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By: Greg Fayard
In California, an anti-fraud bill designed to protect HOA members sailed unopposed through the legislature becoming law January 1, 2019.
The Community Associations Institute and the California Association of Community Managers sponsored the bill, which makes various changes to California’s Davis-Sterling Common Interest Development Act—the statutory scheme governing HOAs in the state. The purpose of the bill was “to take important steps to protect [HOA members] from fraudulent activity by those entrusted with the management of the association’s finances.”
The bill changed California’s Civil Code related to homeowner association money management to require any transfer of $10,000 or 5% of total association combined reserve and operating deposits (whichever is smaller) have prior written approval from the association’s board. (Civ. Code, §§ 5380(b)(6) and 5502.)
The new law prevents overly active board officers or HOA managers who pay bills or transfer funds without first getting explicit board approval. The intent of the new statute appears to require express permission for each individual transfer over $10,000 or 5% of the association’s deposits. Advance written authorization from a board is required not only for payments and withdrawals but also deposits and transfers between association accounts.
Civil Code section 5500 has required boards to at least quarterly review the HOA’s operating and reserve accounts, the reserve revenues and expenses compared to budget, the latest account statements, and income and expense statements for each HOA bank account. Under the amended Civil Code section 5500, these reviews must now be monthly, not quarterly.
Fortunately, new Civil Code section 5501 allows boards to meet the financial review requirements without meeting. The review, however, must be performed by each director or by a subcommittee consisting of the treasurer and another director, with ratification of this review noted at the next open board meeting.
The last new anti-fraud law change is new Civil Code section 5806. This statute requires all associations have fidelity (dishonesty) insurance in an amount equal to at least the total reserve funds plus three months of assessments. The insurance must include computer fraud and funds transfer fraud and must cover the association’s management company if the HOA is professionally managed.
All these changes have one purpose in mind: prevent financial fraud from being perpetrated on HOA members by their HOA leaders.
If you have any questions or would like more information, please contact Greg Fayard at [email protected].