HOAs Fight Supreme Court Over Controversial Anti-Fraud Law that Could Raise HOA Fees

This week on the Breakdown, we cover the legal fight over the Corporate Transparency Act's reach into homeowners associations. We'll discuss why HOAs are asking the Supreme Court for an exemption, what supporters of the law say about its anti-fraud benefits and burden, and what the still-undecided case could mean for HOA fees moving forward.

HOAs versus the Supreme Court: What’s Happening

HOAs are going toe to toe with the Supreme Court over a new anti-fraud law, and they’re sounding the alarm that the law could eventually raise HOA fees across the country. The target is the controversial Corporate Transparency Act (CTA), a law that requires a higher level of reporting from businesses about their owners and others in positions of power.

The law, which was introduced in 2017 and went into effect in 2021, has swept up HOAs, who claim that the in-depth reporting will put a strain on the associations which may push extra fees onto homeowners in their neighborhoods. A group of HOAs and other advocates filed a lawsuit back in 2024 protesting their inclusion in the legislation, but lower courts have continued to uphold its legality—now, appeals are being made all the way up to the Supreme Court.

What is the Corporate Transparency Act (CTA)?

The Corporate Transparency Act was never meant to target HOAs specifically; rather, they’ve been shooed in as a business class included in the wide-reaching anti-fraud law. Let’s go over the basics of the CTA to understand why HOAs are filing lawsuits and why the courts haven’t agreed thus far.

The CTA was introduced with the purpose of preventing financial crimes, such as money laundering, shell companies, pedophile rings, drug trafficking, and even terrorist activity. Before this law, criminals could run these fraudulent “businesses” with some degree of anonymity, making it infinitely easier to keep their income flowing. This law targets that anonymity factor by requiring businesses to report on who is involved with running them—like beneficiaries and officers—bringing illegal activity and its perpetrators to light. By taking away criminals’ ability to hide behind their businesses, the government hopes to quell cases of widespread fraud.

After this law was passed, many groups felt uncomfortable with the level of reporting required and filed lawsuits. This pressure eventually forced the government to pivot their focus to mostly international groups/companies rather than in-state ones. However, the law remains unchanged since the change is only rulemaking. The current administration may not decide to home in on American companies, but the law allows them and future administrations to decide to uphold the law as it’s written at any point.

While the government isn’t currently interested in targeting small groups like HOAs for potential fraud, the reporting requirements, as well as the possibility of them being scrutinized in the future, are at the root of the HOAs’ argument to the Supreme Court that the CTA is unconstitutional.

Both Sides of the CTA Argument

In the documents provided to the Supreme Court, the HOAs make a host of arguments against the CTA, petitioning for the law to be struck down as unconstitutional. Here are the highlights from this amicus briefing submitted to the courts in May:

• HOAs are volunteer, nonprofit organizations, and increased requirements for extra reporting would dampen volunteer support

• HOA boards change quite frequently, meaning far more reporting would be required from them than other types of organizations

• HOAs are the furthest thing from shell organizations, terrorism, or other crime, and are not the intended object of this law to begin with

• Congress cannot legally enforce the CTA because HOAs are intrastate run, not interstate, so the constitution’s commerce clause should ban the law from affecting HOAs

• Each day of noncompliance adds a 500-dollar fine (as well as the threat of imprisonment), so one person’s mistake could put the rest of the HOA in jeopardy

• Requiring beneficial ownership reports (and updating them anytime someone joins the board, leaves, or updates their driver’s license) is tedious and time consuming, which may make HOA members quit—and older members may not have access to the technology needed to complete these reporting requirements

• HOA activity is mostly non-commercial in nature, so the law shouldn’t apply to their organizations anyway

The HOAs argue that while they may have been unintentionally swept into an otherwise valid anti-fraud law, the enforcement of this law for homeowners’ associations isn’t legal or constitutional. Therefore, their petition includes a request to be added to the list of 23 existing exceptions to the CTA.

Thus far, the lower courts have not viewed the case in the same way as the HOAs. Previous judges have ruled that this law causes de minimis harm to these organizations because many of the files required by the CTA are the same as those reported by individual taxpayers yearly, making them pretty standard documents that are easy to file.

Additionally, the courts have decided that the HOAs failed to establish that board members would truly resign if the law were in place for them. These two reasons have been enough evidence for the courts to rule that the case isn’t strong enough to take action on—a ruling that the HOAs are continuing to fight against.

Potential Effects of the Law if the Supreme Court Upholds It

If the appeal isn’t granted, the HOAs allege there will be several negative effects on both these associations and the residents of their neighborhoods. They say the CTA could make reporting tedious for HOA members, and since HOA members are volunteers, many board members may simply decide to resign rather than keep up with the reports. They also claim that reporting mistakes, which could come with steep fines, would quickly become expensive for HOAs to cover, eventually rolling over into increased HOA dues for homeowners.

Supporters of the law disagree with this line of thinking. They believe that the necessary reporting required under the CTA is standard, not overly difficult, and that the law is necessary to tamp down fraud across the U.S.

There is no good way to predict which argument holds more truth until a final decision on the appeal is made and we see the law in action—but the courts don’t move that quickly, and the case isn’t quite there yet.

Where the Case Stands Now

The National Small Business Association has escalated the case through the courts, and as of April 15th, they have officially appealed to the Supreme Court to challenge the legality of this law. Throughout the month of May, they also added several amicus briefs from parties offering other legal perspectives against the CTA, including the Community Association Insititute, the Small Business Association of Michigan, and even non-real estate related groups such as the Advancing American Freedom organization.

All petitioning parties argue that the CTA is a constitutional overreach and should either be struck down or majorly changed, but the lower courts still have an opportunity to respond, and as of this writing, they’ve filed several requests extending their deadline for a response. As of now, the respondents have until August 21st to file a response to the petitioners’ arguments.

Moving Forward: What’s Next for HOAs and Investors

So, what’s next? The Supreme Court is extremely picky, only taking the most extreme cases that would have major effects on the lives of Americans. They only take ~1% of cases sent to them each year, totaling about 60-80 out of 7,000-8,000.

The Supreme Court could take several different directions: 1.) They could choose not to take on the case at all, deciding it’s not worth looking into; 2.) they could take on the case and uphold its legality, a massive blow to HOAs and the other petitioners; or 3.) they could take on the case and side with the NSBA, which would have major ramifications for the law as it stands today. If the Supreme Court takes it on and agrees that it is a constitutional overreach, the law could be eliminated altogether or otherwise majorly changed for many entities, reaching much further than the real estate realm.

There’s no good way to know which way the case will go until the Supreme Court picks the next cases they want to hear. The decision will likely not be made for at least another month though, since the respondents have filed extension requests until then, and the Supreme Court will need to look over both sides of the argument before making a decision.

Rising HOA dues have the potential to chip away at cash flow for investors with properties in HOA communities, slowing the growth of rental businesses across the country. If the petitioning party is right, the increased costs could prove to be inconvenient at best and business-threatening at worst for real estate investors—for now, both sides of the aisle are holding their breath (as are we).