BILL ANALYSIS �
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)
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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 "allow�ing] 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 �their]
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 �(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, bar�] 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 "�t]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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