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.
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 OF 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 deposit.
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 bearing 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 deposits that they provided 16 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 implemented, together with other events that have occurred during the past 30 years.
First, 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 landlord" for the tenant, and thus it is particularly unfair that the landlord should receive most of the interest on such deposits.
A second significant flaw in General Obligations Law § 7-103 is that it provides an administrative fee to landlords, even if no administrative expenses are incurred, When Section 7-103 was amended in 1970, it was anticipated that landlords could be faced with significant costs in administering the accounts, and the Legislature therefore granted landlords a 1% fee to cover those expected costs. After that amendment was passed, however, banking institutions developed special "tenant security deposit accounts" through which the bank handles virtually all of the administrative functions for the landlords. Banks provide these services as an inducement to landlords, because tenant security deposits from the hundreds of thousands of tenants in New York State provide tens of millions of dollars in deposits to the banks. Section 7-103 continues to authorize the payment of a 1% administrative fee to landlords, however even though they perform no administrative duties.
Granting landlords a flat fee eliminates any financial incentive for landlords to place tenant security deposits in higher-earning accounts. For example, while some banks are paying only 1.1% on tenant security deposit accounts, other banks pay up to 2.5% on the same types of accounts. Section 7-103 specifically provides that the landlords hold the security deposits "in trust" for the tenants, and as trustees they are obligated to seek the highest interest rate available for their tenants. Most landlords fail to do so, thereby subjecting themselves to lawsuits for a breach of their fiduciary duties, but the cost of litigation prevents tenants from asserting their rights.
The losses to tenants are significant. As noted above, a $1000 security deposit in an account earning 1.1% will result in the landlord receiving $10 per year and the tenant receiving only $1 per year. If the landlord placed the funds in an account earning 2.5%, the landlord would still receive $10, but the tenant would receive $15, which is 1500% more than the tenant would receive with the 1.1% account. Although an increase of $14 per tenant per year may not appear significant, and certainly does not provide a sufficient incentive for a tenant to commence litigation, the cumulative loss to all tenants in the State is in the millions of dollars per year.
The adverse impact on tenants is further exacerbated by the manner in which security deposit earnings are calculated for tax purposes. specifically, even though Section 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 interest 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 deposit 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, ensuring 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 administrative 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 legislation addresses this problem and ensures that tenants will once again be paid an appropriate
percentage of the interest earned by their security deposits held by landlords.
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS: None.
LEGISLATIVE HISTORY: 2010: S.7965/A.6824-A
EFFECTIVE DATE: The bill takes effect on the first of January following enactment.
STATE OF NEW YORK ________________________________________________________________________ 387 2011-2012 Regular Sessions IN SENATE (PREFILED) January 5, 2011 ___________Introduced by Sen. KRUEGER -- read twice and ordered printed, and when printed to be committed to the Committee on Judiciary AN ACT to amend the general obligations law, in relation to tenant secu- rity deposit accounts THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Subdivision 2 of section 7-103 of the general obligations law, as amended by chapter 402 of the laws of 1979, is amended to read as follows: 2. Whenever the person receiving money so deposited or advanced shall deposit such money in a banking organization, such person shall thereup- on notify in writing each of the persons making such security deposit or advance, giving the name and address of the banking organization in which the deposit of security money is made, and the amount of such deposit. Deposits in a banking organization pursuant to the provisions of this subdivision shall be made in a banking organization having a place of business within the state. If the person depositing such secu- rity money in a banking organization shall deposit same in an interest bearing account,
[he]SUCH PERSON shall be entitled to receive, as administration expenses, a sum equivalent to TWENTY PERCENT OF THE INTEREST EARNED BY SUCH SECURITY MONEY PER ANNUM, BUT NO MORE THAN one [per cent]PERCENT per annum [upon]OF the security money so deposited, which shall be in lieu of all other administrative and custodial expenses. The balance of the interest paid by the banking organization shall be the money of the person making the deposit or advance and shall either be held in trust by the person with whom such deposit or advance shall be made, until repaid or applied for the use or rental of the leased premises, or annually paid to the person making the deposit of security money. S 2. This act shall take effect on the first of January next succeed- ing the date on which it shall have become a law.EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD03126-01-1