Some things in life are mysteries. Are aliens really out there? How exactly IS the sausage made? How do collectors and collection companies work?
We really shouldn’t answer the first two (but if we had to, we’d say “maybe”, and “grossly”), but that third one is right up our alley.
If you’ve been wondering to yourself, ‘how does an HOA collections company even function?” you’re not alone in your pondering. Debt collection is a pretty broad industry, and knowing what kind of debt collection works for your HOA or condo association can be tricky.
Historically, collections have fallen into one of three buckets:
- First-party collections. Some collection agencies are departments or subsidiaries of the company that owns the original debt, making them first-party agencies.
- Third-party collections. Most collection agencies are third-party, called such because these agencies were not a party to the original contract.
- Debt buyers. This would be a company that buys “bad paper” (usually, from unsecured creditors) and attempts to recover those debts, either in-house or through a third-party collections company
Simply put, an HOA collections company is a specialized third-party agency. The HOA debt collection process requires so much more than a traditional collection company would handle, because, on top of being in the highly regulated collections industry, the HOA space is another world of regulations, and they overlap. It gets very complicated, and doing collections for community associations is like dancing Swan Lake in a minefield.
But that doesn’t give a predatory HOA collections company a pass for inflating their prices, or nickel-and-diming standard services like many tend to do–it just means collections companies that work with HOAs need to be extra vigilant and that their costs should be paid
The HOA Difference
Traditional debt collection operates on a model called “contingency debt collection.” This means that a collection agency collects debt for a client, and the fees are based on an agreed-upon percentage of the amount collected. Basically, the client is only going to pay the collection agency if the debt is collected. However, the collection agency retains a percentage of the principal.
“Contingency” collections are impossible in the community association industry.
This is because the assessments, delinquent or not, are considered assets of the association, and oftentimes, even the board of directors can’t give away association assets unless there is a super-majority approval in a community-wide referendum. Achieving this would be difficult, to say the least.
However, “merit-based collections” are allowed. This is where the collection charges are passed through by the association directly to the delinquent owner’s ledger. This way, upon a successful collection event, the community receives 100% of the principal they are entitled to collect, rather than a percentage of that amount.
This is an ideal situation for communities as it does not require the good-paying owners to pay for the transgressions of the delinquent owner. Instead, those costs are shifted to the delinquent offender. It’s the only way a debt collector can work for community associations.
But merit-based does not mean the same thing to all people, and communities should be wary of collections agents that pay lip service to be merit-based, but pad their pockets by racking up huge fines against the delinquent homeowner. A good HOA collections company should always ensure that the fees charged are a small fraction of the total amount owed. Common sense tells us that charging someone $1,000 to collect $1,000, or effectively doubling the amount owed, is kind of wild, isn’t it?
How Does that Impact the Collection Process for HOA Collection Companies?
Although there are several types of collections companies, and different styles of collections processes, the overall format is actually very similar. Much like working in a restaurant, there are “steps of service” when serving patrons–these may have slight variations, but all generally follow the same path: greet the table, mark that the table has been seen, bus throughout, drop the check.
Collections can be seen in much the same way. There is a general order of operations when it comes to the collections process, even for an HOA collections company:
Every debt collection file starts with underwriting–every single one. For community associations, there is a special kind of underwriting. Upon receiving a delinquent ledger, a debt collector for community associations must be sure that the ledger follows the state statutes, and CC&Rs of the association.
- Public Records Review & Skip Tracing
Once the ledger is deemed to be correct and in good order, the collections company must check the public records to ensure that the name on the ledger is the legal owner of the property. You do not want to make a payment demand of the wrong person.
- FDCPA-Compliant Demand Letter
This is an initial demand letter as required by the FDCPA, and gives the owner 30 days to dispute the debt, pay the debt, or get on a payment plan. The first 30 days are what is known as the “silent period,” and no outreach is allowed unless the owner makes the first move.
After the first 30 days have passed, the outreach and engagement campaigns can really begin. When this happens, an HOA collections company should be tackling all of the following action items (without charging extra for them, as these are the absolute basics):
A notice of intent to lien
This is sent to the delinquent owner first and notifies them that continued non-payment may result in a lien being filed against their unit. A lien essentially converts the association from an “unsecured” creditor to a “secured” creditor.
Delinquent owners in community associations should never be harassed, but they should be communicated with to ensure they’re aware of their responsibilities. All outbound calls made should comply with regulations set forth by the FDCPA and the TCPA. And calling campaigns should continue until the owner has been engaged. Calling a few times and giving up is not enough.
Emails, text messages, and regular mails
Collection agencies should deploy a multi-channel campaign in an effort to engage the owners. This can include physical mail, emails, and text messages when allowed. If the goal is to bring them to the table, then all avenues of communication should be attempted.
This is one item that only a specialized collections company can manage. Community Association debts are not static debts for the collector, but rather shifting in that they change every month as new assessments come dueIf the collections company is integrated with the association’s accounting software. They can also pick up on non-recurring charges, such as one-off fines or violations.
A notice can and should be sent to the owner’s bank notifying them of the delinquency. Oftentimes, the bank will intervene and pay off the debt on behalf of the owner, so as to not jeopardize their own lien priority.
Filing a Lien
A specialized HOA company will have a lien recorded to protect the association’s interests. A lien ensures that a property likely won’t sell or be refinanced without the debt being paid off in its entirety.
What Comes Next
After all efforts mentioned above have been exhausted, if the unit is not paid up or the owner is not on a payment plan, it is time to consider whether foreclosure is the best course of action. These days property values have increased, and most properties have equity in them–as long as there is equity, people shouldn’t lose their house over delinquent assessments. But the key is not to let an owner get this far along the process to begin with. With a little encouragement and understanding, delinquent owners will usually pay before the nuclear option of foreclosure even has to be considered.
What we’ve described above are table stakes. Axela Technologies firmly believes that everything we’ve spelled out in this process is the bare minimum a community association should expect when engaging an HOA collections company. Axela follows every step of this process and then some, and provides the online tools for our efforts to be tracked and monitored by the relevant parties. When you engage Axela as your HOA Collections partner, there are no hidden or recurring fees that only make it more difficult for the owner to pay off the balance. Learn more about the Axela difference here.