Tuesday, April 30, 2013

FHA-Approved Condos

What attorneys predicted has finally occurred:  A condominium Board of Directors that failed to apply for FHA certification is being sued by a homeowner.  The plaintiff is a single mother who approached the Ohio Civil Rights Commission with a complaint of discriminatory action.  Her FHA bank loan was denied since the community had chosen not to renew a lapsed FHA approval.  This is devolving into a Fair Housing violation claim.

Many Association governing documents require the HOA to conform with FHA/VA lending guidelines. A high number of rentals or excessive delinquencies may prevent a condominium qualification.  Whether or not an Association can qualify, is it a fiduciary duty for the Board to apply for the certification?   Lack of certification reduces the pool of eligible buyers, impacting sales, and possibly conflicting with the Board’s duty to enhance and protect property values.

It may be argued that the Board chooses to not seek FHA approval because they don’t want the higher risk of foreclosures, which drive down property values:  FHA borrowers do not provide large down payments and qualify under lower credit scores, raising the risk of loan default.  The Board’s position could be viewed as protecting the value of the community, or a blatant attempt to ban “undesirables”.

Although the Association may argue that it is the lender discriminating (the Association does not have direct knowledge of a borrower’s status or circumstances), the Fair Housing law operates under a concept of “disparate impact”.  This provision prohibits actions/policies that unintentionally impact certain protected groups.  Institutions are placed in the position of being guilty until proving themselves innocent, a long and expensive process.

A federal official of the Justice Department has stated the agency is the guardian of the Fair Housing act.  Recently, the Justice Department agreed to not pursue whistleblower cases against the city of St. Paul, Minnesota.  In exchange, the city agreed to drop a suit that the U.S. Supreme Court had already agreed to hear, that would have gutted the “disparate impact” portion of the Fair Housing act.  Having local taxpayers suffer a $200 million loss by not defending the whistleblowers was deemed acceptable collateral damage.

While the outcome of the Ohio case remains to be seen, all Boards should carefully weigh their decisions in light of the current regulatory reality. 

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