Tighter Protection of HOA Funds in 2019

Assembly Bill 2912

The most important new legislation changing how HOAs will operate is Assembly Bill 2912. AB 2912 began with the statement that its purpose is to “take important steps to protect [HOA members] from fraudulent activity by those entrusted with the management of the association’s finances.” Sponsored by the Community Associations Institute and the California Association of Community Managers, the bill received no credible opposition and passed both houses of the Legislature on unanimous votes.

Civil Code 5380(b)(6) and 5502

One very significant change is the new Civil Code 5380(b)(6) and 5502. These new statutes are identical in substance and so appear to be redundant. They require that before any transfer of $10,000 or 5% of total association combined reserve and operating deposits (whichever is smaller), there must be prior written approval from the association board. This slows down the overly active board officer or lazy manager who would pay bills or transfer funds without bothering to obtain explicit board approval. One question is whether a manager could obtain permission in advance to pay certain larger recurring bills, but the intent of the statute seems to argue against this and require express permission for each individual transfer. Association boards should already be preparing for this additional step and talking to their managers about how compliance will occur. This statute does not only reference payments, but controls any “transfer” of association funds. So, advance written authorization is required not only for payments and withdrawals but also deposits and transfers between association accounts.

Civil Code 5500

Civil Code 5500 has for years 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. This changes in several ways in 2019. First, the review must now be monthly, not quarterly. Second, the list of items reviewed is changed. Instead of reviewing the reserve account performance compared to budget, the board must compare the operating account compared to budget. Third, the check register, general ledger and delinquency reports are added to the list of items which the board must review.

Civil Code 5501

The new Civil Code 5501 allows boards to meet the financial review requirements without meeting. However, the review 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. This also means that the longstanding indirect requirement of Civil 5500 that boards meet at least quarterly (to conduct the financial review) no longer exists, and that the Davis-Stirling Act will no longer indicate the minimum number of board meetings per year.

Civil Code 5806

Finally, the new Civil Code 5806 requires that 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.

What happens if a board and its manager do not follow these new financial safeguards? Could boards and managers find themselves alleged to be negligent if they do not follow these requirements and a financial loss occurs? Hopefully your association will never have to learn the answer to those questions.

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.