BILL NUMBER: S2371
TITLE OF BILL :
An act to amend the general obligations law, in relation to tenant
security deposit accounts
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(2) currently authorizes landlords to
retain the first 1% of any interest earned on a tenant's security
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 such accounts. Thus, for the
first time tenants were assured that they would receive interest
payments on the security deposits 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 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, even though they
perform no administrative duties.
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.
LEGISLATIVE HISTORY :
S.5484 of 2007-08; S.2175 of 2005-06.
FISCAL IMPLICATIONS :
EFFECTIVE DATE :
This bill shall take effect on the first day of January following
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