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 (more) SB 561 (Corbett) Page 2 of ? 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 SB 561 (Corbett) Page 3 of ? 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 SB 561 (Corbett) Page 4 of ? 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 SB 561 (Corbett) Page 5 of ? 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 SB 561 (Corbett) Page 6 of ? 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 SB 561 (Corbett) Page 7 of ? 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 SB 561 (Corbett) Page 8 of ? 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. SB 561 (Corbett) Page 9 of ? 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: SB 561 (Corbett) Page 10 of ? (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. SB 561 (Corbett) Page 11 of ? 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, SB 561 (Corbett) Page 12 of ? 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. **************