Veritas Property Management: Accountability

THE BIG PICTURE

One of the challenges a new board member faces is understanding exactly what fiduciary responsibility is – how it works, and, more importantly, how it doesn’t work. A typical scenario is when a shareholder wants to refinance and take out a larger mortgage. The bank requires that the board sign a recognition agreement, so when the board signs, it is approving the refinance. Because the request comes from a neighbor, a new board member may be inclined to sign without reviewing the neighbor’s current financial situation.

BE SMART

This is what fiduciary responsibility is all about. You may want to help out your neighbor, but the bottom line is that this process really needs to be taken far more seriously. Your neighbor’s financial situation may have changed since the original purchase, and it is your fiduciary responsibility to make sure that your neighbor can still pay his co-op bills after the refinance. To do this, you need to review the request just as if you would review a new purchase.

When hearing this, some boards ask: “Why do you bother insisting on this review when banks have already approved this mortgage? It should be a no-brainer for the board to sign off on it.” We remind them of the subprime fallout many years ago, when banks loaned money to people and let them refinance without any problem. Only there were problems. And we often get this rejoinder: “That will never happen again.” We offer examples of current dubious banking practices that have been brought out in the news lately. And then we are told: “That has nothing to do with the mortgage. It has to do with the banking practices.”

The bottom line is that it is the board’s responsibility to ensure that someone has the funds needed to not only make his or her mortgage payment but also the maintenance payment and all other financial obligations. The finances of the co-op are at stake in these decisions, and rubber-stamping these decisions is dangerous. In smaller buildings, particularly, a shareholder who can’t meet their financial obligations can severely hurt a co-op’s finances and its ability to pay its own bills. Board members must understand that while banks have their own criteria for approving someone’s mortgage based on a percentage of the applicant’s income, boards sometimes have far stricter guidelines and that is why they also need to review the information.