9 HOA Strategies for Handling Bank Failures

Homeowners Associations (HOAs) serve to protect the interests and well-being of community residents by maintaining common areas, enforcing regulations, and promoting a sense of community. As part of their responsibility, HOAs often maintain substantial funds in banks to cover expenses and emergencies.

‍

However, the potential collapse of a bank can throw the financial stability of an HOA into disarray. 

‍

In this article, we will provide guidance on what to do when your bank fails as an HOA, and steps to minimize the impact of such an event.

‍

1. Stay Informed

The first line of defense in managing a bank failure is staying informed, meaning the HOA Board must evaluate the association's financial relationship with the bank.

‍

In the event of a bank collapse, the Federal Deposit Insurance Corporation (FDIC) steps in to protect the depositors. The FDIC insures deposits up to $250,000 per account, per institution. 

‍

If a Homeowners Association loan has been taken out, the HOA owes the bank money and is considered a debtor. Conversely, if your HOA holds a deposit, it is a creditor. It's common for customers to be both debtors and creditors.

‍

Although, these roles are not interconnected. For instance, if your HOA has $1 million in deposits and a $1 million loan, they don't offset each other. The uninsured portion of the deposit account may be at risk in case of the bank's default. In this scenario, your HOA might still owe $1 million after bankruptcy and only recover the FDIC-insured portion of the deposit.

‍

To protect large deposits, consider the Certificate of Deposit Account Registry Service (CDARS). Confirm with your bank if this program safeguards your deposits. As an HOA board member, it is crucial to stay updated on the financial health of your bank, as well as any regulatory actions or news involving your institution.

‍

2. Contact the Bank Immediately

Gather information about the situation before making any decisions. Contact the bank and ask questions regarding their financial health, the status of your accounts, and any protection measures they have in place.

‍

Your banker might be following the news on the situation, just like everyone else, but they might also possess insider knowledge about the bank's strategies in these cases. 

‍

3. Review Financial Policies and Procedures

A bank failure provides an opportunity to review and update your HOA's financial policies and procedures. Ensure that your association has established adequate financial controls, including proper documentation, multiple signatories for transactions, and regular audits. 

‍

Make sure to also review your investment policies to ensure that they prioritize safety and liquidity, minimizing the risk of losses due to bank failures or other unforeseen events.

‍

If you've taken out a loan, take a good look at your loan contract to get a handle on what you're responsible for and what you're entitled to as a borrower. Keep an eye out for any sections that talk about what goes down if the lender defaults. You might even find options for activating a grace period for delayed payments.

‍

These contracts may also offer HOA financing information that can help you down the line.

‍

4. Consider Refinancing

Many banks include fees in HOA loans when refinancing with different lenders. If a bank fails, the new entity might waive these fees, allowing the HOA to refinance its loan advantageously.

‍

5. Keep an Eye Out for Financial Institutions Re-Selling Your Loan

Bank failures increase the chances of loans being sold, often to institutions lacking HOA lending expertise. The Board and Management Company must stay vigilant and adjust loan payments accordingly if the lender changes.

‍

6. Consult with Legal and Financial Advisors

When faced with a bank failure, it is important to consult with your HOA's legal and financial advisors. They will provide guidance on the best course of action and help you navigate the complexities of the situation. 

‍

This may involve determining the extent of your insured funds, understanding the implications of the bank's failure on your HOA's financial obligations, and exploring alternative solutions.

‍

7. Communicate with Residents

Communication is key. Proactively update the community members on the situation and any potential impacts on their dues, expenses, or the association's services. Transparency will help to alleviate concerns and build trust with residents. Be prepared to answer questions and provide timely updates as the situation unfolds.

‍

8. Diversify Your Funds

One lesson to learn from all of this is the importance of diversifying your funds. Rather than keeping all your funds in a single institution, consider spreading your assets across multiple banks. This strategy can help protect your HOA's funds from the risks associated with a single bank's failure, while still enjoying the benefits of FDIC insurance. 

‍

Consult with your financial advisors to determine the best approach to diversification based on your HOA's unique needs and circumstances.

‍

9. Plan for Contingencies

Lastly, develop a contingency plan to address potential financial challenges, such as a bank failure or unexpected expenses. This plan should include establishing an emergency reserve fund, reviewing insurance coverage, and maintaining open lines of communication with your bank and financial advisors. By proactively planning for financial emergencies, your HOA can better weather any storm that comes its way.

‍

Conclusion

While a bank failure may seem like a nightmare come true, a well-prepared HOA can successfully navigate the crisis and emerge even stronger. By following this guide, your HOA can minimize the impact of a bank failure and protect the interests of the community. Remember, a proactive approach to financial management is the key to safeguarding your HOA's assets and ensuring the long-term well-being of your community.

‍

If you are interested in learning more about HOA loans, contact us today and we'll help guide you through the basics to evaluate if it's a good option for your community.