Association Fees on Owners’ Credit Reports?
Benefits and Pitfalls of New Credit Reporting Capabilities
Late payers beware. Community associations now have the ability to report delinquent assessment fees to Equifax, thanks to a recent agreement the major credit bureau entered into earlier this year with Sperlonga Data & Analytics.
Sperlonga is the first data aggregation company to offer the community association industry the option to report homeowners who are delinquent in payment of monthly homeowner association fees.
According to Angela Morisco, Esq., an attorney with Becker & Poliakoff, LLP in Morristown, New Jersey, previously, community associations did not have the ability to report delinquencies to a major credit bureau. She explained that there were minimum monthly reporting requirements associations would have to meet to be able to report these fees to a credit bureau, and generally, associations were not able to meet these requirements due to their size.
In addition, Morisco noted that the reporting process itself is a very intricate one. First, a creditor must establish a reporting agreement to report to a credit bureau. Information then needs to be downloaded and transmitted electronically in a specified data format. Sperlonga has stepped in to be the company that will facilitate the data collection from community associations in order to report it in the appropriate format to Equifax.
At this time, Sperlonga is working exclusively with Equifax. The possibility of expanding in the future to be able to report to the other major credit bureaus, such as Experian and TransUnion is currently unknown, said Morisco.
She noted that associations have been inquiring about utilizing credit reporting for many years. However, traditionally, the credit bureaus were not interested in accepting the reporting of delinquent association fees because they did not stand on the same level as other debt, such as a mortgage or auto loan, Morisco explained.
How does this affect unit owners? According to Morisco, for those unit owners who pay on time and in full, this is just one additional way for them to boost their credit scores. The data regarding each owner’s payment status will be extracted from the management company by Sperlonga and reported to Equifax.
On the other hand, Morisco said that sometimes homeowners are in and out of delinquencies or may just have one month they cannot pay. Now, a one-time delinquency could potentially become part of an owner’s credit report, while in the past, it would not have affected the owner’s credit at all.
“Therefore, the negative impact could start sooner rather than later,” said Morisco. “This can affect people applying for a home loan or auto loan,” she explained, adding that some employers also pull credit reports as part of their hiring process.
Prior to the Sperlonga agreement, the only way delinquent assessment fees could negatively affect a homeowner was if the association obtained a judgement, or a recorded lien was issued by the association. Judgements and liens are public records and subsequently appear on credit reports.
Do these reports reflect on an association as a whole as well? According to Morisco, these reports are not related to the associations themselves. She explained that the new credit reporting process is specific to each individual owner, not the association as an entity. In the event an association applies for credit, such as in the form of a capital improvement loan, the lender should look at the aggregate delinquency, not each individual delinquency. This includes the total amount that is delinquent and the percentage of the units that are delinquent. This is a standard procedure for associations applying for loans that has been in place for many years.
Is the credit reporting of delinquent homeowners beneficial for associations? Promoters of it are claiming that unit owners will be prompted to pay more diligently because of concern for their credit ratings, said Morisco. However, she believes this may not always be the case because some delinquent owners are not paying because they cannot, and not because they don’t want to. On the other hand, she said knowing that dues can potentially be reported may prompt owners to pay on time, which would help associations better manage the amount of their delinquencies. “It may prompt some, but I don’t think it will encourage people much more than before,” she said.
Part of the reason for this may be that many unit owners do not even realize that their monthly association fees were not being reported in the first place. “Many owners assume any delinquent debt is automatically reported,” Morisco noted. Of course a history of timely payment of homeowner association fees is very positive.
Are there any pitfalls associations should be aware of with regard to using credit reporting? According to Morisco, one of the major pitfalls is the potential for liability under the Fair Credit Reporting Act and the Fair Debt Collection Practices Act. “If associations are going to start reporting people to Equifax, then they’re going to have to be sure they are reporting them correctly and accurately,” she said.
“For example, there could be potential for misapplication of a payment or a lost payment. Associations, along with their management companies, must ensure their records are accurate. Of course, if an owner disputes the accuracy, there needs to be a procedure in place to handle such disputes effectively,” Morisco said.
She explained that the liability under the statute is not only for actual damages, but also includes attorney’s fees and potentially punitive damages if the reporting is considered to be done maliciously. “If you’re going to engage in credit reporting, you have to make sure it’s done correctly. The process of credit reporting adds another layer of responsibility and another potential avenue for liability for associations,” said Morisco.
She noted that property managers need to be aware of this need for accuracy and the potential for liability. She also said it’s important for managers and board members to keep in mind that there is a cost involved to use the credit reporting technology. Morisco suggested that management companies become educated on the process and terms of the arrangement before deciding whether to utilize the technology. The technology can be very helpful and useful to management companies.
According to some estimates, currently there are approximately 330,000 community associations nationwide taking in about $70 billion in assessment payments each year, noted Morisco. It is unknown how many associations have already made arrangements to utilize the credit reporting technology since the Sperlonga/Equifax agreement was announced in May.