Provides that a landlord depositing security deposits in an interest bearing account shall be entitled to receive as administration expenses a sum equivalent to 20 percent of the interest earned by such security money per annum, but not to exceed one percent per annum of the money so deposited.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A6254
SPONSOR: Walker TITLE OF BILL: An act to amend the general obligations law, in
relation to tenant security deposit accounts
PURPOSE OF BILL:
This bill ensures that tenants receive a fair share of the interest
earned by their security deposits.
SUMMARY OR PROVISIONS:
This bill amends General Obligations Law 7-103(2) to provide that the
fee retained by landlords for their expenses in administering tenant
security deposit accounts shall be twenty percent of the interest earned
on such accounts, up to a maximum of one percent of the amount on depos-
it.
EXISTING LAW:
General Obligations Law § 7-103 currently authorizes landlords to retain
the first 1% of any interest earned on a tenant's security deposit.
JUSTIFICATION:
Prior to 1970, there was no requirement that tenants be paid interest on
the money held by landlords as security deposits for their apartments.
Instead, landlords were free to place those funds in non-interest bear-
ing accounts, and to simply return the security deposit to the tenant at
the end of the term of the lease.
The Legislature sought to cure this inequity through the passage of
Chapter 1009 of the Laws of 1970, which amended General Obligations Law
§ 7-103 in two ways. First, the law provided that landlords in buildings
with six or more dwelling units must place security deposits in accounts
earning the prevailing rate of interest for similar accounts in the
area. Second, the law authorized the landlords to retain a fee of 1% of
the amount deposited to cover any expenses that the landlord incurred in
administering the accounts. Thus, for the first time tenants were
assured that they would receive interest payments on the security depos-
its that they provided to their landlords, and the law also sought to
compensate landlords for the administrative costs that they were
expected to incur.
Unfortunately, the effectiveness of this law has been greatly diminished
by the manner in which Chapter 1009 was drafted and has been imple-
mented, together with other events that have occurred during the past 30
years.
When the amendments to General Obligations Law § 7-103 were enacted in
1970, interest rates on basic savings accounts were about 6%. As a
result, at the time it appeared reasonable to permit landlords to retain
a 1% administrative fee, because the tenant would still receive most of
the interest earned. For example, a $1000 security deposit would earn
$60 per year, with $50 (83% of the total interest) being paid to the
tenant and $10 (17% of the total interest) being paid to the landlord.
Over the years, however, there has been a significant drop in interest
rates on savings accounts, and under the current statutory scheme
tenants have borne all the financial consequences of that decrease.
Indeed, some banks are now paying only 1.1% interest on tenant security
deposits, but the landlord is still getting a full 1% fee, and the
tenant is left with only one-tenth of 1%. For example, the same $1000
security deposit that earned $60 per year in 1970 would earn only $11
per year now, with the landlord still getting $10, and the tenant only
$1. Thus, now the landlord is receiving 91% of the security deposit
interest, and the tenant is receiving only 9%. General Obligations Law §
7-103 specifically provides that rental security deposits "continue to
be the money of the tenant.... and shall be held in trust by the land-
lord" for the tenant, and thus it is particularly unfair that the land-
lord should receive most of the interest on such deposits.
The adverse impact on tenants is further exacerbated by the manner in
which security deposit earnings are calculated for tax purposes.
Specifically, even though § 7-103 provides that the administrative fee
is paid directly to the landlord, and only the interest actually paid to
the tenant "shall be the money of the person making the deposit", most
banks calculate the full interest earned as income of the tenant. As a
result, all of the interest is reported to the Internal Revenue Service
and set forth on the tenant's Form 1099 each year, and the tenant must
pay income taxes on that full amount.
This results in a gross inequity for the tenant. Using the same example
once again, a $1000 security deposit earning 1.1% will pay $11 in inter-
est each year, with $10 being paid to the landlord and $1 being paid to
the tenant. However, the bank reports the full $11 as income of the
tenant. If the tenant is in a 20% tax bracket and does not itemize
deductions, the tenant will have to pay $2.20 in income tax. In other
words, the tenant who has $1000 being held in trust in a security depos-
it account will end up with a $1.20 loss per year ($1 in interest minus
$2.20 in taxes), while the landlord will receive a $10 gain per year
from the "administrative fee", even though the bank is performing all of
the administrative duties. Ironically, the tenant would be better off if
the money were placed in an account that earned no interest at all.
This bill addresses the inequities in the current law. Specifically, the
bill amends General Obligations Law § 7-103(2) to provide that landlords
shall receive an administrative fee equal to 20% of the interest earned
on the tenant security accounts, up to a maximum of 1% of the amount on
deposit. This conforms the law to the initial intent of the Legislature
in 1970, when at least 80% of the interest earned on these accounts
would have been paid to the landlords based upon the interest rates
prevailing at the time.
In addition, by switching from a flat fee to a percentage fee, this bill
will give landlords an incentive to seek out the highest-interest
accounts available. For example, a landlord holding $750,000 in tenant
security deposits will receive a fee of $1,650 per year if the funds are
placed in a tenant security deposit account earning 1.1%, but the fee
will increase to $3,750 per year if the funds are placed in an account
earning 2.5% per year. Encouraging the use of accounts earning higher
interest rates will provide benefits to both the landlord and the
tenant, with landlords earning higher fees and tenants receiving larger
interest payments.
Chapter 1009 of the Laws of 1970 was truly landmark legislation, ensur-
ing for the first time that the tens of millions of dollars in security
deposits paid by tenants would be placed in interest-bearing accounts to
benefit tenants. Unfortunately, a combination of several factors - the
manner in which the legislation was drafted, the transfer of administra-
tive duties from landlords to banks, the absence of financial incentives
for landlords to seek higher-earning accounts, and the subsequent,
significant drop in interest rates- -- has resulted in some tenants
experiencing financial losses under the current statutory mechanism for
allocating interest on tenant security deposit accounts. This legis-
lation addresses this problem and ensures that tenants will once again
be paid an appropriate percentage of the interest earned by their secu-
rity deposits held by landlords.
LEGISLATIVE HISTORY:
2013-14: A.858/S.3183 - A.Cal/S.Judiciary
2012: A.635/S.387 - A.Cal/S.Rules
2011: A.635/S.387 - PA/S.Judiciary
2009-10: A.6824/S.2371 - PA/S.Judiciary
2005-06: A.7299/S.2175 - PA/S.Judiciary
2003-04: A.7884/S.4827 - PA/S.Judiciary
2001-02: A.7540/S.5180 - PA/S.Judiciary
2000: A.10433/S.7802 - PA/S.Judiciary
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
None.
EFFECTIVE DATE:
The bill takes effect on the first of January following enactment.
