Navigating the complex landscape of federal laws is a vital responsibility of HOA boards. Failing to understand or adhere to these requirements can lead to severe consequences, ranging from financial penalties to potential lawsuits.
In this guide, we delve into key federal laws impacting HOAs, offering practical strategies for compliance. We also explore the nuances of the Corporate Transparency Act and attorney-client privilege, equipping your team with the knowledge to mitigate risk and better serve your community.
Contents
- Federal Legislation Affecting HOAs
- Consequences of Federal Non-Compliance
- The Corporate Transparency Act: What You Need to Know
- Attorney-Client Privilege in HOAs
- Federal Compliance Strategies for HOAs
Federal Legislation Affecting HOAs
As a board member, you have a duty to stay informed on all federal legislation that may impact HOA governance, including:
Fair Housing Act
The Fair Housing Act prohibits discrimination in housing-related activities based on race, color, national origin, religion, sex, familial status, or disability. For HOAs, this means community rules and regulations must ensure equal treatment for all residents.
Americans with Disabilities Act
The Americans with Disabilities Act (ADA) requires public spaces be accessible to individuals with disabilities. While the ADA primarily applies to public accommodations, HOAs must also consider accessibility in common areas and facilities.
Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA) regulates how debts, including unpaid HOA assessments, can be collected. While many board members assume assessments are simply maintenance fees, most state and federal courts classify HOA assessments as “debts” under the FDCPA—defined as any obligation to pay money for personal, family, or household purposes.
Who Must Comply
The FDCPA applies to “consumers” (natural persons), not corporations, trusts, or government entities. Anyone collecting assessments on behalf of the association—attorneys, portfolio managers, bookkeepers, or collection agencies—must comply with the FDCPA. While associations and their employees are technically exempt when collecting directly, HOA boards across North Carolina and South Carolina should follow FDCPA guidelines to ensure fair practices and avoid potential disputes.
Required Collection Letter Elements
When collecting late assessments, written correspondence must state:
- The letter is an attempt to collect a debt
- Any information provided will be used to collect the debt
- The amount owed and the name of the association
- The owner has 30 days to dispute the debt in writing
If disputed, the association must provide verification of the debt.
Prohibited Collection Practices
The FDCPA prohibits debt collectors from:
- Harassing, oppressive, or abusive behavior
- Threatening violence or harm
- Publishing lists of delinquent owners (except to credit bureaus)
- Repeatedly calling to annoy the debtor
- Making false statements or misrepresenting debt amounts
- Depositing post-dated checks prematurely
- Threatening unintended legal action
- Sharing delinquent party information without authorization
Consequences of Violations
Violations can result in liability for damages (including emotional distress), punitive damages, attorney fees, and court costs. Given the technical nature of the FDCPA, associations should work with professionals familiar with federal requirements and applicable state laws in the Carolinas to maintain effective, compliant collection practices.
Freedom to Display the American Flag Act
This act protects homeowners’ rights to display the American flag on their property. HOAs cannot impose restrictions that would prevent residents from displaying the flag, although reasonable regulations regarding the size and placement of flags may still apply.
Over-the-Air Reception Devices Rules
The Over-the-Air Reception Devices Rule allows residents to install satellite dishes and antennas for television reception. HOAs cannot prohibit these installations if they meet specific size and placement criteria.
United States Bankruptcy Code
The United States Bankruptcy Code impacts how HOAs collect debts owed by members who declare bankruptcy. More specifically, the legislation sets forth rules regarding the treatment of HOA liens and assessments in bankruptcy proceedings.
Servicemembers Civil Relief Act
The Servicemembers Civil Relief Act provides protections for military service members, including those living in HOA communities. It can affect foreclosures and evictions, ensuring that servicemembers cannot be penalized for non-payment of assessments due to deployment or active duty.
Consequences of Non-Compliance for HOAs
Failure to comply with federal regulations can have serious repercussions for HOAs, including:
Financial Penalties
Depending on the specific regulation violated, HOAs can face hefty monetary penalties. For instance, violations of the Fair Housing Act can result in fines ranging from thousands to millions of dollars, depending on the severity and frequency of the infractions. The Corporate Transparency Act also imposes penalties of up to $10,000 for failure to file required reports.
Legal Action
Non-compliance can lead to lawsuits from residents, regulatory agencies, or even third-party organizations. Homeowners may sue for discrimination, violations of debt collection practices, or breaches of fiduciary duty. Legal battles can be costly, not only in terms of attorney fees but also in potential damages awarded to plaintiffs.
Reputational Damage
An HOA’s reputation can suffer if it is found to be non-compliant with federal laws. Negative publicity can diminish community trust and discourage potential buyers from moving in. A tarnished reputation may also hinder the HOA’s ability to attract volunteers for board positions.
Operational Disruption
Non-compliance can disrupt the day-to-day operations of an HOA by diverting resources and attention away from community-building activities. For example, board members may find themselves preoccupied with legal matters instead of focusing on community improvement projects. Legal fees and fines may also drain funds, threatening the association’s financial solvency.
Increased Scrutiny
Once an HOA is flagged for non-compliance, it may face ongoing scrutiny from regulatory agencies. This can lead to audits, investigations, and heightened oversight, further straining the HOA’s resources.
The Corporate Transparency Act: What You Need to Know
The Corporate Transparency Act (CTA), enacted in 2021 as part of the Anti-Money Laundering Act of 2020, represents a significant development in federal oversight of business entities, including homeowners associations. The Act aims to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activities while minimizing the burden on legitimate entities operating in the United States.
Understanding Reporting Requirements
Under the CTA, any entity created by filing documentation with a state secretary of state, state corporate commission, or similar state office is designated as a “reporting company.” These organizations must report specific information to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
Required reporting information includes:
- Full legal name of the association
- Business address
- State of formation
- Taxpayer identification number
- Detailed information about “beneficial owners”
Beneficial Ownership Disclosure
A “beneficial owner” under the CTA is defined as any individual who either:
- Exercises “substantial control” over a reporting company
- Owns or controls at least 25% of the ownership interests
The Final Rule clarifies that “substantial control” may be exercised through:
- Board representation
- Ownership or control of majority voting power
- Rights associated with financing arrangements
- Control over intermediary entities
- Financial or business relationships with nominees
- Other contractual arrangements or understandings
For each beneficial owner, associations must provide:
- Full legal name
- Date of birth
- Current address
- Unique identifying number from government-issued identification
- Image of the identification document
Note: This information is maintained in a private database accessible only to law enforcement and is not public information.
Exemptions and Compliance Deadlines
The CTA provides exemptions for 23 types of entities, including organizations described in section 501(c) of the Internal Revenue Code and exempt from tax under section 501(a). Some community associations may qualify for exemption as Internal Revenue Code § 501(c)(4) Homeowners’ Associations or 501(c)(7) organizations. However, associations filing under Internal Revenue Code 528 may be subject to reporting requirements.
Key deadlines:
- Reporting companies existing before January 1, 2024: Must file initial report by January 1, 2025
- New reporting companies formed after January 1, 2024: Must file within 30 calendar days of formation
- Changes to reported information: Must file amendments within 30 calendar days
Consequences of Non-Compliance
Failure to comply with CTA reporting requirements can result in:
- Civil penalties of $500 per day (up to $10,000)
- Potential criminal penalties for willful violations
- Increased regulatory scrutiny
Practical Compliance Strategies for Boards and Managers
To ensure successful compliance with the CTA, associations should implement the following strategies:
For Board Members:
Assess Exemption Status
- Consult with tax professionals to determine if your association qualifies for exemption
- Review current tax filing status and maintain documentation of exemption qualification
- Monitor any changes that could affect exemption status
Establish Information Collection Protocols
- Develop secure systems for collecting and storing required beneficial owner information
- Create procedures for maintaining confidentiality of personal identification documents
- Implement processes for tracking changes in beneficial ownership
Document Control Relationships
- Maintain clear records of board positions and responsibilities
- Document management company relationships and scope of authority
- Keep updated records of any individuals meeting beneficial owner criteria
For Community Managers:
Information Management
- Create a centralized system for tracking CTA compliance deadlines
- Maintain secure storage for beneficial ownership documentation
- Establish protocols for updating information when board membership changes
Compliance Monitoring
- Set up reminder systems for filing deadlines
- Track changes requiring amendments to beneficial ownership information
- Maintain communication channels with board members about compliance requirements
Documentation Best Practices
- Keep detailed records of all CTA-related submissions
- Maintain copies of filed reports and supporting documentation
- Document all compliance-related board decisions and actions
Resources and Additional Information
For detailed guidance on CTA requirements:
- CTA Video for Community Managers
- CTA Video for Board Members
- FinCEN Beneficial Ownership Information
Given the complexity of CTA requirements, associations should work closely with legal counsel and tax professionals to ensure proper compliance. Each association’s unique circumstances must be carefully evaluated to determine specific reporting obligations and develop appropriate compliance strategies.
Attorney-Client Privilege in HOAs
Recognized under federal common law, attorney-client privilege is a crucial legal protection that safeguards the confidentiality of communications between the association’s board and its legal counsel.
To be protected by attorney-client privilege, several conditions must be met:
- Existence of an Attorney-Client Relationship: The privilege applies even during initial consultations, provided the communication is intended for legal advice or representation.
- Confidential Communication: The conversation must be made with the intent of keeping it private. Casual comments made in public or informal settings do not qualify for protection.
- Relevance to Legal Matters: The subject of the communication must relate directly to the legal issues for which the attorney was consulted.
- Seeking Legal Advice: The communication must occur in the context of seeking legal guidance for a proper purpose.
- No Waiver of Privilege: The privilege is lost if the client voluntarily shares privileged information with third parties.
Unfortunately, simple mistakes can compromise the attorney-client privilege. For instance, sharing privileged documents or emails with non-board members can breach confidentiality.
Casual conversations in public spaces can also jeopardize this privilege. Discussing sensitive legal matters at a social gathering, for example, exposes that information to potential disclosure.
To maintain this critical protection, boards should treat all communications with their legal counsel as privileged unless explicitly advised otherwise.
Federal Compliance Strategies for HOAs
Staying compliant with federal legislation is essential for your HOA to avoid financial penalties and potential litigation. It also helps build transparency and trust within the community, creating a positive environment for residents.
Here are some tips for remaining compliant with federal laws:
Educate Board Members
Training is vital for board members to understand the federal laws impacting HOAs. When board members are more knowledgeable about these regulations, they can make informed decisions and promote a culture of compliance.
Develop Comprehensive Policies
HOAs should create clear internal policies outlining compliance processes. Designating a compliance officer or a compliance committee to oversee these policies can help the association avoid penalties and potential lawsuits.
Maintain Accurate Records
Keeping thorough and up-to-date records is essential for compliance. HOAs should document all relevant communications, meeting minutes, and member interactions in case of an audit.
Consult Legal Counsel
Engaging legal experts who specialize in HOA regulations can provide valuable insights. Attorneys can assist in drafting policies, reviewing governing documents, and ensuring that the association complies with all federal laws.
Foster Open Communication
Transparent communication with community members about compliance efforts is crucial. HOAs should regularly update residents on relevant regulations and any steps taken to promote adherence.
Stay Informed About Changes
Federal laws can change, so it’s important for HOAs to stay on top of new regulations and updates. Regularly reviewing legal news and participating in training sessions can help boards keep up with evolving requirements.
Create a Compliance Calendar
HOA boards should consider developing a calendar that outlines important deadlines for federal reporting and compliance tasks. This can help board members stay organized and ensure that all required filings are completed on time.
Implement a Whistleblower Policy
One of the best ways to encourage transparency and accountability is by establishing a whistleblower policy. This allows board members to report compliance concerns without fear of retaliation.
Support Your Board With Education and Training
As a board member, staying up to date on the latest federal regulations impacting HOA governance is crucial. But with legislation rapidly changing, it can be easy to fall behind, leading to potential compliance challenges.
To support HOAs in the Carolinas, Community Association Management offers innovative HOA board member training programs. Our educational resources provide board members with the insights and skills necessary to navigate federal regulatory requirements confidently and effectively. By investing in training, your association can improve decision-making, foster community trust, and stay compliant with federal laws.
To learn more about our training and education programs, contact us online or give us a call at 888-565-1226.
The content on this website is provided without any warranty and does not constitute legal advice. For legal advice specific to your community or issue, please consult an attorney specializing in Association Management.
