Real Estate & Property Law

Online Banking for HOAs and Condos - Is it Legal?

Many HOA and Condo boards want to know about online banking. Is it legal? Is it wise? Is it the wave of the future?

Here is a recent question:

"My question is, our newest director, who is also new to our building, is the treasurer. She has the purse right now, and is insisting that we amend our CC&Rs so that she can pay our bills online. We use two signature checks to pay bills and always have. I fear mis-spending can occur when one person alone has the power of the purse without checks and balances - what do you think? Can you advise us of the law in this area please?"

In California, I have not seen a case that indicates to me that a CC&R amendment is required to use online banking. Quite a few years back, HOAs and Condos started using "lockbox" systems for collecting assessments and in the beginning, there was some concern about systems that flowed assessments into holding accounts for numerous associations, and there was some legislation about that which prohibited commingling funds except for some "grandfathered" situations. So, there may be some issues raised about online banking, expecially if it results in losses to associations. But for now, I do not see a legal barrier other than concerns related to breach of fidicuary duty.

As for that, I agree with the writer that there is reason for concern about one-person-one-click spending. There are few checks and balances. A board can most likely set up an online system where there is the ability to void or stop payment on checks which might be especially helpful for checks exceeding a certain level. There is usually some ability to find out about these large expenditures before the checks reach their destination - through email notices as provided to one or more board members. Online banking does generally allow for alerts to be sent out when checks above a certain amount are authorized.

However, a problem can arise depending on who is authorized to make changes in the alerts. If there is only one person, that person can create havoc. if there are two or more, one still can wreak havoc.

One example: There are two board members set up to receive notices of payments from the online account; both have administrative control as well. However, one of the board members makes changes removing the emails of the others who usually received alerts of withdrawals that have been set up. Then that board member made some unauthorized payments from the HOA account.

That said, there are plenty of associations that allow one signer, some even allow the manager to sign checks on operating accounts, so there is also the possibility in that situation of foul play if there are no controls or there is not a close watch on banking activity.

But is online banking illegal? I do not believe so. In California, there is also a legal requirement that there must be 2 signatures on withdrawals from reserve accounts. While I think this protection should be preserved, I am advised that many financial institutions allow transfers through faxed authorizations that do not contain two signatures.

So go figure. Practicalities and progress sometimes trump the most conservative practices. But when things go wrong, the legal claims start to fly, and whether losses could be recovered by any owner or a board would depend on just how careless the actions were that lead to the losses. There might be a balancing of risk vs. convenience vs. exactly what controls were available and which utilized ... or ignored.

Full post as published by California Condo & HOA Law on September 15, 2009 (boomark / email).