The end of the 2005 legislative year in California has a decidedly “half-full, half-empty” flavor, or maybe it should be entitled “in front of every silver lining is a cloud”. The good news is that UTA-sponsored AB 885 has been signed into law, but the bad news is that the Legislature could not resist the temptation to react to a very small number of homeowners association horror stories with new “assessment reform”. This latter issue has been particularly contentious; as readers will see below, reactions to the HOA bill have been, to put it mildly, mixed.

The UTA-sponsored measure resulted, as in past years, from the legislative “wish-list” process. Member suggestions for improvements in the statutes are “vetted” by the Legislative Committee and UTA Board, and those achieving consensus among trustees are then proposed as legislation. Typically, a number of different proposals are packaged together and introduced in one bill, for purposes of legislative economy. This year, Assembly Member Rick Keene from Chico agreed to author the measure, Assembly Bill 885.

Of course, every year some of the UTA suggestions are more controversial than others. Among the original AB 885 proposals not surviving the legislative process, for example, was the idea of allowing county-based publication of foreclosure notices, instead of the current judicial district-based system. As in the past, the California Newspaper Publishers Association vehemently opposed the proposal, and the language was removed in the Assembly.

That is not to say that AB 885 does not make significant changes in the law. Without question, the most far-reaching change is to Civil Code Section 2924g on postponements. The bill simplifies and eliminates major portions of the current postponement law. In place of provisions which have existed for many years limiting the number of postponements to three without the need for a new notice of sale (along with complicated language about which kinds of postponements actually count against the limit), AB 885 instead enacts a time-based system. Greatly simplifying the law, the language requires a new notice of sale when the postponement or postponements exceed 365 days from the original sale date. The bill provides for new fees for this service, consistent with amounts specified in Civil Code Sections 2924c and 2924d, as reasonably necessary to comply with the law. Obviously UTA members are urged to become familiar with the actual text of the new provisions, which will also be addressed at the Annual Conference.

AB 885 was signed into law by Governor Schwarzenegger on September 6, 2005 as Chapter 224, Statutes of 2005.

UTA members also had a vital interest in SB 137, relating to the enforcement of homeowners association assessments. Because at some level the bill criticizes the use of nonjudicial foreclosure for small debts, even those trustees not involved in offering HOA services were concerned. Put another way, if homeowners should not face foreclosure for small HOA debts, why should they face foreclosure for small loan defaults?

This basic philosophical question aside, SB 137 originally proposed no foreclosure, judicial or nonjudicial, when the HOA debt was less than $2500. The foreclosure sale would be subject to a minimum bid of 65% of the appraised value of the property, less senior liens. After sale, a 90-day redemption period would be provided. The bill also proposed various new procedural requirement on homeowners associations prior to the foreclosure, including new service of process, arbitration, votes of the board of directors, and others.

It is fair to say that SB 137 was one of the most controversial bills of the legislative year, with large numbers of interest groups lined up on each side. Proponents, mostly representing seniors and consumer groups, argued that abusive foreclosures by HOAs are a common occurrence, that people have lost their units without any knowledge of the foreclosure, and that it is simply unfair to take houses for small HOA debts. The bill was repeatedly described as “modest”.

Groups in opposition included the California Association of Community Managers, Community Associations Institute, California Association of Realtors, California Land Title Association, First American Title, and UTA. The Executive Council of Homeowners (ECHO) expressed “concerns”, which in legislative parlance is less than “opposed”. Opponents argued that the horror stories described by proponents are exceedingly rare, that remedies already exist for abusive cases, and that the bill will encourage homeowners to neglect their obligations to their associations.

More particularly, opponents argued that the $2500 limit especially punishes small associations, which could be forced to wait years for an effective collections remedy, and that the combination of the 65% minimum bid and the redemption right will seriously chill bidding, to the detriment of associations and homeowners alike. UTA was particularly concerned that the 65% minimum bid will result in potential litigation on every HOA foreclosure, since it will be so easy to challenge either the competence of the appraiser or the accuracy of the appraisal product.

After literally dozens of hours of hearings, meetings, conference calls and the like, the bill ultimately sent to Governor Schwarzenegger limits foreclosures to delinquencies of $1800 or more, or for amounts more than 12 months delinquent. The minimum bid language was ultimately removed, but the redemption period remained in the bill. A variety of new obligations on associations, including personal service of certain notices, were also retained.

While a small number of Republican legislators continued to express reservations about the whole idea, SB 137 was passed by votes of 36-2 in the Senate, and 64-12 in the Assembly. Because Governor Schwarzenegger’s office was extensively involved in the negotiations, the likelihood of his signature is very high. Assuming a signature, the bill will become effective on January 1, 2006.

The concept of limiting foreclosure remedies of HOAs has been coming for several years. The plain truth is that when cases arise of homeowners losing their units for small debts, when they have large amounts of equity, the legislative temptation to act is simply too strong, and the argument that these cases happen very rarely is not compelling. Experience will demonstrate whether problems predicted by opponents actually materialize.