By: Tim S. Carey, Esquire
We have been asked by several clients over the past year about whether they can report delinquent assessment debt to the credit bureaus, or whether we will do so on their behalf. This article is intended to walk you through our general position on this matter. While we draw some conclusions herein, this is not intended as legal advice to any one client.
There are two recent events that make this question a relevant one for your community. First, Equifax announced last year that it would accept information regarding community association fees and begin including those payments on consumers' credit reports.
Second, the three national credit bureaus decided to no longer collect or report information on civil judgments obtained from court systems generally because the accuracy of this reporting was being questioned. We have also seen advertisements and news reports suggesting that credit reporting may improve collections for community associations. Because Nagle & Zaller always investigates any opportunity to improve collections for our clients, we have closely monitored this issue and conducted extensive research to determine whether reporting payment of assessments would be beneficial. Accordingly, I am writing you regarding whether, in our opinion, it would be advisable for communities generally to begin reporting delinquencies to the credit bureaus. This is a business decision for your community, but after our research, it is our opinion that community associations should not report delinquent owners to the credit bureaus, whether that is directly or through a third party. Allow me to explain:
Pursuant to the Fair Credit Reporting Act ("FCRA"), an entity that provides information related to consumers to one or more of the consumer reporting agencies is called a "Data Furnisher." The majority of the law is focused on creditors whose actual business is lending or debt collection, and whose dealings result in this Data Furnisher label. The law is not meant to target community associations or other service providers whose primary purpose is something other than lending or buying and collecting debt. Actions taken by our office on behalf of our clients used to appear on homeowners' credit reports - specifically the entry of judgments. However, because neither your community nor our office is actually submitting information directly to the credit bureaus, the community is not deemed a Data Furnisher. This label is important because the FCRA imposes a variety of obligations on Data Furnishers - and a violation could result in significant civil penalties, as well as administrative penalties by the Federal Trade Commission (FTC) or federal or state authorities.
Our opinion, and the opinion of many community association attorneys and creditor's rights attorneys, is that reporting to the credit bureaus, whether done by a community's attorney or through a third-party, carries far too many variables that could result in significant penalties and expenses for communities. Some examples of the major issues I see with reporting are set forth below:
- Investigation obligations. As a Data Furnisher, communities would be obligated to enact a policy allowing a homeowner to challenge any alleged inaccuracies reported to the credit bureaus. These would be similar to debt disputes under the Fair Debt Collection Practices Act - which Nagle & Zaller currently handles, free of charge, as part of our collection efforts - but under the provisions of the FCRA. Any challenge to the data reported by a community would need to be investigated and responded to within 30 days by the community or vendor. Additionally, notice must be given to the credit bureau(s) regarding the challenge, which will incur additional fees.
- Is the reporting of delinquent assessments legal under Maryland and D.C law? Maryland and D.C. have specific statutes for community associations, which include provisions related to assessments and collection actions. There is no specific authorization granted to community associations to report delinquencies to credit bureaus. Thus, it is possible that such actions are allowed, but we anticipate that lawsuits will be filed questioning the legality, and even a successful defense by your community could be costly. A means to avoid such issues may be amending your community's governing documents to specifically notify owners of the possibility of such reporting in the event that they become delinquent.
- Can costs for reporting be assessed to the owner? So far, we are only aware of one service provider that reports community association debt to the credit bureaus. That company charges the community association for each delinquent owner, and the cost for all reporting is passed on to the delinquent owner. Our firm has concerns that the legality of this practice may be successfully challenged on the basis that such costs are not specifically allowed by statute, rule or in the governing documents and, thus, could be claimed to be a debt for which the association is not entitled to collect. If that occurs, again, this could result in costly litigation for communities. Additionally, currently the majority of fees and costs associated with collection actions may be assessed to a delinquent homeowner pursuant to each community's declaration and bylaws.
- Potential Liability. Taking actions that fall under the FCRA also gives delinquent owners another avenue to challenge such actions by the community. Even if the case is without merit, a case brought under the FCRA would still be a significant expenditure of time and money. There has been a significant increase in FCRA complaints filed in the last few years. The FCRA is extremely "debtor-friendly," and many attorneys that represent homeowners and other debtors are using FCRA complaints to try to force quick settlements, similar to how complaints under the Fair Debt Collection Practices Act ("FDCPA") have been used. In this environment, we are concerned that FCRA cases are the next evolution of cases that will bring great expense and harm to community associations.
- Does reporting actually improve collections? Finally, our research indicates, and the general consensus among other community association attorneys is, that reporting delinquent owners will not necessarily improve collections. I am unaware of any studies or proof that reporting delinquent assessments would result in increased collection or timely payments. Our position is that if the threat of liens, judgments, and even foreclosure, is not enough to make an owner pay on time, then why would the threat of a negative impact on their credit report? Previously, judgments were reported to the credit bureaus and it was rare when our staff members would hear that such reporting caused an individual to enter a payment plan or satisfy the debt obligation. Accordingly, we cannot advise our clients generally to take on the risks and costs to begin reporting assessment data to the credit bureaus when there appears to be little benefit.
That being said, we recognize that others may disagree with the opinions set forth in this newsletter. This is new territory for community associations. Despite our opinions and research into this issue, it may be that the fear of negative credit reporting will inspire more timely payments and increase collections.
We will continue to monitor these recent developments and keep you apprised of any changes that may affect the analysis in this letter. If you have any questions regarding this matter or would like to seek individual advice from one of our attorneys, please do not hesitate to contact us.