New Anti-Fraud Laws Are Enacted In California To Protect HOA Members
New HOA Laws in California: An anti-fraud bill intended to safeguard HOA members in California breezed through the legislature without any opposition and became law on January 1, 2019.
Key Amendments to California’s Davis-Sterling Common Interest Development Act
The bill, which proposes several amendments to California’s Davis-Sterling Common Interest Development Act—the legal framework governing HOAs in the state—was supported by the Community Associations Institute and the California Association of Community Managers. To “take significant steps to protect [HOA members] from fraudulent activity by those entrusted with the management of the association’s finances,” according to the bill’s aim.
The measure amended the California Civil Code to require that any transfer of $10,000 or 5% of the total combined reserve and operating deposits of the homeowner association, whichever is smaller, have prior written consent from the association’s board. (5380(b)(6) and 5502 of the Civil Code)
Financial Safeguards: Consent Requirements and Evaluation Procedures
The new regulation prohibits overly involved board officers or HOA managers from making payments or transferring funds without explicit board consent. According to the new law, every transfer that exceeds $10,000 or 5% of the association’s deposits must have specific consent. In addition to payments and withdrawals, deposits and transfers between association accounts also require prior written approval from the board.
Boards must evaluate the HOA’s operating and reserve accounts, revenues and expenses compared to budget, the most recent account statements, and income and expense statements for each HOA bank account at least quarterly under Civil Code section 5500. Section 5500 of the modified Civil Code now mandates that these reviews occur monthly rather than quarterly.
The good news is that the new Civil Code section 5501 permits boards to fulfill the demands of the financial review without holding meetings. However, the evaluation must be carried out by each director or by a subcommittee made up of the treasurer and another director, and it must be approved at the following open board meeting.
Fidelity Insurance Requirements under Civil Code Section 5806
The most recent amendment to the anti-fraud laws is the new Civil Code Section 5806. By law, every association must carry fidelity (dishonesty) insurance covering at least the total reserve money plus three months’ worth of assessments. If the HOA is professionally managed, the insurance must cover the association’s management business and cover computer fraud and funds transfer fraud.
One goal of all these modifications is to stop HOA leaders from defrauding their HOA members financially.
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