Assembly Bill A6824A

                                BILL NUMBER:A6824             REPLACEMENT 5/21/10

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 deposit.

EXISTING  LAW:    General Obligations Law § 7-103 currently authorizes
landlords to retain the first 1% of any interest earned on  a  tenants
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  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 tenantand 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.

LEGISLATIVE HISTORY:
2009: 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.