Equifax, one of the major consumer credit reporting bureaus, announced recently that it will begin including the common area fees and assessments that 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 condominium associations asked to provide this information and the management companies that collect it on their behalf leave themselves open to incur significant, unwanted and unnecessary liability risks.
The Fair Credit Reporting Act and the Fair Debt Collection Practices Act 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 lawsuits if they submit erroneous information about owners, and they would have to comply with applicable provisions of the FCRA, which makes no allowances for mistakes.
Mistakes are easy to make. For example, property records kept by associations and their managing agents don't always list full names — with initials — and there are an awful lot of John Smiths in the world.
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 be sued as a result.
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.
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.
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 bureaus, which can charge more for the enhanced credit report, and the companies aggregating the information, which can charge for that service. So why should condo associations do anything to facilitate their efforts? They shouldn't.
Patrick Brady and Mark Einhorn are partners in Marcus, Errico, Emmer & Brooks.