards assessments; other fees and costs are 
          paid only after the assessments are paid down.  That ability to 
          pay down assessments (first) is important because, under current 
          law, associations may not use foreclosure to collect delinquent 
          assessments that are under $1,800 (not including fees and 
          costs), or not more than 12 months delinquent.  If a homeowner 
          is able to pay down the amount to under $1,800, and keep from 
          being more than 12 months delinquent, the association is not 
          able to foreclose on his or her home.

          Although the above criteria clearly apply to homeowners 
          associations, there is a difference of opinion as to whether the 
          requirement to apply any payments to assessments first also 
          applies to third party debt collectors hired on behalf of the 
          association.  Some associations are hiring those third parties 
          to collect the delinquent assessments on their behalf, often at 
          minimal or no expense to the association because the debt 
          collector requires the owner to pay their fees.  Those debt 
          collectors then offer payment plans (on behalf of the 
          association) to the homeowners that require, as a condition of 
          the plan, that owners waive their right to have payments apply 
          first towards the delinquent assessments.  Those plans apply any 
          payments to the debt collectors fees and costs first and then to 
          pay down the delinquent assessment amount.  Since the contract 
          between the debt collector and the association itself may 
          prohibit the association from contacting the homeowner directly 
          (or working out a payment plan themselves), the homeowner is 
          left in a position to either agree to waive and accept the 
          payment plan, or, not agree and let the property go to 
          foreclosure.  

          This bill, co-sponsored by the California Alliance for Retired 
          Americans and the Center for California Homeowner Association 
          Law, seeks to respond to the above issue by, among other things, 
          subjecting debt collectors to the requirements of the 
          Davis-Stirling Act, and stating that the waiver of specified 
          rights is void as contrary to public policy. 

                                CHANGES TO EXISTING LAW
           
                                                                      



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           Existing law  , the Davis-Stirling Common Interest Development 
          Act, defines and regulates common interest developments (CIDs), 
          including the ability of the association to levy regular and 
          special assessments sufficient to perform its obligations.  
          (Civ. Code Sec. 1350 et seq.)

           Existing law  provides that an assessment, and any late charges, 
          reasonable fees and costs of collection, reasonable attorney's 
          fees, if any, and interest, shall be a debt of the owner of the 
          separate interest.  (Civ. Code Sec. 1367.1.)

           Existing law  requires an association to send the owner of record 
          a notice by certified mail at least 30 days prior to recording a 
          lien to collect the debt.  That notice must include a general 
          description of the collection and lien enforcement procedures, 
          an itemized statement of charges, the right to meet with the 
          board, and to dispute the debt, as specified.  (Civ. Code Sec. 
          1367.1(a).)

           Existing law  requires any payments made by the owner toward the 
          debt to first be applied toward assessments owed, and, only 
          after the assessments owed are paid in full, may the payments be 
          applied to the fees and costs of collection, attorney's fees, 
          late charges or interest.  (Civ. Code Sec. 1367.1(b).)

           Existing law  permits an owner to submit a written request to 
          meet with the board to discuss a payment plan for debt, and 
          requires the board to meet with the owner within 45 days of the 
          postmark, as specified. (Civ. Code Sec. 1367.1(c)(3).)

           Existing law  prohibits an association from voluntarily assigning 
          or pledging its right to collect payments or assessments, as 
          specified, but does not restrict the right of ability of an 
          association to assign any unpaid obligations of a former member 
          to a third party for purposes of collection.  (Civ. Code Sec. 
          1367.1(g).)

           Existing law  authorizes an association that seeks to collect 
          delinquent assessments of an amount of $1,800, or more, or 
          secured by a lien that are more than 12 months delinquent, to 
          use judicial or non-judicial foreclosure, subject to specified 
          requirements. (Civ. Code Sec. 1367.4(a),(c).)

           This bill  would prohibit an association from voluntarily 
          assigning or pledging its right to enforce or foreclose a lien 
          to a third party, except a financial institution or lender, as 
                                                                      



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          specified.

           This bill  would prohibit an association from voluntarily 
          assigning, selling, or pledging its right to collect payment or 
          assessments to a third party, unless the third party agrees in 
          writing to collect payments or assessments on behalf of the 
          association in the manner set forth in the chapter, as 
          specified.  

           This bill  would state that any agreement that purports to confer 
          a right on a third party to collect assessments, fees, or 
          payments, or to enforce or foreclose a lien in a manner 
          inconsistent with the provisions of the chapter is void as 
          contrary to public policy.  This bill would provide that the 
          section does not restrict the right or ability of an association 
          to assign any unpaid obligations of a former member to a third 
          party for purposes of collection.  

           This bill  would prohibit a third party that has contracted with 
          an association to collect assessments, fees, or payments, or to 
          enforce or foreclose a lien from acting as a trustee in 
          foreclosure proceedings.

           This bill  would additionally state that any waiver by a 
          homeowner of his or her rights, and any waiver by an association 
          of its responsibilities under the chapter is void as contrary to 
          public policy.

           This bill  would subject any debt collector, agent, or third 
          party acting to collect payments or assessments on behalf of an 
          association to all of the provisions of the chapter regarding 
          collecting delinquent assessments, costs, and fees, as 
          specified.

           This bill  would prohibit a foreclosure proceeding from being 
          initiated against an owner if it is based on an agreement that 
          is void pursuant to any provision of the chapter.

           This bill  would include substantial findings and declarations 
          about homeowners being coerced into payment plans, the resulting 
          loss of homes in foreclosure proceedings, and the devastating 
          impact that foreclosures have on the elderly.  
           
                                        COMMENT
           
          1.   Stated need for the bill  
                                                                      



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          According to the author:

            Homeowners Associations (HOAs) have been contracting with 
            professional debt collectors to collect delinquent homeowner 
            assessments and fees.  The companies, often associated with 
            law firms, convince the homeowners to sign repayment 
            contracts that explicitly waive the homeowner's rights under 
            the Davis-Stirling Common Interest Development Act (Civ. 
            Code Sec. 1530, et seq.).

            Current law does not clearly require a debt collector to 
            follow the Davis-Stirling Common Interest Development Act 
            when collecting a delinquent assessment on behalf of an HOA. 
             Debt collectors exploit the lack of clarity and convince 
            homeowners to sign agreements waiving their rights under the 
            Davis-Stirling Common Interest Development Act.  As a 
            result, the homeowner's payments are not used to pay down 
            the outstanding assessment.  Instead, payments go first 
            towards fees and costs, and only towards assessments after 
            those other balances are paid in full.

            Often, a balance is left on the delinquent assessment after 
            a period of 12 months, which triggers the HOA's right to 
            foreclose on the homeowner's property.  These foreclosures 
            are often based upon delinquencies in amounts that are 
            extremely small.  In some cases, the debt collector even 
            acts as trustee in the foreclosure proceeding.

          The author further notes that this bill would address the above 
          issue by "allowÝing] HOAs to contract with debt collectors to 
          recover outstanding assessments and fees only if the contracts 
          require debt collectors to follow the provisions of the 
          Davis-Stirling Common Interest Development Act.  It also 
          specifies that a contract waiving either a HOA's 
          responsibilities, or a homeowner's rights under the Act is void 
          as a matter of public policy."

          2.    Waiver of rights void; debt collectors must comply with 
          Davis-Stirling Act  

          Under existing law, any payments made by an owner shall "first 
          be applied to the assessments owed, and, only after the 
          assessments owed are paid in full shall the payments be applied 
          to the fees and costs of collection, attorney's fees, late 
          charges, or interest."  In cases where the association seeks to 
                                                                      



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          collect delinquent assessments, that provision protects 
          homeowners by allowing them to pay down their assessment before 
          they trigger the threshold that allows an association to 
          foreclose on their home ($1,800 in assessments, or more than 12 
          months delinquent).  Although the plain language of the 
          provision does not restrict its application to associations, 
          questions have arisen about its application to third party debt 
          collectors and whether homeowners can waive their rights 
          regarding application of payments.  This bill would clarify both 
          issues.

          Specifically, this bill would provide that any waiver by a 
          homeowner of his or her rights (and any waiver by an association 
          of its responsibilities) is void as contrary to public policy, 
          and would prohibit the initiation or proceeding of a foreclosure 
          proceeding against an owner if it is based on an agreement that 
          is void.  This bill would also state that any debt collector, 
          agent, or third party acting to collect payments or assessments 
          on behalf of an association shall be subject to provisions of 
          the Act regarding collecting delinquent assessments, costs, and 
          fees.  As a result of those provisions, any agreement that would 
          require homeowners to waive their rights would be void, and, 
          those third party debt collectors would have to apply payments 
          consistent with the intent of the Act. Provided that payment 
          plans are offered by those collectors, the net result of those 
          prohibitions would be to allow homeowners to pay down their 
          delinquent amounts so that the foreclosure thresholds of $1,800, 
          or 12 months delinquent, are not met.  (Staff notes that there 
          is a credible argument that once a payment is made on a 
          delinquent amount that the 12 month time period is reset - 
          failing to apply payments to that amount ensures that the clock 
          continues to run.)  As noted in Comment 5, the opposition 
          (comprising of the homeowners associations), contend that 
          allowing owners to pay down assessments (consistent with 
          existing law) would result in the association getting stuck with 
          the costs of collection because owners may not want to pay the 
          amounts owed for collection if the association can't foreclose 
          for non-payment.

          The California Alliance for Retired Americans, co-sponsor, 
          contends that the agreements at issue "coerce seniors into 
          signing contracts letting the debt collector use homeowner 
          payments to collect his profits instead of paying down Ýtheir] 
          assessment."  A sample agreement from Pro Solutions states:

            Owner acknowledges that Owner is delinquent in the payment 
                                                                      



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            of Association Assessments and attendant charges in the 
            amount of $3,508.64.  This amount includes all fees, costs, 
            and assessments through February 10, 2010.  Notwithstanding 
            the provisions in Civil Code Section 1367(a) which provide:

               . . . Any payments toward such a debt shall be first 
               applied to the principal owed, and only after the 
               principal owed is paid in full shall such payments be 
               applied to interest or collection expenses . . . (bold in 
               original)

            Owner agrees that in return for the ability to pay the 
            delinquent account in a repayment agreement, payments will 
            be applied first to the collection fees and costs of Pro 
            Solutions, and then when paid in full, to the principal 
            amount owed, including interest, late, and any other 
            charges.

          The owner receiving the above agreement has essentially two 
          choices - agree to the payment plan and waive his or her rights; 
          or reject the plan and allow the property to go to foreclosure.  
          While existing law further permits an owner to submit a request 
          to the board for a payment plan, the contract between the 
          association and debt collector may act as a bar in circumstances 
          where the association actually desires to assist the homeowner.  
          As an example of the limitations placed on the associations by 
          these contracts, the author's office provided the Committee with 
          a sample contract by Angius & Terry Collections, LLC, that 
          states:

            Because acceptance of a payment by Client Ý(Homeowner 
            Association)] during the collection process may invalidate 
            the collection process, Client and ATC agree that once ATC 
            has received a file for processing, all payment arrangements 
            will be made by ATC, and delinquent homeowners shall be 
            referred directly to ATC for resolution of all delinquencies 
            in accordance with Client's delinquency policy (if any).  
             Should Client accept any partial payment during the 
            collection process, Client may be billed for ATC's fees and 
            costs incurred to date.   (Emphasis added.)

          From a public policy perspective, foreclosing on a homeowner 
          because he or she fails to agree to waive rights is a poor 
          outcome for all except the debt collectors.  The owner would 
          lose his or her home and be unlikely to receive any proceeds 
          from the sale because, in many cases, the outstanding mortgage 
                                                                      



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          is greater than the value of the home (in other words, the 
          home is probably "underwater").  If the home is underwater, 
          foreclosing on the home will not result in any real gain for 
          the association - the association would receive a home that is 
          subject to a senior lien (the mortgage) that is greater than 
          the value of the house.  On the other hand, the association is 
          arguably still responsible for paying the debt collector's 
          fees, including the costs of conducting the foreclosure. At 
          the end of the process, the owner is left without a home, the 
          association is liable for foreclosing costs, and the debt 
          collector gets paid.

          Staff notes that the exception to the above situation occurs 
          when the person being foreclosed on has significant equity in 
          their home - likely a senior on a fixed income.  In that case, 
          the owner would lose his or her home, the association and debt 
          collector get paid, and the balance would potentially go to 
          pay off senior lienholders (mortgages) with the remainder 
          going to the owner.  In that situation, California Alliance 
          for Retired Americans, sponsor, asserts that this bill would 
          protect "homeowner equity, the bedrock of financial security 
          for the senior homeowner.  Seniors who lose equity through 
          foreclosure are almost never able to recover it.  It is the 
          rare senior who can re-enter the workforce in order to 
          accumulate enough capital to buy another home, once it is 
          lost." 

          3.    Associations, third parties and collection of assessments  

          Existing law prohibits an association from voluntarily assigning 
          or pledging his or her right to collect payments or assessments, 
          as specified, but allows an association to assign unpaid 
          obligations of a former member to a third party for purposes of 
          collection.  This bill modifies that provision by providing that 
          an association shall not assign, sell, or pledge the 
          association's right to collect payments to a third party, unless 
          the third party agrees in writing to collect payments or 
          assessments in the manner set forth in the Act, as specified.  
          Any agreement that purports to confer a right on a third party 
          to collect assessments, fees, and payments or to foreclose in a 
          manner inconsistent with the Act would be void.  The net effect 
          of those provisions would be to clarify that associations can 
          contract with third parties for these purposes while ensuring 
          that those third parties must abide by the same criteria as the 
          association, if the association were conducting that collection 
          activity itself.  
                                                                      



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          As a result of this bill's provisions, associations may use debt 
          collectors, but are not relieved of their specific 
          responsibilities under the Davis-Stirling Act.  For example, an 
          individual arguably would have the right to request to meet with 
          the board to discuss a payment plan for debt, even if a debt 
          collector had been hired to collect on that debt.  The end 
          result could be a two-track system where debt collectors are 
          negotiating payment at the same time as the association, which 
          hired the collector, is meeting with the homeowner regarding a 
          payment plan.  While that system would arguably reduce the 
          bargaining power of the third party debt collector, from a 
          policy perspective, if it facilitates an agreement that allows 
          the homeowner to avoid foreclosure, then it should be considered 
          beneficial for both the owner and association.

          Although Community Associations Institute, in opposition, 
          contends that "HOA board members do not have the expertise or 
          legal training to collect bad debt and should not be burdened 
          with a legal labyrinth of complex and expensive duties to 
          benefit the debtor," existing law already contemplates that 
          exact scenario by granting an owner the right to "meet with the 
          board to discuss a payment plan . . ."  (Civ. Code Sec. 
          1367.1(c)(3).)  Considering the extensive obligations placed on 
          associations out of a desire to provide owners with an 
          opportunity to save their home from foreclosure, from a policy 
          standpoint, it would appear inconsistent to allow associations 
          to use debt collectors to circumvent those previously enacted 
          protections.

          Staff notes that the present language of the bill revises 
          existing law by removing the prohibition on an association 
          assigning or pledging its right to collect payments or 
          assessments, as specified.  (Assignment or pledging usually 
          refers to the sale of the actual debt, not contracting for the 
          ability to recover delinquent assessments on the association's 
          behalf.)  The following amendment is suggested to reinstate that 
          prohibition, and clarify, consistent with the arguments above 
          that an association may "contract" with a third party to collect 
          delinquent assessments only if the third party agrees to collect 
          payments in the manner set forth in the chapter, as specified.
           
          Clarifying amendment  :

            On page 8, strike out lines 1 through 3, inclusive, and 
            insert:
                                                                      



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            (2) An association may not voluntarily assign or pledge the 
            association's right to collect payment or assessments to a 
            third party.  An association may contract with a third party 
            to collect delinquent payments or assessments only if the 
            third party agrees in writing to collect payments

          4.    Debt collectors not able to act as trustee in foreclosure 
          proceedings  

          This bill would also prohibit debt collectors from acting as a 
          trustee in foreclosure proceedings for delinquent assessments.  
          Those debt collectors are currently enlisted to collect the 
          debt, including, if necessary, conducting the foreclosure on 
          behalf of the association.  As noted above, any foreclosure for 
          delinquent assessments would likely be subject to a senior lien 
          (the mortgage) with a balance that is more than the home is 
          worth - in that situation, the foreclosure benefits the debt 
          collector by allowing them to charge the association fees for 
          their work, but displaces the homeowner and leaves the 
          association with a property that is worth less than the 
                                                     outstanding liens.  

          Community Associations Institute (CAI), in opposition, states 
          that this bill proposes unparalleled and significant restraints 
          on third party debt collection, specifically, "third party debt 
          collectors are retained to handle the entire bad debt process 
          because it is less expensive for all concerned.  The bill 
          compels HOA's to contract with a separate company to handle a 
          foreclosure sale." Considering the seriousness of foreclosing on 
          a home, and the prior Legislative concern with associations 
          foreclosing for small delinquencies, requiring associations to 
          take an additional (deliberative) step to foreclose appears 
          prudent.  The alternative, allowing debt collectors to run the 
          entire process and foreclose on individuals who do not agree to 
          pay the debt collector's fees before the delinquent assessments, 
          would appear to be inconsistent with prior Legislative efforts 
          to protect those owners.  

          Staff notes that by removing the ability for those debt 
          collectors to foreclose, this bill would also reduce the 
          leverage those collectors have over homeowners and potentially 
          decrease the number of foreclosures.  Under existing practice, 
          those debt collectors may have an incentive to use foreclosure 
          because it would allow them to charge associations for their 
          additional time in processing the action.  
                                                                      



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          5.   Opposition's remaining concerns  

          CAI, in opposition, generally contends that this bill would 
          restrain HOA's from "entering into a binding and legal agreement 
          to collect delinquent debt from a homeowner, barÝ] a third party 
          from comprehensively and legally managing the collection of the 
          debt including acting as a trustee in a foreclosure sale and, 
          would bind the homeowner association to pay all fees and costs 
          associated with debt owed to the association should the 
          homeowner fail to pay."  The basis for most of CAI's concerns is 
          that the association would end up paying the costs of debt 
          collection, and that the bill would create a "massive 
          disincentive to retain a third party debt collector."  CAI is 
          correct - if a debt collector is hired, and they cannot collect 
          fees from the homeowner until after the assessment is paid off, 
          the debt collector will likely want an up-front payment from the 
          association for their services.  (As a practical matter, any 
          debt collectors hired by an association will likely want payment 
          for their services immediately as opposed to waiting until the 
          homeowner has paid the entirety of their delinquent 
          assessments.)  Since existing law permits the association to 
          recover its "costs of collection" after the assessments are 
          paid, the policy question raised by the opposition is whether 
          debt collectors should be able to continue to recoup their costs 
          from the homeowner first so that the associations are not 
          required to pay for the costs of collection up-front.  That 
          approach, the opposite of the direction by the bill, would 
          continue the practice of allowing associations to arguably 
          circumvent the intent of existing law through the use of debt 
          collectors.  The result could be a continued increase in 
          foreclosures because homeowners are unable to make payments that 
          would keep their delinquent assessments below the $1,800/12 
          month threshold.

          The California Association of Community Managers (CACM), in 
          opposition, additionally contends that this bill would result in 
          increased assessments "to absorb the additional expenses not 
          paid by the delinquent owner," and discourage payment plans 
          because associations may not be inclined to enter into payment 
          plans in the first place.  Despite those contentions, it should 
          be noted that those unpaid expenses remain a debt of the 
          property owner (similar to unsecured credit card debt) and are 
          still required to be repaid.

          The California Association of Collectors, also in opposition, 
                                                                      



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          argues that "Ýt]his bill would make it impossible for the 
          collection agency to get paid, limit association resources and 
          result in needless foreclosures."


           Support  :  AARP; California Advocates for Nursing Home Reform; 
          Congresswoman Jackie Speier; Consumer Attorneys of California; 
          Older Women's League of California; Sacramento Chapter, Older 
          Women's League; one individual

           Opposition  :  California Association of Community Managers; 
          Community Associations Institute; Executive Council of 
          Homeowners (ECHO); one individual

                                       HISTORY
           
           Source  :  California Alliance for Retired Americans; Center for 
          California Homeowner Association Law

           Related Pending Legislation  : None Known

           Prior Legislation  :

          AB 2502 (Brownley, 2010), would have imposed similar 
          restrictions on the use of third party debt collectors by 
          providing that payments must be applied in the same manner 
          whether the payment is made to the association or any agent.  
          This bill was not heard in the Assembly Judiciary Committee.

          SB 137 (Ducheny, Chapter 452, Statutes of 2005), prohibited 
          associations from using a foreclosure action to collect 
          delinquent assessments of less than $1,800 or any assessments 
          that are more than 12 months delinquent.

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