BILL NUMBER:  S3311

 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 axe 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 $1,550 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
2012: S.387/A.635
2013-14: S3183/A858
2015-2015: S.2815/A.10359

 EFFECTIVE DATE :
The bill takes effect on the first of January following enactment.