The Not-So-Surprising Impact of Recession on HOA Collections

by Dee Rowe, CCAM

Homeowners associations are essential for maintaining the integrity and value of communities. However, during a recession, these groups are often hit hard. With an increase in collection cases, combined with rising costs for using licensed collection services as the law now requires, many associations worry about making ends meet.

In this article, we’ll uncover the surprising impact of the recession on communities. From changes in laws governing collections to financial challenges, we’ll delve into the issues these groups face. We’ll also provide steps to help associations weather the storm and emerge stronger on the other side. So, if you’re a manager of one or more associations, buckle up – we’re about to take a deep dive into the world of HOAs during a recession. However, even well-seasoned management executives can benefit, as collection laws and best practices have shifted since the last recession, and technology is changing the collection game.

Challenges With Community Participation

A recession can have a significant impact on homeowners associations, but the biggest challenge is maintaining community participation during tough times. Not only do the financial strains make volunteering and donating harder for members, but the emotional toll of the recession can also lead to disengagement and apathy. This lack of involvement can create communication and decision-making obstacles for the association, hindering its ability to navigate economic turbulence. Moreover, when families need help making ends meet, paying dues or participating in fundraising efforts may be a low priority.

Encouraging community involvement is essential for managers of homeowners associations so clients persevere and thrive during a recession. Finding creative ways to incentivize participation and reenergize members can make all the difference in maintaining the association’s vitality.

One way to accomplish this is to provide information on resources that may help financially challenged individuals, such as letting members know about COVID-19 state assistance programs or inviting a banker to an event to provide information to members on refinancing, investment, or other tactics that can ease their financial burden.

Another suggestion is creating committees or volunteer programs to collect and distribute food donations or assist community members with difficulty covering expenses. Provided a well-worded Committee Charter is adopted to govern the volunteers, such an action requires minimal association resources and shows those in hard times that their neighbors (and the board and management company) care.

Financial Challenges

It’s no surprise that balancing the budget can be a significant challenge for HOAs during tough economic times. The recession can bring a range of financial challenges that make it difficult for members to pay assessments, and the emotional toll of the financial instability leads to apathy and disengagement. In addition, as fewer members pay dues on time, the strain on the operating budget grows.

The growing economic pressure often leads boards to increase assessments to cover the gap between costs and income. Not only do these increases in assessments make it even harder for homeowners behind on payments to catch up, but they also increase the burden on the members paying on time. The owners that pay on time can start to resent those that aren’t, as many boards and managers observed in the financial housing crisis of 2008. It’s a vicious emotional cycle with the potential to destroy community morale.

To mitigate this, managers and boards should focus on fair and equitable collections. For example, instead of immediately moving toward foreclosure, work with a licensed collection firm that works with debtors to find creative funding and payment plan solutions so that members pay down their debt without threats of losing their homes. Doing so has the additional benefit of collecting funds at the front end of the process vs. being paid at the back end of a foreclosure proceeding, as I learned when chatting with collections expert Mitch Drimmer of Axela Technologies, Inc.

Changes In Laws Governing Collections

In California, Senate Bill 908 became effective on January 1, 2021, indicating that any entity collecting money requires a license and background check. Since then, the Department of Financial Protection and Innovation clarified that routine collection of assessments is not consumer debt and is not subject to the licensing requirement. However, collections are still an area fraught with liability. In addition, case law is often not in favor of the collector. Therefore, using an affordable, reputable, licensed collection solution is a best practice.

However, this has yet to be the practice. Instead, management companies have traditionally done early-stage collections in-house to earn extra income. They are often hesitant to outsource for fear of losing the administrative income from collection actions, such as sending pre-lien and lien notices. But, believe it or not, there is a better way.

By using a non-predatory, licensed collection firm, management companies no longer have to employ staff to run reports, assess late fees, send notices, file pre-liens and liens, or take emotionally charged calls from angry debtors who feel they’re being targeted unfairly. The headache of high turnover of collection staff disappears as all calls get forwarded to the agency to protect the consumer’s rights under the Fair Debt Collection Practices Act (FDCPA)

As I discussed with James McCormick, Jr. of Delphi Law Group, LLP, while preparing for this piece, the management company and team are also protected from liability should a debtor file a suit claiming that their rights were violated or, even worse, open a fair housing claim stating such. Finally, some collection firms specializing in association collections structure their programs so that the management company benefits financially from the relationship in addition to the association the firm is collecting for.

STEPS TO WEATHER THE STORM

During difficult economic times, managers and management companies must take proactive steps to help members weather the storm. Here are some strategies that can help:

1. COMMUNICATE REGULARLY

Maintaining open lines of communication with members during a recession is essential. It is crucial to keep everyone informed of financial challenges and any progress made toward addressing them. Providing updates via email or social media can keep members engaged and connected. If your clients haven’t opted for electronic communications yet, recommend that they do so.

2. REDUCE COSTS WHERE POSSIBLE

When members are struggling financially, the HOA needs to minimize expenses where possible. This could mean negotiating better deals with service providers, cutting back on non-essential expenses, or finding ways to reduce energy consumption. It could also mean reducing collection costs by using licensed firms first and saving the high-ticket attorney fees for those rare cases when it’s unavoidable. If you need help finding a reputable collection service, check out CACM’s Industry Partner Directory.

3. INCREASE COMMUNITY INVOLVEMENT

During tough economic times, homeowners often disengage from their community. To prevent this, HOAs can organize volunteer opportunities or neighborhood events to unite members. This can foster a greater sense of community and encourage members to manage their finances so that dues get paid on time.

4. BE PROACTIVE IN COLLECTIONS

In a recession, it’s not uncommon for members to fall behind on paying their dues. Therefore, managers must advise clients to make every effort to collect these dues promptly using the most efficient and affordable method possible to avoid financial strain. In addition, working with a licensed collection service is recommended to avoid costly collection mistakes like accidental violations of the FDCPA. Delegating collections to a firm that specializes in such can improve the management company and association’s bottom line.

5. LEVERAGE TECHNOLOGY

One of the ways you can advise clients to reduce expenses and improve the bottom line is to leverage technology to work smarter, not harder. Technology can streamline timelines and reduce costs for payment processing, communications with members, distributing notices that the law does not require to be mailed, and even collecting delinquent payments. For example, does your collections solution include the following:

· An online self-resolution portal so debtors can act to resolve debt without having to speak to a live person?

· The ability for management staff and boards of directors to access ledgers, notices, and communications in real-time from anywhere at any time?

· Electronic approval and signing of legally required collection resolutions on your smartphone, laptop, or tablet right there at the board meeting where the vote occurred?

If it doesn’t, it should. These tools significantly expedite the collection process, putting recovered assessments in the association’s hands faster and at a lower cost.

It’s unsurprising that recessions impact association finances, collections, and community engagement. What’s surprising is how little some do about it. However, by fostering a strong sense of community participation and managing finances and collections wisely, associations can weather the storm and emerge stronger. As the saying goes, “Tough times don’t last, but tough people do.” So, let’s toughen up, protect our associations and their members, and come out stronger on the other side.

Dee Rowe, CCAM has been a Certified Community Association Manager in California since 2011.