G.A.P. Insurance: Exercise your Due Diligence before Signing Up
As many of you have heard, there is a new collection option called G.A.P. ("Guaranteed Assessment Program") being marketed to associations throughout Colorado. It's presented as insurance that pays the association a portion of assessment fees in exchange for a yearly premium based on a percentage of the association's annual budget and associated risk. At first glance, this may seem like a cost effective and innovative way to collect delinquent assessment fees. However, when exercising your due diligence, here are some things that your board of directors should consider:
- Although it is represented that premiums are fairly low, between 1-2% of the association's annual budget, the premium may be higher depending on various risk factors. If your association has a very high delinquency ratio, the premium is likely to be higher- perhaps much higher. Instead of going with this option, you may instead want to talk with your legal counsel about steps you can take to maximize your collection efforts along with available fee options which do not require your association to front attorney fees.
- The association is guaranteed only six months of assessment fees per collection account turned over. Yes, six months! Given that many delinquent accounts are associated with a public trustee foreclosure at some time, you may receive no more than what you would already obtain through the collection of your six month super lien. Why pay a premium for something that you are certain to obtain without purchasing insurance?
- The collection of any additional debt occurs through the use of a collection agency. If they cannot collect, the files are moved to a collection attorney who forecloses. How do you feel about foreclosing against all homeowners who fail to pay their assessment fees? The fallout in your community related to utilizing this tool of last resort could be damaging. In addition, have you considered that collection attorneys utilizing foreclosures as a consistent first option could lead to legislative prohibitions or caps on an association's right to foreclose in Colorado? We have seen abuses in the use of the foreclosure remedy resulting in caps and prohibitions in other states.
- You've heard that the automatic advance of six months of assessments to the association is a great tool to deal with the difficulties associated with obtaining FHA approval. However, what will happen when judicial foreclosures are filed for all accounts turned over under this program? If you guessed that several homeowners may file counterclaims against the association, you are 100% correct! To make matters worse, it could spur additional litigation by homeowners that may potentially disqualify the association from obtaining FHA approval.
- Last but not least, if the insurance company does not recover 100% of the outstanding assessments, the insurance may only pay up to18 months of assessments. What if there is an action to collect 36 months of delinquent fees and the entire balance is collected save for a few hundred dollars? Does that mean that the association receives only 18 months of assessments? Does the association receive late fees and interest collected? Does the insurance company or collection attorney pocket the rest? Does the association have any control over the foreclosure once it is filed and does it have the ability to reasonably resolve the dispute with the homeowners? These are some important questions to ask.
Although the G.A.P. program may make financial sense for a small number of associations, an association has a fiduciary obligation to consider the potential pitfalls, real financial costs and risks before selecting this option. At a minimum, make sure to ask a lot of questions and discuss alternative collection options with your current attorney.