Bank To Increase Interest Payments On Tenant Security Deposit Accounts
Attorney General Spitzer today hailed a decision by the Astoria Federal Savings Bank to triple the interest rate that it pays on tenant security deposit accounts.
The move follows an inquiry by the Attorney General's office into the practice of certain landlords of keeping tenant security deposits in accounts that pay unreasonably low interest rates.
"We are going to pursue this inquiry until we are convinced that all landlords are fulfilling their statutory duty to their tenants," Spitzer said. "Although the amount lost by each individual tenant is small, the amount lost by tenants collectively amounts to millions of dollars."
Under New York State law, although apartment security deposits are held by the landlord, the money actually is owned by the tenant, and the landlord has a fiduciary duty to the tenant. State law requires that the security deposits be placed in interest-bearing accounts paying the "prevailing rate of interest," and landlords are permitted to keep one percent of the amount of the deposit to cover their administrative costs.
But an investigation by the Attorney General's office revealed that many landlords have placed millions of dollars of tenants' security deposits in accounts paying unreasonably low rates of interest. Indeed, some security deposit accounts pay less than 0.5 percent per year. Because the landlords keep up to one percent for administrative costs, and the accounts earn less than half amount, the landlords are retaining all of the interest being earned on the accounts, and the tenants are receiving nothing. To make matters worse, the tenants must pay taxes on the full interest because they own the security deposits, which means that many tenants actually lose money on the accounts.
Earlier this summer, Spitzer's office began contacting landlords that are holding their tenants' security deposits in accounts that pay less than the "prevailing rate of interest," as well as banks where those accounts are being held. Astoria Federal Savings was paying one of the lowest interest rates in New York State – just 0.4 percent, which was far below the prevailing rate.
Spitzer's investigation found that 90 landlords had placed more than $6 million in security deposits in Astoria's low interest accounts. Spitzer's office advised that the landlords using those accounts either request that the bank increase the interest rate or move their tenant security deposits to other banks paying the prevailing rate.
As a result, Astoria Federal Savings has agreed to triple the amount paid on the accounts, from 0.4 percent to 1.2 percent.
"I want to commend the landlords and the bank for taking this quick action," Spitzer said. "The landlords have recognized their obligation to comply with the statute and maintain these deposits in accounts paying the prevailing interest rate. The bank, by tripling the rate it pays, retains important business customers."
The Attorney General's investigation into other landlords is continuing, and those that do not comply with the statute's mandate will face potential litigation, including a requirement to pay back amounts lost by tenants as a result of the landlord's failure to place the tenant security deposits in accounts paying the prevailing interest rate.
Attorney General Spitzer also has proposed legislation in Albany setting the landlord's administrative fee at 20 percent of the interest earned on the account (up to a maximum of one percent of the total amount on deposit), and granting the remaining 80 percent of the interest to the tenant. This will give landlords a financial incentive to seek out the highest-interest accounts available. The bill passed the Assembly this year, but did not pass the Senate.
The investigation is being conducted by Assistant Attorney General Herbert Israel and Special Assistant Attorney General Sandy Mindell in the Consumer Frauds and Protection Bureau under the supervision of Bureau Chief Thomas Conway.