Protecting the Homeowners Association's Nest Egg

How much is it worth for your condo or homeowners association to keep its money safe?

Lawmakers in Virginia and Maryland are considering legislation that would beef up the accountability standards for professionals hired to manage homeowners' money. It could increase the cost of hiring those companies, but additional consumer protection is overdue for this lightly regulated industry.

Many thousands of dollars of homeowners' dues flow through these management companies each month. There are even larger sums that accrue in association reserve funds. These pots of other people's money have occasionally been tempting targets for embezzlement.

Virginia's General Assembly is considering legislation that would create a regulatory board to license professional management companies. Now, regulation of management companies falls to the department of real estate, which devotes most of its time and resources to regulating brokers. The proposed law would establish a certification system for employees of management companies and require annual independent audits of company books. Perhaps most importantly, the legislation would require management companies to buy fidelity bonds or insurance that would cover losses caused by theft or dishonesty by officers or employees. Bond requirements for board members would be increased as well.

The Virginia proposal is in reaction to the reported theft of at least $2 million from condo and homeowners associations that were managed by Fairfax-based Koger Management Group. As reported last summer by The Washington Post's Bill Turque, a complaint filed by Virginia's Real Estate Board and the Department of Professional and Occupational Regulation named Jeff Koger, the company's former chief financial officer and son of its president, Robert A. Koger, as "the likely primary culprit responsible for embezzling the funds."

No charges have been filed in the Koger Management incident, although investigations continue, said Mary Broz-Vaughan, a spokeswoman for the professional regulation department. Koger Management is now doing business under the name Tri-State Management, and the company continues to operate after filing for Chapter 11 bankruptcy protection in July. That bankruptcy filing has delayed other legal proceedings.

Company officials did not return calls requesting comment.

State Sen. Mary Margaret Whipple (D-Arlington) introduced the measure on behalf of the bipartisan Virginia Housing Commission. She said it was in response to the Koger incident. "We were very concerned," she said.

She noted that the legislation would establish an ombudsman system for handling complaints and would require homeowners associations to set up a system for handling complaints. "I do think it provides better protection," Whipple said.

Similar measures are expected to be introduced in the Maryland General Assembly this week, said Steven A. Silverman, chief of the consumer protection division of the Maryland attorney general's office. The legislation would require management companies to register with the office and would require that bonds be posted by management companies, their employees and association officers who have authority over community money. Currently, there is no registration requirement for management companies in Maryland.

"In light of what has happened in Virginia, and it has also happened in Maryland in the past, not recently but a few years ago, there needs to be a guarantee to homeowners that their accounts and reserves are protected," Silverman said.

In the District, community managers are licensed as real estate agents or brokers.