Homeowners Gain Protection From HOA Fraud Under New Tennessee Law

With incidents of fraud and theft at homeowners' associations on the rise, Tennessee lawmakers have passed a law intending to protect homeowners from HOA malfeasance.

Gov. Bill Lee signed into law SB 2326, which requires HOAs to maintain a blanket fidelity bond, late last month. That would insure the HOA against losses resulting from theft or dishonesty by directors, employees, or management companies.

HOAs must maintain coverage equal to the reserve balances of the association plus one-fourth of the annual assessment income they collect. The legislation will take effect Jan. 1, 2027.

Speaking on the Tennessee House Floor in March, bill sponsor Rep. Caleb Hemmer (D-Nashville) said the measure came about after multiple constituent groups complained about fraud. The fraud even hit a member of Hemmer's staff.

"It's affected four different jurisdictions that have had a massive fraud happen to them, so we're looking to put these protections in to law," Hemmer said. "We're looking to protect future HOAs and the residents they have."

Tennessee's Senate passed the bill 30-0 in March, and the House voted 91-0 shortly after that.

The Tennessee Advisory Commission on Intergovernmental Relations estimated in 2015 there were at least 3,400 homeowners or condo associations in Tennessee.

HOA fraud is a worrying concern

With the new law, Tennessee joins Virginia, California, and Florida in mandating fidelity bonds to protect homeowners from fraud from a homeowners or condo association.

Realtor.com® has covered several high-profile instances of fraud in HOAs across the nation. That includes a Cypress, TX, HOA general manager charged with illicitly spending more than $53,000 of its funds on DoorDash, Amazon, and other personal expenses.

Then there was Marglli Gallego, who last month pleaded guilty to racketeering and grand theft after stealing $11 million from a Florida community, in what could be the largest HOA fraud in U.S. history.

The annual HOA report from Realtor.com shows that the number of people who pay HOA fees is growing, and those monthly fees are getting larger. About 43.6% of homes for sale in the U.S. are subject to an HOA fee. The median fee was $135 last year, compared with $108 in 2019.

One-third of homeowners, or 17.5 million people—across the 100 largest metros pays monthly homeowners or condo fees. Those HOA fees can top $500 a month in some communities.