Published on: October 14, 2016
By Patrick Brady and Mark Einhorn
Equifax, one of the major consumer credit reporting bureaus, announced recently that it will begin including the common are fees and assessments condominium owners pay in the calculation of consumer credit scores. Sperlonga, a data aggregator that will be collecting this information for Equifax, says the expanded reporting will help consumers improve their credit scores by adding another source of timely payments that will count in their favor.
That may be true. But the condo associations asked to provide this information and the management companies that collect it on their behalf could incur significant, unwanted and unnecessary liability risks.
The Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA) impose hefty penalties for inaccurate reports or other violations of the statutes. Managers and attorneys who handle collections for condo associations have argued successfully that the FDCPA, in particular, doesn’t apply to them, because they are not collecting a personal debt ; they are pursuing a lien enforcement action directly against the property and authorized under applicable state statutes. These lien enforcement actions generally do not target the owner of the property, hence the exemption from the statute. That exemption arguably would not apply to managers who collect and report adverse credit information about homeowners, because they would be perceived to be collecting a debt from the consumer.
The FDCPA applies to third parties that collect and report credit information for others; it would not apply to associations that report payment information themselves. But associations would, nonetheless, be vulnerable to law suits if they submit erroneous information, and they would have to comply with applicable provisions of the FCRA, which makes no allowances for mistakes.
Property records kept by associations and their managing agents may not accurately list the legal owner (the property may be held in a trust, rather than owned by an individual), and the records don’t always list full names ― with initials. There are an awful lot of John Smiths in the world. and associations don’t typically have Social Security Numbers on file to verify the identity of each individual owner. If the board reports erroneously that John B. Smith, who has a perfect payment record, is in arrears, when it’s actually John C. Smith who is delinquent, the Smith with a perfect record is not going to be happy. And if he loses a loan or preferential loan rate, or is otherwise harmed by the error, the association is going to face a potentially significant damage claim.
Associations also have to worry about discrimination complaints if they aren’t absolutely consistent in the way they report delinquent payments. An association that reports a minority owner who is 30 days behind and fails to report a white owner who is equally or more delinquent, can expect to measure the time between the report and the resulting law suit in nano-seconds.
The liability risks associations incur by reporting payment information might be justified if they were mitigated by offsetting benefits─ for example, if the threat of an adverse credit report would significantly reduce delinquencies or improve collection efforts. But there is no reason to believe that would be the case.
Owners who fall behind in their condo payments don’t typically do so willfully ― they do so because they have encountered financial difficulties. Threatening to report the delinquency isn’t going to cure the owner’s financial problems and may actually be counter-productive. For example, refinancing a high-rate mortgage to lower the payments might free up enough cash to cover the condo fees and possibly even avoid a foreclosure. But reporting the delinquency could make it impossible for the owner to refinance.
Associations that view reporting as an easy way to deal with delinquencies might not take the more reasonable and more desirable first step – contacting the delinquent owner to ask what is causing the problem and to see if the delinquency can be resolved through non-legal means – by negotiating a repayment plan, for example.
Ineffective and Unnecessary
Even if reporting gave associations some added collection leverage, they don’t need it. Most states have some version of a priority lien statute that puts unpaid condo fees ahead of the first mortgage, and allows associations to foreclose, if necessary, to collect. That is a powerful collection tool – considerably more powerful than credit reporting. It is also more cost-effective, because many superlien statutes include attorneys’ fees and court costs in the amounts associations can collect.
Mortgage lenders have considerable incentive to cure an owner’s delinquency in order to avoid an association foreclosure that might threaten the lender’s priority position. They have no such incentive to protect an owner’s credit score.
Condo associations, for their part, have zero interest in an owner’s credit score. They have no incentive to help owners improve their credit profiles and certainly no obligation to do so. The association’s primary obligation is to protect the interests of the condominium trust by ensuring that all owners pay the fees they owe. Reporting payment information is irrelevant to that goal.
Condominium associations have to ask who benefits if an association reports owners’ payments. It’s not the condominium association, which simply incurs unwanted liability risks, along with the considerable expense of registering with the credit bureau. Owners may benefit from whatever small boost the reporting of timely payments will give their credit scores. But simply making timely payments and avoiding negative reports will do far more to protect their credit profiles.
The primary beneficiaries of the reporting are the credit bureau, which can charge more for the enhanced credit report, and the company aggregating the information, which can charge for that service. So why should condo associations do anything to facilitate their efforts? They shouldn’t.