Are you familiar with earnings credits? Sometimes referred to as an earnings credit rate  (ECR) system, earnings credits are sometimes offered by banks to property management companies.

While property management companies benefit from these credits, they have also sparked controversy due to the ethical and legal concerns raised between the companies and their clients.

Read on to learn more about the benefits and drawbacks of earnings credits.

Table of contents

• What is an earnings credit?
• Are earnings credits new?
• What can property management companies do with earnings credits?
• Is this legal?
• Earnings credits benefits
• Earnings credits drawbacks

What is an earnings credit?

Earnings credits, or ECR programs, are mechanisms that banks use to offset service fees for business accounts. It’s a percentage that a bank applies to a client’s account to calculate credits.

An ECR system incentivizes businesses to maintain higher balances, fostering long-term banking relationships.

Looking specifically at property management companies, a firm could be persuaded to use one bank for all of its clients if it is receiving credits based on its bank balance.

Large firms may deposit millions of dollars every year if they care for multiple associations, making them attractive business partners.

In exchange for depositing most or all of their clients’ funds in one bank, the bank gives the management company a percentage of those funds back.

Typically, the credit rate ranges between 3% to 5% annually. It might not sound like much, but if you deposit $10 million in a year, a 5% credit works out to $500,000. Many management companies are depositing much more than that.

Are earnings credits new?

No. In fact, this system started gaining popularity in the late 90s. Banks realized that HOAs were good business because they made large deposits without much risk. When management companies deposited the funds from multiple associations, the money was substantial.

As an incentive to choose their bank, financial institutions offered free software to management companies to help make them more efficient. However, as management and financial software became more common and interest rates fell, the banks pivoted and started offering other perks.

What can property management companies do with earnings credits?

One of the tricky things about earnings credits is that they vary by bank. Some arrangements benefit both management companies and HOA clients, but firms may also negotiate ECRs for their own benefit.

Credits can be used in the following ways:

• To reduce or eliminate bank service charges
• To pay for software or other business expenses
• To offset business loans

Earnings credits can be a great help to property management companies. But they do more for bigger firms. Furthermore, the companies do not have to pass on savings to their clients, even though they are benefiting from client deposits. Some would argue that this is unfair and unethical.   

On top of that, clients may receive less interest, or no interest on their deposits, when management firms engage in ECR programs. Few associations would knowingly and willingly agree to that arrangement.

Is this legal?

Earnings credits are not categorized as interest, meaning they are not subject to typical interest-reporting laws. That makes them easier to hide from plain sight.

However, depending on where you work, accepting earnings credits could be illegal.

Florida has passed a law that strictly prohibits boards and property managers from receiving kickbacks.  

The updated Florida Chapter 718 Condominium Act says that an officer, a director, or a manager who knowingly solicits, offers to accept, or accepts a kickback commits a felony of the third degree, and is subject to monetary damages.

Under Chapter 720, the Florida HOA regulations permit officers, directors, and managers to accept minimal perks. For example, management could accept a promotional item from a vendor with a value of $20.

Though management companies are not explicitly mentioned, one could safely assume that the law would not support a firm receiving millions of dollars in credits from a bank.

In California, the law says that managers and management companies must disclose any profit-sharing arrangements, or other monetary incentives provided to the management firm or managing agent.

Other states may be silent on the matter. In these cases, while management companies do not have to share benefits with clients, they should, at the very least, consider disclosing that they participate in an ECR program to prospective clients within the property management agreement contract.

Earnings credits benefits

Property management companies cannot rely on hard work alone to grow their portfolios, maintain strong service levels and generate additional revenue. Management companies should take advantage of tools or programs that will allow them to perform at their best and simultaneously grow their portfolios.

Earnings credits can:

• offset business costs like software subscriptions
• decrease or eliminate service charges from the bank
• allow management companies to meet business targets without sacrificing quality of service
• reduce costs that management companies pass on to HOA clients

Earnings credits drawbacks

One of the primary ways that a bank will pay for earnings credits is to offer lower interest rates on deposited funds, costing associations money. After all, there is no such thing as free money.

• Earnings credits can negatively impact an association’s bottom line
• HOAs might get better interest rates if the management company worked with a different bank
• This arrangement can create distrust between companies and their clients
• In rare cases, HOAs may decide to sue the management company if credit-earning benefits are not disclosed or shared

Conclusion

When it comes to earnings credits, honesty is the best policy. If it is legal in your state, HOA management companies can use ECRs strategically and ethically by disclosing the arrangement to potential clients.

Let HOA boards know if you’re receiving earnings credits and how they are being used. In most cases, the application of earnings credits directly or indirectly benefits clients.

Management companies should also recognize that they may be in a position to negotiate better terms. Remember, there is no standard ECR program, and your company is quite valuable to financial institutions. Leverage your portfolio to secure a more favourable group advantage.

Finally, depending on what agreement you’ve made with the bank, your company may want to give boards the option to select between higher interest-bearing accounts and operational accounts with stronger ECR offsets.

Not all property management companies feel comfortable engaging in ECR programs, and that is okay, too.

 But if you do benefit from earnings credits, make sure you aren’t weakening your clients’ financial health in order to strengthen your own.