Late fees on unpaid dues are par for the course, but can an association charge interest on late fees? Board members must understand their authority under state laws and the governing documents. Not everything is black and white, and even a single misstep can expose the association to liability. When it comes to interest, there’s a lot to consider.
Interest on Late Fees: Understanding Definitions
Homeowners associations are no strangers to financial activities. In these communities, owners pay dues, assessments, and even fines. Sometimes, those fees can accumulate interest. Yet, improper practices can lead to a number of problems, including disputes, lawsuits, and a general loss of trust.
Dues vs Late Fees vs Fines vs Interest
Dues are the regular payments that owners make to the association. Also known as HOA fees, these cover the community’s ongoing expenses. These include maintenance, insurance, landscaping, and more.
An association may also levy special assessments. The need usually arises when the association requires additional funds to cover unexpected expenses.
Late fees, on the other hand, are monetary penalties that an association charges when owners fail to pay their dues on time. Most associations charge a flat fee after an account becomes delinquent.
Fines are different. While they are also monetary penalties, their purpose is to encourage compliance with the rules. If an owner never violates a rule, they will never need to pay a fine to the association.
Finally, interest is an additional percentage that an association charges on top of unpaid balances over time. Unlike a one-time late fee, interest continues to grow until the owner settles their debt.
Can an HOA Charge Interest on Late Fees?
Whether an association can charge interest on late fees depends on state law and the governing documents. In most cases, associations have the authority to do so, but boards should never assume the affirmative. Instead, they should check their CC&Rs and bylaws.
That said, most communities must follow certain requirements and procedures before adding interest. Typically, an owner must receive written notice first. Additionally, the interest charge must be reasonable.
In some situations, particularly for communities with high delinquency rates, boards may offer to waive interest charges if an owner agrees to pay their original debt in full. This is done to immediately improve cash flow, as collecting the original amount is better than none at all.
Of course, while this move is considerate, boards should be wary of abuse. Some owners may intentionally fall behind on their dues, expecting penalties to be waived anyway if they settle their principal balance.
Can HOA Charge Late Fees?
As with interest, associations must check their state laws and governing documents to verify if they have the authority to charge late fees. In Illinois, the law does not expressly permit it, leaving the decision to the CC&Rs and bylaws.
Late fees help encourage timely payments from owners. Of course, boards must never abuse this authority or charge an unreasonable amount. Notice requirements must also be followed.
Can HOA Charge Interest on Fines?
Unlike interest on late fees, charging interest on HOA fines is more complicated. Associations usually have stronger legal authority to collect unpaid dues because they fund the community’s operations. Fines, on the other hand, are disciplinary penalties.
That said, in Illinois, both HOAs and condominiums have the authority to collect reasonable fines. As per 765 ILCS 160/1-30 (for HOAs) and 765 ILCS 605/18.4 (for condos), boards can fine owners for rule violations after notice and an opportunity to be heard.
Still, Illinois law does not expressly authorize associations to charge interest on those fines. Boards must look to their CC&Rs and bylaws for this authority. Without it, charging interest on fines may not be possible.
Can HOA Charge Interest on Past Due Accounts?
Yes, associations can charge interest on overdue payments of regular dues or special assessments. This is a common collection strategy used by most HOAs and condos.
Associations often apply interest monthly until the owner pays the balance in full. Still, the governing documents must allow the practice. Some CC&Rs specifically state the maximum interest rate the association may charge. Meanwhile, others simply authorize reasonable interest on delinquent accounts.
Furthermore, board members must apply the interest fairly and consistently. Selective application or unequal treatment can expose the association to liability and result in disputes.
Can HOA Charge Compounding Interest?
Compounding interest means the association charges interest not only on the original debt, but also on previously accumulated interest. In other words, interest begins earning additional interest.
Some governing documents expressly allow compounding interest, but others remain silent. Illinois law does not automatically grant associations unlimited authority to impose compounded charges.
While this may seem like a good idea, boards should proceed with caution. Charging compounding interest on late fees can be seen as unreasonable, especially since an association isn’t designed to earn a profit.
Excessive compounding interest can create several problems. For one thing, owners might challenge the charges in court, claiming they are unreasonable and unauthorized. A judge may view the charges as punitive and rule in the owner’s favor.
Additionally, disputes are bound to escalate. The association will also soon face a high delinquency rate, which may even grow out of control. Because of these risks, many associations use simple rather than compound interest.
How Much Interest Can an HOA Charge?
The amount of interest on late fees will depend on state laws and the governing documents. For many HOAs, their CC&Rs set a maximum annual interest rate for delinquent accounts. Common rates range from 9 to 18 percent every year, but the exact number can vary from one community to another.
Boards can’t simply choose an arbitrary number. They must follow the governing documents. Moreover, courts may rule against an association if the charges are too excessive, unreasonable, or punitive.
Associations should also avoid stacking multiple penalties together, especially if they are aggressive. Imposing high late fees and high interest rates on top of monthly penalties and compounding interest can be seen as extortionate.
A Slippery Slope
Charging interest on late fees and fines may be permitted by the governing documents, but boards must always proceed with caution. High interest rates, compounding interest, and arbitrary amounts can all give rise to disputes and legal challenges. Board members must always confirm their authority through the CC&Rs and seek professional advice when necessary.
Hillcrest offers HOA management services to communities in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
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