Legislation Would Give Tenants Fair Share Of Security Deposits
Attorney General Spitzer said today that he is proposing legislation to ensure that New York State tenants receive a fair share of the interest earned by their security deposits.
The Attorney General’s bill amends the inequities of current State law which provides a disproportionate portion of interest to landlords. Since 1970, landlords in buildings with six or more dwelling units have been required to place tenant security deposits in savings accounts earning the prevailing rate of interest. Landlords are entitled to 1 percent of the interest paid by a financial institution, to cover any expenses incurred in "administering" the account. Interest rates on basic savings accounts were about 6 percent when the law was first passed thirty years ago, but some banks are now paying only 1.1 percent interest on tenant security deposits. Therefore, tenants are left with only one-tenth of 1 percent.
"More than 2.2 million tenants throughout New York State have over $1.3 billion of their hard-earned money sitting in tenant security deposit accounts," Spitzer said. "That money belongs to the tenants, and they are entitled to the interest earned by those funds. Unfortunately, the current law is drafted to benefit the banks and the landlords, rather than the tenants. It’s time that we changed the law to ensure that the tenants get what is rightfully theirs."
Attorney General Spitzer’s proposal would require that tenants get at least 80 percent of the interest earned on the accounts.
"The current system is simply unfair to tenants," said Assemblywoman Helene Weinstein, Chair of the Assembly Judiciary Committee, who is sponsoring the bill in the Assembly. "The banks make money by paying inordinately low interest rates while loaning the funds out at much higher rates, and the landlords automatically keep the first 1 percent in interest payments every year. The tenants are getting shortchanged, and this problem must be addressed."
"Tenants are required to pay these security deposits, but they don’t get to decide where the money is deposited, and they never see the funds again until they vacate the apartment," said Senator Frank Padavan, who is sponsoring the bill in the State Senate. "It’s their money, but they are denied use of the funds, and are often left with minimal interest earnings, even if the money has been on deposit for many years. This legislation will fix that problem and make sure that tenants are treated fairly."
"The interest on these accounts is very important to tenants, especially those who are economically disadvantaged," added Assemblyman Keith Wright, a co-sponsor of the bill in the Assembly. "There are many costs that arise when a family is moving into a new apartment, and the security deposit on the old apartment is often used to cover these expenses, or is used as security for the new apartment. The Attorney General’s bill would bring about awareness for those tenants who are not aware of their right to collect interest, and would help increase their share of the pot."
In 1970, when savings account interest rates were 6 percent, it might have appeared reasonable to permit landlords to retain a 1 percent annual administrative fee, because the tenant would still receive most of the interest earned. As the interest rates on these accounts have declined to extremely low levels, the tenants have borne all the financial consequences.
Despite the fact that many banks are now paying only 1.1 percent interest on tenant security deposits, landlords are still collecting a full 1 percent fee. For example, a tenant’s $1,000 security deposit in such an account would earn only $11 per year, with the landlord getting $10, and the tenant only $1. Thus, the landlord is receiving 91 percent of the interest on the tenant’s funds, and the tenant is receiving only 9 percent. This is particularly unfair because the bank handles virtually all of the administrative functions for the landlords. In addition, granting landlords a 1 percent flat fee eliminates any financial incentive for the landlords to place tenant security deposits in higher-earning accounts.
"The Brooklyn Tenants Council strongly supports this needed legislation. This will be a first step in reminding some owners and banking institutions that these security deposits are a trust held for the tenants rather than an owner’s slush fund," said Jerry O’Shea, Director.
Attorney General Spitzer’s proposed legislation addresses these problems by setting the landlord’s administrative fee at 20 percent of the interest earned on the account (up to a maximum of 1 percent of the total amount on deposit), and granting the remaining 80 percent of the interest to the tenant. This will give landlords an incentive to seek out the highest-interest accounts available. For example, a landlord holding $250,000 in tenant security deposits will receive a fee of $550 per year if the funds are placed in a tenant security deposit account earning 1.1 percent, but the landlord’s fee will jump to $2,500 per year if the funds are placed in an account earning 5 percent per year.
"I want to use the competitive forces of the marketplace to ensure that tenants get a greater share of the interest on their funds," Spitzer said. "With over $1.3 billion in tenant security deposits, every 1 percent increase in rates will mean an extra $13 million in interest to tenants every year. By giving the landlords a percentage rather than a flat fee, they will have an economic incentive to use banks paying the highest interest rates, which will force other banks to raise their rates in order to compete in the marketplace. The result will be greater earnings on the accounts, with most of the funds being paid to the tenants, which is where the money should go."